NCLAT Directs NCLT To Hear Collusion Plea Before Deciding Insolvency Case

The National Company Law Appellate Tribunal (NCLAT) at Delhi has recently directed the NCLT, Mumbai Bench, to first decide an application filed by a sugar cooperative alleging that a Section 7 insolvency case against a company was collusive and could prejudice its rights.

The tribunal said this was warranted by the peculiar facts of the case. The cooperative was not a party to the insolvency proceedings but claimed that its sugar factory and property could be affected.

“In all judicial fairness, it was expected that the Tribunal by virtue of the Impugned Order, before closing the proceedings of CP No. 990/2024, it ought to have taken into consideration the application preferred by the appellant invoking provision contained under Section 60(5) of the Code,” a bench comprising Judicial Member Justice Sharad Kumar Sharma, Technical Members Arun Baroka and Indevar Pandey observed.

The appeal was filed by Shri Sant Eknath Co-operative Sugar Factory Ltd. against an NCLT order in a Section 7 petition filed by Buldana Urban Cooperative Credit Society Limited against Sachin Ghayal Sugar Private Limited.

A Section 7 application is a proceeding through which a financial creditor seeks initiation of the corporate insolvency resolution process against a company over a financial debt. Section 60(5) empowers the insolvency adjudicating authority to decide questions of law or fact arising out of or in relation to insolvency proceedings.

The sugar cooperative was not a party to the insolvency case. It claimed that its interests could be affected because the corporate debtor was managing its sugar factory under a collaboration agreement.

The cooperative entered into the agreement with the corporate debtor on August 3, 2015. Under the arrangement, the corporate debtor was to manage and operate the cooperative's sugar mill for 18 crushing seasons.

Disputes later arose between the parties and were referred to arbitration. A subsequent compromise provided that the corporate debtor would repay amounts payable to various banks and indemnify the cooperative if any bank took action because of non-payment.

The cooperative, which referred to contributions from around 18,000 farmers towards its capital, alleged that the Section 7 proceedings were collusive and could prejudice its rights. It apprehended that its property could be treated as belonging to the corporate debtor in the CIRP because of the latter's management role under the collaboration agreement.

The corporate debtor had failed to file its reply despite being given time by the NCLT. On August 12, 2025, the NCLT recorded that the matter would proceed without the reply.

On September 25, the cooperative filed an application under Section 60(5) of the Insolvency and Bankruptcy Code, 2016, read with Rule 11 of the NCLT Rules. It sought permission to intervene in the CIRP proceedings and asked the NCLT to reject the insolvency petition, alleging fraudulent and malicious initiation of proceedings.

The NCLAT noted that the NCLT proceeded with the Section 7 case without first deciding this application.

The appellate tribunal held that, in the peculiar circumstances, the application had to be considered before the Section 7 petition was finally decided. It observed that keeping the application pending would “nullify the purpose” for which it had been filed, particularly as the cooperative had alleged that the proceedings were collusive.

The NCLAT therefore directed the NCLT to first decide the Section 60(5) application. Only thereafter should it proceed to decide the Section 7 petition on merits.

The tribunal also directed the NCLT to decide the application within three months from September 17, 2026, if it had not already been decided.

For Appellant: Advocate Prakhar Tandon

For Respondent: Advocates Atishay Jain, Kunal K.; Ninad Deshpande, Aishwarya Darda