Noida Sports City Scam Case: Allahabad HC issued Guidelines on Rights of Other Members of Consortium When one Member Goes Into Insolvency [Read Order]

In the Noida Sports City scam, the Allahabad High Court issued guidelines regarding the rights of other consortium members in the event that one of them becomes insolvent.The court laid down the guidelines as the same is not provided in the Insolvency and Bankruptcy Code, 2016.

In 2011, NOIDA introduced a plan to create Sports City in Sectors 78, 79, and 150.  The developer had to provide his money to develop the same, which was one of the requirements.  Of the 30% of land that may be used for development, 28% was to be used for group housing, and the remaining 2% was to be used for business.  The total project area was 7,27,500 square meters, of which 5,92,300 square meters of land were given to the Consortium on May 4, 2011, under the direction of M/s. Xanadu Estates Private Limited. NOIDA authorized an application to subdivide the land.  NOIDA granted the request for a benefit of zero duration because the Sports City project was an integrated project and the whole land allocation had not been made.

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Then, NOIDA urged the allottees to agree to close the matter of granting a benefit of zero term after they transferred control of 80% of the entire allotted land. The latter did not protest.  The surrounding sector received the remaining 20% of the land.  2014 saw the subdivision of a specific piece of property in favor of the petitioner, M/s Three C Green Developers Pvt. Ltd.

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The petitioner's plea to divide another plot in favor of M/s Robust Innovations Pvt. Ltd., a subsidiary, was granted.  The allottees had to make their payments between 4.11.2011 and 4.5.2021.  The Consortium's members divided up the development tasks after NOIDA accepted the integrated map that the petitioner had suggested on the Consortium's behalf.  In 2014, NOIDA also authorized the updated map and the allocation of development duties among Consortium members.

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The petitioner wrote to NOIDA to request that the payment of the outstanding installments not be made because the remaining land that was awarded in 2017 and 2018 was not free from encumbrances.  Owing to NOIDA's delay, the petitioner went to the High Court, requesting, among other things, a writ of mandamus to prevent NOIDA from collecting any lease rent, interest, or penal interest from February 1, 2017, until the present.

For the development project, the petitioner had taken out a debt that was unrepayable.  As a result, while the writ petition was pending and was accepted by NCLT, the debenture trustee filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016.  In order to represent the corporation, an IRP took over.

The Court noted that the Builders (sub-lessees) had committed significant violations in collusion with NOIDA officials, which had cost the State Government, the authority, and the general public money.  The Court was shocked by NOIDA's lack of concern over the Controller and Auditor General of India's report that exposed the scheme.

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The Court determined that the consortium was not legitimate because the promoters of each company in the group were the same.  It was decided that two larger companies bore the responsibility for building the SPROTS facilities, while the majority of the assets were parked in the smaller businesses.  It was further decided that the numerous consortium companies' filing for corporate insolvency was a means of avoiding paying the financial institutions and NOIDA.

It was decided that the original promoters of the enterprises had syphoned off funds intended for the construction of sporting facilities in order to "tailor-make" the smaller businesses insolvent.  The Court determined that the 'piercing of corporate veil' doctrine was required in these situations.

The division  bench of Justice Mahesh Chandra Tripathi and Justice Prashant Kumar laid down the following guidelines:

“(a) As a measure of first recourse, the IRP shall communicate to the company and the Authority for seeking Company’s willingness to continue to perform its functions/ obligations in the contract awarded to the consortium of which the said company is a member.  This would be in furtherance of the functions of the IRP under Section 20 of the IBC.  This communication shall be done within a maximum period of 4 weeks of commencement of CIRP and shall be independent of the constitution of CoC.  If no such intention is communicated within the said period, it will be presumed that the company is unwilling to participate in the subject project.

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 (b) If the IRP, on an assessment of the capabilities of the Company (consortium member facing CIRP), is of the opinion that the said company cannot usefully or meaningfully participate in the business of the consortium, he shall so communicate to the other consortium members and the Authority (for the said project) within the period provided in para (a) above.  The other consortium members (jointly or severally) shall then have an option to undertake the remaining project on their own and complete the same.  The exercise of the option by the consortium members to complete the project shall be done within a period of 4 weeks, which shall commence either from the expiry of the 4 week period mentioned in para (a) above (in the event no communication is received from the IRP) or within 4 weeks from the communication of the IRP to the effect that the said company is not in a position to participate in the business of the consortium. 

(c) If the consortium members fail to communicate their willingness to complete the project on their own and without the participation of the member facing CIRP or express their inability to complete the said project, the Authority shall make alternate arrangements to ensure timely completion of the project.”  

The Court ordered the Central Bureau of Investigation to file a complaint against all the deceitful NOIDA officials, as well as the builders and allottees involved in the approval, development, and allocation of the Sports City Project, as well as any other individuals who might be connected to the fraud, while dismissing the writ petition.

To Read the full text of the Order CLICK HERE

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