Operational Creditor Colludes With Corporate Debtor to Fraudulently Trigger Insolvency; Supreme Court Says NCLT Can Recall Admission Yet Preserve CIRP to Protect Other Creditors
Fake Debt Used to Trigger CIRP and Block Homebuyers’ Remedies; Supreme Court Says NCLT Can Recall Fraudulent Admission and Still Continue Insolvency Process
Facts
The dispute concerned the Greenopolis real estate project in Sector 89, Gurgaon, comprising 1,862 flats. Orris Infrastructure Pvt. Ltd. owned approximately 47.218 acres and had entered into a development agreement with Three C Shelters Pvt. Ltd., under which Three C was to develop the project at its own cost and the constructed flats were to be shared in a 65:35 ratio. ORRIS INFRASTRUCTURE
Construction was delayed substantially. Homebuyers formed the Greenopolis Welfare Association (GWA) and approached HRERA. In January 2019, HRERA directed completion of construction and restricted escrow funds to the project. Subsequently, HRERA held Orris, as landowner, licence-holder and collaborator, primarily responsible for development and completion. ORRIS INFRASTRUCTURE ORRIS INFRASTRUCTURE
Meanwhile, Straight Edge Contracts Pvt. Ltd. claimed to be an operational creditor of Three C Shelters and filed a Section 9 IBC petition on 17 October 2019.
Three C admitted the alleged operational debt, following which the NCLT admitted the Section 9 application and commenced CIRP. ORRIS INFRASTRUCTURE
The homebuyers challenged the insolvency proceedings, alleging that Straight Edge and Three C had colluded to manufacture an operational debt and trigger CIRP.
The subsequent investigation before the NCLT revealed extraordinary circumstances. Two persons representing Three C as directors and admitting the liability were found to have essentially been office/pantry boys, with little or no knowledge of the company’s business affairs. ORRIS INFRASTRUCTURE
The NCLT ultimately recorded a categorical finding of fraud and collusion between Straight Edge and Three C. The NCLAT affirmed that finding, and it was not seriously contested before the Supreme Court. ORRIS INFRASTRUCTURE
The crucial question, however, was what should happen to the CIRP after discovering that the very Section 9 petition which triggered it was fraudulent.
Issues
The Supreme Court framed two fundamental questions.
First, does the NCLT have jurisdiction to recall the admission of a Section 9 petition where CIRP was initiated at the instance of a fraudulent and collusive operational creditor? ORRIS INFRASTRUCTURE
Second, if that power exists, must the entire CIRP necessarily be terminated, or can the insolvency process continue independently of the fraudulent original applicant? ORRIS INFRASTRUCTURE
Finding of Fraud and Collusion
The Supreme Court affirmed the concurrent finding that the initiation of insolvency was fraudulent.
The alleged operational debt itself was highly suspicious. The material showed that construction at Greenopolis had effectively stopped in 2016, although Straight Edge claimed to have undertaken construction work thereafter.
There were also inconsistencies concerning the agreements, the alleged expenditure and the availability of substantial funds in the escrow account. ORRIS INFRASTRUCTURE
The NCLT had further found that documents appeared to have been created to facilitate commencement of CIRP and that the persons who admitted the alleged debt on behalf of the corporate debtor lacked genuine knowledge of its affairs. ORRIS INFRASTRUCTURE
The Supreme Court consequently described the activities of Straight Edge as anything but “straight” and affirmed the finding of active collusion. ORRIS INFRASTRUCTURE
Jurisdictional Fact Under the IBC
The Supreme Court approached the matter through the doctrine of jurisdictional facts.
For an insolvency tribunal to assume jurisdiction, certain foundational statutory facts must exist.
In an IBC proceeding, the existence of a genuine debt/default is such a jurisdictional fact.
If the jurisdictional fact itself is fabricated through fraud or collusion, the tribunal cannot be compelled to perpetuate proceedings merely because an admission order has already been passed. ORRIS INFRASTRUCTURE
The Court emphasised that an error concerning a jurisdictional fact is fundamentally different from an ordinary factual or legal error committed while exercising valid jurisdiction.
Fraud on the Tribunal
The Court drew an important distinction between private-law fraud and public-law fraud.
Where parties manipulate facts to induce a statutory tribunal to exercise jurisdiction that otherwise would not have arisen, the fraud attacks the integrity of the public decision-making process itself.
The doctrine of finality cannot legitimise a proceeding whose jurisdictional foundation was procured by deception. ORRIS INFRASTRUCTURE
Accordingly, persons invoking the IBC have a public-law obligation not to deceive or mislead the adjudicating authority.
Where jurisdiction has been obtained through fraud or collusion, the tribunal possesses power to withdraw or recall the proceeding. ORRIS INFRASTRUCTURE
The Alleged Debt Was a “Mirage”
The Supreme Court’s finding on the purported operational debt was particularly strong.
It held that the existence of debt had been conclusively shown to be a “mirage”.
According to the Court, a debt had been fraudulently portrayed as existing so that CIRP could be initiated and a moratorium imposed, thereby obstructing the independent remedies being pursued by homebuyers and other claimants. ORRIS INFRASTRUCTURE
The NCLT therefore unquestionably possessed jurisdiction to recall the admission of the collusive Section 9 application.
But Fraudulent Admission Does Not Automatically Destroy CIRP
This is the most significant proposition emerging from the judgment.
The Supreme Court held that there are two distinct stages of insolvency proceedings.
