IBC proceedings can’t be used as recovery mechanism – Supreme Court

When IBC proceedings are used for as recovery mechanism, it amounts to an abuse of the insolvency process – Supreme Court

In a recent judgment, Hon’ble Supreme Court upheld that when IBC proceedings are used for as recovery mechanism, it amounts to an abuse of the insolvency process which is a remedy with far-reaching consequences and must be reserved for cases of genuine insolvency or financial distress, not for the enforcement of money decrees

ABCAUS Case Law Citation:
5120 (2026) (04) abacus.in SC

Important Case Laws relied upon:
Dena Bank (Now Bank of Baroda) v. C. Shivakumar Reddy
Pioneer Urban Land and Infrastructure Ltd. v. Union of India
Swiss Ribbons (P) Ltd. v. Union of India
Kotak Mahindra Bank Ltd. v. A. Balakrishnan

the appellant in this case had assailed the order of the National Company Law Appellate Tribunal (NCLAT) setting aside the order of the NCLT and directing the admission of a petition filed under Section 7 of the IBC by the respondent.

The respondent was a money lender who had advanced a loan to the appellant company for a period of two months, carrying interest at 12.75% per annum payable on a half-yearly basis. The oan agreement also provided that in the event of default, the appellant would remain liable to pay interest at the stipulated rate. The appellant had furnished cheques as security against both loans.

When presented, the cheques were dishonoured, leading to the respondent filing a complaint under Section 138 of the Negotiable Instruments Act, 1881 (NI Act). During the pendency of those proceedings, the parties entered into a compromise and the appellant made payments to the respondent.

When the appellant did not honour the compromise in full, the respondent filed a summary suit before the High Court praying for a decree with pendente lite and future interest at 24% per annum. During the pendency of the suit, a second compromise deed was made whereby the appellant agreed to pay agreed amount as full and final settlement.

The pending suit was decreed by the High Court with interest at 24% per annum. The decree also awarded costs. The appellant challenged this decree before the Division Bench, which was dismissed on with costs of Rs. 25,000/-. The appellant’s Special Leave Petition1 was also dismissed by Hon’ble Supreme Court. Thus, the decree attained finality.

However, rather than proceeding to execute the decree, the respondent filed a petition under Section 7 of the IBC before the NCLT alleging that the decretal amount constituted a financial debt and that the appellant was in default thereof.

The NCLT dismissed the petition and held that a decree holder was a separate class of creditor under Section 3(10) of the IBC and did not automatically become a “Financial Creditor” under Section 5(7). Secondly, the NCLT found that the debt in question did not qualify as a “financial debt” under Section 5(8) of the IBC. The original loan advances were for extremely short periods and the respondent had not produced adequate evidence, such as financial statements, to establish that the amounts were disbursed against consideration for the time value of money. Thirdly, the NCLT observed that the appellant was a solvent and functioning enterprise, with sufficient revenue and profits, employing large full-time staff. Fourthly, and most significantly for our purposes, the NCLT recorded that the IBC is not a recovery mechanism and that the respondent was misusing the insolvency process against a solvent company. It noted that the respondent’s claim was based on the Civil Court decree and not on the underlying loan transactions.

The NCLAT, by the impugned order reversed the NCLT’s findings.

The Hon’ble Supreme Court was concerned about whether, in the facts and circumstances of this case, the initiation and continuation of the Corporate Insolvency Resolution Process under the IBC was justified and whether the respondent can seamlessly resort to the insolvency process as a substitute for the execution of a Civil Court decree. In other words, an alternative execution process is a recovery mechanism.

The Hon’ble Supreme Court observed that 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 Hon’ble Supreme Court noted that a three-Judge bench made it clear that the IBC is not a forum for individual creditors to realise their dues through the back door of insolvency.

The Hon’ble Supreme Court observed that the respondent, holding a final decree and having the full machinery of civil execution at his disposal, chose instead to invoke the insolvency jurisdiction. Such conduct is precisely what the Court characterised as an improper use of the IBC using insolvency as a substitute for debt enforcement and as a means of coercing the corporate debtor into payment.

The Hon’ble Supreme Court pointing out the distinction stated that while the IBC incidentally results in the satisfaction of creditors’ claims, that consequence is a byproduct of the resolution process and not its primary object. The object is the revival of the corporate debtor as a going concern. It follows that a creditor who approaches the NCLT not with any genuine concern for the resolution of the corporate debtor but purely to secure payment of his individual dues is acting contrary to the purpose and spirit of the Code. The existence of adequate and efficacious alternative remedies makes such misuse all the more apparent.

The Hon’ble Supreme Court further observed that 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 Hon’ble Supreme Court opined that in the instant case, initiation and maintenance of CIRP proceedings against the appellant when the respondent held a decree of the High Court, could not be sustained. The conduct of the respondent in bypassing execution proceedings and directly invoking the insolvency process calls for scrutiny.

The Hon’ble Supreme Court clarified that NCLAT’s reliance on Apex Curt’s decision where it was held that a decree for money in favour of a financial creditor would give rise to a fresh cause of action for initiating proceedings under Section 7 of the IBC. The Hon’ble Supreme Court stated that the said proposition was a general statement of law. However, that principle does not operate in a vacuum. It does not mean that every decree holder who also happens to be a financial creditor is entitled, as a matter of right, to invoke the insolvency process in preference to execution. The question of whether, in each case, the invocation of the IBC amounts to misuse of the process or to the use of the Code as a recovery mechanism remains a question to be examined on the facts.

Accordingly, the Hon’ble Supreme Court held that the NCLT was correct in holding that the IBC proceedings, in the facts of this case, amounted to an abuse of the insolvency process and were in the nature of a recovery mechanism. The insolvency process is a remedy with far-reaching consequences and must be reserved for cases of genuine insolvency or financial distress, not for the enforcement of money decrees.

Accordingly, the order of the NCLT was restored.

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