Allahabad High Court held the effect of the moratorium under the IB code is confined only to the debtor company, promoters/directors will be personally liable and be prosecuted for their fraudulent actions.
The Division Bench of Allahabad High Court comprising Justice Mahesh Chandra Tripathi and Justice Prashant Kumar was hearing a series of petitions filed by the promoters/directors of the Corporate Debtor and held that the effect of moratorium under the IB code is confined only to the debtor company therefore, the director promoters/petitioners will not get any benefit and shall continue to be liable and be prosecuted for their fraudulent actions.
Since the company is under Insolvency, there is a moratorium as per Section 14 of the Code so no proceeding can continue against the company by any creditors to recover their dues. However the effect of the moratorium under the IB code is confined only to the debtor company therefore, the director promoters/petitioners will not get any benefit and shall continue to be liable and be prosecuted for such offences.
In a consolidated hearing, the High Court delved into a convoluted case surrounding M/s Hacienda Projects Private Limited (HPPL) and its contentious residential project, Lotus 300, in Sector 107, Noida. HPPL, backed by a consortium of companies, faced allegations of fraudulent activities, including misappropriation of funds totalling Rs. 190 crores out of Rs. 636 crores collected from homebuyers. Investigations uncovered unauthorized land sales, deviations from approved plans, and failure to meet contractual obligations, resulting in incomplete project delivery and financial losses for stakeholders.
Despite assurances of project completion, HPPL's directors were arrested on charges of fraud and criminal conspiracy. Subsequently, they obtained interim bail by pledging adherence to an MOU, which they failed to honour, prompting calls for bail cancellation. However, the court upheld their bail, citing ongoing construction efforts and conditional compliance.
The court heard arguments regarding recovery notices issued by the Noida Authority against HPPL's directors, who sought relief through writ petitions. It suspended the recovery notice temporarily, permitting recovery from HPPL if the directors surrendered their passports and pledged not to leave the country without court permission. Homebuyers impleaded, presenting evidence of fund diversion and incomplete projects, while the court noted the promoters' continued control despite resigning.
Following arguments on lifting the corporate veil, the court found evidence of fraudulent activities by HPPL's promoters and directors, piercing the veil to hold them personally liable. It referenced Supreme Court precedents and criticized the Noida Authority and IndusInd Bank for their roles.
The court ordered the Noida Authority to issue occupancy certificates and directed the Enforcement Directorate to investigate under the Prevention of Money Laundering Act (PMLA). It clarified that the Insolvency and Bankruptcy Code (IBC) moratorium applied only to the corporate debtor, not its directors, who remained liable for prosecution.
In conclusion, the judgment emphasized corporate governance, accountability, and justice for affected parties, underlining the importance of upholding legal principles amidst complex financial and regulatory landscapes.
The High Court's decisive ruling in the HPPL case was to pierce the corporate veil, holding the promoters personally liable for fraudulent actions. Despite resigning, they continued to control HPPL, indicating an attempt to dodge liabilities. This underscores the necessity of scrutinizing corporate structures to prevent fraud, as highlighted in legal precedents. The judgment also criticized regulatory lapses by the Noida Authority and financial institutions, emphasizing the need for corporate governance and accountability.
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