BRIEF FACTS

In the year 2012, Som Resorts Private Limited (“Corporate Debtor”) had launched a commercial cum residential project under the name ‘Casa Italia’ (“Project”) on a land allotted by the Uttar Pradesh Housing Development Board. During the period 2012 – 2015, Yadubir Singh Sajwan along with 25 (twenty five) other home buyers (collectively referred to as the “Petitioners”) booked certain units in the Project and entered into separate builder-buyer agreements (“BBAs”). As per the BBAs, the Corporate Debtor was required to deliver the possession of the units to the Petitioners within 36 (thirty six) months from the date of commencement of the construction of the Project. However, on the due date, the Corporate Debtor failed to deliver the possession of the units and failed to refund the money deposited by the Petitioners with the marketing agency of the Project, i.e., Cosmic Structures Limited (“CSL”). Therefore, the Petitioners filed a criminal complaint with the Delhi Police, Economic Offence Wing inter-alia against the Corporate Debtor, its directors and its promoters. The Delhi Police registered a first information report (“FIR”) dated June 14, 2017, bearing FIR No. 108/2017 and filed a chargesheet in relation to the matter. In the interim, a winding up petition was filed before the High Court of Delhi (“Delhi HC”) against CSL. The official liquidator of CSL appointed by the Delhi HC vide order dated January 11, 2017 sealed the Project, considering it to be the property of Cosmic Infrastructure Private Limited.

Thereafter, pursuant to certain discussions between the Corporate Debtor and the allottees/ home buyers of the Project (including the Petitioners), a memorandum of settlement dated September 14, 2018 was executed amongst CSL, the Corporate Debtor and the association of the allottees/ home buyers of the Project (“MOS”), whereby the Corporate Debtor undertook to complete the construction of the Project within 18 (eighteen) months from the date of its de-sealing by the Delhi HC. Further, as per the MOS, the Corporate Debtor undertook to refund the entire amount received by CSL from the allottees/ home buyers of the Project along with an interest at the rate of 18% (eighteen percent) per annum if it fails to deliver the possession of the units within the stipulated time period.

The Delhi HC de-sealed the Project. However, the Corporate Debtor failed to deliver the possession of the units within the time period stipulated under the MOS. Despite repeated requests and correspondences, the Corporate Debtor also failed to make payments of the outstanding amounts due and payable by the Corporate Debtor as per the MOS to the allottees/ home buyers of the Project. Therefore, the Petitioners filed a petition inter-alia under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) to initiate corporate insolvency resolution process (“CIRP”) against the Corporate Debtor.

DOCTRINE OF INDOOR MANAGEMENT AND LIFTING OF THE CORPORATE VEIL

The Corporate Debtor submitted that the agreement dated October 10, 2013 executed for the appointment of CSL as the marketing agency of the Project (“Marketing Agency Agreement”) conferred the marketing rights to CSL for a period of 1 (one) year only. Further, the Marketing Agency Agreement provided that CSL shall be entitled to 10% (ten percent) of the sale consideration as its service fee/ commission and did not permit CSL to enter into any agreement with the allottees/ home buyers of the Project or to receive any consideration from such allottees/ home buyers in its own name.

The Corporate Debtor further submitted that the Petitioners claimed to have paid huge amounts for the units of the Project to CSL, however, the Corporate Debtor only received a minor component of such amounts from CSL towards the sale consideration, which also included the money paid by several other allottees/ home buyers apart from the Petitioners. The Corporate Debtor also submitted that the Petitioners based their claim entirely on the MOS and it was an admitted position that the MOS was executed because the Petitioners had imprudently made the payments to CSL, an entity that was not entitled to collect the same. Accordingly, no debt whatsoever was due and payable by the Corporate Debtor to the Petitioners.

However, the National Company Law Tribunal, New Delhi (“NCLT”) held that the Marketing Agency Agreement was executed in relation to the internal affairs of the Corporate Debtor and the Petitioners, being outsiders, were not privy to the internal affairs of the Corporate Debtor. Further, the NCLT held that the Corporate Debtor had failed to produce/ submit any publication wherein the Corporate Debtor had renounced its association with CSL. Therefore, as per the doctrine of indoor management, the Petitioners cannot be penalized even if CSL was not authorized to execute the BBAs or to receive the payments for the units allotted in the Project.

The NCLT also held that the ‘doctrine of lifting the corporate veil’ is an exception to the distinct corporate personality of a company or its members and is well recognized not only to unravel tax evasion but also where protection of public interest is of paramount importance and the corporate entity makes an attempt to evade legal obligations. In such circumstances, lifting of veil is necessary to prevent the corporate entities from misusing the principle of distinct corporate personality. It further held that the ‘doctrine of lifting the corporate veil’ can be invoked, if the public interest so requires or if there is allegation of violation of any law due to the usage of a corporate entity. In the present case, the promoter of the Corporate Debtor was also appointed as a director on the board of CSL. On lifting the ‘corporate veil’ of the Corporate Debtor, the NCLT held that the Corporate Debtor and CSL were being managed either directly or indirectly by the same person. The Corporate Debtor had merely used another corporate entity, i.e., CSL to enter into BBAs and collect the money from the Petitioners with an ulterior motive to conceal the real transaction. Accordingly, it would not be fair to the Petitioners, if the Corporate Debtor indirectly achieves its agenda, i.e., to defraud the allottees/ homebuyers in the disguise of a separate legal entity by concealing the true nature of the transaction.

In light of the above, the NCLT admitted the petition filed by the Petitioners and ordered initiation of CIRP against the Corporate Debtor.

LAST, BUT NOT THE LEAST

 The order is in the right direction considering the fact that the money was collected from the allottees/ home buyers of the Project by an ‘affiliate’ company of the Corporate Debtor, who was supposedly the developer of the Project. The interest of such allottees/ home buyers should be protected. Presently, with the Real Estate (Regulation and Development) Act, 2016 (“RERA”) being in force, such arrangements may also make the agent a ‘promoter’ of the project and accordingly liable under RERA to the allottees/ home buyers along with the landowner/ developer.

It is pertinent to note that this is an order passed by the NCLT and it will remain subject to an appeal to the National Company Law Appellate Tribunal (“NCLAT”). Any order from NCLAT too remains subject to an appeal to the Supreme Court of India.

We will continue to track the updates on this aspect, so, keep watching this space…