Adjudicating Authority Can Recall Orders Obtained Through Fraud Under Rule 11 Of NCLT Rules: NCLAT

Brief Facts

The Corporate Debtor (Appellant) entered into Agreements for Sale with the Respondents (Homebuyers/Financial Creditors) for residential units in the Marvel Isola J Building Project. The residential units were not constructed on time, and possession was not handed over.

The Respondents filed a section 7 petition under the Insolvency and Bankruptcy Code 2016 (IBC) on 30.11.2019. The Corporate Debtor questioned its maintainability on the ground that the Respondents did not meet the requirements under second proviso to section 7(1) which prescribed minimum threshold of 100 allottees or 10% of the total allottees. The Respondent did not appear before the Adjudicating Authority.

On 04.06.2024, the Adjudicating Authority dismissed the petition due to a failure to meet the required percentage/no. of allottees. On 14.09.2024, the Respondents filed an application under Rule 11 of the NCLT Rules seeking the recall of the 04.06.2024 order.

By the impugned order dated 18.11.2024, the Adjudicating Authority recalled the dismissal order and restored the petition. The Appellant filed the appeal under section 61 of IBC against the impugned order.

Contentions

Counsel for the Appellant argued that the Adjudicating Authority's decision to dismiss the case on merits on 04.06.2024 did not warrant a rehearing. The order not having been challenged within the prescribed limitation period had already attained finality.

Counsel contended that the powers of recall under Rule 11 did not extend to review of its own order/judgment. In the guise of an application filed under Rule 11, the Respondent managed to seek review of the order of 04.06.2024.

Counsel referred to Union Bank of India vs. Dinkar T. Venkatasubramanian & Ors, which held that the power of recall does not include the power to rehear the case to find out any apparent error in the judgment. Reliance was also placed upon My Palace Mutually Aided Co-operative Society vs. B. Mahesh, the Supreme Court held that Civil Courts, while exercising inherent powers, cannot unsettle already decided issues.

Counsel for the Respondent contended that the non-appearance of the counsel was on account of life-threatening medical complications suffered by the counsel's wife. Counsel relied upon Secretary, Department of Horticulture, Chandigarh vs. Raghu Raj, in which the Supreme Court held that a litigant should not suffer on account of default or non-appearance of the advocate.

Counsel further contended that the Corporate Debtor misled the Adjudicating Authority into believing that there were 288 unit-holders, while there were only 44 units. The Corporate Debtor suppressed material information. Thus, the Adjudicating Authority was within its jurisdiction to exercise its inherent powers under Rule 11.

Observations

The Tribunal observed that having already dismissed the Company Petition on 04.06.2024, the Adjudicating Authority, basis a recall application, cannot revisit the Company Petition on the ground that the dismissal was incorrect or that it had been incorrectly adjudicated because of disputed facts.

The Tribunal held that the Corporate Debtor did not disclose that the Homebuyers met the eligibility requirements of the second proviso to Section 7(1). Rather, the Corporate Debtor incorrectly stated that the project had 282 flats, and the 12 Respondent allottees did not meet the required percentage to file the petition.

The Tribunal accepted the explanation offered by the Respondents for their non-appearances.

The Tribunal observed that fraud nullifies all proceedings, and that the Court has power to recall an order which was passed due to a fraud played on the Court. The Tribunal held that the Adjudicating Authority was correct in recalling the order since the Appellants obtained it by suppressing material facts and also took advantage of the Respondent's absence.

In this regard, the Tribunal observed that “where the Adjudicating Authority has been made to rely on distorted facts which the Adjudicating Authority became aware of belatedly, the Adjudicating Authority can always invoke its inherent powers in order to protect itself and to prevent an abuse of its process.”

The Tribunal was convinced with the reasoning of the Adjudicating Authority in recalling the order and restoring the petition.

Case Title: Marvel Landmarks Pvt Ltd. vs. Jay Nihalani & Ors.

Case Number: Company Appeal (AT) (Insolvency) No. 2227 of 2024

For Appellant : Mr. Abhijeet Sinha, Sr. Advocate with Mr. Dhyal Deshpandy and Mr. Amit Arsiwala, Advocates.

For Respondents : Mr. Chaitanya Nikte and Mr. Anuj Tiwari, Advocates.

Date of Judgment: 21.01.2025