The Supreme Court on Wednesday (September 30) held that, under the Insolvency and Bankruptcy Code, 2016, the Adjudicating Authority can recall the admission of a Section 9 insolvency application if the proceedings were initiated based on fraudulent or collusive jurisdictional facts.

However, the Court clarified that such a finding of fraud does not automatically require termination of the entire Corporate Insolvency Resolution Process (CIRP). Once insolvency proceedings have been admitted and have assumed an in rem character, the Adjudicating Authority (AA) must separately determine whether the CIRP should continue in the interests of the corporate debtor and its other stakeholders.

“…insolvency resolution process can be continued even after a finding that the original application under Section 9 was initiated fraudulently and with active collusion of the suspended Directors of the corporate debtor…for deciding whether to continue the resolution process, the AA will take into account multiple factors, the most important of which lies in ensuring that the future proceedings can be conducted with integrity and confidence that the purpose and object of the Act could be achieved with certainty, probity and transparency.”, observed a bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe.

The bench was hearing an appeal filed against the National Company Law Appellate Tribunal's (NCLAT) decision, which has set aside the entire CIRP initiated by an operational creditor concerning the Greenopolis residential project in Gurgaon, upon finding the initiation of insolvency proceedings to be fraudulent and based on collusion with a corporate debtor.

Initially, the National Company Law Tribunal (NCLT) had declined to recall the CIRP, noting that it lacked jurisdiction to recall the admission of the Section 9 petition.

The NCLAT subsequently took a different view. It held that the NCLT possessed the power to recall an order obtained by fraud and consequently set aside the entire CIRP.

Setting aside the NCLAT's order, the Supreme Court said that NCLAT had gone too far in terminating the entire insolvency process commenced upon the admission. Moreover, the Court also faulted the NCLT's view on its lack of power to withdraw the proceeding once admitted.

According to the Court, once the insolvency proceedings have been commenced, then the recall of the entire CIRP would not be permissible merely because the initiation of the CIRP was fraudulent and based on collusion. The Court stressed that upon admission, no decision on recall would be taken without hearing the multiple stakeholders who would have filed their claims.

“While the AA wrongly held that there is no power under the Code to withdraw the proceedings once admitted, the NCLAT reversed that decision and held that such a power exists but did not take the crucial step of deciding whether the proceedings should be continued. We are not in agreement with the approach adopted either by the AA or by the NCLAT; both failed to take the proper consequential action upon finding that the original application is collusive.”, the Court observed.

Accordingly, the Court restored the CIRP to the file of the NCLT, and directed the tribunal to reconsider continuation of the CIRP after hearing the Resolution Professional, Committee of Creditors and other stakeholders, including homebuyers.

In view of the above discussion, the Court restated the following principles that have been followed in arriving at the decision:

"i. Initiation of proceedings under Sections 7, 9 or 10, as case may be, of the Insolvency and Bankruptcy Code, 2016, is based on certain fundamental facts which are jurisdictional in nature. If reliance on such jurisdictional facts, as indicated in the applications, is subsequently proved to be fraudulent and collusive, the AA is entitled to recall admission of the application. This is for the reason that in the invocation of statutory jurisdiction, there is an inherent public law duty not to deceive or mislead on jurisdictional facts, as such manipulation will have the effect of subverting the very purpose and object of the statute.

ii. Commencement and conclusion of proceedings under Sections 7, 9 or 10, as the case may be, are in two stages. At the initial stage, the original applicant has the carriage of the proceedings till the petitions are admitted. 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 corporate debtor become stakeholders in the process, and the affairs of the corporate debtor are vested in the RP, and the proceedings are under the jurisdiction of the AA.

iii. After the applications are admitted by the AA and CIRP proceedings commence, it is not permissible for the original applicant to withdraw the case. This position has also attained statutory recognition in 2018 with the inclusion of Section 12A in the IBC, 2016.

iv. If the AA arrives at a conclusion that initiation of CIRP under Sections 7, 9 or 10, as the case may be, is based on fraud and collusion, it shall disallow the original applicant from participating and may also initiate proceedings under Section 65 of the Act.

v. If the AA is of the opinion that 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, it has the power and jurisdiction to take such a decision. For this purpose, it shall hear the RP, elicit the view of the CoC and also the other stakeholders. It is the duty of the AA to ensure that the proceedings are concluded with integrity and transparency, and that the purpose and object of the code is subserved."

