The National Company Law Appellate Tribunal has clarified that Section 65 of the Insolvency and Bankruptcy Code cannot be invoked merely to challenge the existence of a financial debt already adjudicated under Section 7. The judgment underscores that allegations of fraud or malicious intent must be specific, substantiated by evidence of collusion, and cannot be a proxy for re-agitating rejected defenses raised by the corporate debtor.
Background & Facts
The Dispute
The dispute arises from the initiation of Corporate Insolvency Resolution Process (CIRP) against Carnival Techno Park Pvt. Ltd. by Reliance Commercial Finance Ltd. (RCFL), a financial creditor, under Section 7 of the Insolvency and Bankruptcy Code, 2016. The corporate debtor contested the application, asserting that the debt had been assigned to Asian Business Connections Pvt. Ltd. (ABC Pvt. Ltd.) under an addendum dated 16.10.2017. The adjudicating authority admitted the Section 7 application on 13.02.2024, finding that despite the assignment claim, the debt was duly reflected in the corporate debtor’s audited financial statements up to 31.03.2020, and RCFL was recognized as the financial creditor.
Key Facts
- Reliance Capital Ltd. sanctioned a loan of Rs. 75 crore to the corporate debtor on 16.01.2017 under a Facility Agreement dated 20.01.2017, at 15% p.a. interest, with 36% p.a. penalty on default.
- The loan was secured by a charge over intercorporate deposit receivables of Rs. 175 crore from Advantage Overseas Pvt. Ltd.
- Pursuant to a Scheme of Arrangement dated 06.12.2016 by the Bombay High Court, RCFL acquired the receivables of Reliance Capital Ltd.
- An addendum dated 16.10.2017 granted the corporate debtor the right to assign the loan to ABC Pvt. Ltd. under two conditions: (i) sale of its shares, or (ii) sale of ABC Pvt. Ltd.’s shares in the corporate debtor.
- The corporate debtor claimed assignment of the debt to ABC Pvt. Ltd. effective 30.09.2020.
- The corporate debtor’s audited financial statements for FY 2017-18, 2018-19, and 2019-20 consistently showed RCFL as the financial creditor.
- RCFL filed the Section 7 application on 24.01.2023, claiming Rs. 201,38,92,545/- as due.
- The NCLT admitted the application on 13.02.2024, appointing an Interim Resolution Professional (IRP).
- Canara Bank filed a claim of Rs. 116,99,83,474/- in Form-C on 06.03.2024 and was allocated 28.24% voting rights in the Committee of Creditors (CoC).
- Authum Investment & Infrastructure Ltd. succeeded RCFL as the financial creditor in the CoC following a demerger approved on 10.05.2024.
- Canara Bank filed I.A. No. 595/2025 on 10.01.2025 under Sections 65 and 75 of the IBC, seeking dismissal of the CIRP, penalties, and a forensic audit.
Procedural History
- 16.01.2017: Loan sanctioned by Reliance Capital Ltd.
- 20.01.2017: Facility Agreement executed.
- 06.12.2016: Bombay High Court approves demerger of Reliance Capital’s commercial finance division into RCFL.
- 16.10.2017: Addendum granting assignment right to corporate debtor.
- 30.09.2020: Corporate debtor claims assignment of debt to ABC Pvt. Ltd.
- 24.01.2023: RCFL files Section 7 application (C.P.(IB)/383(MB)/2023).
- 17.05.2023: NCLT issues notice in Section 7 application.
- 13.02.2024: NCLT admits Section 7 application, appoints IRP.
- 06.03.2024: Canara Bank files claim in Form-C.
- 10.05.2024: NCLAT approves demerger; Authum Investment replaces RCFL in CoC.
- 05.06.2024: NCLT dismisses Canara Bank’s I.A. 1698/2024 seeking disclosure of RCFL’s loan documents.
- 06.09.2024: Canara Bank withdraws appeal against dismissal (Comp. App. (AT) (Ins.) No. 1818/2024).
- 10.01.2025: Canara Bank files I.A. 595/2025 under Sections 65 and 75.
- 04.03.2025: NCLT partially allows I.A. 595/2025 - rejects dismissal of CIRP but directs forensic audit at Canara Bank’s cost.
- 04.03.2025: Canara Bank files Comp. App. (AT) (Ins.) No. 556/2025 against rejection of Section 65 prayer.
- 04.03.2025: Authum Investment files Comp. App. (AT) (Ins.) No. 588/2025 against forensic audit direction.
- 17.04.2026: NCLAT delivers judgment.
The Parties' Positions
Canara Bank contended that the CIRP was initiated fraudulently because the debt had been assigned to ABC Pvt. Ltd. before the Section 7 application, and RCFL had no privity with the assignment. It alleged collusion between the corporate debtor, RCFL, and the IRP, pointing to the corporate debtor’s financial statements showing the debt under ABC Pvt. Ltd. post-2020 and RCFL’s failure to report the debt to NeSL.
Authum Investment & RCFL countered that the assignment was invalid as RCFL was not a party to the addendum, the conditions for assignment under Clause 3 were never triggered, and the debt was consistently recognized in the corporate debtor’s books until 2020. They emphasized that Canara Bank had participated in the CoC, filed a claim, and withdrew a prior appeal - thereby estopping it from challenging the debt’s existence under Section 65.
Relief Sought
Canara Bank sought:
- Dismissal of the Section 7 application and CIRP.
