Insolvency proceedings were initiated with Malicious Purpose: NCLAT dismisses Wave Megacity's plea

Insolvency proceedings were initiated with Malicious Purpose: NCLAT dismisses Wave Megacity's plea

The National Company Law Appellate Tribunal (NCLAT) Principal Bench, New Delhi dismissed a plea filed by the Appellant/Corporate Debtor- Wave Mega Centre Private Limited a real estate firm to initiate voluntary insolvency proceedings against itself and imposed a fine of Rs. 1 crore. The Tribunal by its division bench headed by Chairperson Justice Ashok Bhushan and Technical Member Barun Mittal observed that the Appellant's plea to initiate voluntary insolvency proceeding under Section 10 of Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the Code) was done with 'malicious purpose' to save the Corporate Debtor- Wave Megacity from liabilities and prosecution.

The Corporate Debtor had moved to NCLAT to challenge the order passed by the National Company Law Tribunal (NCLT) New Delhi, filed under Section 65 of the Code. The brief facts of the case were that a Lease Deed dated 2 September, 2011 was between Noida Authority and Wave Megacity Ltd. in respect of a Plot situated at Sector 25A and Sector 32, NOIDA for a period of 90 years. Wave Megacity paid payment of ten per cent of the total consideration, i.e., Rs. 662.29 crore. Wave Megacity was to pay the balance premium of ninety per cent in staggered manner as indicated in the Lease Deed. Wave Megacity could not complete the construction of the Project and failed to repay the remaining ninety per cent of the premium amount.

Wave Megacity Centre had in March 2021 approached NCLT under Section 10 of the Code. Section 10 of IBC allows a debtor to initiate insolvency resolution process against itself if it has committed any default. The realty firm, in its petition filed in 2021, had claimed that it had to pay an amount of Rs 1,222.64 crore to Noida Authority and it was unable to clear the dues.

In 2021 the Respondents- Rakesh Taneja and others had filed an Interlocutory Application (IA) Applicants under Section 65 of the Code prayed to reject the Application filed under Section 10 of the Code. In the Application the Applicants, who were allottees of the residential/ commercial units in the Project pleaded that Petition under Section 10 was filed fraudulently and with malicious intent for the purpose other than for resolution of insolvency.

It was alleged in the above Applications that Petitioner is a big-time defaulter in terms of not completing the construction of the Project and handing over possession of the same in terms of arrangement entered with various buyers. About ninety per cent of the amount from 2300 Homebuyers has been siphoned off by the builder and the Application has been filed to save from several different liabilities and the Application deserves to be rejected.

The NCLT on 6 June, 2021 passed an order allowing the Applications filed under Section 65 and dismissed the Company Petition filed by the Corporate Debtor.

Upon hearing all the parties, the NCLAT observed that Section 10 and Section 65, which are part of the same statutory scheme needs to be read together to give effect to the legislative scheme of the Code. The Tribunal added, "in event Corporate Insolvency Resolution Process (CIRP) is initiated by a corporate applicant fraudulently with malicious intent for any purpose other than the resolution of insolvency, holding it that it is obligatory for the Adjudicating Authority to admit Section 10 Application, will be contrary to the statutory scheme under Section 65. In event conditions under Section 65 are fulfilled, Section 10 Application can be rejected, even if debt and default is proved. Thus, Section 65 must be read as enabling provision to reject an application even on proving of debt and default Section 10 Application is not to be obligatorily admitted."

The Appellate Tribunal observed there exists serious allegations against the Corporate Debtor about siphoning off the money collected from homebuyers. Further, evidence was produced by homebuyers that the Corporate Debtor was taking huge amount of cash from them. The Tribunal pointed out that despite receiving the entire amount from homebuyers, the Corporate Debtor failed to give possession or refund the money.

Considering the above circumstances, the Tribunal directed the central government to make necessary investigation into the affairs of Corporate Debtor. Lastly, the Tribunal was satisfied that the Adjudicating Authority did not commit any error in allowing Section 65 Applications and rejecting the Section 10 Application.