Fraudulently Initiated IBC Proceedings Can Justify Recall of Section 9 Admission, But Not Automatic CIRP Termination: SC

New Delhi, Oct 3 (KNN) The Supreme Court has held that the Adjudicating Authority (AA) under the Insolvency and Bankruptcy Code (IBC), 2016 can recall admission of a Section 9 insolvency application if it was initiated on the basis of fraudulent or collusive jurisdictional facts.

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

A bench of Justices Pamidighantam Sri Narasimha and Alok Aradhe made the observations while dealing with proceedings relating to the Greenopolis residential project in Gurgaon.

NCLAT Went Too Far, Says SC

The case arose after the National Company Law Tribunal (NCLT) declined to recall the CIRP, holding that it lacked jurisdiction to recall an admitted Section 9 application.

The National Company Law Appellate Tribunal (NCLAT) subsequently held that the NCLT could recall an order obtained through fraud and set aside the entire CIRP after finding that its initiation involved collusion with the corporate debtor.

The Supreme Court set aside the NCLAT order, holding that it had gone too far by terminating the entire CIRP. At the same time, it rejected the NCLT's view that it had no power to recall an admission obtained through fraud.

The Court said that after admission, the original applicant can no longer control the proceedings, as they become in rem and all creditors become stakeholders. Therefore, recall of the entire CIRP is not automatic merely because its initiation was fraudulent.

Stakeholders Must Be Heard

The Court directed the NCLT to reconsider whether the CIRP should continue after hearing the Resolution Professional (RP), Committee of Creditors (CoC) and other stakeholders, including homebuyers.

It said the AA must assess whether continuing the process would serve the larger objective of resolving the corporate insolvency and ensure that subsequent proceedings are conducted with integrity, transparency and certainty.

The Court also held that where CIRP initiation is found to be fraudulent or collusive, the original applicant can be barred from participating and proceedings under Section 65 of the IBC may be initiated.

SC Lays Down Principles

The Court clarified that fraudulent reliance on jurisdictional facts can justify recall of admission under Sections 7, 9 or 10 of the IBC. However, once proceedings are admitted, they are no longer solely between the original applicant and the corporate debtor.

The Court noted that withdrawal after admission is governed by Section 12A, introduced in 2018, and cannot be treated as a unilateral right of the original applicant.

Restoring the CIRP to the NCLT, the Supreme Court directed the tribunal to determine, after hearing all relevant stakeholders, whether continuation of the insolvency process would serve the objectives of the IBC.

(KNN Bureau)