Brief Overview:

Malicious and fraudulent Corporate Insolvency Resolution Process (“CIRP”) initiated under the Insolvency and Bankruptcy Code (“I&B Code”) is liable to be set aside under Section 65 of the I&B Code, even after resolution plans have been received.

Technical Details:

Fraudulent and collusive initiation of CIRP with related party involvement is liable to be recalled under Section 65 I&B Code. The National Company Law Appellate Tribunal, New Delhi (“NCLAT”) observed and upheld the following:

• Initiating CIRP requires establishing the existence of a debt, that it is due, and a default. At each stage, the relationship between the Petitioner and the Corporate Debtor is crucial. If the Petitioner is a related party, it raises serious doubts about the bona fides of the insolvency initiation, especially if not disclosed to the Adjudicating Authority.
• Adjudicating Authority is fully empowered to pierce the corporate veil and examine the real intent behind the filing, and it rightly did the same.
• Even if an application under Section 65 of the I&B Code is filed at the fag end, the same remains valid, as any fraud, once established, vitiates the entire process, including the approval of the resolution plan. The stage of the CIRP is thus immaterial when considering such an application.

Takeaways:

• Debt & Default isn’t enough – The petitioner’s relationship with the corporate debtor is key. Related-party filings demand strict scrutiny.
• NCLT can lift the veil – The Adjudicating Authority is empowered to pierce the corporate veil and examine real intent behind the initiation of insolvency proceedings.
• Fraud Knows No Timeline – Section 65 of the I&B Code, allows the Adjudicating Authority to intervene at any stage of the CIRP, including post-plan approval.
• Fraud Vitiates All – Once fraud or malicious intent is established, the entire CIRP, including resolution plan approval stands tainted and is liable to be set aside.

For further details, please see:

Expert Realty Professionals Private Limited v. Logix Infrastructure Private Limited & Ors., NCLAT.pdf

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