Before admission, the proceeding is essentially in personam between the applicant creditor and corporate debtor.
Once the petition is admitted, however, CIRP fundamentally changes character.
It becomes a proceeding in rem.
All creditors become stakeholders; management shifts to the IRP/RP; claims are invited; the Committee of Creditors is constituted; and third-party statutory rights arise. ORRIS INFRASTRUCTURE
Thus, after admission, the CIRP no longer belongs to the creditor who originally filed the petition.
Original Creditor Loses Control After Admission
The Supreme Court explained that once CIRP begins, its purpose changes from recovery of an individual creditor’s debt to the collective resolution of the corporate debtor’s insolvency.
The Resolution Professional assumes responsibility for preserving assets, collating claims, inviting resolution applicants and presenting resolution plans.
The insolvency proceeding therefore detaches itself from the original applicant and serves the broader statutory objective of resolving the corporate debtor and maximising asset value. ORRIS INFRASTRUCTURE
Consequently, the fraudulent conduct of the original creditor does not necessarily justify destroying the rights subsequently acquired by innocent creditors, homebuyers and other stakeholders.
CIRP Can Continue Without Fraudulent Applicant
The Supreme Court expressly held that the insolvency resolution process can continue even after it is discovered that the original Section 9 application was fraudulently and collusively filed.
The original applicant can be removed from the process.
The Resolution Professional, CoC and other creditors can thereafter continue the collective insolvency proceedings under the supervision of the NCLT.
The Court therefore rejected the proposition that finding fraud at inception automatically requires termination of the entire CIRP.
NCLT Has Discretion Whether CIRP Should Continue
At the same time, the Supreme Court did not hold that every fraudulently initiated CIRP must continue.
The Adjudicating Authority must independently decide whether continuation serves the objectives of the IBC.
In doing so, it must consider the stage reached by CIRP, the views and commercial wisdom of the CoC, submissions of the Resolution Professional, interests of creditors and other stakeholders, and whether future proceedings can be conducted with integrity, certainty, probity and transparency.
Thus, the Court recognised both powers:
Power to recall the fraudulent admission, and
Power to preserve and continue the CIRP independently of the fraudulent applicant.
Section 65 IBC
The Supreme Court also clarified the consequence for the collusive applicant.
Where the NCLT finds that proceedings under Sections 7, 9 or 10 were initiated through fraud or collusion, the original applicant should be disallowed from participating in the CIRP, and the NCLT may additionally initiate proceedings under Section 65 of the IBC.
This prevents the party responsible for manipulating the insolvency jurisdiction from benefiting from the process it fraudulently initiated.
Why NCLAT’s Approach Was Incorrect
The NCLAT correctly recognised that the NCLT had power to recall an admission obtained through fraud.
Its error was treating termination of the entire CIRP as the automatic consequence.
The Supreme Court held that this ignored the transformation that occurs after admission: the proceedings become in rem and acquire stakeholders beyond the original applicant and corporate debtor.
The NCLAT therefore failed to consider whether the CIRP could continue for the benefit of the legitimate creditors and stakeholders.
Five Principles Laid Down by Supreme Court
The Supreme Court crystallised the law broadly as follows:
- Sections 7, 9 and 10 IBC depend upon jurisdictional facts. If those foundational facts are subsequently established to have been fraudulently or collusively presented, the NCLT can recall the admission.
- Insolvency operates in two stages: before admission it is principally between the applicant and debtor; after admission it becomes in rem, involving all creditors and stakeholders.
- After admission, the original applicant does not retain unilateral control over the proceeding.
- Where fraud or collusion is established, the fraudulent applicant must be excluded and proceedings under Section 65 may follow.
- Despite fraudulent initiation, the NCLT can permit CIRP to continue where doing so serves the larger objective of resolving the corporate debtor, after hearing the RP, CoC and other stakeholders.
Final Directions
The Supreme Court partly allowed the appeals and set aside the NCLAT judgment.
Significantly, it restored CIRP No. IB-2721/ND/2019 to its original number.
The NCLT was directed to independently decide whether the CIRP should continue despite the conclusive finding that Straight Edge had fraudulently and collusively initiated it.
While deciding that question, the NCLT must consider all relevant circumstances, including ownership of the Greenopolis project, and hear the Resolution Professional, CoC and other stakeholders, particularly the homebuyers who had already pursued remedies before other statutory and judicial forums.
If the NCLT decides that CIRP should continue, the Supreme Court directed that it be concluded expeditiously.
Thus, the Supreme Court did not itself finally direct that CIRP must continue; it restored the proceedings and left that consequential decision to the NCLT.
Case Details
Case: Orris Infrastructure Private Limited v. Rakesh Kumar Gupta & Ors.
Citation: 2026 INSC 1070
Court: Supreme Court of India
Proceedings: Civil Appeal Nos. 6797–6801 of 2023 with connected Civil Appeals and Contempt Petitions ORRIS INFRASTRUCTURE
Project: Greenopolis, Sector 89, Gurgaon
Corporate Debtor: Three C Shelters Private Limited
Operational Creditor: Straight Edge Contracts Private Limited
Key provisions: Sections 7, 9, 10, 12A and 65, Insolvency and Bankruptcy Code, 2016
Bench: Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe
Date: 30 September 2026
Result: Appeals partly allowed; NCLAT judgment set aside; CIRP restored; NCLT directed to determine whether CIRP should continue after excluding the consequences of the fraudulent and collusive initiation.
