Lifting Corporate Veil, Allahabad HC Orders ED Probe Against Directors Of Hacienda Project, Three C Universal For Defrauding Lotus 300 Flat Buyers

The Allahabad High Court has lifted the corporate veil to hold the Promoters/Directors of M/s Hacienda Projects Private Limited and M/s Three C Universal Developers Pvt. who are in default, liable for defrauding flat-buyers of the Lotus 300 project in Sector 107, Noida.

The bench comprising Justice Mahesh Chandra Tripathi and Justice Prashant Kumar has directed the Enforcement Directorate under the Prevention of Money Laundering Act, 2002 to proceed against all the directors/promoters/designated promoter/officer who are in default, companies/other entities in which money from Hacienda Projects is syphoned or parked.

The Court expressed surprise as to how the directors had been let go freely by the State and neither the State nor the NOIDA Authority involved are able to recover the defaulted amount due to insolvency. The Court observed,

“This is a classic case of conning, as to how the promoters without investing any amount gets huge tracts of prime land allotted, launches a project and collects Rs.636 crores from the home buyers, out of which they again syphon off almost Rs.190 crores (then sell off a portion of land to a 3rd company, pocket and then syphon the entire sale proceeds (Rs.236 crores), and pay a pittance to Noida Authority, towards the cost of land/premium for land and lease rent, which they were supposed to pay, and defrauded the home buyers, Noida Authority, Banks and other creditors.”

The Court observed that in addition to the above the promoters defrauded hundreds of home buyers in various projects by collecting money and diverting it in different schemes. It was observed that after diverting funds, the directors resigned from the companies pushing them into insolvency to escape criminal and civil liabilities.

The Court observed that the NOIDA authorities had failed to discharge its burden by not cancelling the lease in accordance with the conditions of the lease agreement. The Court held that the NOIDA cannot now recover any money from the company as it is already under insolvency.

“The Noida Authority merely acted as a private trader (rather than a trustee and regulator) selling rights of these lands to developers, who prospered by making a huge profit. The promoters/developers in cahoots with the officers of the Noida Authority kept defrauding innocent buyers. Astonishingly, while buyers were struggling to get possession of their apartments in such incomplete projects of this developer, Noida continued further to allot large tracts of land to new companies floated by one of the promoters.”

Factual Background

A consortium of companies applied were allotted land in Sector 107 under a scheme for group housing floated by Noida Authority. M/s Hacienda Projects Private Limited (HPPL) was made a special purpose company for building and developing a residential project. The lease for the land was executed in 2010 with Mr. Nirmal Singh, Mr. Surpreet Singh Suri and Mr. Vidur Bhardwaj as the Promoters/Directors of the HPPL.

The project was named Lotus 300 as only 300 apartments were to be constructed on an area of 67,941.95 square meters. A Builder Buyers Agreement was executed in 2011 where it was stipulated that builder was supposed to charge a fine at the rate of 18% per annum on the delay of payment by an allottee. After sanction of floor plan, builders sold 27,941.95 Sq mts. of land from this project to some other company for Rs.236 crores reducing the area on which 300 flats were to be constructed.

Thereafter, 30 more flats were added and total of 330 flats in six towers were sold for Rs. 636 crores. The entire money was collected by the developer from home-buyers. The construction of 4 out of 6 towers was completed and possession was handed over to the flat owners.

Out of Rs. 636 crores, Rs.190 crores which was supposed to be utilized for construction/development of the project was syphoned by the promoters of Hacienda Projects into other companies of which they were the promoters. According to the petitioner the resignation as directors of Hacienda Projects was tendered in 2014 and 2015.

The construction of flats in towers 5 and 6 was not completed and the promoters told the flat-buyers to 'take it or leave it' as it is (unfinished flats). Since they had no other choice, the flat owners took the possession of the flats and made repeated requests to the developer to complete the unfinished flats.

FIRs were lodged and investigation was carried by the Economic Offences Wing. In chargesheet various frauds by the Director/promoters were brought to light. Subsequently, all three directors were arrested on 30.11.2018. Upon arrest, they entered into an MOU (as a personal guarantee) with the home-buyers stating that they will arrange funds required to complete the project and obtain 'Completion Certificate' within 9 months. Based on the MOU, bail was granted to the three promoters by Chief Metropolitan Magistrate, South Saket Court, Delhi.

Since the promoters had flouted the conditions of MOU which were the conditions of the bail, an application was moved for cancellation of bail. However, their bail was extended. NOIDA Authority issued recovery notices against Mr. Nirmal Singh, Mr. Surpreet Singh Suri and Mr. Vidur Bhardwaj, the Promoters/Directors of the Hacienda Projects, for default in payment of additional compensation, time extension charges, etc. The Promoters/Directors approached the High Court against the said recovery.

