NCLT Can Recall Fraudulently Initiated CIRP At Any Time; Applicants Have Public Duty Not To Mislead: Supreme Court

The Supreme Court has held that the National Company Law Tribunal (NCLT) can recall an order admitting insolvency proceedings if the jurisdictional facts on which the proceedings were based are later found to have been affected by fraud or collusion.

The court, however, clarified that such a finding does not automatically mean that the entire Corporate Insolvency Resolution Process (CIRP) must end.

Once insolvency proceedings are admitted, they become a collective process involving all creditors and other stakeholders. The NCLT must therefore separately decide whether the CIRP should continue.

A division bench of Justices Pamidighantam Sri Narasimha and Alok Aradhe observed that a person invoking the Insolvency and Bankruptcy Code (IBC) has a public law duty not to deceive or mislead the tribunal on facts that determine its jurisdiction.

"Those who invoke IBC proceedings are under a public law obligation and duty not to deceive or mislead. If jurisdiction is exercised on the basis of fraud or collusion, the Court or the Tribunal can undoubtedly withdraw the proceedings at any point of time. Jurisdictional facts affected by fraud or collusion cannot be the foundation for assuming jurisdiction, as such facts cannot continue to sustain jurisdiction.", the Court observed. 

The ruling came in appeals filed by Orris Infrastructure Pvt Ltd, Greenopolis Welfare Association and homebuyers challenging the NCLAT's August 28, 2023 decision in relation to the CIRP of Three C Shelters Pvt Ltd, developer of the Greenopolis project in Gurugram. Orris had entered into a development agreement with Three C Shelters in 2011 for the 47.218 acre project comprising 1,862 flats.

The insolvency proceedings were initiated after Straight Edge Contracts Pvt Ltd filed an insolvency petition on October 17, 2019, claiming an operational debt of approximately ₹29.96 crore. The NCLT New Delhi bench admitted the petition on July 20, 2020 and commenced CIRP and imposed moratorium on October 16, 2020.

Homebuyers and other stakeholders subsequently alleged that Straight Edge and Three C Shelters had colluded to initiate the insolvency proceedings.

The NCLT found fraud and collusion between Straight Edge and the corporate debtor but held that it had no power to recall its earlier admission orders. The NCLAT reversed this finding on August 28, 2023, holding that the NCLT had jurisdiction to recall an order obtained through fraud and setting aside the CIRP.

Before the Supreme Court, the petitioners argued that the CIRP had reached an advanced stage and should be allowed to continue, while the respondents submitted that the fraudulent initiation could be addressed without terminating the entire process.

The Supreme Court affirmed the findings of fraud and collusion between Straight Edge Contracts and Three C Shelters. It agreed with the NCLT and NCLAT that the insolvency proceedings had been initiated through a collusive arrangement.

The Court stressed that fraud affecting the jurisdiction of a statutory authority cannot be protected by the principle of finality, as public powers must be exercised for the purposes prescribed by law and cannot be used as a tool for private arrangements or deception.

On the facts of the case, the Court found that no genuine debt existed and that the alleged debt had been fraudulently presented to trigger CIRP and the moratorium, thereby affecting the remedies available to homebuyers and other claimants.

It consequently held that the NCLT had the power to recall the CIRP admission by dismissing the Section 9 petition.

The Court also clarified that admission of a Section 9insolvency  petition requires satisfaction of the mandatory statutory conditions under the IBC and that the admission stage is not meant for a detailed adjudication of the underlying commercial dispute.

However once CIRP commences, it becomes a collective, in rem process under the supervision of the NCLT, with the RP and CoC carrying the process. Therefore, the CIRP can potentially continue even if the original applicant is found to have acted fraudulently.

"Once the petition is admitted, the proceedings are no longer the preserve of the original applicant, creditor or debtor. They become in rem, and all creditors of the corporate debtor become stakeholders in the process, and the affairs of the corporate debtor are vested in the RP, and the proceedings are under the jurisdiction of the AA."

The Supreme Court accordingly, partly allowed the appeals and set aside the NCLAT's August 28, 2023 judgment. It restored the Greenopolis CIRP to its original number and directed the NCLT to decide whether the process should continue in light of the conclusive finding of fraud and collusion.

The NCLT must hear the RP, CoC and other stakeholders, including homebuyers and if it decides to continue the CIRP, conclude the proceedings expeditiously.

For the Petitioner: Senior Advocates C. A. Sundaram and Ram Ji Srinivasan, Advocates Harshit Sethi, Rohini Musa, Abhishek Gupta, Zafar Inayat, Vishwa Pal Singh, Amit Sharma, Harneet Singh, Aparna Singh, Tanmay Mehta, Anurag Pandey, Amit Kumar, Dinesh Sharma, Manoj Sharma, Kadambini Arora, Akshay Kumar Dwivedi, Jai Shankar Sikand, Kartik Yadav, Sheenam Chhabra and Nikilesh Ramachandran; AORs Manish Kumar Sharma, Vishwa Pal Singh and Mansi Tripathi.

For the Respondent: Senior Advocates Krishnan Venugopal, Nalin Kohli, Anupam Lal Das, Mukul Rohatgi and Gopal Sankaranarayanan; Advocates Pooja Mahajan, Savar Mahajan, Urvashi Girdhar, Srivatsava Reddy, Umang Motiyani, Avinash B. Amarnath, Kanika Singhal, Ayushman Arora, Vijeta Singh, Shivam Singh Rana, Deepshika, Niranjan Sahu, Abhishek Anand, Karan Kohli, Palak Kalra, Pallavi Pratap, Raj Kamal, Aseem Atwal, Anurag Chandra, Somil Jain, Nupur Kaushik, Shashwat Bali, Dakshita Nagpal, Siddhant Sharma, Nimish Chandra, Ratul Sharma, Shakti Bhati, Nivesh Kumar, Aviral Kapoor, Sonal Alagh, Sanjivan Chakraborty, Rahul Raj, Shivam Singh Tomar, Anurag Ojha, Jyoti Taneja, Prabhas Bajaj, Parikshit Vij, Devanshu Yadav, Gautam Awasthi, Venket Rao, Sanyat Lodha, Pankaj Chandola, Akshay Srivastava, Sumbul Ismail, Avani Sharma, Ashish Pandey, Vishal Sinha, Sidharth Mahajan, Baban Kumar Sharma, Keshari Kumar Tiwari, P. V. Yogeswaran, Pawan Upadhyay, Sharmila Upadhyay, Sarvjit Pratap Singh, Rajesh Kumar Sharma, Sanjeev Kumar, Anmol Wadhwa, Siddharth Batra, Akshat Srivastava, Prateek K Chadha, Purti Gupta, Henna George, Sunidhi Sah, Pooja, Khushi Sharma and Suvarna Chaturvedi; AORs Avinash B. Amarnath, Kanika Singhal, Abhishek Anand, Pallavi Pratap, Aseem Atwal, Nivesh Kumar, Anurag Ojha, Ashish Pandey, M/S. Unuc Legal LLP