INSIGHT OR INCONSISTENCY? INSIDE NCLAT’S EXPANSIVE APPROACH IN EXPERT REALTY

This post is authored by Harshit Sharma and Raghav Agrawal, 2nd-year students at Hidayatullah National Law University, Raipur

Introduction

On 8 September 2025, the National Company Law Appellate Tribunal (NCLAT), in its judgment in Expert Realty Professionals v. Logix Infrastructure, reinforced the jurisdiction of the National Company Law Tribunal (NCLT) to recall an admitted insolvency proceeding, if vitiated by fraud or malicious intent under Section 65 of the Insolvency and Bankruptcy Code, 2016 (IBC). This ruling underscores IBC's core intent in preventing its misuse for collusive arrangements, ensuring the legitimacy and bona fide commercial purposes of the insolvency proceedings, clarifying that such petitions recalled by NCLTs constitute a valid exercise of jurisdiction, rather than review.

However, the judgment reveals certain inconsistencies. It treats related-party connections as sufficient to invoke Section 65 and departs from the IBC’s resolution-first design, favouring fragmented enforcement over coordinated value maximisation. These shortcomings call for calibrated remedies that balance fraud deterrence with corporate value preservation.

Through this article, the authors aim to analyse the expanding judicial interpretation of Section 65 of the IBC, particularly its post-admission application to recall insolvency proceedings on grounds of fraud or collusion. Firstly, it outlines the factual matrix and underlying legal issues. Secondly, it critically evaluates the tribunal’s reasoning and its departure from the Code’s resolution-centric framework. Lastly, it puts forth a constructive way forward, informed by global best practices.

Factual Matrix: Context and Analysis

The central issue in this case concerns the scope of the NCLAT’s power under Section 65 of the IBC to recall a duly admitted application for initiation of the corporate insolvency resolution process when the proceedings are later alleged to be fraudulent or mala fide, in the instant case, Logix Infrastructure entered into a buy back agreement with the Expert Realty and incurred a liability of 12 crores. Subsequently, due to non-payment, a Section 7 petition was filed before the NCLT, which admitted it on 14 July 2023 and appointed an Interim Resolution Professional.

During the process, Logix Infrastructure objected to the admission of such a petition, which was initially dismissed by NCLT. However, subsequent applications filed under Section 65 further alleged the collusion between the creditor and the corporate debtor, thereby raising grave concerns of fraudulent and malicious intent in initiating the Corporate Insolvency Resolution Process (CIRP). Therefore, the NCLT recalled the petition and imposed a penalty. Expert Realty appealed before the NCLAT. However, NCLAT upheld the Tribunal’s authority to examine the substance of admitted petitions.

While Expert Realty’s claim appears valid, the case underscores tensions in the application of Section 65 of the IBC. The tribunal’s dependence on related-party links and financial signals to infer malice is subjective and may not capture the transaction’s real intent. Moreover, the timing of the recall and the imposition of the penalty is inconsistent with the IBC’s value-maximisation framework. By invoking Section 65 post-admission to recall the CIRP, the tribunal replaces a collective and going-concern resolution under CoC supervision with fragmented enforcement-led recoveries. This shift disrupts market-based price discovery, deters resolution applicants, and depresses enterprise value. Fragmented creditor coordination weakens value maximisation by substituting a unified, market-driven resolution of the debtor’s business for disjointed enforcement actions that dissipate assets and reduce overall recovery. At the same time, the tribunal is charged with an obligation to protect the corporate estate from potentially false claims.

Together, these factors show that while the decision strengthens protection against misuse, it simultaneously exposes vulnerabilities to subjective interpretation and discretionary intervention, necessitating reflection on its approach to intent and remedy.

