The Supreme Court clarified the Adjudicating Authority's power to recall Corporate Insolvency Resolution Proceedings (CIRP) initiated through fraudulent or collusive means, while emphasizing that continuation of such proceedings depends on whether they serve the larger purpose of resolving corporate insolvency with integrity.
Background & Facts
The Dispute
Orris Infrastructure Private Limited (Orris), the landowner of a 47.218-acre parcel in Sector 89, Gurgaon, entered into a development agreement dated 02.11.2011 with M/s Three C Shelters Private Limited (the Corporate Debtor or CD) for construction of a real estate project named Greenopolis comprising 1862 flats. Under the agreement, the CD was to develop the Project at its own cost, with the constructed flats to be shared in the ratio of 65:35 between the CD and Orris respectively. The agreement stipulated completion of construction within 36 months from allotment of each unit, with a grace period of 6 months.
Key Facts
- Homebuyers, aggrieved by delays, formed the Greenopolis Welfare Association (GWA) and filed a complaint before Haryana Real Estate Regulatory Authority (HRERA)
- HRERA, by order dated 23.01.2019, directed the CD to complete construction as per schedule and directed that monies deposited in the escrow account must be used only for the Project
- Orris appealed HRERA's order to Haryana Real Estate Appellate Tribunal (HREAT), which dismissed the appeal, holding Orris and CD as joint promoters responsible for timely completion
- National Consumer Disputes Redressal Commission (NCDRC), by common judgment dated 20.07.2020, held CD and Orris responsible towards their respective allottees/consumers
- HRERA initiated suo motu proceedings and, by order dated 07.10.2020, directed that Orris, as landowner and license holder, had primary responsibility for development, construction and completion of the Project, and that funds in escrow account (Kotak Mahindra Bank, Noida) must be transferred to a dedicated RERA account for "Greenopolis Project"
- M/s Straight Edge Contracts Pvt. Ltd. (Straight Edge), claiming to be an operational creditor of the CD, filed a Section 9 petition under the Insolvency and Bankruptcy Code, 2016 (IBC) on 17.10.2019, seeking initiation of CIRP against the CD based on an alleged operational debt of Rs. 29,95,91,034
- The company petition came up for hearing on 24.10.2019; an affidavit filed on 27.01.2020 by the CD's director, Mr. Girish Chander Joshi, admitted the operational debt
- The Adjudicating Authority (AA) allowed the Section 9 petition on 20.07.2020, noting the debt was not disputed and there was admission of default
- By subsequent direction dated 16.10.2020, the AA appointed an Interim Resolution Professional (IRP) for the CD and imposed moratorium, stating fulfillment of Section 9(5) requirements
- Homebuyers and GWA appealed to the National Company Law Appellate Tribunal (NCLAT) alleging fraud and collusion between Straight Edge and the CD in initiating CIRP
- NCLAT, by order dated 06.01.2021, dismissed the appeal and confirmed admission of the Section 9 petition, finding no power in AA to review its own order
- By order dated 15.04.2021, the AA directed parties to maintain status quo regarding amounts in the escrow account
- This Court, by order dated 01.07.2021, permitted Orris to approach the AA for clarification
- NCLAT, by impugned order dated 28.08.2023, set aside the CIRP proceedings, holding that CIRP initiated under fraud cannot be sustained and that AA has power to recall its own orders
- This Court, by order dated 13.10.2023, admitted the appeals and directed status quo maintenance
- By order dated 19.11.2024, this Court granted a stay on the NCLAT's impugned order and clarified that proceedings before AA would continue in accordance with law
Procedural History
- 17.10.2019: Straight Edge filed Section 9 petition for CIRP initiation against CD
- 24.10.2019: Company petition came up for hearing before AA
- 27.01.2020: Affidavit of admission filed by CD director confirming operational debt
- 20.07.2020: AA allowed Section 9 petition, admitting the application
- 16.10.2020: AA appointed IRP and imposed moratorium
- 06.01.2021: NCLAT dismissed appeal by homebuyers/GWA, confirming admission of Section 9 petition
- 15.04.2021: AA directed status quo maintenance regarding escrow account amounts
- 01.07.2021: This Court permitted Orris to approach AA for clarification
- 28.08.2023: NCLAT passed impugned order setting aside CIRP proceedings
- 13.10.2023: This Court admitted appeals and directed status quo maintenance
- 19.11.2024: This Court granted stay on NCLAT's impugned order and clarified AA proceedings continue per law
- 30.09.2026: Judgment pronounced
The Parties' Positions
- Orris (Appellant): Argued that the Section 9 petition was fraudulently filed by Straight Edge in collusion with suspended directors of CD; contended AA has power to recall admission order under Section 65 of IBC; sought setting aside of NCLAT's order and restoration of CIRP proceedings for fresh consideration
- Homebuyers/GWA (Respondents): Supported NCLAT's finding that AA has power to recall fraudulently initiated CIRP; argued that once fraud is established, CIRP proceedings cannot continue as they are vitiated at inception
- Straight Edge & CD: Not actively participating in appeals; their position was that CIRP was validly initiated
Relief Sought
Orris sought: (i) setting aside of NCLAT's order dated 28.08.2023 and related orders; (ii) restoration of CIRP proceedings No. IB-2721/ND/2019 to original number; (iii) direction to AA to decide continuation of proceedings in view of fraud/collusion finding; (iv) if AA decides to continue, direction to conclude proceedings expeditiously.
