The National Company Law Appellate Tribunal has held that a corporate debtor's deposit of claimed amounts expressly without prejudice to its rights cannot justify closure of a Section 7 insolvency petition without adjudicating the debtor's objections to maintainability, existence of debt, and default. The Tribunal set aside the NCLT Mumbai order that released deposited demand drafts and closed the petition, remanding the matter for fresh consideration of the Section 7 application.
Background & Facts
The Dispute
The appellant, M/s. North Life Spaces LLP, a real estate developer based in Mumbai, entered into a Facility Agreement dated 05.04.2021 with the respondent, Dalal Family Private Trust. The respondent claimed that approximately Rs. 4.15 crores was due from the appellant and, alleging default in repayment, filed Company Petition (IB) No. 576/MB/2025 under Section 7 of the Insolvency and Bankruptcy Code, 2016 before the National Company Law Tribunal, Mumbai Bench. The Section 7 petition claimed a debt of Rs. 4,15,19,943 inclusive of principal, interest, and tax penalty, while reserving the claim for default interest.
Key Facts
- The Facility Agreement was executed on 05.04.2021 between North Life Spaces LLP and Dalal Family Private Trust
- The respondent's Section 7 petition claimed: principal of Rs. 2,98,34,717, interest of Rs. 90,04,363, and tax penalty of Rs. 26,80,863 (total Rs. 4,15,19,943)
- The appellant contested the petition on multiple grounds: maintainability under Section 7, authority of Mr. Abhay A. Shah to institute proceedings on behalf of the Trust, and the very existence of debt and default
- The appellant filed an interlocutory application seeking production of documents to support its objections
- During the hearing, the respondent withdrew its claim towards tax penalty of Rs. 26.80 lakh
- The Company Petition and interlocutory application were heard and reserved for orders on 12.08.2025
- On 18.08.2025 (after reservation), the appellant deposited two demand drafts aggregating Rs. 3,49,55,172 (principal and interest after applicable TDS) with the Registry, accompanied by a praecipe stating the deposit was made "purely as a gesture of bona fide conduct and without prejudice to all rights, remedies and contentions available to the Respondent in law and on facts"
- The praecipe explicitly stated the deposit was to show solvency and not an admission of debt or default
Procedural History
- 05.04.2021: Facility Agreement executed between parties
- Date not specified: Respondent filed C.P. (IB) No. 576/MB/2025 under Section 7 IBC before NCLT Mumbai Bench
- 12.08.2025: Company Petition and interlocutory application heard and reserved for orders
- 18.08.2025: Appellant deposited Rs. 3,49,55,172 via two demand drafts with praecipe
- 19.08.2025: NCLT Mumbai Bench passed impugned order directing release of demand drafts to respondent, recording payment of principal and interest, noting withdrawal of tax penalty and default interest claims, and closing the Company Petition with liberty to pursue other legally maintainable claims
- 02.10.2025: Appellant filed Company Appeal (AT) (Insolvency) No. 1610 of 2025 before NCLAT
- 19.09.2025: Respondent issued Demand Notice claiming Rs. 2,77,72,206 towards interest, default interest, and legal expenses
- 09.09.2026: NCLAT pronounced judgment allowing the appeal
Relief Sought
The appellant sought setting aside of the impugned order dated 19.08.2025 on the ground that its objections to maintainability, debt, and default were not adjudicated before the demand drafts were released and the Company Petition closed. The appellant also challenged the subsequent Demand Notice dated 19.09.2025 raising a substantially different claim of Rs. 2,77,72,206.
The Legal Issue
The central question was whether a deposit made by a corporate debtor after a Section 7 petition has been reserved for orders, expressly without prejudice to its rights and contentions, can by itself justify closure of the insolvency proceedings without adjudicating the debtor's specific objections regarding maintainability, existence of financial debt, and default.
Arguments Presented
For the Appellant
Mr. Krishnendu Datta, Senior Counsel, argued that the appellant had specifically disputed the maintainability of the Section 7 petition, the authority of the person instituting proceedings on behalf of the Trust, and the existence of debt and default. These objections were supported by an interlocutory application seeking relevant documents and were never adjudicated. The deposit of Rs. 3,49,55,172 was made after the matter was reserved for orders and was expressly without prejudice to all rights, remedies, and contentions. It was not an admission of debt or default, nor did it authorize closure of the Section 7 petition without determining the objections already raised. The subsequent Demand Notice dated 19.09.2025 claimed Rs. 2,77,72,206 with materially different components (interest, default interest, legal expenses) from the original Section 7 claim, and the liberty granted in the impugned order could not revive or enlarge the insolvency claim through a subsequent computation.
