Bank's IBC Bid Against Debtor Rejected: Loan Paid to Builder

The Supreme Court has clarified that the Insolvency & Bankruptcy Code (IBC), 2016, cannot serve as a tool for debt recovery when the core disagreement between parties is mainly contractual, especially those involving property transfers and related duties. A bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe addressed this matter. The central issue involved Dhanlaxmi Bank, which had paid Rs. 1.34 crores directly to a builder rather than to the corporate debtor for a property purchase. After the debtor’s account became a Non-Performing Asset (NPA), the bank started recovery proceedings through the Debt Recovery Tribunal. Despite these ongoing efforts, the bank later initiated winding-up procedures under the Companies Act against the corporate debtor. These proceedings were later transferred and converted into a Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC. The National Company Law Tribunal (NCLT) initially upheld the CIRP, finding that debt and default were established. However, the National Company Law Appellate Tribunal (NCLAT) overturned this decision. The NCLAT noted that the loan amount was not paid directly to the corporate debtor but to the builder under a specific arrangement. This arrangement tied the repayment to the builder’s performance, meaning the matter was not a straightforward financial creditor-debtor relationship under the IBC. This case then reached the Supreme Court for a final determination. The main question before the court was whether a bank could start insolvency proceedings against a debtor when the funds were given to a third party and repayment depended on that party’s actions. The Supreme Court dismissed the bank’s appeal, agreeing with the NCLAT’s findings. Justice Aradhe, writing the judgment, emphasized that the transaction structure involved intertwined obligations with the builder. Since the loan was directly disbursed to the builder and repayment depended on their performance, it was not a simple lending arrangement between the bank and the corporate debtor. The court warned that using IBC solely for recovery would convert it into a coercive mechanism, which is not permitted. The court held that invoking the code merely to force payment, without genuine financial distress, is an abuse of process. Therefore, the appeal was dismissed, reinforcing the principle that IBC should not be used for simple contractual disputes.