IBC Cannot Be Used to Recover Debt Rooted in a Contractual Property Dispute, Supreme Court Holds

A Division Bench dismisses Dhanlaxmi Bank’s appeal, holding that a tripartite property transaction does not create a straightforward financial debt warranting CIRP under Section 7.

The Supreme Court on 7 May 2026 dismissed a civil appeal by Dhanlaxmi Bank Limited, refusing to revive insolvency proceedings it had initiated against a corporate borrower under Section 7 of the Insolvency and Bankruptcy Code, 2016. A Division Bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe held that the transaction at the centre of the dispute — a quadripartite loan-cum-property arrangement involving the Bank, the corporate debtor, a builder, and a state housing corporation — was predominantly contractual in character. Because the Bank had disbursed the loan directly to the builder rather than to the corporate debtor, and because the builder carried significant independent obligations under the agreement, the Court found that no straightforward financial debt-default scenario existed to justify the Corporate Insolvency Resolution Process (CIRP). The Debt Recovery Tribunal, where proceedings were already active, was identified as the appropriate forum.

How the Dispute Reached the Supreme Court

On 6 April 2011, M/s. Emerald Mineral Exim Pvt. Ltd. (the Corporate Debtor, or CD) and Bengal Shrachi Housing Development Ltd. (the Builder) entered into an agreement for the sale of a commercial unit in “Synthesis Business Park,” New Town, Rajarhat, Kolkata, measuring 5,893.5 sq. ft.

Dhanlaxmi Bank sanctioned a loan of Rs. 1.50 crores to the CD on 27 June 2011 for purchasing this unit. Two days later, a facility agreement was executed between the Bank and the CD. On the same date, a quadripartite agreement was executed among the Bank, the CD, the Builder, and the West Bengal Housing Infrastructure Development Corporation Limited (WBHIDCL). Under that agreement, the CD instructed the Bank to disburse the loan amount directly to the Builder. On 13 September 2011, Rs. 1.34 crores was disbursed directly to the Builder.

The CD paid Rs. 54,13,999.87 to the Bank by 12 April 2014. However, on 31 March 2013, the CD had already executed a nomination agreement with the Builder to transfer the subject property to Jupiter Pharmaceuticals Limited for Rs. 2,26,77,250. A deed of conveyance was executed on 10 June 2013 in favour of the Builder and WBHIDCL for the same consideration.

The CD's account was classified as a Non-Performing Asset on 5 July 2014. The CD acknowledged its liability on 25 April 2014 and again on 22 July 2014. A one-time settlement proposal of Rs. 74 lakhs made by the CD on 7 September 2015 came to nothing when the cheques issued were dishonoured for insufficient funds.

On 28 January 2016, the Bank initiated proceedings before the Debt Recovery Tribunal under the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, seeking recovery of Rs. 1,80,32,125.50 as on 11 December 2015, along with interest at 14.25% per annum. The DRT, by an order dated 20 September 2016, held that the Bank's charge subsisted despite the sale deed executed by the Builder in favour of a third party, appointed a receiver to take possession of the subject property, and directed the Builder to deposit Rs. 1.50 crores as security. The Builder complied on 27 September 2016.

On 28 September 2016, the Bank filed a winding-up petition against the CD under Sections 433, 434 and 439 of the Companies Act, 1956. Following the Central Government notification of 7 December 2016, the matter was transferred to the National Company Law Tribunal on 19 April 2019 and treated as a petition under Section 7 of the Code.

The NCLT admitted the petition on 20 February 2020, holding that debt and default were proved beyond reasonable doubt, and initiated CIRP against the CD. The suspended Director of the CD appealed. The NCLAT, by its order dated 2 August 2022, set aside the NCLT's order. It held that the Bank had not directly disbursed the amount to the CD and therefore could not be termed a “Financial Creditor” under Section 7. The NCLAT also held that the Bank had indulged in forum shopping and that the Code could not be used as a recovery mechanism. Dhanlaxmi Bank then appealed to the Supreme Court.

