A collusive insolvency petition can be recalled without ending the process, Supreme Court holds
Justices P.S. Narasimha and Alok Aradhe set aside the NCLAT order, restore the Greenopolis insolvency to its original number, and lay down five principles on fraudulent initiation.
An insolvency that was begun on a debt the Supreme Court has described as a mirage can be undone by the tribunal that admitted it — but undoing the admission does not automatically kill the resolution process built on top of it. Deciding appeals arising from the stalled Greenopolis housing project in Gurgaon, Justices Pamidighantam Sri Narasimha and Alok Aradhe held that an adjudicating authority has the power to recall a corporate insolvency resolution process admitted at the instance of a collusive operational creditor, because jurisdictional facts tainted by fraud cannot sustain jurisdiction. They also held that it is not bound to do so once the process has matured into a proceeding in rem. The NCLAT order was set aside and the insolvency restored to its original number, with the tribunal directed to decide afresh whether it should continue.
Forty-seven acres, 1,862 flats, and a project that stopped in 2016
Orris Infrastructure Private Limited owns 47.218 acres at Sector 89, Gurgaon. By a development agreement of 2 November 2011 it engaged M/s Three C Shelters Private Limited, the corporate debtor, to build a project called Greenopolis with 1,862 flats at the developer's own cost, the constructed flats to be shared 65:35 between the developer and the landowner. Tripartite apartment buyer agreements followed in 2012-13, under which the developer was to complete construction within 36 months of each allotment with a six-month grace period.
It did not. Buyers who had put in heavy sums formed the Greenopolis Welfare Association and went to the Haryana Real Estate Regulatory Authority, which directed completion on schedule and ordered that escrow money be used only for the project. The appellate tribunal dismissed the landowner's challenge, holding both companies to be promoters bound to complete and hand over. The National Consumer Disputes Redressal Commission held each company responsible to its own allottees. In suo motu proceedings on 7 October 2020 the regulator went further: the developer had no development rights at all, the landowner as licensee and collaborator carried primary responsibility for completing the project, and funds in a Noida bank account were the homebuyers' assets to be moved into a dedicated project account.
A Section 9 petition that nobody contested
Against that background, a company called M/s Straight Edge Contracts Pvt. Ltd., claiming to be an operational creditor, filed a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 on 17 October 2019. By the time it came up for hearing again, an affidavit by a director of the corporate debtor admitting the operational debt was already on the file. The adjudicating authority allowed the petition on 20 July 2020 in two sentences resting on that admission, and by a later order of 16 October 2020 appointed an interim resolution professional and imposed the moratorium, recording that default was not denied and that there was a clear admission of debt.
The homebuyers, who were pursuing remedies before the regulator and the consumer commission, appealed to the NCLAT alleging fraud and collusion between the purported creditor and the debtor. That appeal was dismissed in January 2021 on the footing that other creditors had already invoked the Code and the moratorium had commenced.
What the tribunal found when it finally looked
When the allegation was eventually examined, the picture that emerged was comprehensive. The regulator and its appellate tribunal had concurrently found that construction at Greenopolis came to a standstill in early 2016, yet the purported creditor claimed to have started work in June 2017 under an agreement executed five months later, in November 2017. Completion work was valued at about Rs 256 crore, but that agreement committed the purported creditor to spend only Rs 5 crore and another entity Rs 65 crore, and was silent on where the rest would come from, on the mode of payment, and on any default clause fixing liability. The land put into the project by the landowner was worth more than Rs 500 crore.
The sequence of documents was worse. The demand notice issued on 9 October 2019, but the corporate debtor's board resolution directing a reply to it was dated 24 June 2019 — months earlier, so the company had pre-empted a notice it had not yet received. A memorandum of understanding of January 2019 was executed without any board resolution, without two of the parties to the 2017 agreement, and was neither attested nor registered; the tribunal called it an afterthought fabricated to facilitate the insolvency. A former director deposed that the person who signed it had told the Economic Offences Wing his signatures were not genuine. No authorisation existed in favour of the individuals who executed documents with the purported creditor. The corporate debtor had Rs 53 crore sitting in escrow and, despite admitting the liability, chose not to pay it. And the company that admitted the debt was represented by two directors whom the tribunal described as mere pantry or office boys, unaware of the company's activities and unfamiliar with its documents, who later asked to be discharged.
The activities of the purported creditor, the Supreme Court observed, were anything but straight. The findings of fraud and collusion were affirmed by the NCLAT and were not even contested before the Supreme Court, which affirmed them.
Why a tainted admission can be undone
The adjudicating authority had held it possessed no power to recall its own admission order, relying on authority that a tribunal cannot review its own order except for an error apparent on the record, and concluded there was no option but to let the insolvency run. The NCLAT held the power did exist and, having so held, simply rejected the application and recalled the entire process.
The Supreme Court located the answer in the doctrine of jurisdictional facts. Drawing on Shrisht Dhawan v. Shaw Brothers, it recorded that a jurisdictional fact is one on whose existence or non-existence depends the assumption or refusal of jurisdiction; that an error of jurisdictional fact renders an order ultra vires and void; that a tribunal cannot confer jurisdiction on itself by deciding such a fact wrongly, as held in Raza Textiles v. Income Tax Officer; and that a void order may be challenged at any time in any proceeding. An authority must be satisfied of the jurisdictional fact that alone grants it power, and its assumption of jurisdiction must not be, in the Court's word, mindless — thoughtless, or without care or caution.
