IBC Not Forum For Adjudication Of Individual Contractual Claims; Can’t Be Used As Tool For Coercion & Debt Recovery: Supreme Court
The appeal before the Supreme Court was filed assailing the order of the National Company Law Appellate Tribunal (NCLAT).
Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe, Supreme Court
The Supreme Court has dismissed an appeal of a Bank where permitting the invocation of the Insolvency and Bankruptcy Code would have amounted to converting insolvency proceedings into a coercive mechanism for recovery. The Apex Court held that the same was impermissible as the Code is not a forum for the adjudication of individual contractual claims, and it cannot be used as a tool for coercion and debt recovery by individual creditors.
The appeal before the Apex Court was filed assailing the order of the National Company Law Appellate Tribunal (NCLAT), whereby the order passed by the National Company Law Tribunal (NCLT) was set aside.
The Bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe held, “The Code operates as a collective insolvency resolution mechanism and not as a forum for the adjudication of individual contractual claims. This Court has underscored that where the object behind the invocation of Code is to compel payment rather than to address genuine financial distress, such invocation would amount to an abuse of process. The Code must not be used as a tool for coercion and debt recovery by individual creditors.”
Factual Background
In 2011, M/s. Emerald Mineral Exim Pvt. Ltd. (Corporate Debtor-CD) and Bengal Shrachi Housing Development Ltd. (Builder) entered into an agreement for the sale of a unit, which was to be constructed in the building (subject property). The appellant (Bank) sanctioned a loan of Rs.1.50 crore in favor of CD for purchasing the subject property, and a quadripartite agreement was executed between the Bank, CD, the Builder and the West Bengal Housing Infrastructure Development Corporation Limited (WBHIDCL). Under the said agreement, the CD instructed the Bank to disburse the loan amount directly to the Builder, subject to the terms of the facility agreement. Pursuant thereto, an amount of Rs.1.34 crore was disbursed directly to the Builder.
The CD executed a nomination agreement with the Builder to transfer the subject property to Jupiter Pharmaceuticals Limited (JPL) for Rs.2,26,77,250. A deed of conveyance was executed by the CD in favour of the Builder and WBHIDCL, for the transfer of the subject property. However, the account of the CD was classified as a Non-Performing Asset (NPA). The CD proposed a one-time settlement of Rs 74 lakh, and the cheques issued by the CD towards the loan repayment were dishonoured due to insufficient funds. The Bank initiated proceedings under the Recovery of Debts Due to Banks & Financial Institutions Act, 1993, before the Debt Recovery Tribunal (DRT) against the CD, Builder and Guarantors for the recovery of an amount of Rs.1,80,32,125.50. The DRT directed the Builder to deposit a sum of Rs 1.50 crore as security.
The Bank then filed a winding-up petition against the CD under Sections 433, 434 and 439 of the Companies Act, 1956. Pursuant to the Central Government notification dated December 7, 2016, the matter was transferred to NCLT, and the Tribunal treated it as a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016. The NCLT admitted the petition and initiated the Corporate Insolvency Resolution Process (CIRP) against the CD. The suspended Director of the CD challenged the aforesaid order in an appeal. The NCLAT set aside the order passed by the NCLT, allowed the appeal and held that the Bank did not directly disburse the amount to the CD and, therefore, the Bank could not be termed as “Financial Creditor” under Section 7 of the Code. Aggrieved thereby, the appellant approached the Apex Court.
Reasoning
The Bench, at the outset, reiterated that the condition precedent invocation of Section 7 of the Code is the existence of a ‘financial debt’ and a ‘default’ in its repayment, and the scheme of the Code is to ensure that when a debt becomes due and is not paid, the Insolvency Resolution Process begins.
The Bench noted that the loan amount was directly disbursed to the Builder and the structure of the transaction revealed that the Bank’s disbursement was intrinsically linked to the performance of the Builder’s obligation. As per the Bench, the transaction could not be viewed in isolation as a simple financial lending arrangement between the Bank and the CD.
Considering that the matter was one which did not involve a straightforward financial debt default scenario warranting initiation of CIRP, the Bench stated that the facts disclose a dispute which is predominantly contractual in nature and is the subject matter of the proceedings before the DRT, the appropriate forum for recovery. Taking note of the fact that the matter was actively being adjudicated in an appropriate proceeding, the Bench held that permitting the invocation of the Code in cases would amount to converting insolvency proceedings into a coercive mechanism for recovery, which is impermissible.
Thus, refusing to interfere with the judgment of the NCLAT, the Bench dismissed the appeal.
Cause Title: Dhanlaxmi Bank Limited v. Mohammed Javed Sultan & Ors. (Neutral Citation: 2026 INSC 460)