The Legal Issue
The central questions were: (1) Whether the Adjudicating Authority has the power and jurisdiction to recall CIRP by dismissing the Section 9 petition that was admitted at the instance of a collusive operational creditor? and (2) If such power exists, whether the CIRP proceedings could be continued after a finding of fraud and collusion in the initiation of the proceedings?
Arguments Presented
For the Appellant/Petitioner (Orris)
Orris relied on the principle that jurisdiction based on fraudulent or collusive facts is voidable, citing Shrisht Dhawan (SMT) v. M/s Shaw Brothers to argue that fraud in public law vitiates the very foundation of jurisdiction. It contended that the AA, having found fraud and collusion in the initiation of CIRP (where Straight Edge falsely portrayed a non-existent debt as due), must recall the admission order under Section 65 of IBC. Orris emphasized that the NCLAT correctly held AA has such power, but erred in setting aside the entire CIRP without considering whether continuation serves the Act's purpose. It argued that the AA must hear the Resolution Professional, Committee of Creditors, and stakeholders (including homebuyers who pursued statutory remedies) before deciding on continuation.
For the Respondent/State (Homebuyers/GWA)
The homebuyers and GWA supported the NCLAT's conclusion that AA possesses power to recall its own order when obtained by fraud or collusion on jurisdictional facts. They relied on the AA's own findings of fraud (no work since 2016, fabricated MoU, directors as mere office boys) and collusion (preemptive board resolution, directors admitting liability before demand notice). They argued that once jurisdiction is exercised based on false facts, the proceedings are a nullity and cannot be sustained, as allowing continuation would legitimize fraudulent initiation and defeat the purpose of IBC. They contended that the AA's power to recall is mandatory upon finding of fraud, not discretionary.
The Court's Analysis
The Court grounded its analysis in the doctrine of jurisdictional facts, stating: "In administrative law, such facts are referred to as jurisdictional facts. Under the Insolvency and Bankruptcy Code, for example, the existence of a 'debt' is the jurisdictional fact." It cited Shrisht Dhawan to explain that "an error in respect of jurisdictional fact... renders the order ultra vires and bad" and that "fraud in public law... arises from a deception committed by disclosure of incorrect facts knowingly and deliberately to invoke exercise of power and procure an order from an authority."
The Court affirmed the AA and NCLAT's findings of fraud and collusion: "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." It held that "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 continue to sustain jurisdiction."
Regarding the nature of CIRP post-admission, the Court explained the shift from in personam to in rem proceedings: "Once the petition is admitted, the proceedings are no longer the preserve of the applicant creditor and the debtor. They now become in rem and all creditors of the corporate debtor become stakeholders in the process." It cited Section 12A (introduced in 2018) to note that "after the applications are admitted by the AA and CIRP proceedings commence, it is not permissible for the original applicant to withdraw the case."
The Court synthesized these principles: "If the AA arrives at a conclusion that initiation of CIRP under Sections 7, 9 or 10... 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." Crucially, it held that continuation depends on whether proceedings serve the larger purpose: "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... 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."
The Court rejected the AA's view that it lacks power to recall and the NCLAT's approach of not deciding on continuation: "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."
The Verdict
The appeals were allowed in part. The Court set aside the judgment and order of the NCLAT in Comp. App. (AT) (Ins) No. 444 of 2022, Comp. App. (AT) (Ins) No. 651 of 2022, Comp. App. (AT) (Ins) No. 370 of 2022, Comp. App. (AT) (Ins) No. 602 of 2022, and Comp. App. (AT) (Ins) No. 1379 of 2022. It restored CIRP proceedings No. IB-2721/ND/2019 pending before the AA to their original number. The Court directed the AA to decide upon continuation of the proceedings in view of the conclusive finding of fraud and collusion of the original applicant Straight Edge, requiring the AA to hear the Resolution Professional, Committee of Creditors, and other stakeholders including homebuyers who have adopted statutory and judicial remedies. If the AA decides to continue the CIRP process, it must conclude the proceedings expeditiously in view of the long pendency. The Contempt Petition (C) Nos. 249-253/2025 were closed.
What This Means For Similar Cases
Fraud Vitiates Jurisdiction, Not Necessarily Proceedings
The judgment establishes that while fraud or collusion in initiating CIRP vitiates the jurisdictional foundation, it does not automatically mandate termination of proceedings. Practitioners must now argue before the AA that even where initiation was fraudulent, continuation may be warranted if it serves the Act's purpose of resolving corporate insolvency with integrity. This requires presenting evidence of stakeholder claims, asset value preservation, and feasibility of resolution plans.
AA's Discretionary Power Post-Admission
The AA gains discretion to disallow the fraudulent operational creditor from participating in the CoC and may initiate proceedings under Section 65 against collusive parties. However, the AA cannot unilaterally withdraw proceedings post-admission due to Section 12A; instead, it must assess whether continuation serves the larger public purpose. This shifts focus from the initiator's conduct to the ongoing integrity of the resolution process.
Stakeholder Participation Is Critical
The judgment mandates that the AA must hear the Resolution Professional, Committee of Creditors, and other stakeholders (including homebuyers who pursued remedies under RERA or consumer law) before deciding on continuation. Practitioners should ensure their clients' claims are properly filed and represented in the CoC to influence this decision, as the AA will weigh stakeholder views on whether proceedings should continue expeditiously.
