Back
Supreme Court Holds NCLT Can Recall Fraudulent But May Allow Continuation of Insolvency Process
In a significant ruling that clarifies the intersection of fraud and the insolvency process, the has held that the possesses the to recall an order admitting a Corporate Insolvency Resolution Process () if the underlying the admission were tainted by fraud or collusion. However, the Court cautioned that such a finding does not automatically mandate the termination of the ; once admitted, the process becomes a collective, involving all creditors and stakeholders, and the NCLT must separately decide whether to allow it to continue.
The judgment, delivered by a division bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe, underscores the
of parties invoking the
not to deceive or mislead the tribunal.
"Those who invoke IBC proceedings are under a
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,"
the Court observed.
The Dispute: Collusive Initiation of at Greenopolis
The case arose from the of , the developer of the Greenopolis residential project in Gurugram. had entered into a development agreement with Three C Shelters in for a sprawling 47.218-acre project comprising 1,862 flats. The insolvency proceedings were triggered on , when filed a petition under , claiming an operational debt of approximately ₹29.96 crore. The , admitted the petition on , and subsequently commenced and imposed a on .
Soon after, homebuyers and other stakeholders alleged that the petition was a —that Straight Edge and Three C Shelters had conspired to initiate the insolvency process. The NCLT, upon investigation, found between the two entities but held that it lacked the power to recall its own admission orders. The reversed that finding on , holding that the NCLT indeed had jurisdiction to recall an order obtained through fraud, and consequently set aside the .
Before the Supreme Court, the appellants—Orris Infrastructure, the , and homebuyers—argued that the had reached an advanced stage and should be allowed to continue, while the respondents submitted that the fraudulent initiation could be remedied without terminating the entire process.
The Supreme Court's Reasoning: Fraud Vitiates Jurisdiction, but is In Rem
The Supreme Court affirmed the concurrent findings of
between Straight Edge and Three C Shelters. It stressed that fraud affecting the jurisdiction of a statutory authority cannot be shielded by the
.
"
affected by fraud or collusion cannot be the foundation for assuming jurisdiction, as such facts cannot continue to sustain jurisdiction,"
the Court stated.
Nevertheless, the Court drew a crucial distinction: once a
is admitted, it ceases to be a bilateral dispute between the applicant and the
. It transforms into a collective,
under the supervision of the NCLT, with the
and the
carrying the process forward.
"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
become stakeholders in the process, and the affairs of the
are vested in the RP, and the proceedings are under the jurisdiction of the AA,"
the bench observed.
Therefore, even if the original applicant acted fraudulently, the can potentially continue if it serves the interests of the collective body of creditors. The NCLT must exercise its discretion—after hearing the RP, the CoC, and other stakeholders including homebuyers—to decide whether the should proceed or be terminated.
The Order: NCLAT Judgment Set Aside, NCLT to Decide Continuation
The Supreme Court partly allowed the appeals and set aside the NCLAT’s judgment. It restored the Greenopolis to its original number and directed the NCLT to hear all stakeholders and determine whether the process should continue in light of the conclusive finding of . If the NCLT decides to continue the , it must conclude the proceedings expeditiously.
On the facts, the Court found that no genuine debt existed and that the alleged debt had been fraudulently presented solely to trigger the and the , thereby prejudicing the remedies available to homebuyers and other claimants. The NCLT, therefore, had the power to recall the admission by dismissing the Section 9 petition.
Implications for IBC Practice
This judgment provides much-needed clarity on the NCLT's inherent powers to recall orders procured by fraud—a power that the tribunal itself had previously doubted. It reaffirms that public law proceedings cannot be used as tools for private deception. At the same time, it protects the integrity of the collective insolvency process by preventing a unilateral withdrawal of the based solely on the applicant's malfeasance. The ruling balances the need to purge fraud from the system with the need to preserve the legitimate interests of other creditors and stakeholders who may have acted in good faith.
For legal practitioners, the decision underscores the importance of scrutinizing the of the debt and the relationship between the applicant and the at the admission stage. It also opens the door for stakeholders to challenge collusive petitions even after the has commenced, though the ultimate fate of the process will be decided by the NCLT based on the overall interests of the creditor community.
The Supreme Court's nuanced approach—recognizing both the power to recall for fraud and the discretion to continue the process—marks a significant development in insolvency jurisprudence, one that is likely to be cited in future cases involving allegations of collusive initiation.
