NCLAT: Adjudicating Authority Can Examine Fraud Allegations Under Section 65 IBC Even During Consideration Of Resolution Plan
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice N. Seshasayee and Mr. Arun Baroka (Technical Member), has ruled that an Adjudicating Authority retains the power to adjudicate allegations of fraud under Section 65 of the Insolvency and Bankruptcy Code, 2016 (IBC), even if a resolution plan is already under consideration. The Tribunal observed that if fraud in the initiation of insolvency proceedings is established, the entire process stands vitiated, irrespective of the stage of the Corporate Insolvency Resolution Process (CIRP). The Bench clarified that the timing of a Section 65 application is inconsequential — meaning that even a late-stage application, filed while a resolution plan is being evaluated, does not divest the Adjudicating Authority of its jurisdiction to examine allegations of fraud, collusion, or misuse of process.
Background
The appeal was filed under Section 61 of the IBC challenging an order of the National Company Law Tribunal (NCLT), New Delhi, which had admitted a Section 65 application alleging fraudulent and collusive conduct in the initiation of insolvency proceedings. The Appellant contended that the application under Section 65 was filed only on 13.12.2023, which was five months after the admission of CIRP (14.07.2023) and eight months after the filing of the Section 7 petition (06.04.2023). It was argued that such a delayed application was clearly an afterthought, aimed at derailing an ongoing resolution process. The Appellant further submitted that merely being a related party does not automatically attract Section 65, which pertains to fraudulent or malicious initiation of proceedings. It was emphasized that while the IBC disqualifies related parties from being part of the Committee of Creditors under Section 21(2) and from submitting a resolution plan under Section 29A, it nowhere equates related-party status with fraud or malice.
Respondents’ Submissions
The Respondents argued that the corporate debtor’s own conduct revealed collusion and mala fides in initiating the insolvency process. They highlighted that the corporate debtor had promptly admitted the debt claimed by the Appellant in its reply to the Section 7 application, without raising any objection or dispute. This, according to the Respondents, demonstrated that the parties had conspired to misuse the IBC mechanism to defeat the legitimate rights of other creditors and allottees.
It was further alleged that the non-disclosure of the related-party relationship between the entities was deliberate and formed part of a larger scheme to misuse the insolvency framework. The NCLT, therefore, was justified in lifting the corporate veil to uncover the real intent behind the initiation of proceedings, which was found to be collusive and designed to shield the corporate debtor from genuine claims.
Tribunal’s Observations
On examining the MoU and financial transactions between the parties, the NCLAT found that the Appellant had invested ₹15 crore in the corporate debtor under an understanding that the returns would be linked to the sale proceeds of developed property, i.e., ₹2,200 per sq. ft. and above. Subsequently, the corporate debtor had admitted its liability of ₹12.88 crore, payable within a month, without interest and thereafter with 18% interest if delayed. The Bench noted that such an arrangement effectively converted an investment into a financial debt, but the absence of a stamped loan agreement and lack of proper documentation raised serious concerns about the authenticity of the transaction.
It also observed that the Appellant had submitted backdated and unregistered documents to validate the alleged transactions. The records from the Ministry of Corporate Affairs (MCA) revealed that Mr. Hemant Sharma, a common director in both the Appellant company and the corporate debtor, was simultaneously involved in the transaction — suggesting a related-party nexus and possible collusion. The Tribunal remarked: “Form D-12 indicates that Mr. Hemant Sharma remained Director of both entities at the time of execution of the MoU which prima facie suggests that the filings were done back dated. The Binding Understanding and Minutes of Meeting are not registered. Additionally, there are no witnesses and the documents are forged to validate sham transactions to defraud legitimate creditors.” Based on these findings, the Bench concluded that the CIRP initiation was not bona fide, and the corporate debtor had colluded with the Appellant to circumvent other creditors’ claims.
Legal Findings
Rejecting the contention that the Section 65 application was filed belatedly, the Tribunal held: “We cannot agree with the argument of the Appellant that the Application under Section 65 and impugned order was filed at the fag end of the CIRP and therefore it is not maintainable. We note that if there is fraud it will vitiate everything including order approving the resolution plan. Thus, the stage of CIRP is inconsequential, while considering the Section 65 application.” The NCLAT relied on its earlier decision in Ashmeet Singh Bhatia v. Pragati Impex India Pvt. Ltd. & Anr., wherein it was held that the pendency of a resolution plan does not restrict the Adjudicating Authority from examining fraud allegations if such claims are substantiated.
The Tribunal concluded that the transactions between the Appellant and the corporate debtor were collusive, and that the insolvency process had been initiated with malicious intent to misuse the provisions of the IBC. It reaffirmed that fraud vitiates all proceedings, regardless of the procedural stage, and that the Adjudicating Authority is duty-bound to scrutinize such allegations under Section 65 whenever they arise. Accordingly, the appeal was dismissed, upholding the NCLT’s findings and reinforcing that the power to examine fraud lies at the core of the IBC’s integrity framework.
Appearance
For Appellant: Mr. Sunil Fennandes, Sr. Advocate with Mr. Ketan Madan and Ms. Muskan Surana, Advocates
For Respondent: Mr. Gaurav Rana and Mr. Ajitesh Kumar, Advocates for R-2 & 3. Mr. Rishi Singhal, Mr. Pawan Kr. Goyal and Ms. Reena, Advocates for RP/R-1.
Cause Title: Expert Realty Professionals Private Limited Versus Logix Infrastructure Private Limited
Case No: Company Appeal (AT) (Insolvency) No. 383 of 2025
Coram: Justice N. Seshasayee, Mr. Arun Baroka (Technical Member)
