NCLAT order on insolvency fraud may cloud IBC interpretation: Experts

Experts say NCLAT's order allowing recall of resolution plans if fraud is detected could weaken bidder confidence and blur clarity on the Insolvency and Bankruptcy Code

The National Company Law Appellate Tribunal (NCLAT) in the case Expert Realty Professionals Private Limited vs Logix Infrastructure Private Limited upheld the National Company Law Tribunal’s (NCLT’s) authority to recall a resolution plan at any stage if fraud was detected during the insolvency process.

 

According to experts, the order could create uncertainty in interpreting the Insolvency and Bankruptcy Code (IBC), particularly given the Supreme Court’s (SC’s) emphasis on the primacy of lenders’ commercial wisdom in insolvency proceedings. “Fraudulent intent is a dangerously wide umbrella. If stretched too far, it undermines the finality that the SC has sought to protect. While the apex court has made the Committee of Creditors’ wisdom paramount, the NCLAT’s view that a resolution plan can be recalled at any stage creates confusion and erodes bidder confidence,” says Raheel Patel, partner at Gandhi Law Associates. In its September 8 order, the NCLAT observed that “fraud” during the insolvency process “will vitiate everything, including an order approving the resolution plan”.  

 

It also clarified that the stage of the process was irrelevant if Section 65 of the IBC — which penalises fraudulent or malicious initiation of proceedings — applied.

 

This stance contrasts with the SC’s position in the Bhushan Power and Steel case, where the court upheld JSW Steel’s resolution plan, warning that reopening approved plans would “open a Pandora’s box” and compromise the sanctity of the IBC.

 

While the two rulings address different aspects, the ambiguity over what constitutes “fraud” could leave resolution plans exposed to perpetual challenges, experts caution.

 

Some, however, argue the SC’s high threshold for recalling approved plans ensures the NCLAT ruling would apply only sparingly.

 

“While Section 65 of the IBC does not spell out a mechanism for identifying fraudulent intent, it continues to provide a safeguard against malicious filings,” said B Shravanth Shanker, advocate-on-record in the SC. “The (SC) order indicates that courts will now exercise their jurisdiction sparingly and prioritise finality of resolution plans.”

 

Others warn the lack of clarity leaves scope for extended litigation. “Resolution applicants must recognise that their plans or acquisition transactions could still be modified or voided — even after approval or implementation. They will need to build in protections and compensation mechanisms for such contingencies,” says Deep Roy, managing partner at Equilex.

 

Chirag Gupta, associate partner at Alpha Partners, adds: “If there are reasonable grounds to believe that insolvency or liquidation was initiated to defraud creditors, the plan can be recalled at any stage.”