Bank Cannot Invoke IBC Against Debtor Over Loan Directly Disbursed To Builder Linked To Construction Progress: Supreme Court

The Supreme Court has observed that the mechanism under the Insolvency & Bankruptcy Code, 2016, cannot be invoked for recovery of debt, particularly when the dispute between the parties is predominantly contractual in character, involving competing claims relating to transfer of property and associated obligations.

A bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe was dealing with a case in which the appellant-bank(Dhanlaxmi Bank) had directly disbursed a sum of Rs. 1.34 crores to a builder, instead of the corporate debtor, for the latter's purchase of a property in the builder's real estate project. After the corporate debtor's account was classified as a Non-Performing Asset (NPA), the bank initiated proceedings before the Debt Recovery Tribunal, which resulted in recovery proceedings against the corporate debtor. Despite the pendency of such recovery proceedings, the bank subsequently initiated winding-up proceedings under the Companies Act against the corporate debtor, which were later transferred and treated as proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 for commencement of the Corporate Insolvency Resolution Process (CIRP).

The NCLT upheld the CIRP against the Corporate Debtor after noting that a debt and default were established, prompting its suspended director to appeal to the NCLAT.

Noting that the debt was not directly distributed to them, but to the builder, as part of the mutual arrangement, where repayment was actually based on the builder's performance, the NCLT's decision was set aside by the NCLAT, leading to a present appeal before the Supreme Court.

Issue

The issue was whether a bank can initiate a CIRP against the corporate debtor, despite the debt not being directly disbursed to them, but to the builder as part of an arrangement, where repayment was based on the actual performance of the builder.

Decision

Dismissing the appeal, the judgment authored by Justice Aradhe upheld the NCLAT's decision, noting that where the transaction structure itself reveals intertwined third-party obligations and the dispute is fundamentally contractual, the matter may fall outside the scope of a straightforward financial creditor-debtor relationship under the IBC.

“It is an admitted position that the loan amount was directly disbursed to the Builder. The quadripartite agreement indicates that the Builder had significant obligation concerning the construction, delivery and transfer of subject property. The structure of transaction reveals that Bank's disbursement was intrinsically linked to performance of Builder's obligation. In such circumstances, the transaction cannot be viewed in isolation as a simple financial lending arrangement between the Bank and the CD.”, the court observed.

“…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 court held, emphasizing that where the object behind invoking the IBC is merely to compel payment rather than resolve genuine financial distress, such invocation would amount to abuse of process.

In view of the aforesaid, the appeal was dismissed.

Cause Title: DHANLAXMI BANK LIMITED VERSUS MOHAMMED JAVED SULTAN & ORS.

Citation : 2026 LiveLaw (SC) 480

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Appearance:

For Appellant(s) : Mr. Amarjit Singh Bedi, AOR

For Respondent(s) : Mr. M.M. Singh, Adv. Mr. Jitendra Kumar, AOR Mr. Manoj, Adv. Ms. Aparna Sinha, AOR Mr. Muddam Thirupathi Reddy, Adv.