Orders Obtained through Fraud may be Recalled by Adjudicating Authority u/r 11 of the NCLT Rules: NCLAT [Read Order]

The National Company Law Appellate Tribunal ( NCLAT ) has observed that where the adjudicating authority has been made to rely on distorted facts which the adjudicating authority became aware of belatedly, the adjudicating authority can always invoke its inherent powers under Rule 11 of NCLT Rules in order to protect itself and to prevent an abuse of its process.

The Respondents (homebuyers/financial creditors) and the Corporate Debtor (appellant), Marvel Landmarks Pvt Ltd, signed agreements for the sale of residential units in the Marvel Isola J Building Project. Possession was not transferred, and the residential units were not built on schedule.

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On November 30, 2019, the Respondents submitted a section 7 petition in accordance with the Insolvency and Bankruptcy Code 2016 ( IBC ). Due to the Respondents' failure to comply with the second proviso of section 7(1), which stipulates a minimum threshold of 100 allottees or 10% of the total allottees, the Corporate Debtor questioned its maintainability. The Adjudicating Authority did not see the Respondent.

The petition was dismissed by the Adjudicating Authority on June 4, 2024, because it did not meet the required number of allottees or percentage. The Respondents requested the recall of the 04.06.2024 order on September 14, 2024, by filing an application under Rule 11 of the NCLT Rules. The Adjudicating Authority recalled the dismissal order and reinstated the petition in the contested order dated 18.11.2024. The appellant appealed the contested order under section 61 of the IBC.

The appellant's attorney contended that a rehearing was not necessary because the Adjudicating Authority had dismissed the case on merits on June 4, 2024. The order had already reached finality because it had not been contested within the allotted time frame. Counsel argued that reviewing its own order or decision was not covered by the recall powers under Rule 11. The Respondent was able to request review of the order dated 04.06.2024 under the pretense of an application submitted under Rule 11.

Counsel further contended that the corporate debtor misled the adjudicating authority into believing that there were 288 unit-holders, while there were only 44 units. The corporate debtor suppressed material information. Thus, the adjudicating authority was within its jurisdiction to exercise its inherent powers under Rule 11.

The Tribunal observed that having already dismissed the Company Petition on 04.06.2024, the Adjudicating Authority, basis a recall application, cannot revisit the Company Petition on the ground that the dismissal was incorrect or that it had been incorrectly adjudicated because of disputed facts.

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According to the Tribunal, the Corporate Debtor failed to reveal that the Homebuyers satisfied the second proviso of Section 7(1)'s qualifying requirements. Instead, the 12 respondent allottees failed to meet the necessary percentage to file the petition, and the corporate debtor falsely claimed that the project had 282 apartments. The respondents' justification for their non-appearances was accepted by the Tribunal.

The bench, which included Justice Ashok Bhushan as the chair, Barun Mitra as a technical member, and Arun Baroka as a technical member, noted that fraud renders all proceedings void and that the court has the authority to revoke an order that was issued as a result of court fraud. According to the Tribunal, the adjudicating authority was right to recall the order since the appellants used the Respondent's absence and the suppression of material facts to achieve it.

The Tribunal noted that in cases where the adjudicating authority was forced to depend on misrepresented facts that it only about later, the adjudicating authority can always utilize its inherent authority to defend itself and stop misconduct. The adjudicating authority's justification for recalling the order and reviving the petition persuaded the tribunal.

To Read the full text of the Order CLICK HERE

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