Insolvency Process Has Far-Reaching Consequences, Cannot Be Used To Enforce Money Decrees: Supreme Court

The Supreme Court on Thursday held that insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 cannot be invoked as a substitute for execution of a civil court decree.

A Bench of Justices Pamidighantam Sri Narasimha and Alok Aradhe observed that, “The insolvency process is a remedy with far-reaching consequences and must be reserved for cases of genuine insolvency or financial distress, not for the enforcement of money decrees.”

The Division Bench allowed an appeal against a National Company Law Appellate Tribunal (NCLAT) order which had directed admission of a Section 7 application against Anjani Technoplast Limited.

The dispute arose from loan transactions in 2010, under which Shubh Gautam advanced ₹2.5 crore and ₹2 crore to the company under separate agreements carrying interest. Cheques issued as security were dishonoured, leading to proceedings under Section 138 of the Negotiable Instruments Act. The parties later entered into settlements under which substantial payments were made.

Gautam subsequently obtained a decree from the Delhi High Court for Rs. 4.38 crore with interest at 24% per annum from February 1, 2016. The decree attained finality after dismissal of the company's challenge up to the Supreme Court. However, instead of initiating execution proceedings, he filed an insolvency application alleging default on the decretal amount.

The National Company Law Tribunal (NCLT) dismissed the plea, noting that the company was solvent and that the IBC was being used as a recovery mechanism. The NCLAT reversed this finding and directed admission of the Section 7 application.

Before the Supreme Court, the primary issue was whether insolvency proceedings could be used as a substitute for executing a civil court decree.

Emphasising the object of the Code, the Bench observed:

“The Code was enacted to provide for the reorganisation and insolvency resolution of corporate persons in a time-bound manner for the maximisation of the value of assets. It is not a debt recovery legislation.”

Relying on precedent, including Swiss Ribbons (P) Ltd v. Union of India, the Court reiterated that the IBC is intended for revival of the corporate debtor as a going concern and not for recovery of dues by individual creditors.

“The above referred passage identifies the essential character of the IBC, whose purpose is the rescue and revival of the corporate debtor as a going concern. It is not a proceeding for the benefit of individual creditors seeking to recover their dues. The moratorium under Section 14 operates in the interest of the corporate debtor itself. The resolution process is not intended to be adversarial toward the corporate debtor but rather to be protective of its interests.”

The Court noted that despite having a final decree and the option to execute it, the respondent chose to initiate insolvency proceedings, which amounted to misuse of the Code.

“The object is the revival of the corporate debtor as a going concern. It follows that a creditor who approaches the NCLT not with any genuine concern for the resolution of the corporate debtor but purely to secure payment of his individual dues is acting contrary to the purpose and spirit of the Code.”

It further observed that the appropriate remedy for the respondent was to execute the decree under the Code of Civil Procedure:

“The natural and ordinary remedy available to the respondent was to execute the decree under the provisions of the Code of Civil Procedure, 1908. The decree is a money decree, and the machinery for its execution is well established and effective.”

Taking note of the company's conduct, the Court observed:

“These are not the habits of an insolvent entity; these are instincts of an earnest judgment debtor willing and able to satisfy its liability, but disputing the quantum claimed.”

The court also noted that disputes regarding the quantum of dues were pending before the Delhi High Court and declined to examine the same.

Holding that the NCLAT erred in directing admission of the insolvency application, the Court found that initiation and continuation of CIRP in the present case amounted to an abuse of the insolvency process.

Accordingly, the appeal was allowed, the NCLAT order was set aside, and the NCLT's order dismissing the Section 7 application was restored. Costs of Rs 5 lakh were imposed on the respondent.

For Petitioner: Advocate Megha Karnwal

For Respondent: Advocate Shloka Narayanan