The Supreme Court has held that the Insolvency and Bankruptcy Code, 2016 (IBC) cannot be invoked as a coercive recovery mechanism in disputes that are predominantly contractual in nature and intertwined with property transfer obligations.
The bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe dismissed the appeal filed by Dhanlaxmi Bank Limited against the order of the National Company Law Appellate Tribunal (NCLAT), which had set aside the initiation of Corporate Insolvency Resolution Process (CIRP) against a corporate debtor.
The dispute arose from a commercial property transaction concerning a unit in “Synthesis Business Park” situated at Rajarhat, Kolkata. On 6 April 2011, the corporate debtor, M/s Emerald Mineral Exim Pvt. Ltd., entered into an agreement with Bengal Shrachi Housing Development Ltd. for purchase of the property.
Subsequently, on 27 June 2011, Dhanlaxmi Bank sanctioned a loan of ₹1.50 crore in favour of the corporate debtor for purchase of the said property. A facility agreement and a quadripartite agreement involving the Bank, the corporate debtor, the builder and the West Bengal Housing Infrastructure Development Corporation Limited (WBHIDCL) were executed on 29 June 2011.
Under the arrangement, the corporate debtor instructed the Bank to directly disburse the loan amount to the builder. Pursuant thereto, the Bank disbursed ₹1.34 crore directly to the builder on 13 September 2011.
Later, disputes arose after the corporate debtor transferred the property rights through a nomination agreement in favour of Jupiter Pharmaceuticals Limited for more than ₹2.26 crore. The loan account was eventually classified as a Non-Performing Asset (NPA) on 5 July 2014.
The Bank initiated recovery proceedings before the Debt Recovery Tribunal (DRT) in 2016 seeking recovery of ₹1.80 crore along with interest. The DRT held that the Bank’s charge over the property continued to exist and directed the builder to deposit ₹1.50 crore as security.
Thereafter, the Bank filed a winding-up petition under the Companies Act, 1956, which later stood transferred to the National Company Law Tribunal (NCLT) and was treated as a Section 7 IBC petition.
The NCLT admitted the insolvency petition on 20 February 2020 after holding that the debt and default were established beyond reasonable doubt.
However, the suspended director of the corporate debtor challenged the order before the NCLAT. The appellate tribunal held that since the Bank had directly disbursed the amount to the builder and not to the corporate debtor, the Bank could not be treated as a “financial creditor” under Section 7 of the IBC. The NCLAT also observed that the Bank was indulging in forum shopping and attempting to use the IBC as a recovery mechanism.
Accordingly, the NCLAT set aside the CIRP proceedings.
Before the Supreme Court, the Bank argued that the corporate debtor was the real borrower under the quadripartite agreement and had acknowledged its liability multiple times. It also contended that merely pursuing different statutory remedies could not amount to forum shopping.
On the other hand, the respondents argued that the transaction was not a pure financial debt default case but was deeply connected with the builder’s contractual obligations concerning transfer and construction of the property.
The Supreme Court examined the clauses of the quadripartite agreement and noted several important features of the transaction. The Court observed that the builder had substantial obligations relating to construction, transfer of the property, refunds in specified situations, creation of security interests, and restrictions on third-party transfer of the property.
The Bench specifically noted that the loan amount had been directly disbursed to the builder and that the Bank’s disbursement was intrinsically linked with the builder’s performance obligations under the agreement.
The Supreme Court reiterated that the IBC is intended to function as a collective insolvency resolution mechanism and not as a forum for enforcing individual contractual claims. The Court relied on earlier decisions including Innoventive Industries Ltd. v. ICICI Bank, Pioneer Urban Land and Infrastructure Ltd. v. Union of India, and Glas Trust Company LLC v. BYJU Raveendran.
The Court observed that where the objective behind invoking the IBC is merely to compel payment rather than address genuine financial distress, such invocation amounts to abuse of process.
Holding that the present dispute was “predominantly contractual in nature,” the Court stated that the DRT was already adjudicating the recovery proceedings and the builder had deposited ₹1.50 crore pursuant to DRT orders.
The Bench ultimately held, “Permitting invocation of the Code in cases such as the present one, would amount to converting insolvency proceedings into a coercive mechanism for recovery which is impermissible.”
The Supreme Court concluded that the matter did not involve a straightforward “financial debt-default” scenario warranting initiation of CIRP under the IBC. Accordingly, it refused to interfere with the NCLAT judgment and dismissed the appeal filed by Dhanlaxmi Bank.
Case Details
Case Title: Dhanlaxmi Bank Limited Versus Mohammed Javed Sultan & Ors.
Citation: JURISHOUR-1152-SC-2026
Case No.: Civil Appeal No. 7184 Of 2022
Date: 07/05/2026
Read More: GST Proceedings on Corporate Guarantees Given Without Consideration Quashes: Bombay High Court
