Supreme Court Dismisses Dhanlaxmi Bank Plea Against NCLAT Order Setting Aside CIRP Against Emerald Mineral Exim

The Supreme Court on Thursday dismissed an appeal filed by Dhanlaxmi Bank Ltd against an NCLAT order that had set aside insolvency proceedings against Emerald Mineral Exim Pvt Ltd.

The court held that the dispute arising from a commercial property transaction was predominantly contractual in nature and not a straightforward financial debt-default case warranting initiation of CIRP under the Insolvency and Bankruptcy Code.

A Bench of Justices Pamidighantam Sri Narasimha and Alok Aradhe refused to interfere with the NCLAT's August 2, 2022 order setting aside the NCLT Cuttack Bench's decision admitting CIRP against Emerald Mineral Exim Pvt Ltd. The Court observed that the matter was already pending before the DRT, which was the appropriate recovery forum.

“The present case does not involve a straightforward financial debt default scenario warranting initiation of CIRP. The facts disclose a dispute which is predominantly contractual in nature and is subject matter of the proceedings before the DRT-the appropriate forum for recovery. The deposit made pursuant to order of the DRT further indicates that the matter is actively being adjudicated in appropriate proceeding.”

The Court said permitting invocation of the IBC in such cases would convert insolvency proceedings into an impermissible coercive recovery mechanism.

“Therefore, permitting invocation of the Code in cases such as the present one, would amount to converting insolvency proceedings into a coercive mechanism for recovery which is impermissible.”

The dispute arose from a 2011 transaction involving the purchase of a commercial unit in “Synthesis Business Park” at New Town, Rajarhat, Kolkata by Emerald Mineral Exim. Dhanlaxmi Bank had sanctioned a loan of Rs.1.50 crore to the company. The amount was directly disbursed to the builder under a quadripartite agreement executed between the bank, the corporate debtor, the builder and WBHIDCL.

The account was later classified as NPA on July 5, 2014. The bank subsequently initiated recovery proceedings before the DRT in 2016 seeking recovery of over Rs.1.80 crore.

The NCLT Cuttack Bench admitted CIRP against the company in 2020. The NCLAT later set aside the order. It held that the transaction was not a simple lending arrangement as the builder had substantial obligations relating to the property.

The Supreme Court agreed with the appellate tribunal's view. It said the material on record showed that the dispute predominantly involved contractual claims intertwined with the builder's obligations concerning construction and transfer of the property.

“The material on record indicates that obligations arising out of the transaction are intertwined with Builder's performance. The dispute between the parties is predominantly contractual in character involving competing claims relating to transfer of property and associated obligations.”

The Court took note of the quadripartite agreement. It observed that since the loan amount was directly disbursed to the builder and linked to the builder's obligations concerning construction and transfer of the property, the transaction could not be treated as a simple financial lending arrangement.

Relying on Innoventive Industries Ltd. v. ICICI Bank and Pioneer Urban Land and Infrastructure Ltd. v. Union of India, the Court reiterated that the IBC operates as a collective insolvency resolution mechanism. It said the Code is not meant for adjudication of individual contractual claims and cannot be invoked merely to compel payment.

“The Code operates as a collective insolvency resolution mechanism and not as a forum for the adjudication of individual contractual claims. This Court has underscored that where object behind the invocation of Code is to compel payment rather than to address genuine financial distress, such invocation would amount to an abuse of process. The Code must not be used as a tool for coercion and debt recovery by individual creditors.”

Accordingly, the court dismissed Dhanlaxmi Bank's appeal and upheld the NCLAT judgment.