The Supreme Court on Wednesday held that a corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code (IBC) can continue even if the insolvency application that originally triggered the process is subsequently found to have been fraudulent and collusive [Orris Vs Rakesh Kumar Gupta].
A Bench of Justices PS Narasimha and Alok Aradhe held that while the National Company Law Tribunal (NCLT) has the power to recall the admission of an insolvency application obtained through fraud, such a finding does not automatically require the entire CIRP to be terminated.
“The initiating creditor is merely the triggering creditor, and not the proprietor of the CIRP,” the judgment said.
Once an insolvency application is admitted, the proceedings cease to remain a dispute between the creditor who initiated the process and the corporate debtor. They become proceedings in rem involving the entire body of creditors and other stakeholders, the Court explained.
“The resolution process can therefore continue even in the absence of the original applicant,” the top court made it clear.
The Court was dealing with insolvency proceedings against Three C Shelters Private Limited, developer of the Greenopolis residential project in Gurugram.
The CIRP was initiated in 2020 on a Section 9 application filed by Straight Edge Contracts Private Limited, which claimed nearly ₹30 crore as operational debt.
However, the NCLT subsequently found that the insolvency proceedings had been initiated through fraud and collusion between Straight Edge and the corporate debtor.
Among other things, it found that two persons who had represented Three C Shelters as directors and admitted the alleged liability were, in fact, described as an office boy and pantry boy who were unaware of the company's affairs. The NCLT also found discrepancies in documents relied upon to establish the purported operational debt.
Hence, it set aside the CIRP. The decision was upheld by the NCLAT. This led to the appeal before the Supreme Court.
The apex court affirmed the findings of fraud and collusion, observing that the supposed debt was a "mirage" and had been projected to enable initiation of CIRP and the consequent moratorium, thereby blocking remedies available to homebuyers and other claimants.
However, the Court disagreed with the National Company Law Appellate Tribunal's (NCLAT) decision to set aside the entire CIRP merely because its initiation was fraudulent.
The Supreme Court stressed that admission fundamentally alters the nature of insolvency proceedings. Management passes to the resolution professional, claims from creditors are invited and a Committee of Creditors (CoC) is constituted, the Court said.
Hence, the CIRP can continue even in the absence of the original applicant, the Court underscored.
The Court held that even where the original application was fraudulent, the NCLT can exclude the collusive applicant from participating in the process and consider initiating proceedings against it under Section 65 of the Insolvency and Bankruptcy Code.
The NCLT must then independently decide whether continuation of the CIRP would serve the larger interests of resolving the corporate debtor's insolvency.
For this exercise, the tribunal must hear the resolution professional, consider the views and commercial wisdom of the CoC and hear 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,” the Court further stated.
Hence, it set aside the NCLAT order and restored the CIRP before the NCLT.
The tribunal was directed to decide whether the process should continue after considering all relevant facts, including ownership of the Greenopolis project and the interests of homebuyers who have pursued other statutory and judicial remedies.
If the NCLT decides to continue the CIRP, the proceedings should be concluded expeditiously, the Court directed.
The appellants were represented by Senior Advocates CA Sundaram and Ramji Srinivasan.
The respondents were represented by Senior Advocates Mukul Rohatgi, Krishnan Venugopal, Nalin Kohli, Anupam Lal Das, Saurabh Kripal and Gopal Sankaranarayanan.
[Read Judgment]