Mere Pendency Of Counterclaim For Damages Does Not Bar Financial Creditor From Invoking Insolvency Proceedings Under IBC: Supreme Court
The Apex Court held that an unadjudicated counterclaim does not extinguish an admitted financial debt or suspend a creditor’s statutory right to initiate insolvency proceedings, and such disputes must be resolved within the statutory framework without defeating admission of a Section 7 application.
Justice Pamidighantam Sri Narasimha, Justice Manoj Misra, Supreme Court
The Supreme Court held that the pendency of a counterclaim for damages against a financial creditor does not operate as a legal bar to the initiation of corporate insolvency resolution proceedings when the existence of financial debt and default is otherwise established in accordance with the Insolvency and Bankruptcy Code, 2016.
The Court was hearing a statutory appeal arising from proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016, challenging the admission of a corporate insolvency resolution process initiated by a consortium of banks led by the State Bank of India against a corporate debtor.
A Bench of Justice P.S. Narasimha and Justice Manoj Misra while stating that “initiation of proceedings by a financial creditor under other statutes does not bar filing of an application under the provisions of IBC”, further observed that “mere pendency of a counterclaim for damages against a financial creditor will not operate as a bar on the right of the financial creditor to invoke the provisions of IBC”.
Background
The financial creditor consortium had initiated proceedings under Section 7 of the Insolvency and Bankruptcy Code, alleging default exceeding the statutory threshold in repayment of credit facilities extended to the corporate debtor.
The debtor resisted admission of the application on multiple grounds, including limitation, alleged insufficiency of particulars in the application, pendency of recovery proceedings before the Debt Recovery Tribunal, and the existence of a substantial counterclaim for damages.
The debtor contended that the account had originally been classified as non-performing several years prior, rendering the application time-barred. It further asserted that restructuring exercises, pending proceedings under the Recovery of Debts Due to Banks and Financial Institutions Act and SARFAESI Act, and criminal allegations against bank officials demonstrated mala fide invocation of insolvency jurisdiction.
The financial creditors relied on written acknowledgements of liability executed during restructuring arrangements and working capital consortium agreements to contend that the limitation stood extended. They also maintained that a counterclaim filed by the debtor after initiation of insolvency proceedings did not extinguish the outstanding financial debt.
The adjudicating authority admitted the Section 7 application, and the appellate tribunal upheld that decision. The matter reached the Supreme Court in appeal.
Court’s Observation
The Apex Court began by examining the statutory framework governing an application under Section 7 of the Insolvency and Bankruptcy Code. It noted that the Code requires satisfaction of essential elements: the applicant must be a financial creditor, a financial debt must exist, a default must have occurred, and the default must exceed the statutory threshold prescribed under Section 4.
The Court explained that the purpose of the prescribed form and supporting documents is to enable threshold verification of these elements, and procedural defects that do not obscure the existence of debt and default are curable.
Interpreting the concept of default under Section 3(12), the Court reaffirmed that insolvency jurisdiction is concerned with non-payment of debt that is legally due and payable. It referred to prior interpretation recognising that the Code incorporates limitation principles, and that only debts not barred by limitation may form the basis of insolvency proceedings.
The Court accepted the tribunal’s finding that successive restructuring agreements and written acknowledgements executed by the debtor constituted acknowledgements of liability, thereby extending limitation. It noted that the account classification and restructuring chronology demonstrated continuing admission of dues, and that the amended Section 7 application adequately disclosed the date of default and subsequent acknowledgements.
Another contention raised concerned the legal effect of a counterclaim filed by the debtor before the Debt Recovery Tribunal. The Court held that an unadjudicated counterclaim remains an assertion of liability and does not operate as a set-off against admitted debt.
“The director of CD had signed the balance sheets, and those were produced by CD in proceedings before DRT, the acknowledgment therein of the debt, albeit with a caveat that the recovery matter is sub judice before DRT, in our view, would be sufficient to serve as an acknowledgment within the purview of Section 18 of 1963 Act”, the Bench remarked.
The appellant also contended that the Section 7 application was filed with an oblique motive to stall proceedings initiated by the banks in other fora and to retaliate against the corporate debtor for initiating criminal action, particularly in light of a pending counterclaim allegedly exceeding the outstanding debt.
The Court found no merit in this submission, holding that initiation of proceedings by a financial creditor under other statutory mechanisms does not bar recourse to insolvency proceedings. It further clarified that the mere pendency of a counterclaim for damages, without adjudication affecting the subsisting liability, cannot operate as a legal impediment to the invocation of the Insolvency and Bankruptcy Code.
Insofar as the contention regarding the institution and pendency of criminal proceedings was concerned, the Court held that “mere allegations about commission of offences by officers of the financial creditor cannot stifle proceedings under IBC, particularly when those offences have no bearing on the existence of the financial debt”.
On the scope of discretion available to the adjudicating authority, the Court held that “if the Adjudicating Authority is satisfied from the materials placed before it in the application that all the necessary ingredients are satisfied for presentation of an application under Section 7(1) of IBC, it may not reject the application for an insignificant omission or non-adherence to the Form”.
Conclusion
The Supreme Court upheld the finding that the Section 7 application satisfied statutory requirements, was within limitation due to valid acknowledgements of liability, and was not vitiated by pending recovery proceedings or criminal allegations.
Finding no merit in the appeal, the Supreme Court dismissed it. Pending applications were accordingly closed.
Cause Title: B. Prashanth Hegde v. State Bank of India & Anr. (Neutral Citation: 2026 INSC 155)
Appearances
Appellant: Senior Advocate Abhishek Manu Singhvi, with Advocates Amit Bhandari, Avishkar Singhvi, Madiya Mushtaq, Nagarjun Sahu, Pranjal Kishore
Respondents: Senior Advocate Rajiv Shakdher with Advocates Sanjay Kapur, Surya Prakash, Shubhra Kapur, Mansi Kapur, Santha Smruthi, Anurag Mishra, Mukund P. Unny, Rajiv Shakdher, Atul Shankar Vinod
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