Section 7 IBC | CIRP Admission Unaffected By Unperformed OTS Or Debt Assignment : NCLAT

The National Company Law Appellate Tribunal has reaffirmed that the admission of a Corporate Insolvency Resolution Process under Section 7 of the Insolvency and Bankruptcy Code turns solely on the existence of a financial debt and the occurrence of a default, and cannot be derailed by unperformed one-time settlement proposals or the subsequent assignment of debt to an asset reconstruction company. The Tribunal dismissed an appeal by the suspended director of Distribution Logistics Infrastructure Private Limited against the NCLT Mumbai order admitting Bank of India's Section 7 application, holding that the corporate debtor's repeated failure to honour settlement commitments and the commercial wisdom of lenders in rejecting conditional offers are not grounds to interfere with the statutory admission framework.

Background & Facts

The Dispute

The appellant, Sudarshan Aithal, suspended director of Distribution Logistics Infrastructure Private Limited (formerly Vikram Logistics Limited), challenged the order dated 14.05.2026 passed by the National Company Law Tribunal, Mumbai Bench-VI, in Company Petition (IB) No. 1078 of 2025. The NCLT had admitted an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 filed by Bank of India, initiating the Corporate Insolvency Resolution Process against the corporate debtor. The appeal was preferred under Section 61 of the Code read with Rule 11 of the NCLAT Rules, 2016.

Key Facts

• Bank of India sanctioned a term loan of Rs. 57.50 Crore to Vikram Logistics Limited on 21.01.2013 for its container trains project; the company later changed its name to Distribution Logistics Infrastructure Private Limited.
• The term loan was restructured in 2014 with an additional Rs. 4.89 Crore, enhancing the existing loan to Rs. 52.90 Crore via sanction letter dated 11.12.2014.
• In 2016, credit facilities were again reviewed and restructured via sanction letter dated 06.10.2016 with an aggregate sanctioned limit of Rs. 68.84 Crore.
• The credit limits were sanctioned under a consortium banking arrangement with Punjab National Bank as lead bank, and Bank of Baroda, Union Bank of India, State Bank of India, and L&T Infrastructure Finance Company Limited as member banks.
• In 2021, the corporate debtor approached all existing term lenders for one-time restructuring; all three consortium members formed a single consortium led by Bank of Baroda.
• Vide sanction letter dated 22.06.2021, credit limits were renewed; a master restructuring agreement was executed on 26.06.2021 and again in 2022; limits were reviewed on 30.06.2022.
• The corporate debtor failed to regularize the account; default occurred on 29.12.2022; the cash credit account was classified as NPA on 28.03.2023.
• Bank of India issued a demand notice on 23.12.2024 under Section 13(2) of the SARFAESI Act, 2002; no positive response was received.
• During the appeal, Bank of India and other consortium lenders executed an assignment agreement dated 30.06.2026 assigning the debt in favour of JM Financial Asset Reconstruction Company Limited (arrayed as Respondent No. 3 by NCLAT order dated 22.07.2026).
• The corporate debtor made multiple OTS proposals: Rs. 580 Crore (letter dated 15.01.2025), enhanced to Rs. 590 Crore (accepted by consortium led by Bank of Baroda subject to 10% upfront deposit of Rs. 59 Crore by 07.10.2025), then Rs. 631 Crore (offered before NCLAT).
• The appellant failed to deposit the 10% upfront amount (Rs. 59 Crore) as required; Bank of Baroda rejected the OTS on 16.04.2026 for non-deposit.
• A Swiss challenge process was conducted with Rs. 621 Crore as anchor bid; JM Financial was declared successful bidder at Rs. 621 Crore.
• The holding company challenged the Swiss challenge before the Bombay High Court and offered Rs. 625 Crore, later enhanced to Rs. 631 Crore with 50% upfront; the COC rejected the offer on 18.06.2026 as conditional.
• Before NCLAT, the appellant offered to deposit 50% of Rs. 631 Crore by 09.07.2026 and balance by 20.07.2026 (recorded in order dated 29.06.2026); no deposit was made.

