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Supreme Court Rules CIRP Initiated by Fraud May Continue for Other Creditors
The on Wednesday delivered a landmark judgment on the interplay between initiation of insolvency proceedings and the rights of other stakeholders, holding that while a corporate insolvency resolution process (CIRP) triggered by a operational creditor can be recalled, it need not be terminated if the larger interests of other creditors and stakeholders warrant its continuation.
A Bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe partly allowed appeals by , the , and individual homebuyers in the stalled Greenopolis housing project in Gurugram. The Court set aside the National Company Law Appellate Tribunal’s (NCLAT) order that had wiped out the entire CIRP of , and restored the proceedings before the for a fresh decision on whether the process should continue.
The Greenopolis Saga
The dispute centres on a 47.218-acre real estate project called Greenopolis in Sector 89, Gurgaon. Landowner Orris Infrastructure had entered into a development agreement with Three C Shelters in . Construction stalled after , prompting homebuyers to approach the , which in directed Orris, as statutory licensee, to complete the project using funds from an escrow account.
Amid these proceedings, —claiming to be an operational creditor owed about Rs 29.95 crore—filed a Section 9 petition under the in . The NCLT admitted the petition in after the corporate debtor’s director filed an affidavit admitting the debt, and appointed an interim resolution professional (IRP) in , imposing a .
Homebuyers alleged collusion between Straight Edge and Three C Shelters, but the NCLAT dismissed their appeal in . However, in , the NCLT—on applications by the resolution professional of (a shareholder) and Orris—found that the Section 9 petition was “ ” and “ .” Among the clinching evidence: the board resolution authorising a reply to the demand notice was issued 107 days before the notice itself; the directors who admitted the debt later described themselves as an “office boy” and “pantry boy”; and an unregistered memorandum of understanding was found to be an afterthought.
But the NCLT held that it had no power to its own admission order. The NCLAT reversed that view in , setting aside the entire CIRP. Appeals by Orris and homebuyers followed.
Arguments at the Supreme Court
, for Orris, argued that the CIRP had advanced to a mature stage and could be allowed to continue, relying on the principle that once admitted, the proceedings become . urged the Court to adopt principles from the erstwhile to steer the process clear of fraud.
On the other side, contended that fraud and collusion vitiate the entire proceeding from its inception, and supported the NCLAT’s order terminating the CIRP.
The Power to : A
The Supreme Court first addressed whether the NCLT has the power to CIRP once fraud is established, answering emphatically in the affirmative.
Drawing on a line of precedent—including , , and —the Court explained that the existence of a “debt” is a under the IBC. If that fact is procured through deception, the tribunal never truly had jurisdiction to admit the petition.
“Those who invoke IBC proceedings are under a and duty not to deceive or mislead,” the Court observed. “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.”
On the facts, the Court noted that the debt was a “mirage,” fabricated solely to trigger a CIRP and impose a that would block the remedies of homebuyers. “It is evident from the above findings that activities of M/s Straight Edge were anything but straight, in fact outright crooked,” the judgment said.
From to : Why CIRP Outlives the Initiating Creditor
The more nuanced question was whether such a finding must automatically end the CIRP. The Court held that it does not.
Drawing on and , the Court traced the transformation of insolvency proceedings from (between the applicant and debtor) to once the petition is admitted. At that stage, the under Section 14 vests management in the IRP, claims are collated from all creditors under Section 18, a Committee of Creditors (CoC) is formed under Section 21, and the resolution plan must benefit all creditors under the waterfall in Section 53.
“The initiating creditor is merely the , and not the ,” the Court stressed. Further, Section 12A, introduced in , requires 90% CoC approval for any withdrawal, confirming that the applicant no longer holds unilateral control.
“Requiring other creditors to begin afresh because the original applicant colluded with the debtor would defeat the very idea of resolution,” the Court reasoned. “The resolution process can therefore continue even in the absence of the original applicant.”
The Court laid down clear principles: where initiation is found , the NCLT must disallow the original applicant from participating and may initiate proceedings under Section 65. But it must then decide, after hearing the RP, CoC, and stakeholders, whether the CIRP should continue. If it does, the process must be concluded expeditiously.
Key Observations
- “Those who invoke IBC proceedings are under a and duty not to deceive or mislead.”
- “The initiating creditor is merely the , and not the .”
- “CIRP proceedings that have commenced need to be continued to subserve the larger interests of resolving the corporate insolvency of the corporate debtor for which there are other stakeholders.”
As the LiveLaw report paraphrased, “A creditor who sets insolvency in motion through fraud can be thrown out of the process, but the process itself belongs to every creditor once admitted.”
Decision and Directions
The Supreme Court partly allowed the appeals, set aside the NCLAT’s order, and restored CIRP No. IB-2721/ND/2019 before the NCLT. The NCLT must now decide whether to continue the proceedings in light of the conclusive finding of fraud and collusion against Straight Edge, considering the ownership of the Greenopolis project and after hearing the RP, CoC, homebuyers, and other stakeholders. If the NCLT decides to continue, it must conclude the CIRP expeditiously.
The Court expressly declined to rule on Orris’s ownership claims, leaving the NCLT free to address the issue. The contempt petitions were closed.
Implications
The ruling strikes a balance between deterring abuse of the IBC and protecting the collective interests of creditors. It empowers NCLTs to sanction applicants while preserving a viable resolution process for the benefit of all stakeholders—a outcome that could influence numerous real estate insolvencies where initiation is alleged. The judgment also reinforces that the IBC’s overarching objective of and credit availability trumps the integrity of the initiating creditor’s claim, provided the process can be conducted with .
