Admission Of Petition U/S. 9 IBC Induced By Fraud/Collusion Can Be Recalled, But CIRP Need Not Automatically End: Supreme Court
The Bench noted that the jurisdictional facts affected by fraud or collusion cannot be the foundation for assuming jurisdiction; AA to hear RP, CoC and stakeholders before deciding whether to continue process.
Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe, Supreme Court
The Supreme Court has held that the Adjudicating Authority can recall the admission of a Section 9 petition under the Insolvency and Bankruptcy Code, 2016, where it was induced by fraud and collusion, but that such recall does not automatically end the corporate insolvency resolution process. The Court observed that those who invoke IBC proceedings are under a public law duty not to deceive or mislead, and that if jurisdiction is exercised on the basis of fraud or collusion, the Tribunal "can undoubtedly withdraw the proceedings at any point of time".
The Court, further held that, "jurisdictional facts affected by fraud or collusion cannot be the foundation for assuming jurisdiction". On continuation, it held that once a petition is admitted, the proceedings become in rem and the resolution process can continue even after a finding of collusive initiation. The original applicant is to be disallowed from participating. Before deciding whether the process should go on, the Adjudicating Authority must hear the Resolution Professional, elicit the view of the Committee of Creditors and hear other stakeholders.
A Bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe observed, “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”.
“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. 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”, it further noted.
Senior Advocates Ramji Srinivasan, Mukul Rohatgi appeared for the appellant and Senior Advocate Krishnan Venugopal appeared for the respondent.
“Those who invoke IBC proceedings are under a public law obligation and duty not to deceive or mislead. If jurisdiction is exercised on the basis of fraud or collusion, the Court or the Tribunal can undoubtedly withdraw the proceedings at any point of time. Jurisdictional facts affected by fraud or collusion cannot be the foundation for assuming jurisdiction, as such facts cannot continue to sustain jurisdiction. The Courts exercise somewhat greater control over the determination of jurisdictional facts than over findings on non-jurisdictional facts, i.e, facts which do not have a consequence on the jurisdiction”, the Bench had observed.
Orris Infrastructure Private Limited, landowner of 47.218 acres at Sector 89, Gurgaon, entered a 2011 development agreement with Three C Shelters Private Limited, the Corporate Debtor, for the Greenopolis project of 1862 flats. The project stalled, and homebuyers approached HRERA and the consumer fora. Straight Edge Contracts Private Limited then filed a Section 9 petition, backed by an affidavit from a director of the Corporate Debtor admitting an operational debt of about Rs. 29.95 crore.
The Adjudicating Authority admitted the petition on July 20, 2020, and imposed a moratorium on October 16, 2020. The NCLAT dismissed the homebuyers' appeal in January 2021. Orris and the Resolution Professional of a shareholder company later alleged collusion.
The NCLT found active collusion on March 29, 2022, but held it had no power to recall its order. On August 28, 2023, the NCLAT held that the power exists and set aside the entire CIRP. The Supreme Court stayed that order on November 19, 2024, allowing the CIRP to continue.
On the first issue, the Court held that the existence of a debt is the jurisdictional fact under the Code. Here, it found, the debt was "a mirage", portrayed so that the CIRP could begin and the moratorium could block the homebuyers' remedies. The Adjudicating Authority therefore had the power to recall the admission.
“In the facts of the present case, it is conclusively proved that the existence of debt is a mirage; none existed at all. In fact, it was fraudulently portrayed as if there was a debt so that the AA could initiate CIRP proceedings and impose moratorium, thereby blocking other legal remedies of the homebuyers and other claimants. Under these circumstances, there is every power and jurisdiction for the AA to recall CIRP by dismissing the Section 9 petition that was admitted at the instance of a collusive operating creditor. The issue is answered accordingly”, it noted.
On the second issue, the Court reasoned that admission is a watershed. The moratorium, the vesting of management in the IRP, the collation of claims, the Committee of Creditors and Section 12A show that the initiating creditor is merely the triggering creditor, not the proprietor of the CIRP. The resolution process must be unitary, and the Court held it can continue even after a finding of collusive initiation, guided by integrity, transparency and the Committee's commercial wisdom.
The Court set aside the NCLAT's order and restored CIRP No. IB-2721/ND/2019, and the Adjudicating Authority must now decide on continuation, considering all relevant facts including ownership of the project, and must conclude expeditiously if it continues. The contempt petitions were closed.
Cause Title: Orris Infrastructure Private Limited v. Rakesh Kumar Gupta & Ors. (Neutral Citation: 2026 INSC 1070)
Appearances:
Appellant: Ramji Srinivasan, Mukul Rohatgi, Senior Advocates.
Respondent: Krishnan Venugopal, Senior Advocate.