Procedural History

• 21.01.2013: Original term loan sanction of Rs. 57.50 Crore by Bank of India
• 11.12.2014: Restructuring sanction enhancing loan to Rs. 52.90 Crore
• 06.10.2016: Further restructuring with aggregate limit of Rs. 68.84 Crore
• 22.06.2021: Renewal of credit limits under new consortium led by Bank of Baroda
• 26.06.2021: Master restructuring agreement executed
• 30.06.2022: Credit limits reviewed
• 29.12.2022: Default occurred
• 28.03.2023: Account classified as NPA
• 23.12.2024: Demand notice under SARFAESI Act issued
• 15.01.2025: Corporate debtor offered Rs. 580 Crore OTS
• 04.10.2025: Bank of Baroda accepted OTS of Rs. 590 Crore subject to 10% upfront deposit by 07.10.2025
• 30.10.2025: Bank of Baroda declared corporate debtor as successful bidder in Swiss challenge (anchor bid Rs. 590 Crore)
• 16.04.2026: Bank of Baroda rejected OTS for non-deposit of upfront amount; fresh Swiss challenge with Rs. 621 Crore anchor bid by JM Financial
• 14.05.2026: NCLT Mumbai admitted Section 7 application, initiated CIRP
• 21.05.2026: Present appeal filed before NCLAT (verified at New Delhi)
• 30.06.2026: Assignment agreement executed in favour of JM Financial ARC
• 22.07.2026: NCLAT disposed of substitution application, arrayed JM Financial as Respondent No. 3
• 29.06.2026: NCLAT directed appellant to deposit 50% of Rs. 631 Crore by 09.07.2026 and balance by 20.07.2026
• 06.11.2026: NCLAT pronounced judgment dismissing appeal

Relief Sought

The appellant sought setting aside of the NCLT order dated 14.05.2026 admitting the Section 7 application and initiating CIRP, contending that a binding OTS subsisted, Bank of India was a minority lender (~9.4% share), and the assignment of debt to JM Financial ARC was illegal and under challenge before the Bombay High Court.

The Legal Issue

The central questions were: (1) Whether the admission of a Section 7 application can be resisted on the ground of ongoing one-time settlement negotiations where the corporate debtor has failed to fulfil condition precedent of upfront deposit; (2) Whether a minority financial creditor can initiate CIRP when the debt has been assigned to an asset reconstruction company during the appeal; (3) Whether the commercial wisdom of lenders in rejecting conditional OTS proposals is subject to judicial review at the admission stage.

Arguments Presented

For the Appellant

Senior Counsel Kunal Tandon submitted that the corporate debtor had been actively pursuing resolution with the consortium from 2021 to 2025. A revised OTS offer of Rs. 590 Crore was accepted by the consortium led by Bank of Baroda, and the corporate debtor's offer of Rs. 590 Crore was kept as anchor bid in a Swiss challenge process. The assignment of debt to JM Financial ARC was under challenge before the Bombay High Court, and the auction process was doubtful. Bank of India, holding only ~9.4% of the debt, filed the Section 7 petition to derail the OTS procedure. The appellant relied on Vidarbha Industries Power Limited v. Axis Bank Limited (2022) 8 SCC 352 to argue that the adjudicating authority has discretion to not admit the petition where resolution is imminent. The appellant further offered Rs. 631 Crore before NCLAT with 50% upfront, which was higher than the ARC's Rs. 621 Crore bid, and contended that the 120 employees would suffer if CIRP continued.

For the Respondent

Senior Counsel Krishnendu Datta for JM Financial ARC submitted that the law is settled: an appeal against Section 7 admission turns only on existence of financial debt and occurrence of default, both admitted by the appellant. The corporate debtor's own OTS letter dated 15.01.2025 acknowledged the debt. Reliance on Vidarbha Industries was misconceived as the Supreme Court in M. Suresh Kumar Reddy v. Canara Bank (2023) 8 SCC 387 clarified that decision was fact-specific and Innoventive Industries still holds good. The OTS was never binding as the letter dated 20.10.2025 expressly stated it was subject to final approval of all consortium lenders and did not create binding obligations; the 10% upfront deposit (Rs. 59 Crore) was never made. The appellant had a history of repeated defaults: failed to deposit Rs. 59 Crore during Section 7 proceedings, failed to honour Rs. 621 Crore offer, and failed to deposit amounts directed by NCLAT on 29.06.2026. Acceptance or rejection of OTS lies within the commercial wisdom of lenders, which is non-justiciable. The amended Section 12A (effective 26.05.2026) makes withdrawal more stringent: an admitted application cannot be withdrawn prior to COC constitution or after first invitation for resolution plans. The three-member bench decision in Ayush Prashant Aggarwal v. Uma Export Limited (CA (AT) Ins No. 1366 of 2026, decided 24.08.2026) was relied upon. The object of IBC is resolution, not debt recovery; the appeal cannot be used to negotiate settlement quantum and reopen a concluded RBI-compliant public auction (Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17).

