The Supreme Court has ruled that a corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code (IBC) does not necessarily have to come to an end merely because the creditor who set it in motion had acted fraudulently.
A Bench of Justices PS Narasimha and Alok Aradhe held that although the National Company Law Tribunal (NCLT) can recall an insolvency admission secured through fraud or collusion, that finding by itself does not wipe out the entire resolution process.
The judgment arose from insolvency proceedings involving Three C Shelters Private Limited, the developer of the Greenopolis housing project in Gurugram.
The CIRP began in 2020 after Straight Edge Contracts Private Limited approached the NCLT under Section 9 of the IBC, claiming an operational debt of nearly ₹30 crore.
The proceedings later came under scrutiny after the NCLT concluded that the alleged debt itself had been manufactured through collusion between Straight Edge and Three C Shelters.
The tribunal found, among other irregularities, that individuals who had appeared as directors of the company and acknowledged the alleged liability were actually described elsewhere as an office boy and pantry boy, with no apparent knowledge of the company’s affairs. It also detected inconsistencies in the documents produced to substantiate the claimed operational debt.
On that basis, the NCLT concluded that the insolvency proceedings had been fraudulently engineered and set aside the CIRP. The NCLAT subsequently upheld that decision.
The Supreme Court agreed with the finding that fraud and collusion had occurred. It observed that the alleged debt was essentially a “mirage” created to obtain admission into CIRP and secure the moratorium that followed, potentially preventing homebuyers and other claimants from pursuing alternative remedies.
But the Court drew a distinction between an improper initiation and the insolvency process that follows admission.
Once an insolvency application is admitted, the proceedings are no longer confined to the creditor who initiated them and the corporate debtor. They take on the character of proceedings in rem, involving creditors and other stakeholders as a whole.
The initiating creditor, the Court observed, is only the party that triggers the process and does not own or control the CIRP.
This means that the resolution process can, in appropriate circumstances, proceed even after the original applicant is removed from the picture.
The Supreme Court therefore disagreed with the NCLAT’s approach of terminating the entire CIRP solely because its initiation was fraudulent.
Following admission, the insolvency framework undergoes a fundamental change. Control of the company moves to the resolution professional, claims are invited from creditors and a Committee of Creditors (CoC) is formed. Those developments create interests extending well beyond the original applicant.
The Court said the NCLT can exclude a creditor found to have participated in a fraudulent or collusive initiation and can also consider action against it under Section 65 of the IBC.
At the same time, continuation of the CIRP cannot be treated as automatic. The NCLT must independently determine whether keeping the process alive would serve the broader objective of resolving the company’s insolvency.
In making that assessment, the tribunal must hear the resolution professional, take into account the commercial wisdom of the CoC and consider the interests of other stakeholders.
The Supreme Court stressed that the adjudicating authority has a responsibility to ensure that the insolvency process proceeds with integrity and transparency and remains consistent with the objectives of the IBC.
The Court consequently set aside the NCLAT’s order and restored the CIRP to the NCLT.
The tribunal has been directed to reconsider whether the resolution process should continue, taking into account matters including ownership of the Greenopolis project and the interests of homebuyers who have already pursued remedies under other statutory and judicial mechanisms.
If the NCLT concludes that the CIRP should continue, the Supreme Court directed that the proceedings be brought to a conclusion without unnecessary delay.
The ruling was delivered in the case concerning Orris Infrastructure/Three C Shelters and the disputed insolvency proceedings initiated by Straight Edge Contracts.