Counterclaims, Set-Off Claims No Bar to Insolvency Admission Without Proof of Full Discharge: NCLT Allahabad

The National Company Law Tribunal (NCLT) at Allahabad has held that set-off claims, counterclaims or assertions of business losses cannot defeat the admission of an insolvency application unless they are supported by undisputed material showing that the debtor has completely discharged its liability.The tribunal delivered this finding while admitting Punjab National Bank's (PNB) insolvency plea against Bhagwati Rice Mills Pvt Ltd. A coram of Judicial Member Praveen Gupta and Technical Member Ashish Verma passed the order on December 3, 2025, and emphasised the limited scope of scrutiny at the admission stage. “At the admission stage, under Section 7, we are concerned only whether a financial debt exists and whether default has occurred; counterclaims or set-off claims do not defeat admission unless they demonstrate complete discharge of debt by undisputed material evidence, which is not the case here.” the tribunal recorded. PNB had filed its application on January 15, 2025, claiming an outstanding debt of over Rs 74.35 crore. The bank said Bhagwati Rice Mills had availed several credit facilities, including Cash Credit and Working Capital Term Loans, supported by sanction letters issued between 2019 and 2022 that reflected increased credit limits backed by hypothecation deeds and personal guarantees. The borrower's account was classified as a Non-Performing Asset on June 8, 2023, following persistent defaults. Recall notices were thereafter issued on January 4, 2024, and October 16, 2024, but the dues remained unpaid. PNB relied on an authenticated NeSL Record of Default dated December 10, 2024, which showed outstanding liabilities of Rs 75.35 crore. Bhagwati Rice Mills opposed the application by alleging that PNB violated RBI guidelines governing MSME accounts while classifying the account as NPA. It further accused the bank of taking signatures on blank documents, manipulating records, levying exorbitant interest rates and withholding limits, allegedly causing reputational and operational losses. The company asserted a set-off claim of Rs 47.92 crore, citing crop price fluctuations, supply-chain disruptions and the bank's alleged conduct. It also argued that its liability stood reduced on account of Rs 5.93 crore deposited with the bank. The tribunal rejected these objections, describing them as claims for damages that cannot be adjudicated in a summary proceeding under the Insolvency and Bankruptcy Code. It said, “We, observe that several defences raised by the Corporate Debtor such as alleged fire losses, alleged obstruction of business operations, alleged freezing of accounts, alleged negligence of bank officials etc. are in the nature of damages and cannot be claimed by this forum. These issues cannot be adjudicated in a summary process at the admission stage and do not disprove the existence of financial debt or non-payment.” It added that the corporate debtor's principal defence was not a denial of the debt but an attempt to reduce it through set-offs and alleged losses, all of which were unsubstantiated and already the subject of proceedings before the Debts Recovery Tribunal. Relying on the Supreme Court's decision in M Suresh Kumar Reddy vs Canara Bank (2023), the tribunal reiterated that once debt and default are established, admission of the Section 7 application is the natural consequence. Concluding that both elements stood proved, it admitted the petition, imposed a moratorium and appointed Babita Jain as the Interim Resolution Professional. PNB was directed to deposit Rs 2 lakh with the IRP towards initial CIRP expenses. Case Title: Punjab National Bank vs Bhagwati Rice Mills Private Limited Case Number: CP(IB) No. 24/ALD/2025 For Financial Creditor: Advocate Prakhar Shukla For Corporate Debtor: Advocate Amit Dhall Click Here To Read/Download Order

Counterclaims, Set-Off Claims No Bar to Insolvency Admission Without Proof of Full Discharge: NCLT Allahabad

Kirit Singhania

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