Dhanlaxmi Bank Limited Vs Mohammed Javed Sultan & Ors. (Supreme Court of India)
In a significant ruling under the Insolvency and Bankruptcy Code, 2016, the Supreme Court held that insolvency proceedings cannot be invoked as a coercive recovery mechanism where the dispute is predominantly contractual and already pending before an appropriate forum like the DRT.
The case arose from a quadripartite arrangement involving a bank, corporate debtor, builder, and infrastructure authority relating to purchase of a commercial property. Although the bank sanctioned a loan to the corporate debtor, the loan amount was directly disbursed to the builder under the contractual structure.
After default, the bank initiated recovery proceedings before the DRT and later invoked CIRP under Section 7 of the IBC. The NCLT admitted the petition, but the NCLAT reversed the order holding that the transaction was not a straightforward financial debt-default situation under the Code.
Upholding the NCLAT decision, the Supreme Court emphasized that the Code is intended for collective insolvency resolution and not for adjudicating complex contractual disputes or enforcing individual recovery claims. The Court reiterated that where the dominant objective is to compel payment rather than resolve genuine insolvency, invocation of the IBC amounts to abuse of process.