The Court then drew a distinction it treated as central. Fraud and collusion carry a different juridical significance in private contractual relations and in public law. In a private transaction, fraud concerns deception practised on a contracting party and collusion a common design to secure an improper private advantage. In public law the vice travels beyond the parties: fraud corrupts the decision-making process by misleading the tribunal, and collusion undermines the genuineness of the proceeding by using adjudication to procure a privately engineered result. The distinction matters because public power is exercised not for the benefit of the parties before the authority but according to law and for the public purpose for which the power was conferred. Maintaining it protects the integrity of public decision-making, stops the machinery of law being used as an instrument of private arrangement, and prevents the principle of finality from conferring legitimacy on a decision whose foundation is itself vitiated.
From that the Court derived the duty: those who invoke proceedings under the Code are under a public law obligation not to deceive or mislead. Where jurisdiction has been exercised on the basis of fraud or collusion, the tribunal can withdraw the proceedings at any point, because jurisdictional facts affected by fraud cannot continue to sustain jurisdiction. Courts exercise greater control over the determination of jurisdictional facts than over findings that carry no consequence for jurisdiction.
On these facts, the Court held, it was conclusively proved that the existence of the debt was a mirage — none existed at all. It was fraudulently portrayed so that the tribunal would start the insolvency and impose the moratorium, thereby blocking the other legal remedies of the homebuyers and other claimants. The adjudicating authority therefore had every power and jurisdiction to recall.
But recall is not the automatic consequence
Having found the power, the Court turned to whether the authority is duty-bound to use it, and answered that it is not.
The Code's architecture works in two stages. Following GLAS Trust Company LLC v. Byju Raveendran, the Court recorded that a petition under Sections 7, 9 or 10 is initially in personam, concerning essentially the applicant and the corporate debtor. Admission changes that: a moratorium is declared, claims are publicly invited, an interim resolution professional is appointed, and the proceedings become in rem, so that all creditors become stakeholders and the management of the debtor vests in the professional. The trigger, as Indus Biotech held, is admission and not filing.
Admission, the Court said, is a watershed moment, after which Sections 14, 17, 18, 20, 21, 25, 32 and 53 interlock. The moratorium under Section 14 has consequences far beyond the original applicant's claims, protecting the debtor against proceedings, execution, enforcement of security and other coercive action while the existing management loses control. A proceeding of that magnitude cannot logically remain a private matter between the original creditor and the debtor. That is why Section 12A, inserted in 2018, does not permit the original applicant to withdraw at will, requiring instead an application by the resolution professional with the approval of ninety per cent of the committee of creditors.
Other creditors file their claims pursuant to the resolution professional's invitation and their rights become part of the collective insolvency estate. It would defeat the whole idea of resolving the debtor's insolvency, the Court held, if those creditors had to begin fresh Section 9 proceedings merely because the original applicant turned out to be colluding. The resolution process has to be unitary, and the Code does not contemplate multiple simultaneous processes absent glaring intervening circumstances. Carriage at that stage lies not with the original applicant but with the joint decisions of the resolution professional and the committee of creditors, approved by the adjudicating authority — so the process can continue even in the original applicant's absence.
In deciding whether to continue, the authority must ensure the future proceedings can be conducted with integrity and with confidence that the object of the Code will be achieved with certainty, probity and transparency, guided by the commercial wisdom of the committee of creditors and the submissions of the resolution professional. The Court did not rule out the authority concluding, for reasons it records, that continuation cannot be permitted.
Five principles the Court restated
The Court set out the principles on which it decided. First, initiation under Sections 7, 9 or 10 rests on fundamental facts that are jurisdictional in nature, and if reliance on them is later proved fraudulent and collusive the authority may recall the admission, because invoking statutory jurisdiction carries an inherent public law duty not to deceive or mislead on jurisdictional facts, such manipulation subverting the purpose of the statute.
Second, such proceedings run in two stages: the original applicant has carriage until admission, after which they are no longer the preserve of applicant, creditor or debtor, becoming in rem with all creditors as stakeholders, the debtor's affairs vested in the resolution professional and the proceedings under the authority's jurisdiction. Third, after admission the original applicant may not withdraw the case, a position given statutory recognition by Section 12A in 2018.
Fourth, on concluding that initiation was based on fraud and collusion, the authority shall disallow the original applicant from participating and may also initiate proceedings under Section 65 of the Code. Fifth, if the authority is of opinion that the process should continue to serve the larger interest of resolving the insolvency for the other stakeholders, it has the power and jurisdiction to decide so, after hearing the resolution professional and eliciting the views of the committee of creditors and other stakeholders, and it is its duty to ensure the proceedings conclude with integrity and transparency.
Measured against that, the Court held neither forum below had taken the proper consequential step. The adjudicating authority wrongly held there was no power to withdraw once admitted; the NCLAT reversed that but then failed to decide whether the proceedings should continue.
Order
The appeals by Orris Infrastructure, by the Greenopolis Welfare Association and by two individual appellants were allowed in part, and the NCLAT judgment in five company appeals was set aside. The insolvency proceedings numbered IB-2721/ND/2019 were restored to their original number before the adjudicating authority.
The authority must now decide on continuation in view of the conclusive finding of fraud and collusion by the original applicant, taking into account all necessary facts and events including the ownership of the Greenopolis project, and hearing the resolution professional, the committee of creditors and other stakeholders, among them the homebuyers who have already taken other statutory and judicial remedies. If it decides to continue, it must conclude the proceedings expeditiously, given how long these cases have been pending. The contempt petitions were closed and pending applications, including those for intervention and impleadment, were disposed of.
The Court recorded one express reservation. On the adjudicating authority's observations about the landowner's ownership and control of the project, and about property in the corporate debtor's possession being excluded from the term “assets” under Section 18, it said it was not called upon to adjudicate and expressed no opinion whatsoever.