Evaluating the Judgment: Deviations and Challenges

The NCLAT, after admitting the insolvency application, invoked Section 65 of the IBC to recall the order under Section 7 and terminate the CIRP while lifting the moratorium on the ground that the proceedings were vitiated by collusion and nondisclosure. This remedial step marks a departure from the Code’s resolution-centric framework as it replaces a collective and value-driven process with fragmented enforcement that undermines the preservation of the corporate debtor’s estate as it recalls the admission process, thereby overlooking the coordinated framework requiring the supervision of the Committee of Creditors (CoC) envisaged under IBC. Once a Petition is admitted under Section 7, the insolvency proceedings are carried out under the supervision of the CoC. By forcing the creditors back into individual enforcement, like in a pre-admission stage, the tribunal has effectively disturbed the well-defined structure of resolution. Such an approach stands in contrast to Swiss Ribbons Private Limited v. Union of India (Swiss Ribbons), although the Court recognised risks from persons acting jointly or in concert, its rationale operates within the process by excluding tainted participation and preserving CoC independence rather than by recalling an admitted proceeding and Committee of Creditors of Essar Steel India Limited v. Satish Kumar Gupta  (Essar Steel), wherein the SC emphasised that the IBC is designed to secure collective resolution and sustain the going-concern value of the debtor rather than facilitate piecemeal or punitive interventions.

Secondly, proportionality emerges as the central difficulty in calibrating the remedial response to the identified misconduct of collusion and non-disclosure. Read with Swiss Ribbons, proportionality requires neutralising related-party influence through process-compatible tools first, reserving recall for situations where in-process remedies cannot cure pervasive taint. Under the framework of IBC, proportionality requires a necessary and less restrictive approach to achieve the resolution objectives of the code. However, the precedent of Essar Steel affirms the principle of creditor primacy and establishes a narrow threshold for judicial interference, permitting disruption of an ongoing CIRP only when such intervention is strictly unavoidable. Setting aside an admitted process under Section 65 prioritises. The tribunal adopted a response disproportionate to the misconduct, prioritising penal conduct over a resolution-centric model. The related-party strand reflects a similar proportionality concern. In the present case, the court, on the grounds of overlapping directorships back-dated filings to establish that the financial and corporate debtors were related parties. This reasoning, however, stands inconsistent with  Phoenix ARC Private Limited v. Spade Financial Services Limited and Others, where the Court treated related-party risk as a process-internal issue. The Code addresses this within the CIRP framework by excluding related parties from the CoC voting and by subjecting indirect or engineered control to heightened scrutiny, thereby neutralising undue influence without collapsing the proceeding itself.

A further deviation concerns the judgment’s preference for an external remedial intervention over the IBC’s established in-process policing mechanisms. In Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited v. Axis Bank Limited and Others(Anuj Jain), the Supreme Court (SC) recognised calibrated tools to address misconduct without derailing the resolution process. These mechanisms, such as avoidance of preferential and undervalued transactions under Sections 43 and 45, and fraudulent trading actions under Section 66, operate while the CIRP continues and the moratorium remains intact. The ratio thus reinforces that corrective measures are intended to function within the procedural continuity of the CIRP, not through its premature termination. By opting for termination instead of engaging these process-preserving mechanisms, the order shifts the focus from transaction-level correction to process-level extinction. The position of homebuyers underscores the cost. In Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others, the SC recognised real-estate allottees as financial creditors precisely so they could benefit from the IBC’s collective process. Terminating the CIRP after admission removes those protections and returns allottees to individual, uncoordinated recovery proceedings under non-insolvency law, which is the very outcome the Code was designed to prevent.

At​‍​‌‍​‍‌​‍​‌‍​‍‌ last, risks at the systemic level come about when routinely referring back to a fraud finding post-admission in a broadly framed manner is the normal practice. This kind of approach weakens the firmness and predictability that are very much needed for the insolvency ecosystem to function properly. In fact, the IBC was intended to be a tool to attract investor confidence and to ensure quick, market-led resolution; nevertheless, the threat of a retrospective recall dissipates the trust of resolution applicants by making them vulnerable to unpredictable judicial reversals. As a result, bidder participation is discouraged, risk premia increase, and price discovery gets distorted as applicants take positions to protect themselves against a possible ex post invalidation of the approved processes. The decrease in bidder participation that ensues leads to the fading of competition, lowering of recovery values, and hence, the weakening of the Code’s core objectives of certainty, efficiency, and value maximisation in corporate insolvency ​‍​‌‍​‍‌​‍​‌‍​‍‌resolution.

Way Forward

To reconcile the competing imperatives of fraud deterrence and resolution continuity, there is a need for a carefully crafted framework addressing misconduct without compromising the insolvency resolution process. The main solution lies in institutionalising a multi-tiered remedial framework in the CIRP, drawing on the Chapter 11 Bankruptcy Code of the United States. Rather than dismissing proceedings on the suspicion of fraud or collusion, this framework adopts a series of interventions graded according to the extent of misconduct. At its core, whatever mechanisms exist currently under Sections 43, 45, and 66 of the IBC can be productively employed for identifying and curing preferential, undervalued, and fraudulent transactions while the process continues to unfold. Building on this, the framework could allow for more intensive supervision via court-appointed examiners/monitors, modelled on Section 1104 of the US Bankruptcy Code, which can ensure accountability and transparency. In serious cases, NCLTs could impose restrictions on or replace management while ensuring the continuity of the CIRP, which could culminate in a provision that the sanctioned plan should incorporate corrective disclosures or amendments to address identified deficits. This approach finds resonance in the precedent of Anuj Jain, where the SC favoured calibrated tools that function during the moratorium, and complement the Swiss Ribbons' theme of proportionality and resolution-first approach of the Code.

A complementary track lies in reinforcing the IBC’s resolution framework through process-integrated safeguards that reflect elements of comparative restructuring practice in the United Kingdom, the Netherlands, and Germany. The UK Part 26A framework is illustrative of how judicial supervision can combine procedural fairness with commercial feasibility. It's "no creditor worse off" testing corresponds to the protection already contained in Section 30(2)(b) of the IBC and the CIRP Regulations, which secure a liquidation value floor and ensure priority of payment for operational creditors. However, the United Kingdom model supplements this quantitative safeguard with an independent fairness and feasibility review that requires valuation evidence and class-based scrutiny before approval. A measured adaptation of this evidentiary mechanism, through a tribunal-appointed expert opinion at the plan approval stage, could improve transparency and credibility without disturbing the statutory order of distribution. Similarly, the Dutch WHOA and German StaRUG frameworks employ pre-insolvency moratoriums and court-approved, super-priority debtor-in-possession financing that preserve the going concern value of the debtor and address collusive conduct within the restructuring process itself. In contrast, Section 65 currently functions as a post-admission and punitive tool, as reflected in the instant case. The comparative experience demonstrates the value of shifting from curative termination to preventive oversight, enabling tribunals to address misconduct without dismantling the collective process. In light of the proposition advanced above, such calibrated adaptations would not alter the normative structure of the IBC but refine its operation by embedding proportional safeguards that align deterrence with continuity and advance the Code’s objectives of value maximisation, institutional integrity, and procedural coherence.

Conclusion

The interpretation of Section 65 in the instant case signifies a critical inflexion in the IBC’s jurisprudence, one that extends the tribunal’s deterrent powers but simultaneously unsettles its structural coherence. Although the decision is legally sustainable within the statutory language of Section 65, its post-admission application converts a corrective mechanism into a terminating power, disrupting the procedural continuity that underpins the Code’s value-maximisation objective. The recall of an admitted CIRP fragments creditor coordination, constrains market-based price discovery, and introduces uncertainty in the insolvency ecosystem. Such consequences illustrate the tension between judicial discretion in preventing abuse and the legislative design of preserving resolution as the primary mode of insolvency management.