The Court's Analysis

The Tribunal, per Justice Mohd. Faiz Alam Khan (Member Judicial) and Naresh Salecha (Member Technical), began by noting that the NCLT had considered key precedents including Innoventive Industries, RK Industries, HPCL Biofuels, Swiss Ribbons, Pioneer Urban Land, and Power Trust v. Bhuvan Madan (Civil Appeal No. 2211 of 2024, decided 18.02.2026). The NCLT summarized the legal position from Power Trust: the Code mandates initiation of insolvency process upon default; the adjudicating authority at the admission stage only ascertains existence of default from information utility records or creditor evidence within 14 days; it cannot examine disputes regarding the debt; the only two courses are admission or rejection based on default; inability to pay is irrelevant; the scope of enquiry is restricted to existence of default of a debt due and payable.

The Tribunal observed that neither before the NCLT nor before it had the appellant disputed the debt or default. The grounds agitated were: Bank of India being a minority lender (~9.4%), alleged illegal rejection of OTS, and illegal assignment to Respondent No. 3. The assignment was challenged in a writ petition before the Bombay High Court, which was pending.

The Tribunal reproduced the Supreme Court's holding in Innoventive Industries v. ICICI Bank (Civil Appeals Nos. 8337-38 of 2017) emphasizing that under Section 7, a default in respect of a financial debt owed to any financial creditor suffices; the adjudicating authority must be satisfied of default within 14 days; the corporate debtor can only point out that default has not occurred in the sense that the debt is not due; once satisfied of default, the application must be admitted unless incomplete.

On Vidarbha Industries, the Tribunal reproduced the Supreme Court's review order clarification (22.09.2022) that the decision was in the setting of facts of that case and cannot be read as contrary to Innoventive Industries and E.S. Krishnamurthy. The view in Innoventive Industries still holds good.

The Tribunal found that the appellant failed to deposit the 10% upfront amount (Rs. 59 Crore) as required by the letter dated 04.10.2025, which stated the OTS was accepted on condition of deposit so that other lenders could seek internal approvals. The amount was required by 07.10.2025 but never deposited. Bank of Baroda's communication dated 16.04.2026 confirmed rejection of OTS for non-deposit. The lenders were not obliged to accept the OTS absent such deposition.

The Tribunal recorded the appellant's repeated defaults: (1) failure to deposit Rs. 59 Crore during Section 7 proceedings; (2) failure to honour the enhanced Rs. 621 Crore offer; (3) failure to deposit amounts as directed by NCLAT order dated 29.06.2026 (50% by 09.07.2026, balance by 20.07.2026). The COC unanimously rejected the Rs. 631 Crore offer as conditional, citing loss of trust in the appellant's conduct.

On the amended Section 12A, the Tribunal agreed with Respondent No. 3 that withdrawal is now permitted only on application by the resolution professional with 90% COC approval. Subsection 2 begins with a non-obstante clause stating an admitted application under Sections 7, 9, and 10 shall not be withdrawn prior to COC constitution or after first invitation for resolution plans. The Ayush Prashant Aggarwal decision was cited. The financial creditor could not be compelled to accept the OTS, especially given the appellant's history of non-performance.

The Tribunal concluded that the NCLT committed no error in admitting the Section 7 application. The appeal lacked merit and was dismissed.

"The Code prescribes whenever a corporate debtor defaults on a debt that is due and payable, an insolvency process must be initiated. Section 3(12) defines 'default' as non-payment of a debt which has become due and payable, and includes default in respect of a part or instalment thereof."

"The adjudicating authority is empowered only to verify whether a default has occurred or if a default has not occurred. Based upon its decision, the adjudicating authority must then either admit or reject an application, respectively. These are the only two courses of action which are open to the adjudicating authority in accordance with Section 7(5)."

