Two statutes, two limitation regimes

For an NCLT appeal to NCLAT, the most common and most costly error is applying the wrong limitation period. The NCLAT hears appeals under both the Companies Act, 2013 and the Code, and the timelines differ.

Under the Code. Section 61(1) permits any person aggrieved by an order of the Adjudicating Authority to appeal to the NCLAT. Section 61(2) fixes thirty days. The proviso permits the NCLAT to allow an appeal filed after that period where sufficient cause is shown, but such further period shall not exceed fifteen days.

Under the Companies Act, 2013. Section 410 constitutes the NCLAT, and Section 421 provides the appeal. The period is forty-five days from the date on which a copy of the order is made available to the aggrieved person, with a discretionary further period on sufficient cause shown, in the terms the section prescribes.

Where an order is passed in an insolvency matter, the Code governs. It is a complete code with an overriding effect, and a party cannot borrow the longer Companies Act period for an appeal arising under the Code.

The thirty-plus-fifteen rule is absolute

Under the Code, forty-five days is the ceiling, not a guideline. The NCLAT has no jurisdiction to condone delay beyond fifteen days past the initial thirty, and the Supreme Court has declined to relieve against it even in cases of apparent hardship — including declining to exercise the power under Article 142 of the Constitution to condone a delay that exceeded the statutory limit, on the footing that the extraordinary power cannot be used against an express statutory provision.

Equally important is when the clock starts. The Supreme Court has held that limitation under Section 61 runs from the date on which the order is pronounced, not from the date the appellant claims to have learned of its contents, and not from the date it was uploaded. An appellant who waits for a certified copy to arrive before considering an appeal has usually already lost days that cannot be recovered.

The practical discipline that follows is simple: apply for the certified copy immediately upon pronouncement, and file within thirty days if at all possible.

NCLT appeal to NCLAT: grounds and scope of appeal

The NCLAT is an appellate tribunal, not a forum for re-arguing commercial merits. Appeals succeed on identifiable defects: an error of law; a finding reached without jurisdiction; a violation of the principles of natural justice, such as an order passed without hearing a necessary party; a conclusion unsupported by any evidence; or non-compliance with a mandatory statutory requirement.

In insolvency matters specifically, one limit is fundamental. The commercial wisdom of the committee of creditors in approving or rejecting a resolution plan is not open to review on merits. In Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531, decided on 15 November 2019, the Supreme Court held that neither the Adjudicating Authority nor the Appellate Tribunal may substitute its own view for the commercial judgment of the committee. What remains reviewable is whether the process complied with the Code — the treatment of dissenting financial creditors, the minimum entitlements of operational creditors, the eligibility of the resolution applicant, and the requirements of Section 30(2).

Filing an appeal before the NCLAT

An NCLT appeal to NCLAT is filed under the National Company Law Appellate Tribunal Rules, 2016, in the prescribed form of memorandum of appeal, accompanied by a certified copy of the impugned order, the grounds, the documents relied upon, an affidavit of verification and the prescribed fee.

Two applications commonly accompany the memorandum. Where the appeal is beyond thirty days under the Code, an application for condonation must set out the cause with dates — and must be capable of bringing the filing within the fifteen-day outer limit. And an application for interim relief is usually essential: an appeal does not, by itself, stay the order appealed against, and in insolvency matters the process moves on while the appeal is pending.

What happens on appeal

The NCLAT may admit the appeal and issue notice, dismiss it at the threshold, or grant interim relief pending hearing. On final hearing it may confirm, modify or set aside the order, and may remit the matter to the Tribunal.

The nature of the relief that remains available is worth weighing before filing. Where a corporate insolvency resolution process has advanced, or a resolution plan has been implemented, an appellate court may find that the position cannot practically be reversed — which is why interim relief sought early matters more than an appeal argued well and late.

Further appeal

Section 62 of the Code provides an appeal to the Supreme Court from an order of the NCLAT on a question of law arising out of that order, within the period the section prescribes. The corresponding route under the Companies Act, 2013 is provided by Section 423. Both are confined to questions of law: neither is a further opportunity to reopen findings of fact.

A short checklist

Identify which statute the order was passed under, and apply that statute’s limitation period. Diarise the date of pronouncement, not the date of receipt. Apply for the certified copy at once. Decide whether interim relief is needed and seek it with the appeal. And frame the grounds around a legal or procedural defect rather than a disagreement with the outcome — particularly where the outcome reflects a decision of the committee of creditors.

FAQ

1. What is the limitation period for an NCLT appeal to NCLAT?
Under the IBC, an appeal must generally be filed within 30 days, with a maximum additional 15 days that may be condoned for sufficient cause.

