Allahabad High Court

Allahabad High Court: In a writ petition filed on the ground that the petitioner is no longer a director of the company, and the liability is that of the company and not on the ex-director of the company and the recovery certificate issued against them is illegal, the division bench of Mahesh Chandra Tripathi and Prashant Kumar*, JJ. has referred the matter to Directorate of Enforcement (‘ED’) and directed it to proceed against all the directors/persons/designated partners/officers, who is in default or companies or other entities in which the money from Cloud 9 Projects is diverted or parked. Further, it directed ED to make all the efforts to recover the said amount from persons/companies and used the said amount for the payment of Noida Authority and if any amount is left then to use it for completion of the project.

A few of the Private Limited Companies jointly in a consortium decided to participate in a tender for Plot in Noida to develop a Group Housing Project. It was decided to apply for a plot and if the plot was accorded, the consortium would set up a “special purpose company” for execution of the project. After allotment of the project, a Special Purpose Company known as Cloud 9 Projects Private Limited was incorporated on 20-01-2009, which entered a lease-deed with Noida Authority.

The flat owners, as well as the Noida Authority alleged that the directors of the project company had siphoned off the money, though it was taken from the flat owners, but it was not deposited to the Noida Authority.

The Court said that the entire proceedings in the instant matter as it gets unfurled, manifest the intention of the promoters for defrauding and cheating both Noida Authority and the home buyers.

The Court said that the promoters/directors/petitioner held 70% shares of the project company through various other companies in which the petitioner or his family members are directors or have control over the company. It is apparent that they have launched a project, booked/sold the flats to the gullible home buyers, collected considerable chunk of money and then diverted the money off from the project company to their other companies, or invest in other companies where they have business interest. Thereafter, resign from the position of director of the company. Now, the petitioner is trying to shield himself under the mask of different juristic personalities by stating that the liability of the company can only be recovered from the company.

The Court lifted the corporate veil to see how the promoters though after resigning as directors continued to be in full control over the company. They had made their petty employees as the director of the company. Even while they were directors, a lot of money has been siphoned away to their other companies.

While reiterating that the company is a separate juristic personality and any liability of the company has to be recovered from the company and not from the personal properties of the director unless the statute so provides , the Court said that in the facts and circumstances of the present case, it is apparent that a fraud has been played and the directors have siphoned off the funds of the company to their other companies, which is duly substantiated by the records and accounts of the company, thus, the above will not apply in this case.

The Court said that the doctrine of a separate legal personality of a corporation and the situations where that veil could be pierced or lifted is well embedded. The shield of a separate legal personality is neither inviolable nor impenetrable. The Court can very well pierce a corporate veil when the public interest is involved, or where there are sham transactions to cover up fraud or has been done with the intention to evade tax or statutory dues or dues of the statutory authorities.

The Court noted that the directors have averred that after the resignation they have nothing to do with the company and cannot be prosecuted for the offences of the company. They further averred that the present directors are responsible for the company’s affairs. Thus, to see if the resignation is genuine or was made as a part of the conspiracy to avoid any civil and criminal liability, while having full control over the company, the Court pierced the corporate veil to see as to who are the persons in charge of the company and who is keeping full control of the company, and whether a fraud has been played by those personnel, and who are trying to hide their fraudulent activities and themselves, under the mask of the company being a separate juristic personality.

The Court reiterated 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 the facade and sham created to camouflage the illegal action with a view to avoid payment of liabilities.

The Court stated that the law has changed with its earlier exception that the company is a separate juristic personality and the liability of the company cannot be recovered from the property of directors.

The Court viewed that the concept of separate corporate entity evolved to encourage and promote trade and commerce, but not to commit illegalities or to defraud people. Therefore, where the corporate character is employed for the purpose of committing illegality or for defrauding others, the Court would ignore the corporate character and will look at the reality behind the corporate veil.

Concerning the conduct of the Noida Authority, the Court noted that the terms of the lease deed was clear that in case any amount due is not paid the sub-lease would be cancelled but no action was taken by the Noida Authority to cancel the sublease even after so many defaults done by the project company. Thus, it said that the officers of the Noida Authority had been allowing the petitioners to commit the fraud.

It added that apart from sending few notices, which was nothing but an eyewash, the Noida Authority did not take any steps to recover the same, and kept their eyes closed, while the promoters collected money from the home buyers and siphoned off the same to their other companies. The inaction of the Noida Authority speaks volumes of their conduct. It is because of their inaction and not taking timely action, against the defaulting company, home buyers have come to such a situation where they, after paying the entire money are not getting the occupancy certificate and the Noida Authority is now not able to recover any amount from the company.

The Court remarked that it is a clear case of diverting of funds from the Project Company to other companies by these directors, and after illegally transferring all the funds and defrauding the home buyers by not delivering the flats in spite of receiving the full amount, and also defrauding the Noida Authority by not paying the dues, it is a case of cheating. Further, as per the lease deed, the Noida Authority was also responsible for seeing that the project is completed on time. The project was delayed by the promoters but, Noida Authority did not object to it. Further, no action was taken against the lead member of the consortium, responsible for the project’s implementation and completion. There was an abject failure of Noida Authority and a complete abdication of their duties to protect the rights of hapless home buyers.

Thus, the Court held that the director still have full control of the project company, he along with his family members through various other corporate entities still hold 70% shares of the project company. Even while they were directors, they had diverted money from the project company and that was the reason the company could not complete the project, nor pay the Noida Authority their dues. These directors were completely responsible for the affairs and present condition of the company. The resignation tendered was just a sham to escape civil and criminal liabilities. It is a clear case of cheating which falls under the ambit of Section 120 and 420 of Penal Code, 1860, which as per amended Section 2(y) of Prevention of Money Laundering Act, 2002 would be a scheduled offence.

The Court directed the Noida Authority to provide the occupancy certificate for towers and conclude the flat owners’ sale-deeds within six weeks. Further, it directed the Authority to proceed to recover the said amount from the company through the recovery proceedings and whatever amount is not recoverable they can proceed to recover from unsold inventory of tower and can take any action against the promoter as prescribed under the law.

The Court also modified the condition laid down vide order dated 07-08-2019 wherein the Sub-Registrar, Gautambudh Nagar/Ghaziabad was directed not to register any deed of transfer for any flat constructed by the project company, and now the flat owners can register any deed of transfer of any flat in the project company.

[Ashish Gupta v. State of U.P., 2024 SCC OnLine All 543, Order dated 29-02-2024]

Advocates who appeared in this case :

Counsel for Petitioner: Advocate Ashish Kumar Singh, Advocate Swetashwa Agarwal, Advocate Varad Nath , Advocate Agarwal Archi Piyush

Counsel for Respondent: CSC Abhinav Gaur, Advocate Aditya Vardhan Singh, Advocate Anshul Kumar Singhal, Advocate Kaushalendra Nath Singh, Advocate Nikhil Kumar Pandey Advocate Balkrishna , Advocate Prashant Kanha, Advocate Prateek Sinha, Advocate Raghav Dev Garg, Advocate Rishu Mishra, Advocate Sumit Daga, Advocate Varad Nath, Advocate Vinayak Mithal, CSC Anjali Upadhya, Advocate Kaushalendra Nath Singh

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