Supreme Court: NCLT Can Recall Fraudulent CIRP Admission

• The Supreme Court has upheld the NCLT's power to recall CIRP admissions if the initiation is found to be fraudulent or collusive.
• This recall power applies to CIRP applications admitted under Sections 7, 9, or 10 of the IBC, particularly if the claimed debt is fraudulent.
• The Court emphasized that 'jurisdictional facts,' such as the existence of a debt, must be established for the NCLT to assume jurisdiction.
• Upon finding fraud, the NCLT can disallow the original applicant and may initiate Section 65 proceedings, but can also choose to continue CIRP if it serves broader stakeholder interests.
• The ruling stemmed from an appeal involving Orris Infrastructure Private Limited, where a Section 9 petition by M/s Straight Edge Contracts Pvt Ltd was found to be fraudulent and collusive.

The Supreme Court has recently affirmed the National Company Law Tribunal's (NCLT) inherent authority to recall orders admitting Corporate Insolvency Resolution Process (CIRP) applications, particularly when such admissions are found to be based on fraud or collusion.

The Supreme Court has recently affirmed the National Company Law Tribunal's (NCLT) inherent authority to recall orders admitting Corporate Insolvency Resolution Process (CIRP) applications, particularly when such admissions are found to be based on fraud or collusion. This significant ruling clarifies that the NCLT can revoke a CIRP initiated under Sections 7, 9, or 10 of the Insolvency and Bankruptcy Code (IBC), 2016, if the underlying debt that formed the basis for the insolvency proceedings is discovered to be fraudulent.

Justices P S Narasimha and Alok Aradhe, presiding over the Bench, underscored the fundamental principle that certain basic facts must be unequivocally established before any court or tribunal can assume jurisdiction over a case. These essential prerequisites, termed "jurisdictional facts," are critical for the legitimate commencement of insolvency proceedings under the IBC. The Court's decision reinforces the judiciary's commitment to upholding the integrity of the insolvency framework by providing a mechanism to address instances where the process has been subverted.

The concept of "jurisdictional facts" is central to the Supreme Court's pronouncement. In administrative law, these are the specific facts or events whose existence empowers statutory authorities, like the NCLT, to exercise their jurisdiction. For insolvency proceedings under the IBC, the existence of a legitimate debt is a primary jurisdictional fact. Should the adjudicating authority determine that the initiation of a CIRP was predicated on fraud or collusion, it possesses the requisite power and jurisdiction to recall the admission of the application.

However, the Court also clarified the complex nature of CIRP once it has commenced. Upon admission, the proceedings transform into an 'in rem' process, meaning they are no longer solely within the control of the original applicant, creditor, or debtor. At this stage, all creditors of the corporate debtor become stakeholders, the corporate debtor's affairs are vested in a resolution professional, and the entire process falls under the adjudicating authority's jurisdiction. This shift means that, post-admission, the original applicant is not permitted to unilaterally withdraw the case.

When the NCLT concludes that a CIRP under Sections 7, 9, or 10 was initiated through fraud and collusion, it is mandated to disallow the original applicant from participating further in the process. Furthermore, the adjudicating authority retains the discretion to initiate separate proceedings under Section 65 of the IBC against those responsible for the fraudulent initiation. This provision acts as a deterrent against the misuse of the insolvency framework for ulterior motives.

Crucially, the Supreme Court also recognized that even in cases of fraudulent initiation, the adjudicating authority has the power and jurisdiction to decide whether the CIRP should continue. This decision would be made if continuing the process is deemed to serve the broader interests of resolving the corporate insolvency of the corporate debtor, especially where other stakeholders are involved. To make such a determination, the NCLT is required to hear the Resolution Professional (RP), solicit the views of the Committee of Creditors (CoC), and engage with other stakeholders. This ensures that the proceedings are concluded with integrity and transparency, thereby upholding the fundamental purpose and object of the IBC.

The Supreme Court's clarification arose from an appeal filed by Orris Infrastructure Private Limited. The Court was tasked with examining whether the adjudicating authority possessed the power to recall a CIRP by dismissing a Section 9 petition that had been admitted at the behest of a collusive operational creditor. A unique situation unfolded in 2023 when the adjudicating authority was specifically called upon to investigate if a CIRP, initiated following the admission of a Section 9 petition by M/s Straight Edge Contracts Pvt Ltd (who claimed to be an operational creditor), was fraudulent and in collusion with the corporate debtor.

Upon thorough examination, it became unequivocally clear that the CIRP in question was indeed fraudulent and collusive. This ruling provides a critical avenue for challenging or defending against CIRP proceedings initiated on fraudulent grounds, and highlights the importance of establishing 'jurisdictional facts' accurately at the outset to avoid potential Section 65 proceedings. The decision significantly strengthens the NCLT's oversight capabilities, ensuring that the insolvency resolution process remains a tool for genuine financial restructuring rather than a mechanism for fraudulent manipulation.

Lawyers advising on insolvency matters must note that NCLT admissions of CIRP applications are not absolute and can be recalled by the NCLT if fraud or collusion is discovered, even after commencement. This ruling provides a critical avenue for challenging or defending against CIRP proceedings initiated on fraudulent grounds, and highlights the importance of establishing 'jurisdictional facts' accurately at the outset to avoid potential Section 65 proceedings.

Source: Original reporting via LiveLaw