The National Company Law Appellate Tribunal (NCLAT), Principal Bench, has delivered a significant ruling holding that where a corporate debtor has only one financial creditor and the entire outstanding debt has been deposited for repayment, continuation of the Corporate Insolvency Resolution Process (CIRP) merely because the creditor refuses to accept the money would amount to an abuse of the Insolvency and Bankruptcy Code (IBC). 

The bench of Arun Baroka (Technical Member) and Indevar Pandey (Technical Member) terminated the CIRP, observing that the Code is meant to facilitate revival of companies and not to become a tool for pursuing personal vendettas. 

The appeal arose from an order passed by the National Company Law Tribunal (NCLT), Kolkata Bench, admitting Sulojay Realty Private Limited into CIRP under Section 7 of the Insolvency and Bankruptcy Code, 2016.

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The appeal was filed by Achal Kumar Jindal, a suspended director of the corporate debtor, challenging the admission order dated December 13, 2024. Initially, the challenge questioned the merits of the admission order. However, during the appellate proceedings, the controversy shifted to whether continuation of CIRP remained justified after the entire debt claimed by the sole financial creditor had been deposited before the Tribunal. 

The Tribunal recorded that respondent Sanjay Kumar Bhuwalka, who was previously a director and majority shareholder of the corporate debtor, had advanced approximately ₹7.47 crore to the company between April 2021 and May 2022 through banking channels.

Although the company repaid about ₹1.85 crore, the balance liability continued to be acknowledged in the company’s annual reports for FY 2021–22 and FY 2022–23, reflecting an outstanding amount exceeding ₹6.43 crore.

Subsequently, following a change in ownership and management through a Share Purchase Agreement, Bhuwalka resigned as director while the present management assumed control.

When repayment was not forthcoming, the financial creditor initiated proceedings under Section 7 of the IBC claiming more than ₹7.54 crore including interest, leading to admission of CIRP by the NCLT. 

During the pendency of the appeal, the NCLAT restrained further progress of CIRP except for collation of claims by the Interim Resolution Professional (IRP), subject to the appellant depositing the entire claimed amount together with accrued interest.

The appellant complied with the direction and later sought termination of CIRP, contending that the complete debt had been deposited and was available for withdrawal by the creditor.

Interestingly, the Interim Resolution Professional informed the Tribunal that no other creditor had submitted claims. Consequently, the Committee of Creditors (CoC) consisted solely of the original financial creditor. 

Despite the entire amount being deposited, the financial creditor declined to withdraw it.

The creditor argued that the deposit had been made only because of the Tribunal’s interim order and not pursuant to any voluntary settlement. It further contended that once CIRP had commenced, withdrawal could only occur under Section 12A of the IBC through a concluded settlement, and not merely because the debt amount stood deposited.

Reliance was also placed upon the Supreme Court’s decision in GLAS Trust Co. LLC v. Byju Raveendran, which emphasized the statutory mechanism for withdrawal of insolvency proceedings. 

The Appellate Tribunal observed that although admission under Section 7 requires only proof of debt and default, the considerations governing continuation of CIRP are entirely different once subsequent developments demonstrate that the debt is available for repayment.

The Bench emphasised that the Insolvency Code is fundamentally designed to revive financially distressed companies rather than to facilitate compulsory divestiture of businesses from their promoters.

It noted that where promoters themselves express willingness to repay the debt and revive the company, continuation of CIRP merely because admission was legally justified would defeat the legislative philosophy underlying the Code. 

A significant feature of the judgment is the Tribunal’s criticism of the conduct of the sole financial creditor.

Since there was only one creditor in the insolvency process and the entire debt had already been deposited, the Bench questioned what purpose the continuation of CIRP would serve.

The Tribunal observed that the creditor’s refusal to accept repayment indicated an intention inconsistent with the objective of insolvency resolution.

It remarked that the Insolvency Code should not be permitted to produce “Shylocks” out of creditors by allowing them to insist upon continuation of CIRP even after complete repayment had been made available.

The Bench further observed that if the sole member of the Committee of Creditors arbitrarily rejects a genuine settlement offer without any justifiable reason, such conduct reflects misuse of the insolvency framework rather than pursuit of insolvency resolution. 

While Section 65 of the Insolvency and Bankruptcy Code primarily provides for penal consequences in cases involving fraudulent or malicious initiation of insolvency proceedings, the Tribunal held that where malicious intent becomes evident during the course of proceedings, courts cannot remain passive spectators.

According to the Bench, judicial forums possess sufficient authority to prevent abuse of the insolvency process instead of waiting until after the damage has occurred.

The Tribunal observed that permitting continuation of CIRP in the present circumstances would amount to allowing a “shameless attempt to abuse the Code, its objectives, and the judicial process.” 

Allowing the appeal, the NCLAT terminated the Corporate Insolvency Resolution Process initiated against the corporate debtor.

The Tribunal concluded that continuation of CIRP had become wholly unjustified after the sole financial creditor was offered complete repayment and yet chose to reject it without valid reasons. It held that the objectives of the Insolvency and Bankruptcy Code would be better served by permitting revival of the corporate debtor rather than allowing insolvency proceedings to continue as a means of pursuing personal or commercial grievances. 

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