Supreme Court: IBC Cannot Be Used as Coercive Debt Recovery Tool by Individual Creditors in Dhanlaxmi Bank Case

News Citation : 2026 LN (SC) 460

May 8, 2026 : The Supreme Court has dismissed an appeal filed by Dhanlaxmi Bank Limited and reaffirmed that the Insolvency and Bankruptcy Code, 2016 (IBC) cannot be invoked as a coercive mechanism for debt recovery or for adjudicating individual contractual disputes.

A Bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe upheld the judgment of the National Company Law Appellate Tribunal (NCLAT), which had set aside the initiation of Corporate Insolvency Resolution Process (CIRP) against M/s Emerald Mineral Exim Pvt. Ltd.

The Court observed:

“The Code operates as a collective insolvency resolution mechanism and not as a forum for the adjudication of individual contractual claims. This Court has underscored that where object behind the invocation of Code is to compel payment rather than to address genuine financial distress, such invocation would amount to an abuse of process. The Code must not be used as a tool for coercion and debt recovery by individual creditors.”

The dispute arose from a 2011 transaction in which Emerald Mineral Exim Pvt. Ltd. entered into an agreement with Bengal Shrachi Housing Development Ltd. for the purchase of a commercial unit in Kolkata. Dhanlaxmi Bank sanctioned a loan of ₹1.50 crore to the corporate debtor, and under a quadripartite agreement, the amount was directly disbursed to the builder.

Subsequently, the corporate debtor’s account was classified as a Non-Performing Asset (NPA), and the bank initiated proceedings before the Debt Recovery Tribunal (DRT) for recovery of over ₹1.80 crore. The DRT directed the builder to deposit ₹1.50 crore as security. Later, the bank filed a winding-up petition, which, after the enforcement of the IBC framework, came to be treated as a Section 7 insolvency petition before the National Company Law Tribunal (NCLT).

The NCLT admitted the petition and initiated CIRP against the corporate debtor. However, the NCLAT reversed the order, holding that the bank had not directly disbursed the loan amount to the corporate debtor and that the IBC proceedings were being used as a recovery mechanism.

Affirming the NCLAT’s reasoning, the Supreme Court noted that the transaction was not a straightforward financial debt default case. The Bench highlighted that the builder had substantial obligations regarding construction, transfer, and refund conditions under the quadripartite agreement, making the dispute predominantly contractual in nature.

The Court further held that since the matter was already being adjudicated before the DRT, allowing insolvency proceedings in such circumstances would effectively convert the IBC into a recovery forum, contrary to the object of the legislation.

Accordingly, the Supreme Court dismissed the appeal and declined to interfere with the NCLAT judgment.

Case Reference : Dhanlaxmi Bank Limited v. Mohammed Javed Sultan & Ors.