The National Company Law Appellate Tribunal has set a critical precedent by terminating Corporate Insolvency Resolution Process (CIRP) not on the merits of the initial default, but on the subsequent malicious refusal of a sole creditor to accept full repayment. This judgment redefines the boundaries of creditor conduct under the Insolvency and Bankruptcy Code, 2016, emphasizing that the Code’s rehabilitative purpose cannot be subverted by bad-faith obstruction.
Background & Facts
The Dispute
The dispute arose between Sulojay Realty Private Limited (the Corporate Debtor) and its former director and majority shareholder, Sanjay Kumar Bhuwalka (Respondent No.1), who initiated CIRP under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC). The Corporate Debtor was incorporated on 20.03.2021. Between April 2021 and May 2022, Respondent No.1 advanced ₹7,47,32,000 to the Corporate Debtor through banking channels. A partial repayment of ₹1,85,01,399 was made in June 2021. The outstanding balance of ₹6,43,51,360 as of 31.03.2023 was duly acknowledged in the Corporate Debtor’s annual reports for FY 2021-22 and FY 2022-23.
Key Facts
- The Corporate Debtor’s shareholding was transferred to M/s Exclusive Motors Private Limited on 02.06.2022 pursuant to a Share Purchase Agreement.
- Respondent No.1 and another director resigned from the Board on 02.06.2022.
- The appellant, Achal Kumar Jindal, and Mr. Satya Prakash Bagla assumed control of the Corporate Debtor after the transfer.
- Post-transfer, approximately ₹55.66 crores were paid by the Corporate Debtor to members of the Agarwala family, allegedly towards repayment of their loans.
- Respondent No.1 issued a demand notice dated 29.02.2024 claiming ₹7,54,79,326, including interest.
- The Corporate Debtor did not repay the amount, prompting Respondent No.1 to file an application under Section 7 IBC.
- The National Company Law Tribunal, Kolkata Bench, admitted the Corporate Debtor to CIRP by order dated 13.12.2024.
Procedural History
- 13.12.2024: NCLT, Kolkata, admitted Corporate Debtor to CIRP under Section 7 IBC (CP(IB) 69/KB/2024).
- 18.12.2024: NCLAT passed interim order restraining further CIRP proceedings, directing appellant to deposit the entire claimed amount with interest.
- 20.12.2024: Appellant deposited ₹7,54,79,326 plus accrued interest with NCLAT.
- 28.12.2024: Interim Resolution Professional (IRP) confirmed receipt of no claims other than from Respondent No.1.
- 05.01.2025: Appellant moved for termination of CIRP on grounds of repayment and abuse of process.
- 30.06.2026: NCLAT delivered judgment disposing of the appeal.
The Parties' Positions
The appellant, as a suspended director of the Corporate Debtor, contended that the deposit of the full debt amount with interest rendered the continuation of CIRP unjustified and abusive. The respondent, as the sole creditor and sole member of the Committee of Creditors (CoC), refused to accept the deposit, asserting that it was made under compulsion and not as a genuine settlement.
Relief Sought
The appellant sought termination of the CIRP initiated under Section 7 IBC, withdrawal of the NCLT’s order dated 13.12.2024, and direction to release the deposited amount to Respondent No.1 as full satisfaction of the debt.
The Legal Issue
Can the continuation of CIRP be terminated under Rule 11 of the NCLAT Rules or Section 65 IBC when the sole creditor, who constitutes the entire CoC, refuses to accept full repayment of the admitted debt, thereby demonstrating malicious intent?
Arguments Presented
For the Appellant
The appellant argued that the deposit of the entire claimed amount, including interest, before the NCLAT extinguished the basis for CIRP. He relied on the legislative intent of the IBC to revive corporate debtors, not to punish them. He contended that with no other creditors involved, the refusal to accept repayment was not a legitimate exercise of creditor rights but an abuse of process. He invoked Section 65 IBC and Rule 11 of the NCLAT Rules to argue that the proceedings had become malicious in effect, even if not in initiation.
