By Legum Pacific Editorial ·
Suppose a housing project stops making progress and a small contractor files for insolvency. Homebuyers, banks and suppliers worry about whether that insolvency case can be used to freeze other remedies.
What does the law say?
Section 9 of the Insolvency and Bankruptcy Code allows an operational creditor (for example a contractor or supplier) to start the corporate insolvency resolution process (CIRP) when there is a default (non‑payment). When the tribunal admits a Section 9 petition, CIRP begins. Admission brings a moratorium (a pause on many legal actions) and control of the company’s affairs moves to an insolvency professional (IRP/RP).
The Supreme Court explained that the existence of a “debt” is a jurisdictional fact. A tribunal must be satisfied that the jurisdictional fact exists before it can assume jurisdiction. If a petition was filed by deception or in collusion with the company, the tribunal’s jurisdiction may have been invoked on a false premise.
Fraud or collusion in public‑law proceedings is different from private commercial fraud. In public law, fraud that misleads a tribunal corrupts the decision‑making process. Where such fraud results in the tribunal exercising jurisdiction that it would not otherwise have had, the admission can be vitiated.
What did the Supreme Court decide?
In the Greenopolis appeals the tribunal (NCLT) had found active collusion between the operational creditor and the corporate debtor. The Supreme Court said the Adjudicating Authority has the power and jurisdiction to recall a CIRP by dismissing a Section 9 petition if the petition was admitted at the instance of a collusive operational creditor.
The Court also stressed that once an application is admitted, the CIRP changes its character. Admission makes the process in rem (affecting the insolvency estate and all creditors). Rules in the Code—about moratorium, management passing to an IRP, inviting and verifying claims, and formation of a Committee of Creditors—show that the process is no longer solely between the applicant and the debtor.
Because the CIRP affects many stakeholders, the Court held that a finding of fraud at the initiation stage does not automatically require the tribunal to stop the entire CIRP. The Adjudicating Authority may, after considering the stage of proceedings, the position of the resolution professional and the Committee of Creditors, and the interests of other creditors, decide whether the CIRP should continue or be set aside.
The Court also recorded that it was not called upon to decide certain issues about ownership and control of the project in question.
What does this mean for ordinary people and businesses?
If you are a homebuyer, supplier or bank with a claim, your position can change once a Section 9 petition is admitted. If a later inquiry shows the petition was brought by fraud or collusion, the tribunal can set aside the admission. But the tribunal will weigh whether stopping the CIRP would harm the collective interest of creditors and other stakeholders.
Claims already placed before the resolution professional and actions taken in the CIRP are relevant to that decision. The Code treats the insolvency process as a collective mechanism to maximise value for creditors, not as a private lawsuit driven by the initiating creditor alone.
Key points
- A tribunal can recall a Section 9 admission if the petition was induced by fraud or collusion.
- A finding of fraud at initiation does not automatically end the CIRP; the tribunal may allow the process to continue in suitable cases.
- After admission, CIRP becomes an in rem process involving many creditors, the IRP/RP and the Committee of Creditors; the initiating creditor no longer controls the process.
- The Adjudicating Authority will consider the stage of the CIRP, the interests of other creditors and the prospect of reaching a lawful resolution before deciding whether to continue or to set aside the CIRP.
Source: Supreme Court of India (official judgment) (opens in a new tab) · Greenopolis Welfare Confederation v. Rakesh Kumar Gupta, C.A. Nos. 6792-6796 of 2023, 2026 INSC 1070