In a landmark ruling on collusive operational creditor-initiated insolvency, the Supreme Court has restored the CIRP to the NCLT and directed it to decide continuation on merits, holding that admission vitiated by fraud does not automatically entail recall where other creditors have joined the process. The Court said that the NCLT (Adjudicating Authority) has the power and jurisdiction to recall admission of a Section 9 IBC petition where jurisdictional facts such as the existence of debt and default are subsequently proved to be fraudulent and collusive.
Before admission, proceedings under Sections 7, 9 or 10 are in personam between the applicant and the Corporate Debtor, and once admitted, the proceedings become in rem, all creditors become stakeholders, and management vests in the IRP/RP under the NCLT’s supervision, added the Court.
A Two-Judge Bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe affirmed the concurrent findings of fraud and collusion recorded by the Adjudicating Authority and the NCLAT, observing that the activities of M/s Straight Edge were ‘anything but straight, in fact outright crooked’. The Court observed that the existence of the debt itself was a ‘mirage’ and was fraudulently portrayed to invoke the Adjudicating Authority’s (NCLT) jurisdiction, block other legal remedies of homebuyers, and impose moratorium.
The Bench explained the where the NCLT finds that CIRP was initiated on the basis of fraud and collusion, it shall disallow the original applicant from participating and may also initiate proceedings under Section 65 of the IBC. Most importantly, the NCLT is not duty-bound in every case to recall CIRP upon a finding of fraud, rather, it has the power and jurisdiction to continue the CIRP proceedings in the larger interest of resolving the corporate debtor’s insolvency.
The Court pointed out that statutorily recognised under Section 12A, withdrawal post-admission requires 90% CoC voting share approval, confirming that the carriage of proceedings shifts from the applicant to the collective insolvency estate. Further, where the existence of debt itself is a fraudulent portrayal, the AA’s assumption of jurisdiction is void and the order of admission can be recalled at any stage, as jurisdictional facts affected by fraud cannot sustain jurisdiction.
The Bench also explained that the IBC Code does not contemplate multiple simultaneous resolution processes, and where other creditors have joined and the resolution process has advanced, the AA may continue CIRP in the larger interest of resolving corporate insolvency, after hearing the RP, CoC and other stakeholders. The Court emphasised that fraud in public law arises from deception committed by knowingly disclosing incorrect facts to invoke jurisdiction, and that jurisdictional facts vitiated by fraud cannot sustain the assumption of jurisdiction.
Briefly, Orris Infrastructure Private Limited, the landowner of a 47.218-acre parcel in Sector 89, Gurgaon, entered into a development agreement in 2011 with M/s Three C Shelters Private Limited (the Corporate Debtor) for construction of a real estate project called ‘Greenopolis’ comprising 1,862 flats, with a sharing ratio of 65:35 between the Corporate Debtor and Orris. The Corporate Debtor failed to complete the project within the stipulated 36-month period, prompting homebuyers to form the Greenopolis Welfare Association and approach the Haryana Real Estate Regulatory Authority (HRERA).
The HRERA held that the Corporate Debtor had no development rights and that Orris, as landowner, licensee and collaborator, bore the primary responsibility for completing the project. Against this backdrop, M/s Straight Edge Contracts Pvt Ltd. filed a Section 9 petition under the Insolvency and Bankruptcy Code, 2016, claiming to be an operational creditor. Notably, an affidavit filed by a director of the Corporate Debtor admitting the operational debt was already on record when the petition was heard. The Adjudicating Authority admitted the petition and appointed an Interim Resolution Professional and imposed moratorium.
Aggrieved homebuyers approached the NCLAT, which dismissed their appeal. Subsequently, applications were filed before the AA alleging fraud and collusion between Straight Edge and the Corporate Debtor, leading the AA to conduct a full-fledged inquiry. The AA returned a clear finding of fraud and collusion but held that it had no power to recall CIRP. The NCLAT reversed this view, set aside the CIRP, and held that the AA did possess such power.
