Fraudulent or collusive CIRP admission may be recalled, but the insolvency process can continue if it has acquired an in-rem character

The Hon’ble Supreme Court of India recently considered whether an Adjudicating Authority under the Insolvency and Bankruptcy Code, 2016 (‘IBC’) possessed the power to recall admission of a Section 9 application upon discovering that the insolvency proceedings had been initiated through fraud and collusion, and whether such a finding inevitably required termination of the Corporate Insolvency Resolution Process (‘CIRP’).

The Supreme Court held that where jurisdictional facts underlying initiation of CIRP were fraudulently created or collusively presented, the Adjudicating Authority had the power to recall admission and reject the original application. It further stated that, once admitted, insolvency proceedings acquire an in-rem character involving the rights of multiple stakeholders and, therefore, continuation or termination of CIRP must be determined independently based on the interests of the insolvency process as a whole.

M/s Orris Infrastructure Private Limited (‘Appellant’) owned land on which the Greenopolis Housing Project was developed pursuant to a development agreement with M/s Three C Shelters Private Limited (‘Corporate Debtor’). The Corporate Debtor failed to complete the project within the stipulated period, resulting in proceedings by homebuyers before the Haryana Real Estate Regulatory Authority (‘HRERA’), the Haryana Real Estate Appellate Tribunal, and the National Consumer Disputes Redressal Commission. During this period, M/s Straight Edge Contracts Private Limited. (‘Operational Creditor’) filed a petition under Section 9 of the IBC alleging unpaid operational debt against the Corporate Debtor. The petition was admitted and CIRP commenced.

Subsequently, homebuyers and other stakeholders alleged that the insolvency proceedings had been initiated through collusion between the Operational Creditor and the Corporate Debtor to frustrate remedies available to homebuyers and shield the project from regulatory action. Upon detailed examination, the Adjudicating Authority found extensive fraud and collusion in the creation and assertion of the alleged debt but concluded that it lacked power to recall the admission order.

In this regard the National Company Law Appellate Tribunal (‘NCLAT’) held that such power existed and consequently had set aside the entire CIRP. Partially aggrieved by setting aside of CIRP, the appellant sought relief before the Hon’ble Supreme Court.

Before the Supreme Court, the Appellant contended that the findings of fraud and collusion were conclusive and justified exclusion of the collusive Operational Creditor but did not warrant destruction of the entire insolvency process after numerous creditors and stakeholders had already entered the CIRP. It was submitted that insolvency proceedings, once admitted, became collective proceedings in rem and could continue, notwithstanding defects attributable to the original applicant.

The Respondent submitted that fraud vitiated the entire process and that insolvency proceedings initiated on the basis of a fictitious or collusive debt could not be permitted to survive. It was contended that recalling the admission order necessarily required termination of CIRP in its entirety.

Considering the submissions, the Hon’ble Supreme Court observed that existence of a debt constituted a jurisdictional fact for invocation of insolvency jurisdiction under the IBC. Where such jurisdictional facts were procured through fraud, collusion, or deliberate misrepresentation, the Adjudicating Authority retained inherent power to recall admission because public law powers could not be exercised on the basis of deception. It affirmed the concurrent findings that the alleged operational debt is fraudulently projected and that the Operational Creditor and Corporate Debtor had actively colluded to initiate CIRP. However, the Apex Court distinguished between the pre-admission and post-admission stages of insolvency proceedings. It held that once a petition is admitted, the proceedings ceased to remain a dispute between the original applicant and the Corporate Debtor and became a collective process involving all creditors.

Accordingly, the Hon’ble Supreme Court in Orris Infrastructure Private Limited v. Rakesh Kumar Gupta & Ors partly allowed the appeals, set aside the NCLAT’s order terminating the CIRP, restored the insolvency proceedings, and directed the Adjudicating Authority to determine whether the CIRP should continue in light of the established fraud and collusion. The Adjudicating Authority is further directed to hear the Resolution Professional, Committee of Creditors, homebuyers, and other stakeholders before taking a final decision regarding continuation of the insolvency process.