2. Does the Companies Act have a different appeal period?
Yes. Appeals under Section 421 of the Companies Act, 2013 generally have a 45-day limitation period, subject to the statutory power to condone delay.

3. When does the limitation period under Section 61 of the IBC begin?
It runs from the date the NCLT order is pronounced, rather than from the date the appellant receives or downloads the order.

4. Can NCLAT condone delay beyond 45 days under the IBC?
No. The NCLAT cannot condone a delay exceeding the 30-day period plus the additional 15-day statutory limit under Section 61(2).

5. Does filing an appeal automatically stay the NCLT order?
No. An appeal does not automatically operate as a stay. Appropriate interim relief should be sought from the NCLAT.

6. What can be challenged in an NCLT appeal?
An appeal may challenge errors of law, jurisdictional defects, procedural violations, denial of natural justice, unsupported findings, or failure to comply with mandatory statutory requirements.

Legal Information Disclaimer

This article is published for general legal information and educational purposes only. It reflects the position of Indian law as researched up to 10 August 2026 and may not account for subsequent amendments, notifications, rule changes or judicial developments. It is not legal advice, does not take into account any individual’s particular facts or circumstances, and no advocate-client relationship arises from reading it. Outcomes in litigation depend on the specific facts of each case and on procedural requirements in force at the relevant time. Readers dealing with an actual dispute should obtain independent professional advice from a qualified advocate of their own choosing before acting on any information contained here.

Sources / Authorities

• Insolvency and Bankruptcy Code, 2016 — Sections 61 and 62, and Section 30(2) — India Code, https://www.indiacode.nic.in
• Companies Act, 2013 — Sections 410, 421 and 423 — India Code, https://www.indiacode.nic.in
• National Company Law Appellate Tribunal Rules, 2016
• Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531, Supreme Court of India, decided 15 November 2019 — primacy of the commercial wisdom of the committee of creditors; limits of appellate review
• Constitution of India, Article 142 — India Code, https://www.indiacode.nic.in

The post How to appeal an NCLT order to the NCLAT appeared first on Bhatt & Joshi Associates.

Promoters and directors often provide personal guarantees for company loans to secure financing from creditors. Earlier, if the company defaulted, creditors generally had to pursue recovery through a civil suit or proceedings before the Debt Recovery Tribunal (DRT), which could take considerable time. The position changed with the introduction of personal guarantor insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC). A creditor can now initiate insolvency proceedings against a personal guarantor of a corporate debtor, potentially exposing the guarantor’s personal assets and estate to the consequences of the insolvency process.

How the provisions came into force

Part III of the Code deals with insolvency resolution and bankruptcy for individuals and partnership firms. It was not brought into force wholesale. By a notification dated 15 November 2019, the Central Government brought specified provisions into force in relation to one category only — personal guarantors to corporate debtors.

That selective commencement was challenged. In Lalit Kumar Jain v. Union of India, (2021) 9 SCC 321, decided on 21 May 2021, the Supreme Court upheld the notification, rejecting the contention that the Government had impermissibly brought the Code into force for a sub-class of individuals.

The judgment also decided a question of far greater commercial significance. The Court held that approval of a resolution plan in respect of the corporate debtor under Section 31 does not by itself discharge the personal guarantor from liability under the contract of guarantee. A plan that reduces or extinguishes the company’s debt does not automatically reduce or extinguish the guarantor’s obligation, which survives subject to the terms of the guarantee and of the plan.

A further constitutional challenge followed, directed at the procedure itself. In Dilip B. Jiwrajka v. Union of India, decided on 9 November 2023, the Supreme Court upheld the validity of Sections 95 to 100 of the Code, rejecting the argument that the absence of an adjudicatory hearing before the appointment of a resolution professional rendered the scheme arbitrary.

Which forum

The Adjudicating Authority depends on what is happening to the company. Where a corporate insolvency resolution process or liquidation proceeding in respect of the corporate debtor is pending before the National Company Law Tribunal, the application against the personal guarantor goes to the same Tribunal. Otherwise the Debt Recovery Tribunal has jurisdiction over individuals under Part III.

That linkage is deliberate. It allows the guarantor’s insolvency and the company’s to be considered by the same forum, and it is one reason creditors frequently move against guarantors while the corporate process is under way.

Personal Guarantor Insolvency Process under the IBC: Step by Step

Initiation. A debtor may apply under Section 94; a creditor may apply under Section 95, either personally or through a resolution professional.

Interim moratorium. Under Section 96, an interim moratorium commences on the filing of the application. During it, pending legal proceedings in respect of any debt are deemed to have been stayed, and creditors are barred from initiating fresh legal action in respect of any debt. This is immediate and automatic — it does not await any order.