Arguments by the Parties

Counsel for home-buyers argued that the directors while tendering resignation from Hacienda Projects made a petty employee the director while controlling the company themselves. It was argued that since inception, the directors were defrauding the flat-owners and forced them into taking possession of incomplete flats.

It was argued that after the interim order staying the recovery by NOIDA was passed, the Directors stalled the project and stopped all construction activities. The Flat-owners association filed an impleadment application was rejected, therefore they filed a separate writ petition seeking mandamus regarding Completion Certificate and other amenities which were to be provided by the developer.

Further, the flat-owners sought recovery of the money from M/s Three C Universal Developers Pvt., Hacienda Projects and the three directors/promoter which had been diverted into other projects.

Before the High Court, NOIDA submitted that since there was no response from the company, the authorities were forced to recover the huge sum of dues from its directors/promoters. The total amount due to NOIDA was around Rs.107 crores.

Counsel for the directors argued that due to a stay order by the National Green Tribunal, the entire project was stalled. It was argued that NOIDA had not considered its objections while issuing the recovery notices. Further, it was submitted that for all dues, Insolvency Resolution Professional should be approached as the company has been taken over by him.

Observations by the Court

The Court expressed surprise on how IndusInd Bank had advanced a loan of Rs. 33 crores to Hacienda Projects without carrying out proper due diligence. It also expressed surprise as to why the personal guarantees of the directors were not invoked by the bank before filing insolvency petition against the company.

Further, the Court observed that NOIDA authority had given a special concession to the builder as no upfront amount was charged while making the allotment of land. The amount was to be paid from the booking amount deposited by the home-buyers.

“As a part of the larger conspiracy to defraud everyone the promoters/directors (petitioners herein) after syphoning off 236 crores (sale proceeds of the part of the land) and 190 crores from the total corpus of Rs.636 crores, which was paid by the flat buyers, by illegally transferring to other entities/companies directly or indirectly owned/controlled by the promoters or where they had personal interest, all the three directors resigned and made their petty employees as puppet directors of the company just to escape their liabilities,” observed the Court regarding appointment of Store Keeper as the Director of Hacienda Projects.

The Court held that in this case it was necessary to lift the corporate veil to overcome injustice which was cause by the company by selling portion of land allotted for the project to a third part and syphoning off the funds obtained from the home-buyers to other companies.

“To divest this amount, corporate structure was set up for masking the sham transactions and a fraud is apparently played with the bank or the public at large as well as the State.”

Regarding the law on lifting of corporate veil, the Court observed

“It is trite law that the corporate veil cannot be lifted unless there is some impropriety or fraud been played, which is being masked as a separate juristic entity. And if so found, the veil may be pierced to see who is in actual control of the company and has created a facade and sham to camouflage the illegal action with a view to avoid payment of liabilities.”

The Court held that the three directors approached the High Court are in effective control of the company and Anand Ram, the storekeeper who was appointed as the director, has no knowledge about the affairs of the company.

The Court also attributed collusion to the officers of NOIDA who despite the default took no steps to cancel the lease or recover the defaulted amount since 2014. The Court observed that the NOIDA authorities only issued the recovery certificates when they were forced to pay additional compensation to the farmers.

“The Noida Authority had given enough long rope for the promoters to siphon away all the funds of the company and leave the company absolutely in an insolvent condition.”

The Court observed that the transactions in question fell within the ambit of the Prevention of Money Laundering Act and the case must be referred to Enforcement Directorate. The Court directed NOIDA to issue Occupancy Certificate/part Completion Certificate and to execute tripartite agreement and registered deed in favor of flat buyer within a month.

Appearances: Shashi Nandan, Senior Advocate and Anupam Lal Das, Senior Advocate assisted by Prateek Sinha, counsel for petitioner, Anurag Khanna, Senior Advocate assisted by Raghav Dev Garg, counsel for petitioner, Vinayak Mithal, Rahul Agarwal, counsel for petitioners, Kartikeya Saran, counsel for Home Buyers, Amit Saxena, Senior Advocate assisted by Shivam Yadav and Kaushlendra Nath Singh, counsel for Noida Authority, Ambrish Shukla, Ms. Uttara Bahuguna, Additional Chief Standing Counsels for the State respondents.

Case Title: Nirmal Singh vs. State Of U.P. And 4 Others 2024 LiveLaw (AB) 128 [WRIT - C No. - 41110 of 2019]

Case citation: 2024 LiveLaw (AB) 128 

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