For the Respondent
Mr. Abhijeet Sinha, Senior Counsel, contended that after the petition was reserved for orders, the appellant voluntarily offered to deposit the principal and interest claimed and thereafter deposited Rs. 3,49,55,172. The Adjudicating Authority merely acted upon the appellant's own statement and deposit, and the impugned order was not an order directing recovery. The appellant could not approbate and reprobate by making a voluntary deposit and then challenging its consequences. The Section 7 petition was validly instituted by Mr. Abhay A. Shah, duly appointed as trustee. The appellant's denial of default was contrary to its own acknowledgment of outstanding principal and interest. The respondent withdrew only the tax penalty claim, not the default interest claim, and expressly reserved its right to pursue the same. The liberty granted in the impugned order merely preserved the respondent's right to pursue other legally maintainable claims.
The Court's Analysis
The NCLAT, through Justice N. Seshasayee, identified the core issue as whether the deposit made after reservation of orders could justify closure of Section 7 proceedings without adjudicating the appellant's objections. The Tribunal examined the praecipe accompanying the deposit, which explicitly stated the deposit was made "purely as a gesture of bona fide conduct and without prejudice to all rights, remedies and contentions available to the Respondent in law and on facts."
"A deposit expressly made without prejudice cannot, by itself, be treated as an unconditional admission of a liability, particularly when the appellant had already raised specific objections to the maintainability of the proceedings. At the best it only indicates that the appellant is solvent and not insolvent to initiate CIRP."
The Tribunal held that the Adjudicating Authority necessarily had to consider the controversy already argued before it. The subsequent deposit did not, without more, extinguish the objections already on record. The plea of approbation and reprobation was rejected because the deposit was expressly made without prejudice to rights, remedies, and contentions. The real question was the legal consequence of such a deposit, not the factum of deposit.
Regarding the subsequent Demand Notice dated 19.09.2025 claiming Rs. 2,77,72,206 (materially different from the original claim of principal Rs. 2,98,34,717, interest Rs. 90,04,363, and tax penalty Rs. 26,80,863), the Tribunal observed that each component must have a contractual or statutory foundation and be legally recoverable. The liberty granted to pursue other legally maintainable claims could not amount to an adjudication of those claims. The Tribunal expressed doubts on how the same debtor could be treated as insolvent for part of a claim and not for the rest when both arise from the same transaction, if Section 7 is not a recovery proceeding.
The Verdict
The NCLAT allowed the appeal and set aside the impugned order dated 19.08.2025 passed in C.P. (IB) No. 576/MB/2025. The matter was remanded back to the Adjudicating Authority for fresh consideration of the petition under Section 7 of the Code. The respondent was directed to re-deposit the amount of Rs. 3,49,55,172 to the credit of the case before the Adjudicating Authority. No costs were awarded. The Tribunal clarified that nothing in the judgment prevents the respondent from pursuing any amount otherwise legally due to it, and expressed no opinion on the merits of the subsequent claim.
What This Means For Similar Cases
Deposit Without Prejudice Is Not Admission Of Liability
A corporate debtor's deposit of claimed amounts after a Section 7 petition is reserved for orders, when accompanied by an explicit "without prejudice" praecipe, cannot be treated as an unconditional admission of debt or default. The deposit at best demonstrates solvency, which is antithetical to the insolvency threshold for initiating CIRP. Practitioners should ensure that any protective deposits are accompanied by clear, unambiguous praecipes preserving all objections.
Section 7 Requires Adjudication, Not Mere Recovery
The Adjudicating Authority cannot close a Section 7 petition merely because the corporate debtor has deposited money. The statutory mandate requires determination of three jurisdictional facts: existence of financial debt, occurrence of default, and maintainability of the petition. Where these are specifically contested, they must be adjudicated. Closure without such determination is a jurisdictional error.
Liberty To Pursue Claims Does Not Adjudicate Them
The standard liberty clause "to pursue such other claims as may be legally maintainable" preserves rights but does not adjudicate them. A subsequent demand notice with materially different components (e.g., default interest, legal expenses not part of the original Section 7 claim) cannot be treated as validated by the closure order. Each component of a financial debt must independently satisfy contractual or statutory foundations. Practitioners should object to any attempt to use a Section 7 closure order as res judicata for subsequent claims.