Appointment of the resolution professional. Under Section 97 the Adjudicating Authority appoints a resolution professional, on confirmation from the Board or by direction.

The report. Under Section 99 the resolution professional examines the application, may seek information and explanation from the debtor, and submits a report recommending approval or rejection.

Admission or rejection. Under Section 100 the Adjudicating Authority passes an order admitting or rejecting the application. Dilip B. Jiwrajka clarified the character of the earlier stages: the resolution professional’s function at the Section 99 stage is recommendatory and facilitative rather than adjudicatory, and the adjudication occurs at Section 100.

Moratorium. On admission, a moratorium under Section 101 operates for the period the section prescribes, during which creditors cannot initiate or continue legal action in respect of the debt and the debtor cannot transfer or dispose of assets.

Repayment plan. The debtor, in consultation with the resolution professional, prepares a repayment plan. It is placed before a meeting of creditors, which votes on it; if approved and then approved by the Adjudicating Authority, it binds the creditors and the debtor.

Discharge. On completion of the repayment plan, or in the circumstances the Code provides, a discharge order may follow. If no repayment plan is approved, bankruptcy proceedings may be initiated.

What Should a Personal Guarantor Expect under the IBC?

Several features of insolvency proceedings involving personal guarantors under the IBC tend to surprise those encountering this regime for the first time.

The guarantee is not extinguished by the company’s resolution. This is the direct consequence of Lalit Kumar Jain. Guarantors frequently assume that a resolution plan approved for the company closes the matter. It does not.

Liability is co-extensive with the company’s. A creditor is not required to exhaust its remedies against the company or its security before proceeding against the guarantor, unless the guarantee itself so provides. The terms of the guarantee deed — whether it is continuing, whether liability is limited in amount, whether it survives variation of the facility — therefore repay careful reading.

The interim moratorium is a shield as well as a consequence. It stays pending proceedings in respect of the debt, which can halt parallel recovery actions.

The estate at risk is personal. Unlike corporate insolvency, this process reaches the individual’s own assets, subject to the exclusions the Code provides.

Disqualification consequences may follow under the Companies Act, 2013 and under the Code, including restrictions on submitting a resolution plan.

Practical points

For a guarantor, the documents that matter are the guarantee deed itself, the invocation notice, the account statements establishing the amount claimed, and the record of the corporate insolvency process. Defences commonly turn on whether the guarantee was validly invoked, whether the claimed amount is correctly computed, whether limitation has expired — Section 238A applies the Limitation Act, 1963 — and whether the guarantee’s own terms limit or exclude the liability asserted.

For a creditor, the route is now materially faster than a recovery suit, which is precisely why it has become a standard step alongside corporate insolvency rather than an afterthought.

For anyone being asked to sign a personal guarantee, the position is worth understanding before signature rather than after invocation. The guarantee is not a formality that lapses when the company’s debt is resolved.

FAQ

What is Personal Guarantor Insolvency under the IBC?

A personal guarantor is an individual who has guaranteed repayment of a company’s debt. The IBC allows creditors to initiate insolvency proceedings against such a guarantor, subject to the applicable provisions of the Code.

Does a company’s resolution plan discharge the personal guarantor?

No. Under Lalit Kumar Jain v. Union of India, approval of a resolution plan for the corporate debtor does not automatically discharge the personal guarantor from liability.

Which Forum Handles Personal Guarantor Insolvency under the IBC?

The NCLT generally handles the application when CIRP or liquidation of the corporate debtor is pending before it. Otherwise, the Debt Recovery Tribunal may have jurisdiction.

What happens after a Section 95 application is filed?

An interim moratorium begins under Section 96. A resolution professional then examines the application and submits a report before the Adjudicating Authority decides whether to admit or reject it.

Can a personal guarantor’s assets be affected?

Yes. The insolvency process can affect the guarantor’s personal estate, subject to the exclusions and protections provided under the IBC.

Can a creditor proceed against the guarantor without first recovering from the company?

Generally, yes, unless the terms of the guarantee provide otherwise. The guarantor’s liability is ordinarily co-extensive with that of the principal debtor.

Legal Information Disclaimer

This article is published for general legal information and educational purposes only. It reflects the position of Indian law as researched up to 10 August 2026 and may not account for subsequent amendments, notifications, rule changes or judicial developments. It is not legal advice, does not take into account any individual’s particular facts or circumstances, and no advocate-client relationship arises from reading it. Outcomes in litigation depend on the specific facts of each case and on procedural requirements in force at the relevant time. Readers dealing with an actual dispute should obtain independent professional advice from a qualified advocate of their own choosing before acting on any information contained here.

