The Supreme Court has held that a money decree in favour of a financial creditor may furnish a fresh cause of action for initiation of proceedings under Section 7 of the IBC, but that principle does not entitle a decree holder, as a matter of right, to invoke the insolvency process in substitution of execution proceedings. Where the corporate debtor is a solvent and functioning company, the creditor has an efficacious execution remedy, and the quantum of debt is seriously disputed, the the insolvency process invoked only to secure payment of individual dues, and the initiation and continuation of CIRP amounts to misuse of the IBC as a recovery mechanism and abuse of process.
On the facts of the present case, the Supreme Court restored the NCLT’s dismissal of the Section 7 application, set aside the NCLAT’s order directing admission, and left the respondent to pursue execution of the decree in accordance with law.
A Two-Judge Bench comprising Justice Pamidighantam Sri Narasimha and Justice lok Aradhe observed that the central issue was not whether some money was due from the appellant, but whether the insolvency process under the IBC could be invoked as a substitute for execution of a civil court decree. The Bench reiterated that the IBC is enacted for reorganisation and insolvency resolution of corporate persons in a time-bound manner and is not a debt recovery legislation.
Referring to the decision in the case of Swiss Ribbons (P) Ltd. vs. Union of India [(2019) 4 SCC 17], Pioneer Urban Land and Infrastructure Ltd. vs Union of India [(2019) 8 SCC 416], and GLAS Trust Co. LLC vs. BYJU Raveendran [(2025) 3 SCC 625], the Bench observed that the IBC must not be used as a tool for coercion and debt recovery by individual creditors, and that using insolvency as a substitute for debt enforcement amounts to improper use of the Code. The Bench further noted that Section 65 of the IBC itself reflects the legislative intent to prevent fraudulent or malicious initiation of insolvency proceedings for purposes other than insolvency resolution.
The Bench found the respondent’s conduct significant: despite holding a final money decree, he did not initiate execution proceedings and instead invoked Section 7 of the IBC against a solvent and functioning company. The appellant had represented itself as a running company with substantial revenue and profits, had undertaken to pay the amount lawfully due, and had deposited substantial sums before the High Court and pursuant to orders of this Court. These circumstances did not indicate genuine insolvency.
The Bench also considered the serious and unresolved dispute as to the quantum of debt. It noted that the computation of the decretal amount, including credit for prior payments, was already pending before the Delhi High Court, and that the respondent had taken materially inconsistent positions before different forums regarding the amount due. Such discrepancies, in the Bench’s view, went to the root of the claim and made insolvency proceedings inappropriate.
The Bench clarified that although Dena Bank states that a decree for money in favour of a financial creditor gives a fresh cause of action to initiate proceedings under Section 7 of the IBC, that proposition does not mean that every decree holder who is also a financial creditor can invoke the IBC as a matter of right in preference to execution. Whether resort to the IBC amounts to misuse of process must still be examined on the facts of each case.
Briefly, the respondent, a money lender, advanced two loans to the appellant: Rs. 2.50 crores on February 24, 2010 for two months carrying interest at 12.75% per annum, and Rs. 2 crores on March 31, 2010 for fifteen days carrying interest at 3% per month; and cheques were furnished as security. Upon dishonour of the cheques, proceedings under Section 138 of the Negotiable Instruments Act, 1881 were initiated, followed by a compromise dated August 31, 2013 under which the appellant agreed to pay Rs. 3.22 crores within twelve months, though the appellant had already paid Rs. 3.53 crores by July 31, 2014.
Thereafter, the respondent filed a summary suit before the Delhi High Court on February 01, 2016 claiming Rs. 4.38 crores with pendente lite and future interest at 24% per annum. Although a second compromise deed dated December 23, 2016 recorded a full and final settlement figure of Rs. 2.38 crores, the suit was ultimately decreed on January 11, 2018 for Rs. 4.38 crores, with interest at 24% per annum from February 01, 2016, subject to deduction of Rs. 25 lakhs and with costs of Rs. 5 lakhs. The appeal before the Division Bench and the Special Leave Petition were dismissed, and the decree attained finality.
Instead of pursuing execution, the respondent filed a Section 7 application under the Insolvency and Bankruptcy Code, 2016 on December 13, 2021, asserting that the decretal amount constituted a financial debt and that the appellant had committed default. The NCLT dismissed the petition on June 20, 2022, inter alia holding that the IBC was not a recovery mechanism and noting that the claim was founded on a civil court decree against a solvent and functioning company.
The NCLAT reversed the NCLT on November 01, 2022, holding that the loan agreements satisfied the “time value of money” requirement under Section 5(8) of the IBC and relying on Dena Bank and Kotak Mahindra Bank to hold that a money decree gives a fresh cause of action for initiation of proceedings under Section 7 of the IBC within three years from the decree.
Meanwhile, disputes arose regarding the correct computation of the amount due. The appellant moved the Delhi High Court under Section 151 CPC for redetermination of the decretal amount, contending that substantial prior payments had not been credited, and deposited Rs. 3 crores pursuant to the High Court’s order. The record also showed that before the ITAT the respondent had placed a computation reflecting only Rs. 96.48 lakhs as outstanding as on March 31, 2012, whereas before this Court he claimed over Rs. 12.51 crores as due as on February 28, 2026.
Appearances:
Senior Advocate Dama S Naidu, AOR Megha Karnwal, along with Advocates Pankaj Pandey, Girish Tripathi, Digvijay Prasad, Ashish Yadav, and Ranjeeta Rohtagi, for the Appellant
Senior Advocates Kapil Sibal and S. Niranjan Reddy, AOR Shloka Narayanan, along with Advocates Gaurav Singh, Rajeshwari, and Shubhani D Krishan, for the Respondent