The Verdict

The NCLAT dismissed the appeal filed by Sudarshan Aithal against the NCLT Mumbai order dated 14.05.2026 admitting the Section 7 application by Bank of India and initiating CIRP against Distribution Logistics Infrastructure Private Limited. The Tribunal held that the existence of financial debt and occurrence of default were undisputed; the corporate debtor's repeated failure to honour OTS commitments (non-deposit of Rs. 59 Crore upfront, non-compliance with NCLAT directions to deposit Rs. 315.5 Crore by 09.07.2026 and balance by 20.07.2026) disentitled it from equitable relief; the commercial wisdom of lenders in rejecting conditional OTS proposals is non-justiciable; the assignment of debt to JM Financial ARC for Rs. 621 Crore via Swiss challenge was a concluded RBI-compliant process; and the amended Section 12A (effective 26.05.2026) bars withdrawal of an admitted application without 90% COC approval. No order as to costs. Pending IAs disposed of.

What This Means For Similar Cases

Admission Under Section 7 Remains A Narrow Enquiry

The judgment reinforces that the adjudicating authority's role at the Section 7 admission stage is strictly limited to verifying the existence of a financial debt and the occurrence of a default. Practitioners must advise corporate debtors that disputes over OTS negotiations, debt assignment, or lender conduct cannot be agitated to stall admission. The Power Trust summary adopted by the Tribunal makes clear: the Code restricts the scope of enquiry to default of a debt due and payable and nothing more. Any attempt to expand this enquiry at the admission stage will fail.

Unperformed OTS Offers Create No Legal Bar To CIRP

• An OTS accepted subject to a condition precedent (here, 10% upfront deposit) does not become binding until the condition is fulfilled. Non-deposit of the stipulated amount within the prescribed timeline (07.10.2025) renders the OTS unenforceable.
• Lenders' internal approval processes and commercial wisdom in accepting or rejecting settlement proposals are not subject to judicial review at the admission stage.
• Repeated defaults in honouring settlement commitments (three documented instances here) severely undermine a corporate debtor's credibility before the Tribunal.

Amended Section 12A Severely Restricts Post-Admission Settlement

• With effect from 26.05.2026, Section 12A(2) provides that an application admitted under Sections 7, 9, or 10 shall not be withdrawn prior to COC constitution or after the first invitation for resolution plans.
• Withdrawal now requires an application by the resolution professional with approval of 90% voting share of the COC.
• Practitioners must factor this heightened threshold when advising on post-admission settlement strategies; the era of bilateral settlements derailing CIRP after admission is effectively over.

Debt Assignment To ARC During Appeal Does Not Affect Admission Validity

• The assignment of the consortium's debt to JM Financial ARC for Rs. 621 Crore via a Swiss challenge process, conducted in compliance with RBI guidelines, was treated as a concluded public auction.
• The pendency of a challenge to the assignment before the Bombay High Court did not stay or affect the Section 7 admission.
• The appellate tribunal will not reopen a concluded auction process based on deferred and unfunded counter-offers.

Minority Lender Status Is Irrelevant For Section 7 Standing

• Bank of India's ~9.4% share in the consortium debt did not impair its standing to file a Section 7 application. Under the Explanation to Section 7(1), a default in respect of a financial debt owed to any financial creditor suffices; it need not be the applicant creditor's own debt.
• Once the debt is assigned to an ARC holding 100% of the financial debt, the ARC steps into the shoes of all consortium lenders.

Practical Takeaways For Practitioners

• At the Section 7 admission stage, focus exclusively on whether the financial creditor has produced evidence of default (information utility records or other evidence). Do not invest advocacy capital in OTS narratives unless a binding, performed settlement exists.
• Ensure any OTS proposal includes immediate deposit of stipulated upfront amounts; conditional offers without performance are legally worthless.
• Post-admission, advise clients that Section 12A withdrawal is now a high-barrier process requiring RP initiative and 90% COC consent - bilateral deals with individual lenders will not suffice.
• If debt assignment to an ARC occurs during proceedings, the ARC's substitution is routine; challenges to the assignment process must be pursued in the appropriate forum (here, Bombay High Court) but will not automatically stay CIRP.