Sources / Authorities

• Insolvency and Bankruptcy Code, 2016 — Part III, including Sections 60, 94, 95, 96, 97, 99, 100, 101 and the repayment plan provisions; Sections 31 and 238A — India Code, https://www.indiacode.nic.in
• Central Government Notification dated 15 November 2019 bringing specified provisions of Part III into force in relation to personal guarantors to corporate debtors
• Insolvency and Bankruptcy (Application to Adjudicating Authority for Insolvency Resolution Process for Personal Guarantors to Corporate Debtors) Rules, 2019
• Lalit Kumar Jain v. Union of India, (2021) 9 SCC 321, Supreme Court of India, decided 21 May 2021 — validity of the 15 November 2019 notification; approval of a resolution plan for the corporate debtor does not ipso facto discharge the personal guarantor
• Dilip B. Jiwrajka v. Union of India, Supreme Court of India, decided 9 November 2023 — constitutional validity of Sections 95 to 100 upheld; nature of the resolution professional’s role at the Section 99 stage
• Limitation Act, 1963

The post Personal Guarantor Insolvency under the IBC: What to Expect appeared first on Bhatt & Joshi Associates.

The statutory scheme

Section 4 of the Code provides that Part II — the part dealing with insolvency resolution and liquidation of corporate persons — applies where the minimum amount of the default is one lakh rupees. The proviso empowers the Central Government to specify, by notification, a higher minimum amount of default, which shall not be more than one crore rupees.

The Central Government exercised that power by notification S.O. 1205(E) dated 24 March 2020, issued by the Ministry of Corporate Affairs, specifying one crore rupees as the minimum amount of default for the purposes of Section 4 of the IBC.

Two consequences follow. The operative threshold is one crore rupees, not the one lakh figure that appears on the face of Section 4. And one crore is the statutory ceiling: the proviso itself caps what the Government may specify, so no notification can raise the threshold further without an amendment to the Code.

Why Was the IBC Default Threshold Increased to ₹1 Crore?

The notification was issued on the day nationwide restrictions were announced in response to the COVID-19 pandemic. Its stated purpose was to protect companies, particularly micro, small and medium enterprises, from insolvency applications arising out of the economic disruption that followed.

The effect has proved durable rather than temporary: the notification carried no expiry date and continues to govern.

The policy trade-off it created is worth naming, because it cuts both ways. Raising the threshold shields smaller companies from being dragged into insolvency over modest sums. It equally removes the Code as a remedy for small creditors — often themselves MSMEs — owed amounts below one crore by larger counterparties.

The threshold is not retrospective

When the notification was issued, a question arose immediately: did it apply to applications already filed and pending admission? Tribunals took the view that the notification operates prospectively, so that applications filed before 24 March 2020 were not defeated by it. Litigation on the point continued for some time in different forums.

For any application contemplated now the question is academic, since the threshold applies to every fresh filing. It remains relevant only where an old application is still being defended on that basis.

How Is the Minimum Default Amount Calculated Under the IBC?

This is where applications are most often lost.

Default, not total debt. Section 3(12) defines default as non-payment of a debt when it has become due and payable. It is the amount in default that must reach one crore rupees, not the total facility, the contract value, or the sum of all dealings between the parties.

Measured at the time of filing. A part-payment that brings the outstanding default below one crore before the application is filed will defeat it. Corporate debtors facing a threatened application not infrequently make precisely such a payment.

Aggregation of a single creditor’s dues. A creditor may generally aggregate the amounts due to it — several unpaid invoices, several tranches of a facility — provided each is genuinely due and payable and none is time-barred. What a creditor may not do is add another creditor’s dues to reach the figure, since the threshold applies to the default in respect of which the applicant applies.

Interest. Whether contractual interest may be counted towards the threshold depends on whether interest is payable under the agreement or applicable law, as distinct from being claimed unilaterally in a demand notice. Interest asserted for the first time in order to cross one crore invites scrutiny.

Disputed components. Amounts genuinely in dispute are unlikely to assist an operational creditor in reaching the threshold, since the dispute itself is a separate ground of rejection.

Related limits that operate alongside the threshold

Meeting the threshold is necessary but not sufficient. Three other bars apply.

Limitation. Section 238A applies the Limitation Act, 1963 to proceedings under the Code. A debt on which limitation has expired cannot found an application, whatever its size.

The Section 10A bar. Section 10A prohibits the filing of an application under Sections 7, 9 or 10 in respect of a default arising during the period it specifies, beginning 25 March 2020, and provides that no application shall ever be filed in respect of such a default. This is a permanent exclusion for defaults falling within that window, not a temporary suspension, and it operates independently of the amount involved.

