The National Company Law Appellate Tribunal dismissed an appeal challenging the admission of a corporate debtor into the Corporate Insolvency Resolution Process, holding that allegations of fraudulent or malicious initiation under Section 65 of the Insolvency and Bankruptcy Code must be raised before the Adjudicating Authority and cannot be entertained for the first time at the appellate stage. The Tribunal affirmed that once debt and default are established, admission under Section 7 is mandatory absent proof of fraud.
Background & Facts
The Dispute
The appellant, Affle 3i Limited (formerly Affle India Limited), is a shareholder holding Compulsory Convertible Preference Shares in the corporate debtor, Talent Unlimited Online Services Private Limited, and claims to be a creditor/decree holder with inspection rights and an arbitral award holder. The first respondent, Axis Trustee Services Limited, acted as debenture trustee and filed a Section 7 application under the Insolvency and Bankruptcy Code, 2016 (IBC) seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against the corporate debtor. The second respondent is the corporate debtor itself. The appellant contends that the CIRP was fraudulently initiated to avoid implementation of an arbitral award in its favour.
Key Facts
- The appellant held inspection rights under the shareholders agreement and issued inspection notices to the corporate debtor on 02.12.2022 and 07.12.2022.
- Pursuant to those notices, the Delhi High Court passed an order on 31.07.2023 allowing informational and inspection rights of the books and records of the corporate debtor.
- The Singapore International Arbitration Centre (SIAC) issued an Inspection Order on 11.03.2024 and an Award on Reimbursement of Costs on 02.04.2024.
- The Delhi High Court, by judgment dated 04.04.2026, dismissed the challenge to the arbitral tribunal's order and permitted execution of the SIAC inspection order.
- The debenture trustee issued a Warning Letter on 02.01.2026, an Event of Default Notice on 22.01.2026, and a Final Demand Notice on 09.02.2026.
- A Record of Default for INR 1,89,13,351 was filed with the Information Utility (NeSL) on 23.01.2026.
- The Section 7 application was filed by Axis Trustee Services Limited, leading to the impugned order dated 12.06.2026 admitting the corporate debtor into CIRP.
- The Resolution Professional made a public announcement on 14.06.2026 inviting claims from creditors.
- The appellant filed its claim before the Resolution Professional on 26.06.2026.
- On 03.07.2026, the appellant submitted a settlement proposal to acquire the alleged debt without any haircut.
- The appeal was filed on 25.07.2026, resulting in a delay of 13 days; the appellant sought condonation of delay via IA No. 5683 of 2026.
- The appellant had previously proposed a loan facility to the corporate debtor in March 2023, which was rejected in favour of a competing financing proposal from Trifecta that later filed the Section 7 application.
Procedural History
- 02.12.2022: First inspection notice issued by appellant.
- 07.12.2022: Second inspection notice issued by appellant.
- 31.07.2023: Delhi High Court order allowing inspection rights.
- 11.03.2024: SIAC Inspection Order.
- 02.04.2024: SIAC Award on Reimbursement of Costs.
- 04.04.2026: Delhi High Court judgment permitting execution of inspection order.
- 02.01.2026: Warning Letter issued by debenture trustee.
- 22.01.2026: Event of Default Notice.
- 09.02.2026: Final Demand Notice.
- 23.01.2026: Record of default filed with NeSL for INR 1,89,13,351.
- 12.06.2026: Impugned order admitting corporate debtor into CIRP.
- 14.06.2026: Public announcement by Resolution Professional inviting claims.
- 26.06.2026: Appellant filed claim before Resolution Professional.
- 03.07.2026: Appellant submitted settlement proposal to acquire debt without haircut.
- 25.07.2026: Appeal filed (delay of 13 days).
- 22.09.2026: Judgment delivered.
Relief Sought
The appellant sought quashing of the impugned order dated 12.06.2026, direction to withdraw the CIRP, liberty to file a proper Section 65 application before the Adjudicating Authority, and reimbursement of costs.
The Legal Issue
The central question was whether an allegation of fraudulent or malicious initiation of the Corporate Insolvency Resolution Process under Section 65 of the IBC can be raised for the first time at the appellate stage without having been pleaded before the Adjudicating Authority, and whether the Adjudicating Authority is obliged to examine such allegations when admitting a Section 7 application based on proof of debt and default.
