The Supreme Court has held that an Adjudicating Authority can recall the admission of an insolvency application under Section 9 of the Insolvency and Bankruptcy Code (IBC), 2016, if it is later found that the proceedings were initiated on the basis of fraudulent or collusive jurisdictional facts.

However, the Court clarified that a finding of fraud at the stage of initiation does not automatically mean that the entire Corporate Insolvency Resolution Process (CIRP) must be terminated.

A bench of Justices Pamidighantam Sri Narasimha and Alok Aradhe said that once insolvency proceedings are admitted, they acquire an in rem character and the Adjudicating Authority must independently decide whether the CIRP should continue in the interests of the corporate debtor and its stakeholders.

The bench was hearing an appeal against a National Company Law Appellate Tribunal (NCLAT) decision that had set aside the entire CIRP initiated against a company concerning the Greenopolis residential project in Gurgaon.

The insolvency proceedings had been initiated by an operational creditor. The NCLAT had found that the Section 9 application was filed fraudulently and in collusion with the suspended directors of the corporate debtor and consequently terminated the entire CIRP.

Initially, the National Company Law Tribunal (NCLT) had refused to recall the CIRP, holding that it did not have the jurisdiction to recall the admission of a Section 9 application.

The NCLAT subsequently held that the NCLT did have the power to recall an order obtained through fraud and set aside the entire insolvency process.

The Supreme Court disagreed with both approaches. It held that while the NCLT was wrong in concluding that it had no power to recall the admission, the NCLAT went too far by terminating the entire CIRP without considering whether the process should continue.

“Insovency resolution process can be continued even after a finding that the original application under Section 9 was initiated fraudulently and with active collusion of the suspended Directors of the corporate debtor,” the Court observed.

The bench said that the Adjudicating Authority must consider several factors before deciding whether the CIRP should continue, with the primary consideration being whether the subsequent proceedings can be conducted with integrity, transparency and confidence that the objectives of the IBC can be achieved.

The Court further emphasised that once an insolvency application is admitted, the proceedings are no longer controlled solely by the original applicant, creditor or debtor. The interests of various stakeholders, including the Resolution Professional, Committee of Creditors and homebuyers, must also be considered.

“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 Court said.

The Supreme Court accordingly set aside the NCLAT's order and restored the CIRP before the NCLT.

It directed the NCLT to reconsider whether the insolvency process should continue after hearing the Resolution Professional, Committee of Creditors and other stakeholders, including homebuyers.

The Court reiterated that where the fundamental jurisdictional facts relied upon for initiating proceedings under Sections 7, 9 or 10 of the IBC are subsequently found to be fraudulent or collusive, the Adjudicating Authority can recall the admission. However, such recall does not by itself determine the fate of the entire CIRP, which must be assessed separately after considering the interests of all stakeholders.