- Penalties under Sections 65 and 75 against RCFL, the corporate debtor, and the IRP.
- Direction to IBBI to investigate collusion.
- Direction to SIFO to conduct a forensic investigation.
- Stay on the resolution plan and suspension of CIRP pending adjudication.
Authum Investment sought:
- Setting aside the direction for a forensic audit at Canara Bank’s cost, as no fraud was established.
The Legal Issue
Can a financial creditor’s application under Section 65 of the IBC be used to re-litigate the existence of a financial debt and default that was already considered and rejected by the adjudicating authority during admission under Section 7, particularly when the applicant has participated in the CIRP process and failed to challenge the admission order?
Arguments Presented
For the Appellant (Canara Bank)
Canara Bank relied on Hindalco Industries Ltd. v. Hirakud Industrial Works Ltd. and Acute Daily Media v. Rockman Advertising to argue that Section 65 permits recall of a Section 7 admission order if fraud or collusion is established. It contended that the assignment of debt to ABC Pvt. Ltd. rendered the debt non-existent at the time of the Section 7 application, and the corporate debtor’s financial statements post-2020 confirmed this. It alleged that RCFL’s failure to report the debt to NeSL, combined with the corporate debtor’s concealment of the assignment, constituted suppression of material facts. Canara Bank argued that its participation in the CoC did not waive its right to challenge fraudulent initiation under Section 65, as the fraud was latent and only became apparent after access to documents.
For the Respondent (Authum Investment & RCFL)
Authum Investment and RCFL argued that the debt’s existence was adjudicated in the Section 7 proceedings, where the corporate debtor raised identical assignment claims, which were rejected. They emphasized that RCFL was not a party to the addendum and had no knowledge of the alleged assignment. The financial statements of the corporate debtor up to 2020 clearly recognized RCFL as the creditor. They contended that Canara Bank’s application was a disguised review petition, barred by the principle of res judicata and the doctrine of approbate and reprobate. Participation in the CoC and withdrawal of a prior appeal estopped Canara Bank from challenging the debt’s validity. The forensic audit direction was ultra vires since no fraud was established.
The Court's Analysis
The NCLAT examined the scope of Section 65 of the IBC, which empowers the adjudicating authority to terminate CIRP proceedings if initiated fraudulently or with malicious intent. The Tribunal emphasized that Section 65 is not a mechanism for re-agitating issues already decided under Section 7. The adjudicating authority had already considered the assignment claim raised by the corporate debtor and found that the debt was duly recognized in the corporate debtor’s audited financial statements until 2020, and that the conditions for assignment under Clause 3 of the addendum were not triggered.
"The plea which is now sought to be raised by Canara Bank in application under Section 65 was thus clearly pleaded and contended by the corporate debtor before the adjudicating authority when Section 7 application came for consideration. Adjudicating authority has considered the submission and held that corporate debtor has shown in its books of account, the financial creditor as financial creditor."
The Tribunal distinguished Hindalco Industries and Acute Daily Media, noting that in those cases, there was clear evidence of fabricated transactions, suppression of ongoing litigation, and collusion between promoters and creditors. Here, RCFL was not a party to the addendum, and the assignment was unilateral by the corporate debtor. The NCLAT found no evidence of collusion between RCFL and the corporate debtor, and noted that RCFL had contested the assignment in the Section 7 proceedings.
The Court further held that Canara Bank’s participation in the CoC, filing of a claim in Form-C, and withdrawal of a prior appeal challenging the IRP’s refusal to disclose documents, amounted to acquiescence in the CIRP process. The delay of over 10 months in filing the Section 65 application further undermined its credibility.
Regarding the forensic audit direction, the NCLAT observed that no prayer for such an audit existed in Canara Bank’s application. The direction was issued without any statutory basis and was therefore ultra vires.
The Verdict
The NCLAT dismissed Comp. App. (AT) (Ins.) No. 556/2025 filed by Canara Bank and allowed Comp. App. (AT) (Ins.) No. 588/2025 filed by Authum Investment. The order directing a forensic audit dated 04.03.2025 was set aside. The CIRP proceedings initiated under Section 7 remain valid. Parties shall bear their own costs.
What This Means For Similar Cases
Section 65 Cannot Be a Review Mechanism
- Practitioners must understand that Section 65 is not a substitute for challenging an admission order under Section 7. Once the adjudicating authority has examined and rejected a defense (e.g., assignment of debt), it cannot be re-agitated under Section 65.
- A creditor seeking to invoke Section 65 must present new, specific evidence of collusion or fabrication - not merely restate arguments already considered.
Participation in CIRP Estops Later Challenges
- A financial creditor who files a claim in Form-C, participates in CoC meetings, and withdraws prior appeals cannot later claim the CIRP was fraudulent.
- Such conduct constitutes approbate and reprobate - accepting benefits of the process while later challenging its foundation.
Forensic Audits Require Express Prayer
- Adjudicating authorities cannot direct forensic audits under Section 65 unless specifically prayed for in the application.
- Any such direction without a corresponding prayer is ultra vires and liable to be set aside.
Assignment Claims Must Be Validated Against Contractual Conditions
- A debtor’s unilateral assignment of debt under a conditional clause (e.g., "if shares are sold") is invalid if the conditions are not met.
- Creditors not party to the assignment clause cannot be bound by it, and their recognition as creditors in financial statements remains prima facie evidence of debt.