The Bank’s Case and the Respondents’ Answer

Senior counsel for the Bank argued that the CD was the true borrower under the quadripartite agreement, pointing to Clauses 2 and 19. The facility agreement, it was submitted, showed that the CD had paid interest on the loan and had executed acknowledgements of liability. The Bank also contested the NCLAT's finding that it had recovered Rs. 1.50 crores, clarifying that the amount remained in deposit with the DRT and had not been received by the Bank. On the forum-shopping charge, the Bank argued that taking recourse to different statutory remedies does not amount to forum shopping.

Counsel for the respondents countered that the loan amount was disbursed to the Builder, not the CD, and that there was no enforceable default by the CD in the manner alleged. They argued that the quadripartite agreement placed obligations concerning payment and transfer of the subject property on the Builder, making the dispute essentially contractual — involving questions of transfer of property and the Builder's obligations — rather than a pure insolvency default under the Code.

What the Court Held on Section 7 and the Nature of the Transaction

The Court began by restating the settled position: the condition precedent for invoking Section 7 of the Code is the existence of a ‘financial debt’ and a ‘default’ in its repayment. Citing Innovative Industries Ltd. v. ICICI Bank & Anr., (2018) 1 SCC 407, the Court affirmed that the Code operates as a collective insolvency resolution mechanism and not as a forum for adjudicating individual contractual claims.

The Court then examined the quadripartite agreement in detail, drawing out the following from Clauses 7 to 14, 16, 17 to 20 and 25:

• The Bank was to pay Rs. 1.50 crores upfront or in tranches directly to the Builder.
• The CD had instructed the Bank to disburse the loan amount directly to the Builder, subject to the facility agreement.
• On completion of construction, the Builder was required to give seven days’ prior notice before executing the sale deed in favour of the CD.
• In specified contingencies — including cancellation of the agreement for sale, failure of the CD to deposit the balance amount, or death of the CD — the Builder was obliged to refund the amount to the Bank after deducting its dues.
• Amounts received by the Builder on account of the provisional sale price were required to be paid to the Bank.
• The Builder had assured the Bank that the subject property was free from encumbrances and had confirmed that the Bank would have a lien on it.
• The Builder had undertaken not to mortgage the subject property to any financial institution and not to transfer it to any other person without the Bank's prior consent.

From this analysis, the Court found that the Bank's disbursement was intrinsically linked to the Builder's performance. The transaction could not be viewed in isolation as a simple financial lending arrangement between the Bank and the CD. The obligations arising from the transaction were intertwined with the Builder's performance, and the dispute was predominantly contractual, involving competing claims relating to transfer of property and associated obligations.

The Court’s Reasoning on Misuse of the Code

The Court referred to Pioneer Urban Land and Infrastructure Ltd. & Anr. v. Union of India & Ors., (2019) 8 SCC 416, for the proposition 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. It also cited Glas Trust Company LLC v. BYJU Raveendran & Ors., (2025) 3 SCC 625, and Anjani Technoplast Ltd v. Shubh Gautam, 2026 INSC 410, for the principle that “the Code must not be used as a tool for coercion and debt recovery by individual creditors.”

The Court found that the present case did not involve a straightforward financial debt-default scenario warranting initiation of CIRP. The facts disclosed a dispute predominantly contractual in nature, already the subject of proceedings before the DRT. The deposit of Rs. 1.50 crores made pursuant to the DRT's order of 20 September 2016 indicated that the matter was being actively adjudicated in the appropriate proceeding. Permitting invocation of the Code in such circumstances would convert insolvency proceedings into a coercive recovery mechanism, which the Court held to be impermissible.

Outcome

The Supreme Court dismissed Civil Appeal No. 7184 of 2022. The NCLAT's order dated 2 August 2022 — which had set aside the NCLT's admission of the Section 7 petition and the consequent initiation of CIRP against M/s. Emerald Mineral Exim Pvt. Ltd. — was upheld. There was no order as to costs.