CIRP Impermissible for Contractual Dispute – Not Pure Financial Debt

Case Details: Dhanlaxmi Bank Ltd. vs. Mohammed Javed Sultan - [2026] 186 taxmann.com 373 (SC)

Judiciary and Counsel Details

Alok Aradhe & Pamidighantam Sri Narasimha, JJ.
Amarjit Singh Bedi, Aor for the Appellant.
M.M. Singh, Manoj, Muddam Thirupathi Reddy, Advs., Jitendra Kumar & Ms Aparna Sinha, Aors for the Respondent.

Facts of the Case

In the instant case, the appellant/Bank sanctioned a loan to the corporate debtor (CD) for the purchase of a commercial unit. A quadripartite agreement was executed among Bank, CD, builder, and WBHIDCL, under which CD instructed Bank to disburse the sanctioned loan directly to the builder.

CD defaulted on repayment, and the Bank initiated proceedings under the Recovery of Debts Due to Banks & Financial Institutions Act, 1993, before the DRT against CD, the builder, and the guarantors to recover the loan amount.

The DRT held that the Bank’s charge continued irrespective of the sale deed executed in favour of a third party, appointed a receiver to take possession from the third party, and directed the builder to deposit the loan amount. Builder deposited the loan amount.

The Bank filed a winding-up petition against CD under the Companies Act, 1956, which was transferred to the NCLT and treated as a petition under Section 7 of the IBC. The NCLT held that debt and default were proved beyond a reasonable doubt, admitted the petition, and initiated CIRP against CD.

The NCLAT held that Bank did not directly disburse a loan to CD and, therefore, could not be termed a financial creditor under Section 7, observed that Bank had indulged in forum shopping and that the Code could not be used as a recovery mechanism, and set aside NCLT’s order.

It was noted that, since the loan amount was disbursed directly to the builder and the quadripartite agreement indicated that the builder had a significant obligation regarding the construction, delivery, and transfer of the subject property, the transaction could not be viewed in isolation as a simple financial lending arrangement between the Bank and CD.

Supreme Court Held

The Supreme Court observed that, since the dispute between parties was predominantly contractual in character, involving competing claims relating to the transfer of property and associated obligations, the facts disclosed a dispute which was predominantly contractual in nature and was the subject matter of proceedings before the DRT, which was an appropriate forum for recovery.

The Supreme Court held that permitting the invocation of the Code in cases such as the instant one would amount to converting insolvency proceedings into a coercive mechanism for recovery, which was impermissible. Therefore, NCLAT was justified in setting aside the NCLT order admitting the CIRP application.