NCLT Mumbai Bench Recalls CIRP Order, Slams Financial Creditor for Fraudulent Initiation under IBC S.65 - 2025-03-21

NCLT Mumbai Bench Recalls CIRP Order, Cites Fraud by Financial Creditor

Mumbai, India – In a significant judgment delivered on March 18, 2025, the National Company Law Tribunal (NCLT) Mumbai Bench-I, comprising Hon’ble Member (Judicial) Shri Prabhat Kumar and Hon’ble Member (Technical) Shri V.G. Bisht , recalled an earlier order initiating the Corporate Insolvency Resolution Process (CIRP) against Sonata Realty Private Limited. The Tribunal found that the CIRP was fraudulently initiated by Nitco Realties Private Limited, the financial creditor, who misrepresented facts and suppressed crucial documents.

Background of the Case

The case arose from an application filed by Fountain Square Residents and Commercial Welfare Association, an association of homebuyers, seeking to challenge the CIRP initiated against Sonata Realty Private Limited. The homebuyers had invested in a project to be developed by Sonata Realty and Shree Shubh Builders Pvt. Ltd. and were aggrieved by the initiation of CIRP based on a claim by Nitco Realties.

The Applicant association contended that Nitco Realties had fraudulently initiated CIRP by suppressing a Memorandum of Understanding (MOU) dated February 2, 2008, which revealed the true nature of the transaction between Nitco and Sonata Realty . The homebuyers argued that the purported financial debt was not actually a debt but rather an investment towards a shareholding agreement, and thus did not qualify as a financial debt under the Insolvency and Bankruptcy Code (IBC). They further highlighted that the properties of Sonata Realty were already under the custody of the Bombay High Court Receiver.

Arguments and Tribunal's Observations

The Applicant argued that Nitco Realties misrepresented the transaction as a simple loan carrying interest, while the MOU revealed it was related to a proposed equity acquisition. They pointed out that Nitco failed to disclose the MOU and orders from the Bombay High Court in its CIRP application.

Nitco Realties, in its defense, argued that the recall application was not maintainable and that the MOU was known to the applicant since 2016. They maintained that the disbursed amount was indeed a financial debt, meant to enable Sonata Realty to acquire land, and the MOU was merely a security mechanism.

The Interim Resolution Professional (IRP) also filed a reply detailing the creditor claims received and categorized during the CIRP process.

The NCLT Bench meticulously examined the MOU and related documents. It noted discrepancies between Nitco 's claims in the CIRP petition and the actual nature of the transaction as revealed in the MOU. The Tribunal observed:

> "In the present case, it is apparent that the particulars of debt as stated in Part IV of the Application evidencing its nature is completely different, except the total amount outstanding. While in Part IV, the Respondent No. 2 had pleaded it to be simpliciter transaction of amounts, carrying interest, disbursed in a scheme floated by the Corporate Debtor, however, on a careful analysis of the MOU dated 2.2.2008 read in conjunction with the receipts issued towards payment of the amounts (claimed as disbursement of loan in Part IV), the true nature of the transactions is not a simpliciter loan transaction..."

The Tribunal further emphasized that the MOU clauses indicated a deal for 50% equity in the developed land, with payments linked to land acquisition and project development costs, not a simple loan.

Reliance on Legal Precedents

The NCLT referred to the Supreme Court’s judgment in Greater Noida v. Prabhjit Singh Soni (2024) which affirmed the Tribunal's inherent power to recall its orders, especially in cases of misrepresentation or fraud. It also cited Beacon Trusteeship Limited versus Earthcon Infracon Private Limited and Another (2020) and Acute Daily Media Pvt. Ltd. and Others versus Rockman Advertising and Marketing (India) Ltd. and Others (2025) to underscore the Adjudicating Authority's duty to address allegations of fraudulent CIRP initiations under Section 65 of the IBC.

Decision and Implications

Ultimately, the NCLT concluded that Nitco Realties had indeed misrepresented facts and suppressed the MOU, leading to a fraudulent initiation of CIRP. The Tribunal stated:

> "Accordingly, we are of considered view that the Respondent No. 2 has mis-represented the particulars of its debt so as to prevent this Tribunal from determining the true nature of the amount due claimed by it in the C.P. (IB) 48/2024 and mis-declared the surrounding facts leading to disbursement of claimed debt. The Order dated 4.6.2024 was passed by this Tribunal believing its submission... Had the MOU dated 2.2.2008 and receipts issued by the Corporate Debtor would have been placed on record, the outstanding amount of Rs. 2.50 crore could not have held to be a financial debt, and this would have led to rejection of C.P. (IB) 48/2024."

Consequently, the NCLT recalled its order dated June 4, 2024, dismissed the CIRP petition, and imposed a penalty of ₹5,00,000 on Nitco Realties for fraudulent initiation of the CIRP process. This judgment serves as a strong warning against misrepresentation and suppression of facts in CIRP applications and reinforces the NCLT's commitment to preventing abuse of the IBC. The decision also offers a degree of relief to the homebuyers, whose interests were indirectly threatened by the potentially fraudulent CIRP.