Arguments Presented
For the Appellant/Petitioner
The appellant contended that it possessed locus to file the appeal as a creditor/decree holder, inspection rights holder, and award holder under the shareholders agreement and arbitral proceedings. It argued that the CIRP was fraudulently initiated by the suspended management to avoid implementation of the arbitral award in its favour, citing the rejection of its loan facility proposal in March 2023 and the preference given to Trifecta's competing financing. The appellant emphasized that it had made a bona fide settlement offer on 03.07.2026 to acquire the debt without any haircut, which was ignored. It relied on Independent Sugar Corporation Ltd. v. Girish Shriram Juneja & Ors. and Chandra Shekhar Jha & Anr. v. Religare Enterprises Ltd. & Ors. to assert that a person aggrieved under Section 61 IBC includes a creditor/decree holder. The appellant further submitted that the delay in filing the appeal was justified due to lack of knowledge of the impugned order and the time taken to pursue settlement efforts.
For the Respondent/State
The respondents argued that the appellant's interest arises solely from its shareholding in the corporate debtor and does not constitute a direct or independent injury, thereby negating locus under Section 61 IBC. They asserted that withdrawal of CIRP is not permissible after the constitution of the Committee of Creditors and publication of Form-G under the amended Section 12A IBC. The respondents maintained that any allegation of fraudulent or malicious initiation must be raised before the Adjudicating Authority and cannot be introduced for the first time in appeal, citing Beacon Trusteeship Limited v. Earthcon Infracon Pvt. Ltd. & Anr. They stressed that debt and default were established through documentary evidence, making admission under Section 7 mandatory absent proof of fraud, and relied on Innoventive Industries Ltd. v. ICICI Bank and Swiss Ribbons P. Ltd. v. Union of India to support this position.
The Court's Analysis
The Tribunal first addressed the condonation of delay application, finding sufficient justification for the 13-day delay and allowing the same. Turning to the merits, the Court examined Section 65 IBC, which penalises fraudulent or malicious initiation of insolvency proceedings. It observed that the provision requires the Adjudicating Authority to examine the surrounding circumstances to satisfy itself of the threshold element of fraudulent intent, and that the degree of proof required is beyond reasonable doubt and of an unimpeachable nature. The Tribunal quoted:
"Since Section 65 is designed to deter misuse and protect the integrity of the insolvency framework, it is incumbent upon the Adjudicating Authority to examine the conduct of the Corporate Debtor in the surrounding circumstances for satisfying itself that the threshold element of fraudulent intent was met."
It noted that the appellant had not placed any cogent material before the Adjudicating Authority to demonstrate a dishonest design by the suspended management. The Tribunal agreed with the respondents that the allegation of fraudulent initiation could not be raised for the first time at the appellate stage without having been pleaded and adjudicated upon by the Adjudicating Authority, citing the principle laid down in Beacon Trusteeship. Furthermore, the Court held that once the Adjudicating Authority is satisfied of the existence of financial debt and a default, admission under Section 7 is mandatory unless the application is incomplete, as affirmed by Innoventive Industries and Swiss Ribbons. No such exception was made out in the present case. Consequently, the Tribunal found no basis to interfere with the impugned order and directed that the appellant may file a proper Section 65 application before the Adjudicating Authority for adjudication on the fraud allegation.
The Verdict
The appeal was dismissed, with the respondents succeeding. The Tribunal held that allegations of fraudulent or malicious initiation under Section 65 IBC must be raised before the Adjudicating Authority and cannot be entertained for the first time at the appellate stage. It affirmed that admission of a corporate debtor into CIRP under Section 7 is mandatory once debt and default are established, absent proof of fraud. No monetary relief was granted; the parties were directed to bear their own costs. The Tribunal granted liberty to the appellant to file a proper Section 65 application before the Adjudicating Authority to have the fraud allegation examined in accordance with law.
What This Means For Similar Cases
Fraud Allegations Must Be Raised Before the Adjudicating Authority
- Practitioners must ensure that any claim of fraudulent or malicious initiation of CIRP under Section 65 is pleaded and supported by evidence before the Adjudicating Authority at the outset.
- Raising such allegations for the first time in appeal is unlikely to succeed, as appellate tribunals will not consider new pleas of fraud without a factual foundation placed before the court of first instance.
Locus Standi Requires Direct Injury, Not Mere Shareholdership
- To maintain an appeal under Section 61 IBC, a person must demonstrate a direct or independent injury, such as status as a creditor, decree holder, or holder of inspection rights, rather than relying solely on shareholding.
- Mere shareholding in the corporate debtor is insufficient to confer locus to challenge the admission into CIRP.
Section 7 Admission Is Mandatory on Proof of Debt and Default
- Where the Adjudicating Authority is satisfied of the existence of financial debt and a default, admission under Section 7 is obligatory unless the application is defective.
- Challenges to admission must focus on disproving debt and default or establishing fraud under Section 65 with evidence presented before the Adjudicating Authority.
