NCLAT Upholds Withdrawal of Insolvency Proceedings Based on Related Party Nexus and Fraudulent Intent Between Financial Creditor and Corporate Debtor

Overview of the Case

The National Company Law Appellate Tribunal (NCLAT), Delhi Bench, examined an appeal arising from insolvency proceedings initiated under Section 7 of the Insolvency and Bankruptcy Code, 2016. The appellate tribunal scrutinized whether the Corporate Insolvency Resolution Process (CIRP) was initiated through collusive arrangements between parties having undisclosed relationships, thereby violating the fundamental principles of the Code.

In the matter of Expert Realty Professionals Private Limited Vs Logix Infrastructure Private Limited, the NCLAT analyzed the legitimacy of insolvency proceedings where substantial evidence pointed towards a pre-planned strategy between the Financial Creditor and Corporate Debtor to misuse the insolvency framework for objectives unrelated to genuine debt resolution.

Background Facts

Logix Infrastructure Pvt. Ltd. (Corporate Debtor) operated in the real estate development sector and launched a residential project titled Blossom County located in Sector 137, Noida. The development consisted of 17 towers containing 2,384 residential units, with an original completion timeline set for 2013. However, several towers remained incomplete beyond the scheduled date.

In October 2020, the Corporate Debtor entered into an understanding with Expert Realty Professionals Pvt. Ltd. (Financial Creditor) whereby approximately 1,37,918 square feet of built-up area was to be transferred under a buy-back mechanism. Pursuant to this arrangement, the Financial Creditor infused approximately Rs. 15 crore between October 2020 and February 2021 through legitimate banking channels, which facilitated ongoing construction activities at the project location.

Transformation of Commercial Understanding

Initially, the transaction was structured as an advance payment against property sale. However, based on minutes of a meeting held on 15.12.2021, the parties purportedly converted this advance into a straightforward financial debt. According to these minutes, the Corporate Debtor acknowledged a liability of approximately Rs. 12.88 crore, agreeing to repay the amount without interest within one month, failing which interest at 18% per annum would apply.

Initiation of Section 7 Proceedings

Relying on the Memorandum of Understanding dated 20.10.2020 and the minutes of meeting dated 15.12.2021, the Financial Creditor filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 in 2023. The National Company Law Tribunal admitted this application on 14.07.2023 and appointed an Interim Resolution Professional.

Challenge Under Section 65

Subsequently, two homebuyers (designated as Respondent No. 2 and Respondent No. 3) filed an application under Section 65 of the Code, alleging that the Section 7 proceedings were collusive, fraudulent, and initiated with malicious intent to defeat the legitimate rights of genuine creditors including homebuyers who had invested in the project.

Contentions Advanced by the Financial Creditor (Appellant)

Validity of Transaction Documents

The Financial Creditor contended that the Memorandum of Understanding and subsequent minutes of meeting validly transformed the transaction into a financial debt arrangement. According to the appellant, all material particulars relating to the debt were properly disclosed in the Section 7 application, and the Adjudicating Authority had applied its judicial mind before admitting the petition.

The appellant argued that merely being classified as a related party under Section 5(24) of the Insolvency and Bankruptcy Code, 2016 does not automatically establish fraudulent or malicious conduct. The Code disqualifies related parties from participating in the Committee of Creditors under Section 21(2) and from submitting resolution plans under Section 29A, but nowhere does it equate related party status with fraud or malice per se.

Timing of Section 65 Application

The Financial Creditor emphasized that the application under Section 65 was filed five months after the admission of CIRP on 14.07.2023 and eight months after the filing of the Section 7 petition on 06.04.2023. According to the appellant, this delay indicated that the application was an afterthought and should not be entertained to reverse a reasoned order of admission.

Bar Against Review

The appellant submitted that reversing an admission order after detailed examination of facts and documents amounts to impermissible review under the guise of fresh determination. Once the Adjudicating Authority applies its mind and admits a petition, such order should not be disturbed through subsequent applications.

Contentions Raised by Homebuyers (Respondents)

Fraudulent Purpose Behind CIRP Initiation

The homebuyers contended that the sole objective behind filing the insolvency application was to evade the Corporate Debtor's statutory obligations toward the Noida Authority, liabilities toward genuine homebuyers who had been granted compensation or refund orders from UP RERA and Consumer Forums, and to derail the registration process of apartments allotted to bona fide purchasers.

According to the respondents, all units in the project had been sold to allottees and payments had been received by the Corporate Debtor, confirming that funds were recovered as planned. However, deliberate non-payment of statutory dues prevented the Noida Authority from registering units in favor of genuine homebuyers, reflecting misappropriation of funds by the Corporate Debtor's promoters.

The respondents demonstrated that Mr. Hemant Sharma, a Director of the Corporate Debtor, held the position of Additional Director in the Financial Creditor company from 12.05.2020 to 05.09.2020. Shortly after leaving the Financial Creditor, Mr. Hemant Sharma was appointed as Director of the Corporate Debtor. Mr. Neeraj Gusain was appointed as Director in the Financial Creditor company from 30.09.2020 and continued in that position.

The conjunction of these appointments with the Memorandum of Understanding dated 20.10.2020 executed between the parties—signed by Mr. Hemant for the Corporate Debtor and Mr. Neeraj for the Financial Creditor—revealed that the purported loan transaction was pre-planned. The respondents argued that Mr. Hemant Sharma resigned from the Financial Creditor merely one month before the transaction to avoid scrutiny of related party dealings, and immediately joined the Corporate Debtor.

Common LLP Partnership

The nexus between Mr. Hemant Sharma and Mr. Neeraj Gusain was further established through their designation as partners of a common entity, New Greens Landkart LLP. This partnership existed since July 2020, demonstrating a continuing relationship between the individuals controlling both the Financial Creditor and Corporate Debtor.

Non-Disclosure and Collusive Conduct

The respondents emphasized that neither the Financial Creditor in its Section 7 petition nor the Corporate Debtor in its reply disclosed the common directorship and related party status. The prompt admission of liability by the Corporate Debtor without raising any objection or contest further reinforced the inference of collusive conduct designed to misuse the insolvency framework.

Defective Transaction Documents

The homebuyers pointed out that neither the Memorandum of Understanding dated 20.10.2020 nor the minutes dated 15.12.2021—whereby the Corporate Debtor undertook to pay approximately Rs. 12.88 crore—were executed on stamp paper, raising serious questions about their validity. The Financial Creditor failed to produce documentary evidence substantiating the execution of these documents on their respective dates.

Examination at All Stages

The respondents submitted that the relationship between parties must be examined at all three critical stages under the Insolvency and Bankruptcy Code, 2016: the existence of debt, the debt becoming due, and the occurrence of default. If the applicant is found to be a related party at any of these stages and this fact is not disclosed to the Adjudicating Authority, it casts serious doubt on the legitimacy of insolvency proceedings.

Purpose of Section 65

According to the respondents, the legislative intent behind Section 65 of the Code is to protect and preserve the interests of legitimate creditors of the Corporate Debtor. Section 65 entrusts the Adjudicating Authority with the duty to deliberate on actions undertaken and the intent behind filing insolvency petitions. The provision explicitly empowers the Adjudicating Authority to set aside admission orders if it is proved through documentary evidence that CIRP was initiated fraudulently and with malicious intent.

Timing Not a Bar