The Supreme Court has held that a finding of fraud and collusion in initiating insolvency proceedings does not automatically require the entire Corporate Insolvency Resolution Process (CIRP) to be terminated. While the National Company Law Tribunal (NCLT) has the power to recall an admission order obtained through fraud, it must separately examine whether the insolvency process should continue in the interests of other creditors and stakeholders.
A bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe allowed the appeals, set aside the National Company Law Appellate Tribunal’s (NCLAT) judgment terminating the CIRP, and restored the proceedings before the adjudicating authority.
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However, the Court did not direct unconditional continuation of the insolvency process. It required the NCLT to decide that question after hearing the resolution professional, the Committee of Creditors (CoC), and other stakeholders, including homebuyers.
The petitioner/assessee owned 47.218 acres of land in Sector 89, Gurgaon. Under a development agreement, Three C Shelters Private Limited was to develop the Greenopolis project comprising 1,862 flats at its own cost.
The constructed flats were to be shared between Three C Shelters and Orris in a ratio of 65:35. Tripartite apartment buyer agreements executed during 2012–13 contemplated completion within 36 months from allotment, with a further grace period of six months.
As construction remained incomplete, homebuyers formed the Greenopolis Welfare Association and approached the Haryana Real Estate Regulatory Authority (HRERA). In January 2019, HRERA directed completion of the project and required money deposited in the escrow account to be used only for the project.
Further regulatory and consumer proceedings followed. In an order dated October 7, 2020, HRERA held that Orris, as landowner, licence holder and collaborator, bore the primary responsibility for development, construction and completion of the project. It also directed the transfer of funds to a dedicated RERA account for the project.
Meanwhile, Straight Edge Contracts Private Limited filed an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC), on October 17, 2019, claiming to be an operational creditor of Three C Shelters.
The petition proceeded on the basis of an admission of liability by a director of the corporate debtor. The NCLT allowed the petition on July 20, 2020. By a subsequent order dated October 16, 2020, it appointed an interim resolution professional and imposed the moratorium.
The operational debt referred to in the proceedings was approximately ₹29.96 crore.
Homebuyers challenged the admission before the NCLAT, alleging fraud and collusion between the operational creditor and the corporate debtor. The appellate tribunal initially dismissed the challenge in January 2021, noting, among other circumstances, that several other creditors had also sought insolvency proceedings against the company.
Subsequent applications brought the allegations of collusive initiation into sharper focus.
During a detailed examination, the NCLT found that the insolvency application had been initiated through active collusion between Straight Edge Contracts and the corporate debtor.
The tribunal identified inconsistencies between the claimed construction work and earlier findings of the real estate authorities that construction had virtually stopped in early 2016. It also questioned the supporting agreements, the later memorandum of understanding acknowledging liability, and the authority of the persons who admitted the debt.
Another circumstance considered was that a board resolution authorising a response preceded the demand notice by several months.
The NCLT also recorded that persons presented as directors had described themselves as office or pantry staff without knowledge of the companies’ business affairs. It questioned the admission of liability without authenticated documents corroborating the claimed work.
These findings of fraud and collusion were affirmed by the NCLAT. The Supreme Court noted that they were not contested before it and expressly affirmed them.
Despite finding collusion, the NCLT held that it lacked the power to recall the admission orders once the insolvency process had commenced. It therefore concluded that the CIRP had to continue.
The NCLAT took the opposite view in its judgment dated August 28, 2023. It held that an admission order obtained by fraud could be recalled and consequently set aside the insolvency process.
The Supreme Court found that both approaches failed to address a necessary distinction: the power to recall a fraudulently obtained admission order and the separate question of whether the collective insolvency process should nevertheless be preserved.
The Supreme Court held that statutory jurisdiction depends upon the existence of foundational or “jurisdictional” facts. Under the IBC, the existence of debt is one such fact.
Where the facts relied upon to invoke insolvency jurisdiction are subsequently proved to be fraudulent or collusive, the adjudicating authority is entitled to recall the admission of the application.
The Court explained that fraud affecting statutory proceedings goes beyond a private dispute. It can corrupt the decision-making process and turn the machinery of law into a means of securing a privately engineered outcome.
Accordingly, the finality of an admission order cannot legitimise proceedings founded on deception about the facts necessary to invoke the tribunal’s jurisdiction.
The Court nevertheless held that recall of the initiating application does not inevitably require termination of everything that follows.
Before admission, an insolvency petition principally concerns the applicant creditor and the corporate debtor. After admission, the proceedings become in rem—a collective process affecting the body of creditors and other stakeholders.
The moratorium takes effect, management passes to the insolvency professional, claims are invited and verified, and the CoC assumes its statutory role. The process therefore ceases to remain under the control of the creditor who first invoked the IBC.
The Court emphasised that the initiating creditor triggers the process but does not own it. Other creditors acquire interests in the resolution process independently of the original applicant.
Requiring those creditors to begin fresh proceedings merely because the initiating creditor was collusive could undermine the collective and unitary character of insolvency resolution.
The Supreme Court held that the adjudicating authority may continue the CIRP where doing so serves the larger interests of resolving the corporate debtor’s insolvency.
That decision must follow a hearing of the resolution professional, consideration of the CoC’s views, and consultation with other stakeholders.
A central consideration is whether future proceedings can be conducted with integrity, transparency and confidence that the IBC’s purpose will be achieved.
The Court also made clear that continuation is not compulsory. The adjudicating authority may decide that the circumstances do not permit the insolvency process to continue, provided it gives reasons.
Where initiation is found to be fraudulent and collusive, the original applicant must be disallowed from participating. Proceedings under Section 65 of the IBC may also be initiated.
The NCLT had made findings concerning Orris’s ownership and control of Greenopolis, the corporate debtor’s rights in the project, and the resolution professional’s entitlement to take custody of the property and escrow funds.
The Supreme Court expressly declined to adjudicate those issues and expressed no opinion on them.
However, it directed the adjudicating authority to consider all necessary facts and events, including ownership of the project, when deciding whether the CIRP should continue.
The Supreme Court restored the insolvency proceedings to their original number before the adjudicating authority.
The NCLT must now decide whether to continue the process in light of the conclusive finding of fraud and collusion involving Straight Edge Contracts. It must hear the resolution professional, the CoC and other stakeholders, including homebuyers who have pursued other statutory and judicial remedies.
If the NCLT decides to continue the CIRP, the proceedings must be concluded expeditiously, considering the prolonged pendency of the dispute. The connected contempt petitions were closed.
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