Appearance:

For Appellant(s) : Mr. C. A. Sundaram, Sr. Adv. Mr. Ram Ji Srinivasan, Sr. Adv. Mr. Harshit Sethi, Adv. Ms. Rohini Musa, Adv. Mr. Abhishek Gupta, Adv. Mr. Zafar Inayat, Adv. Mr. Vishwa Pal Singh, Adv. Mr. Amit Sharma, AOR Mr. Manish Kumar Sharma, Adv. Mr. Harneet Singh, Adv. Ms. Aparna Singh, Adv. Mr. Tanmay Mehta, Adv. Mr. Anurag Pandey, Adv. Mr. Amit Kumar, Adv. Mr. Dinesh Sharma, Adv. Mr. Manoj Sharma, Adv. Mrs. Kadambini Arora, Adv. Mr. Akshay Kumar Dwivedi, Adv. Mr. Vishwa Pal Singh, AOR Mr. Kartikeya Singh, AOR Mr. Harshit Sethi, Adv. Mr. Jai Shankar Sikand, Adv. Mr. Kartik Yadav, Adv. Ms. Sheenam Chhabra, Adv. Mr. Nikilesh Ramachandran, AOR Ms. Mansi Tripathi, Adv.

For Respondent(s) : Mr. Krishnan Venugopal, Sr. Adv. Mr. Mukul Rohatgi, Sr. Adv. Mr. Saurabh Kripal, Sr. Adv. Mr. Gopal Sankaranarayanan, Sr. Adv. Ms. Pooja Mahajan, Adv. Mr. Savar Mahajan, Adv. Ms. Urvashi Girdhar, Adv. Mr. Srivatsava Reddy, Adv. Mr. Umang Motiyani, Adv. Mr. Avinash B. Amarnath, AOR Mr. Nalin Kohli, Sr. Adv. Ms. Kanika Singhal, AOR Mr. Ayushman Arora, Adv. Vijeta Singh, Adv. Mr. Shivam Singh Rana, Adv. Ms. Deepshika, Adv. Mr. Niranjan Sahu, AOR Mr. Abhishek Anand, Adv. Mr. Karan Kohli, Adv. Ms. Palak Kalra, Adv. Ms. Pallavi Pratap, AOR Mr. Anupam Lal Das, Sr. Adv. Mr. Raj Kamal, AOR Mr. Aseem Atwal, Adv. Mr. Anurag Chandra, Adv. Mr. Somil Jain, Adv. Ms. Nupur Kaushik, Adv. Mr. Shashwat Bali, Adv. Ms. Dakshita Nagpal, Adv. Mr. Raj Kamal, Adv. Mr. Siddhant Sharma, AOR Mr. Aseem Atwal, Adv. Mr. Nimish Chandra, Adv. Mr. Ratul Sharma, Adv. Mr. Shakti Bhati, Adv. Mr. Nivesh Kumar, AOR Mr. Aviral Kapoor, Adv. Mrs. Sonal Alagh, Adv. Mr. Sanjivan Chakraborty, Adv. Mr. Rahul Raj, Adv. Mr. Shivam Singh Tomar, Adv. Miss Kanika Singhal, AOR Mr. Anurag Ojha , AOR Ms. Jyoti Taneja, Adv. Mr. Prabhas Bajaj, Adv. Ms. Parikshit Vij, Adv. Mr. Devanshu Yadav, Adv. Mr. Gautam Awasthi, AOR Mr. Venket Rao, Adv. Mr. Sanyat Lodha, AOR Mr. Pankaj Chandola, Adv. Mr. Akshay Srivastava, AOR Ms. Sumbul Ismail, Adv. Ms. Avani Sharma, Adv. Mr. Ashish Pandey, AOR Mr. Venket Rao, Adv. Mr. Vishal Sinha, Adv. Mr. - Pankaj Chandola, Adv. Mr. Sidharth Mahajan, AOR Mr. Baban Kumar Sharma, Adv. Mr. Keshari Kumar Tiwari, Adv. Mr. P. V. Yogeswaran, AOR Mr. Pawan Upadhyay, Adv. Ms. Sharmila Upadhyay, Adv. Mr. Sarvjit Pratap Singh, Adv. Mr. Rajesh Kumar Sharma, Adv. Mr. Sanjeev Kumar, Adv. Mr. Anmol Wadhwa, Adv. M/S. Unuc Legal Llp, AOR Mr. Siddharth Batra, AOR Mr. Akshat Srivastava, AOR Mr. Prateek K Chadha, AOR Ms. Purti Gupta, AOR Ms. Henna George, Adv. Ms. Sunidhi Sah, Adv. Ms. Pooja, Adv. Ms. Khushi Sharma, Adv. Ms. Suvarna Chaturvedi, Adv.