Fraudulent Debt Can Undermine CIRP: Supreme Court Upholds NCLT’s Power To Recall Admission

The Supreme Court recently held that the National Company Law Tribunal (NCLT) can recall an order admitting insolvency proceedings if it later finds that the case was started through fraud or collusion. This can include cases where the claimed debt, which formed the basis for starting the insolvency process, is found to be fraudulent.

A Bench of Justices P S Narasimha and Alok Aradhe said that certain basic facts, such as the existence of a debt, must be established before a court or tribunal can assume jurisdiction over a case. The Bench said these are known as “jurisdictional facts” and form the basis for starting insolvency proceedings under Sections 7, 9 or 10 of the Insolvency and Bankruptcy Code, 2016.

When Can NCLT Recall CIRP Proceedings?

Court held that where the adjudicating authority finds that the initiation of Corporate Insolvency Resolution Process (CIRP) was based on fraud and collusion, it has the power and jurisdiction to recall the admission of the application.

Court, however, clarified that once an application is admitted and CIRP commences, the proceedings are no longer in the control of the original applicant, creditor or debtor.

"Once the petition is admitted, the proceedings are no longer the preserve of the original applicant, creditor or debtor. They become in rem, and all creditors of the corporate debtor become stakeholders in the process, and the affairs of the corporate debtor are vested in the resolution professional, and the proceedings are under the jurisdiction of the adjudicating authority," the Bench said.

Court also emphasised that after an application is admitted and CIRP proceedings commence, it is not permissible for the original applicant to withdraw the case.

"If the adjudicating authority arrives at a conclusion that initiation of CIRP under Sections 7, 9 or 10, as the case may be, 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," the Bench said.

Court further held that if the adjudicating authority is of the opinion that the CIRP proceedings that have commenced need to be continued to serve the larger interests of resolving the corporate insolvency of the corporate debtor, particularly where there are other stakeholders, it has the power and jurisdiction to take such a decision.

"For this purpose, it shall hear the RP, elicit the view of the Committee of Creditors and also the other stakeholders. It is the duty of the adjudicating authority to ensure that the proceedings are concluded with integrity and transparency, and that the purpose and object of the code is subserved," the Bench said.

What Are 'Jurisdictional Facts' Under The IBC?

Court explained that when statutory authorities are empowered to exercise a particular jurisdiction, their power to do so rests on the existence of certain facts and events. In administrative law, such facts are referred to as "jurisdictional facts", it pointed out.

Dealing with an appeal filed by Orris Infrastructure Private Limited, the Court examined whether the adjudicating authority has the power and jurisdiction to recall CIRP by dismissing a Section 9 petition that was admitted at the instance of a collusive operational creditor.

Court noted that a unique situation arose in 2023 when the adjudicating authority was called upon to examine whether the CIRP initiated after admission of a Section 9 petition under the IBC by M/s Straight Edge Contracts Pvt Ltd, claiming to be an operational creditor, was fraudulent and in collusion with the corporate debtor.

"Upon examination, it became crystal clear that the initiation of CIRP was fraudulent and, in fact, collusive," the Bench said.

In the case, while the adjudicating authority held that there was no power of recall after an application was admitted and CIRP commenced, the NCLAT held that such power certainly existed.

Having held that the power exists, the NCLAT considered it a logical consequence to simply reject the application and recall the entire CIRP process, the Bench noted.

Orris Infrastructure Private Limited was the landowner of a parcel of 47.218 acres of land situated at Sector 89, Gurgaon. Orris entered into a development agreement in 2011 with M/s Three C Shelters Private Limited, the corporate debtor, for construction of a real estate project called Greenopolis, comprising 1,862 flats.

After examining the facts of the matter, the Bench found that there was clear collusion between M/s Straight Edge and the corporate debtor.

"It was evident that the activities of M/s Straight Edge were anything but straight, in fact outright crooked. There is a clear collusion between M/s Straight Edge and the CD. These findings are affirmed by the NCLAT. Even before us there was no contest on the findings of fraud and collusion as found by the AA and affirmed by the NCLAT. We affirm these findings," the Bench said.

Allowing the appeals in part, Court directed the adjudicating authority to decide whether the proceedings should now continue in view of the conclusive finding of fraud and collusion involving the original applicant, M/s Straight Edge Contracts Pvt. Ltd.

"For this purpose, it shall take into account all the necessary facts and events, including the ownership of the Greenopolis project, hear the RP, the CoC and other stakeholders, including the homebuyers who have already adopted other statutory and judicial remedies," the Bench said.

Court further directed that if the adjudicating authority decides to continue the CIRP process, it should conclude the proceedings expeditiously in view of their long pendency.

Case Title: Orris Infrastructure Private Limited Vs Rakesh Kumar Gupta & Ors

Bench: Justices P S Narasimha and Alok Aradhe

Date of Judgment: September 30, 2026