IBC Mechanism Not Substitute For Decree Execution Or Recovery Proceedings : Supreme Court

The Supreme Court on Thursday (April 23) reiterated that the Corporate Insolvency Resolution Process cannot be invoked as a substitute for executing a money decree, especially against a solvent and functioning company. A bench of Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe was hearing an appeal filed by the corporate debtor against the NCLAT's decision to allow the admission of CIRP against it. At the heart of the dispute was whether a decree-holder creditor could trigger the Corporate Insolvency Resolution Process (CIRP) merely to recover dues under a civil court decree, particularly when the debtor company remained financially sound, and the debt quantum was contested. Setting aside the NCLAT's ruling, the Court restored the NCLT's order dismissing the creditor's Section 7 application, holding that the mere existence of a money decree does not entitle a creditor to initiate CIRP, and reiterating that the IBC cannot be invoked as a mechanism for debt recovery.The dispute traces back to 2010, when the respondent advanced short-term loans totaling ₹4.5 crore to the appellant company. After cheque dishonour proceedings under the Negotiable Instruments Act, 1881, the parties entered into multiple settlement agreements. Despite payments exceeding ₹3.5 crore by 2014, litigation continued. A summary suit before the Delhi High Court culminated in a decree dated January 11, 2018 for ₹4.38 crore with 24% interest. The decree attained finality after dismissal of appeals up to the Supreme Court. However, instead of initiating execution proceedings under the Code of Civil Procedure, the creditor filed a Section 7 petition under the IBC in December 2021. The NCLT dismissed the petition, however, the NCLAT allowed the petition, prompting the corporate debtor to move to the Supreme Court. Setting aside the impugned order, the Court said that “the insolvency mechanism cannot, therefore, be pressed into service as a substitute for ordinary execution or recovery proceedings.” “The Code was enacted to provide for the reorganisation and insolvency resolution of corporate persons in a timebound manner for the maximisation of the value of assets. It is not a debt recovery legislation.”, the court said, referring to Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17."Section 65 of the IBC provides that if any person initiates the insolvency resolution process fraudulently or with malicious intent for any purpose other than the resolution of insolvency, the Adjudicating Authority may impose a penalty. The presence of this provision in the statute itself underscores the legislative intent that the IBC is not to be misused as a tool for recovery or as a lever to coerce payment."The Court said that the Respondent-creditor, in spite of initiating the execution proceedings under CPC, had unnecessarily invoked the IBC mechanism, terming it to be an abuse of the process of law. “The respondent held a decree. He did not file execution proceedings. He chose instead to file a Section 7 petition against a solvent, functioning company. The quantum of the 'debt' itself, as contemplated under the code, is seriously disputed. The appellant has deposited Rs. 3,60,98,847/- with the Registrar General of the Delhi High Court and has consistently maintained its willingness to pay whatever is lawfully due. The proceedings pending before the Delhi High Court, including the application under Section 151 of the CPC and the proceedings under Section 340 of the CrPC, remain undetermined. In these circumstances, the initiation of CIRP is nothing more than the use of the IBC as a recovery mechanism. We will term it as an abuse of the process.”, the court held. In terms of the aforesaid, the appeal was allowed.HeadnoteInsolvency and Bankruptcy Code, 2016 – Section 7 vs. Civil Court Decree Execution – Primary Objective of the IBC vs. Debt Recovery Mechanism — The primary focus of the IBC is to ensure the revival and continuation of the corporate debtor as a going concern, protecting it from its own management and liquidation - It is a beneficial legislation and not a debt recovery mechanism for individual creditors seeking to enforce money decrees - Initiating the Corporate Insolvency Resolution Process (CIRP) purely to secure payment of individual dues, bypassing established civil execution remedies against a solvent and functioning company, constitutes an abuse of the process - The insolvency jurisdiction under the IBC is not designed to resolve intense disputes regarding the computation or quantum of a decretal amount. [Paras 19, 21 - 33]Insolvency and Bankruptcy Code, 2016 – Section 7 – General Rule on Fresh Cause of Action vs. Contextual Misuse— While a judgment or decree for money in favor of a financial creditor gives rise to a fresh cause of action to initiate proceedings under Section 7 of the IBC, this principle does not operate in a vacuum - Every decree holder who happens to be a financial creditor is not entitled, ...

IBC Mechanism Not Substitute For Decree Execution Or Recovery Proceedings : Supreme Court

Yash Mittal

IBC is not to be misused as a tool for recovery or as a lever to coerce payment, the court said.

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Yash Mittal

IBC Mechanism Not Substitute For Decree Execution Or Recovery Proceedings : Supreme Court

Yash Mittal

IBC is not to be misused as a tool for recovery or as a lever to coerce payment, the court said.

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INR 1099+GST

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Yash Mittal

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