Fraudulent CIRP Initiation Does Not Automatically Terminate Insolvency Proceedings: Supreme Court Clarifies the Two-Stage Approach
Overview of the Judgment
The Supreme Court of India, in Orris Infrastructure Private Limited Vs Rakesh Kumar Gupta & Ors., has delivered a significant ruling on a question that had created divergent views between the Adjudicating Authority and the National Company Law Appellate Tribunal: what happens to a Corporate Insolvency Resolution Process when its very initiation is found to be fraudulent and collusive?
The Court's answer is nuanced and carefully calibrated. It holds that the Adjudicating Authority ("AA") under the Insolvency and Bankruptcy Code, 2016 ("IBC") is indeed empowered to recall an admission order that was obtained through fraud or collusion. However — and this is the critical clarification — such a finding does not automatically bring the entire CIRP to an end. The two questions, namely whether the fraudulent admission should be recalled and whether the CIRP should be permitted to continue, are legally distinct and must each receive a separate, reasoned determination.
Background: The Greenopolis Project and Its Stakeholders
The Development Agreement and the Project
Orris Infrastructure Private Limited is the landowner of approximately 47.218 acres of land situated at Sector 89, Gurgaon. Under a development agreement dated 02.11.2011, M/s Three C Shelters Private Limited — the corporate debtor — undertook to construct a real estate project named Greenopolis comprising 1,862 flats. The constructed flats were to be distributed between the corporate debtor and Orris in the ratio of 65:35. Apartment buyer agreements executed between 2012 and 2013 stipulated project completion within 36 months from the date of allotment, with a further grace period of six months.
The relevant contractual clause reads:
"Subject to Clause 5.2 and subject to all the buyers of the apartments in the Project making timely payment the 3C shall endeavor to complete the construction of the Apartment within 36 months with a grace period of 06 months from the date of the allotment of the Apartment."
Regulatory and Consumer Forum Proceedings
Construction came to a virtual standstill, causing considerable distress to homebuyers who had committed substantial funds. They formed the Greenopolis Welfare Association ("GWA") and approached the Haryana Real Estate Regulatory Authority ("HRERA"). By its order dated 23.01.2019, the HRERA directed the corporate debtor to complete construction and restricted use of escrow account funds to project purposes alone.
Orris challenged certain HRERA findings before the Haryana Real Estate Appellate Tribunal ("HREAT"), which dismissed the appeal, holding both Orris and the corporate debtor jointly responsible as promoters for completing the project.
The National Consumer Disputes Redressal Commission ("NCDRC") similarly held, vide a common judgment dated 20.07.2020, that the corporate debtor and Orris were each responsible to their respective allottees.
In suo motu proceedings, the HRERA, by its order dated 07.10.2020, went further and held that the corporate debtor had no development rights, and that Orris, as landowner, licensee, and collaborator, bore primary responsibility for completing the project.
How the CIRP Was Initiated
M/s Straight Edge Contracts Pvt. Ltd., claiming to be an operational creditor of the corporate debtor, filed a petition under Section 9 of the IBC on 17.10.2019. Remarkably, by 27.01.2020 — before the AA had disposed of the petition — an affidavit had already been placed on record in which a director of the corporate debtor admitted the operational debt. On the strength of this admission alone, the AA allowed the application on 20.07.2020:
"Heard the submissions made by the Operational Creditor as well as Corporate Debtor. Annexure A-10 which is affidavit of admission shows that on January 27, 2020, the Director of Three C Shelters Private Limited. Mr. Girish Chander Joshi has confirmed that the Corporate Debtor has to pay to the Operational Creditor as per his claim. Therefore, the petition is allowed."
A subsequent order dated 16.10.2020 formally appointed the Interim Resolution Professional and imposed the moratorium.
Fraud and Collusion: The AA's Findings
The AA, upon a full examination of the circumstances — including applications brought by the Resolution Professional of a related entity, M/s Three C Universal Developers, and by Orris — returned categorical findings of fraud and collusion between M/s Straight Edge Contracts Pvt. Ltd. and the corporate debtor.
Key indicators of collusion identified by the AA included: