Supreme Court: In a civil appeal challenging the judgment dated 2 August 2022 passed by the National Company Law Appellate Tribunal (NCLAT), wherein the National Company Law Tribunal’s (NCLT) order admitting the application under Section 7, Insolvency and Bankruptcy Code, 2016 (IBC) was set aside, the Division Bench of Pamidighantam Sri Narasimha and Alok Aradhe*, JJ., affirmed the impugned order holding that present case does not involve a straightforward “financial debt-default” scenario warranting initiation of Corporate Insolvency Resolution Process (CIRP) and IBC cannot be invoked as a coercive recovery tool in individual contractual property dispute pending before Debt Recovery Tribunal (DRT).
Factual Matrix
In the instant matter, the dispute arose out of a commercial transaction concerning a unit in “Synthesis Business Park”, New Town, Rajarhat, Kolkata. On 6 April 2011, the corporate debtor, entered into an agreement with the builder, for purchase of Unit No. SBP-9C(A), measuring 5893.5 sq ft.
Subsequently, on 27 June 2011, appellant Bank sanctioned a loan of Rs 1.50 crores in favour of the corporate debtor for purchase of the said property. A facility agreement was executed on 29 June 2011 between the appellant Bank and the corporate debtor. On the same date, a quadripartite agreement was also executed among the appellant Bank, the corporate debtor, the builder and West Bengal Housing Infrastructure Development Corporation Limited (WBHIDCL). Under this arrangement, the corporate debtor instructed the appellant Bank to disburse the sanctioned loan amount directly to the builder in accordance with the facility agreement.
Pursuant thereto, on 13 September 2011, the Bank directly disbursed an amount of Rs 1.34 crores to the builder. The corporate debtor thereafter made payments aggregating to Rs 54,13,999.87 to the Bank as on 12 April 2014.
Meanwhile, on 31 March 2013, the corporate debtor executed a nomination agreement with the builder for transfer of the subject property to Jupiter Pharmaceuticals Limited for Rs 2,26,77,250. A copy of this nomination agreement was furnished to the appellant Bank on 22 April 2013. Thereafter, on 10 June 2013, a deed of conveyance was executed concerning transfer of the subject property for the aforesaid consideration amount.
The corporate debtor subsequently executed acknowledgments of liability on 25 April 2014 and again on 22 July 2014. However, on 5 July 2014, the loan account was classified as a non-performing asset (NPA). Later, on 7 September 2015, the corporate debtor proposed a one-time settlement of Rs 74 lakhs, but the cheques issued towards repayment were dishonoured on account of insufficient funds.
On 28 January 2016, the appellant Bank initiated proceedings before the Debt Recovery Tribunal (DRT) under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 seeking recovery of Rs 1,80,32,125.50 together with interest at the rate of 14.25 per cent per annum against the corporate debtor, the builder and guarantors.
Procedural History
The DRT, by order dated 20 September 2016, held that the Bank’s charge over the subject property subsisted despite the sale deed executed in favour of a third party. The Tribunal appointed a Receiver to take possession of the property and directed the builder to deposit Rs 1.50 crores within 2 days as security. In compliance, the builder deposited the amount on 27 September 2016.
Thereafter, on 28 September 2016, the appellant Bank filed a winding-up petition against the corporate debtor under Sections 433, 434 and 439, Companies Act, 1956. Following the Central Government Notification dated 7 December 2016, the matter stood transferred to the NCLT on 19 April 2019 and came to be treated as a petition under Section 7 IBC
The NCLT, by order dated 20 February 2020, held that the existence of debt and default stood established beyond reasonable doubt. Consequently, the application under Section 7 IBC was admitted and CIRP was initiated against the corporate debtor.
The suspended Director of the corporate debtor challenged the NCLT order before the NCLAT. By judgment dated 2 August 2022, the NCLAT allowed the appeal and set aside the NCLT’s order of admission.
The NCLAT held that the Bank had not directly disbursed the loan amount to the corporate debtor and therefore could not be regarded as a “financial creditor” within the meaning of Section 7 IBC. The NCLAT further observed that the Bank had indulged in forum shopping and that the provisions of the IBC could not be employed merely as a recovery mechanism.
Issues for Consideration
Whether the transaction in question constituted a straightforward “financial debt” and “default” under Section 7 IBC and whether initiation of CIRP against the corporate debtor was justified in the facts and circumstances of the case.
Analysis
The Court reiterated that the existence of a “financial debt” and a “default” in repayment are the essential preconditions for invocation of Section 7 IBC. It referred to Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407 and Pioneer Urban Land & Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416, where it was observed that the IBC is intended to ensure commencement of insolvency resolution once a debt becomes due and remains unpaid, and that it functions as a collective insolvency resolution mechanism rather than a forum for adjudicating individual contractual disputes, thereby amounting to an abuse of process.
The Court further referred to Glas Trust Co. LLC v. BYJU Raveendran, (2025) 3 SCC 625 and Anjani Technoplast Ltd. v. Shubh Gautam, 2026 SCC OnLine SC 668, where it was stated that IBC must not be used as “a tool for coercion and debt recovery by individual creditors”.
The Court closely examined Clauses 7 to 14, 16, 17 to 20 and 25 of the quadripartite agreement and held that the transaction could not be viewed in isolation as a simple financial lending arrangement between the appellant Bank and the corporate debtor. The disbursement by the appellant Bank was intrinsically linked with performance of obligations by the builder. The obligations arising from the transaction were therefore “intertwined with builder’s performance”. Therefore, the Court asserted that “the dispute between the parties is predominantly contractual in character involving competing claims relating to transfer of property and associated obligations”.
The Court further noted that proceedings were already pending before the DRT, which was the appropriate forum for recovery. The deposit of Rs 1.50 crores pursuant to the DRT order indicated that the matter was actively under adjudication before the competent forum.
The Court held that permitting recourse to the IBC in such circumstances would amount to converting insolvency proceedings into a coercive recovery mechanism, which is impermissible in law.
Decision
The Court held that the present case did not involve a straightforward financial debt-default situation warranting initiation of CIRP under the IBC and the dispute was essentially contractual and appropriately triable before the DRT.
Consequently, the Court declined to interfere with the NCLAT’s judgment and dismissed the appeal.
[Dhanlaxmi Bank Ltd. v. Mohd. Javed Sultan, Civil Appeal No. 7184 of 2022, decided on 7-5-2026]
*Judgment by Justice Alok Aradhe