IBC cannot be used as a coercive recovery tool

Background

Dhanlaxmi Bank sanctioned a loan of Rs.1.50 crores in favour of M/s Emerald Mineral Exim Pvt. Ltd. (Corporate Debtor) for the purchase of a commercial unit in Kolkata. A quadripartite agreement was executed on 29.06.2011 between the Bank, the Corporate Debtor, Bengal Shrachi Housing Development Ltd. (Builder), and the West Bengal Housing Infrastructure Development Corporation Limited. Under this agreement, the Corporate Debtor instructed the Bank to disburse the loan amount directly to the Builder. An amount of Rs.1.34 crores was accordingly disbursed to the Builder on 13.09.2011.

The Corporate Debtor subsequently transferred the subject property to a third party through a nomination agreement and deed of conveyance. The account was classified as NPA on 05.07.2014. The Bank first approached the Debt Recovery Tribunal in January 2016, where the DRT held that the Bank's charge continued and directed the Builder to deposit Rs.1.50 crores as security. The Builder complied. The Bank also filed a winding up petition under the Companies Act, 1956 in September 2016, which was later transferred to the NCLT and treated as a Section 7 petition under the Insolvency and Bankruptcy Code, 2016.

NCLT and NCLAT Proceedings

The NCLT admitted the petition on 20.02.2020, holding that debt and default were proved beyond reasonable doubt, and initiated CIRP. On appeal by the suspended Director of the Corporate Debtor, the NCLAT set aside this order on 02.08.2022. The NCLAT held that since the Bank had not directly disbursed the amount to the Corporate Debtor, it could not be termed a Financial Creditor under Section 7. The NCLAT further found that the Bank had indulged in forum shopping and that the Code could not be used as a recovery mechanism.

Supreme Court Analysis

Justice Alok Aradhe, writing for the bench that included Justice Pamidighantam Sri Narasimha, examined the clauses of the quadripartite agreement in detail. The Court noted that the Builder had significant obligations concerning construction, delivery, and transfer of the property. The structure of the transaction revealed that the Bank's disbursement was intrinsically linked to the Builder's performance. This meant the transaction could not be viewed in isolation as a simple financial lending arrangement between the Bank and the Corporate Debtor.

The Court observed that the obligations arising from the transaction were intertwined with the Builder's performance and that the dispute was predominantly contractual in character, involving competing claims relating to transfer of property and associated obligations.

Reaffirming the trilogy of precedents, the Court cited Innovative Industries Ltd. v. ICICI Bank (2018) 1 SCC 407, Pioneer Urban Land and Infrastructure Ltd. v. Union of India (2019) 8 SCC 416, and Glas Trust Company LLC v. BYJU Raveendran (2025) 3 SCC 625, emphasizing that where the object behind invoking the Code is to compel payment rather than to address genuine financial distress, such invocation amounts to an abuse of process.

Holding

The Supreme Court held that this case did not involve a straightforward financial debt and default scenario warranting CIRP. The DRT proceedings, where Rs.1.50 crores was already deposited, constituted the appropriate forum. Permitting invocation of the Code in such cases would convert insolvency proceedings into a coercive mechanism for recovery. The appeal was dismissed.

Practical Takeaway

Banks and financial institutions should carefully assess whether the underlying transaction structure supports a Section 7 application; where loan disbursement was made to a third party under a multi-party agreement and the dispute is predominantly contractual, the DRT or civil courts remain the appropriate remedy, and an IBC petition risks being treated as an abuse of process.