For the Respondent
The respondent argued that once CIRP is admitted under Section 7 IBC, the statutory process cannot be halted except under Section 12A, which requires a 90% CoC vote. He asserted that the deposit was made under court order, not voluntarily, and therefore did not constitute a settlement. He maintained that the refusal to accept the deposit was lawful and that Section 65 IBC could not be invoked for the first time on appeal without prior pleadings. He further claimed the Corporate Debtor’s liabilities exceeded its assets, justifying continuation of CIRP.
The Court's Analysis
The NCLAT undertook a rigorous doctrinal analysis of the IBC’s structure, distinguishing between the threshold for initiating CIRP and the conditions for its termination. The Court emphasized that while Section 7 IBC requires only proof of debt and default for admission, the Code’s rehabilitative purpose does not mandate the continuation of CIRP when its objective is rendered obsolete.
"The entire fulcrum of insolvency process rests on a presumption that once the corporate debtor has committed default in paying a solitary debt - the debt due to the petitioning-creditor, such default is necessarily owing to its insolvency. However, if the basic character or objective of the Code is understood not as an exproprietary statute... then there is a compelling need to limit the operation of this underlying presumption right at the point where a genuine offer of settlement is made."
The Court rejected the respondent’s argument that Section 12A is the exclusive route for termination. It held that Rule 11 of the NCLAT Rules empowers the Tribunal to terminate proceedings that constitute an abuse of process, particularly where the sole creditor’s conduct reveals malice. The Court noted that the CoC, being a single-member body, had no independent commercial interest to weigh; its refusal was therefore personal and arbitrary.
The Tribunal further held that Section 65 IBC, though framed as an ex-post facto penalty provision, does not preclude the Tribunal from acting preventively when malice becomes evident during proceedings. The Court observed:
"It would be a travesty of justice if we choose to abdicate our authority when there is a need to act and accept the contentions of the first respondent and to oversee what we consider as a shameless attempt to abuse the Code, its objectives, and the judicial process of this tribunal."
The Court concluded that the refusal to accept repayment, in the absence of any other creditor or legitimate commercial rationale, amounted to an abuse of the insolvency process, rendering continuation of CIRP unjustifiable.
The Verdict
The appeal was allowed. The NCLAT terminated the CIRP initiated against Sulojay Realty Private Limited. The deposit of ₹7,54,79,326 plus accrued interest made by the appellant was directed to be released to Respondent No.1 as full and final satisfaction of the debt. The order of the NCLT dated 13.12.2024 admitting the Corporate Debtor to CIRP was set aside. The Tribunal directed compliance within 14 days.
What This Means For Similar Cases
Single Creditor Conduct Is Now Judicially Scrutinized
- Practitioners must now assess whether a sole creditor’s refusal to accept repayment during CIRP is commercially rational or retaliatory.
- A refusal without justification, especially when no other creditors exist, may trigger abuse of process arguments under Rule 11 NCLAT Rules.
- The burden shifts to the creditor to demonstrate a legitimate reason for rejecting repayment, beyond mere procedural rigidity.
CIRP Termination Is Not Limited to Section 12A
- Section 12A is not the exclusive mechanism for ending CIRP.
- Tribunals may invoke inherent powers under Rule 11 of the NCLAT Rules to terminate proceedings where the original justification for CIRP has vanished and continuation serves no statutory purpose.
- This creates a new avenue for debtors to seek relief when creditors act in bad faith post-admission.
Malice Can Be Established During CIRP, Not Just at Initiation
- Section 65 IBC is not confined to fraudulent initiation alone.
- Conduct during CIRP - such as refusal to accept repayment by a sole creditor - can establish malicious intent that retroactively taints the proceedings.
- Legal teams should now plead Section 65 IBC as a dynamic remedy, not merely a punitive afterthought.
The Revival Principle Overrides the Default Principle
- The IBC’s primary goal is revival, not liquidation.
- When promoters or suspended directors offer full repayment before third-party claims arise, tribunals must prioritize corporate survival over creditor retaliation.
- This judgment reinforces that default is not an irreversible sin under the IBC.