Pre-existing dispute. For an operational creditor, a plausible dispute pre-dating the demand notice defeats the application regardless of quantum, following Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., (2018) 1 SCC 353.

Practical implications

For a creditor owed less than one crore rupees, the Code is closed. The realistic alternatives are a summary suit, a commercial court proceeding where the dispute falls within the Commercial Courts Act, 2015, arbitration where the contract provides for it, or the statutory mechanism available to a micro or small enterprise in respect of delayed payments.

For a creditor at or above the threshold, the calculation should be documented in the application itself: which invoices or tranches, which due dates, what has been paid, and what remains. An application that presents a single consolidated figure without that breakdown invites a challenge on quantum, and a challenge on quantum in an insolvency application is a challenge to jurisdiction.

For a company facing a threatened application, the threshold is a defence worth examining early — both as to the arithmetic and as to whether components of the claimed sum are time-barred, disputed, or attributable to a default falling within the Section 10A window.

Frequently Asked Questions

What is the minimum default amount under the IBC?

The current minimum default amount for initiating insolvency proceedings against a corporate debtor is ₹1 crore, as notified under Section 4 of the IBC.

Can multiple unpaid invoices be combined to reach ₹1 crore?

Yes. A creditor may generally aggregate its own due and payable amounts, provided they are legally recoverable and not time-barred or genuinely disputed.

Is the total debt considered for the ₹1 crore threshold?

No. The relevant figure is the amount in default, not the debtor’s total outstanding debt or the total value of the underlying contract.

Can interest be included in the default amount?

Interest may be included where it is legally payable under the contract or applicable law. A creditor cannot simply add an unsupported interest amount to cross the ₹1 crore threshold.

What happens if the default is below ₹1 crore?

A fresh application under Section 7, Section 9 or Section 10 cannot be initiated on that default because it does not meet the prescribed minimum threshold.

Does meeting the ₹1 crore threshold guarantee admission?

No. The threshold is only one requirement. Limitation, Section 10A and, for operational creditors, a pre-existing dispute can independently prevent an application from being admitted.

Legal Information Disclaimer

This article is published for general legal information and educational purposes only. It reflects the position of Indian law as researched up to 10 August 2026 and may not account for subsequent amendments, notifications, rule changes or judicial developments. It is not legal advice, does not take into account any individual’s particular facts or circumstances, and no advocate-client relationship arises from reading it. Outcomes in litigation depend on the specific facts of each case and on procedural requirements in force at the relevant time. Readers dealing with an actual dispute should obtain independent professional advice from a qualified advocate of their own choosing before acting on any information contained here.

Sources / Authorities

• Insolvency and Bankruptcy Code, 2016 — Sections 3(12), 4, 7, 9, 10, 10A and 238A — India Code, https://www.indiacode.nic.in
• Notification S.O. 1205(E) dated 24 March 2020, Ministry of Corporate Affairs, F. No. 30/9/2020-Insolvency — one crore rupees specified as the minimum amount of default under the proviso to Section 4
• Limitation Act, 1963
• Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., (2018) 1 SCC 353
• Commercial Courts Act, 2015 — India Code, https://www.indiacode.nic.in

The post Minimum Default Amount to Trigger IBC Proceedings appeared first on Bhatt & Joshi Associates.

The National Company Law Tribunal (NCLT) is a key forum for corporate disputes in India, particularly matters arising under the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016. For companies registered in Gujarat, the NCLT Ahmedabad Bench is the relevant forum for matters falling within its territorial jurisdiction. Yet a common misconception is that the NCLT is a general commercial court for every dispute involving a company. It is not. NCLT jurisdiction in India is specifically conferred by statute, and disputes that fall outside the Tribunal’s statutory jurisdiction must be brought before the appropriate civil court, commercial court, arbitral tribunal or other forum.

What the NCLT is

The NCLT is a statutory tribunal constituted under the Companies Act, 2013. It took over the corporate jurisdiction formerly distributed between the Company Law Board, the High Courts and the Board for Industrial and Financial Reconstruction. It also functions as the Adjudicating Authority under the Insolvency and Bankruptcy Code, 2016 for corporate persons.

Appeals from its orders lie to the National Company Law Appellate Tribunal, and from the NCLAT to the Supreme Court on the terms provided in the respective statutes.

Territorial jurisdiction

The NCLT sits in benches, and the territorial jurisdiction of each bench is fixed by notification. The NCLT Ahmedabad Bench exercises jurisdiction over companies having their registered office in Gujarat, together with such other States and union territories as the governing notification assigns to it.

Two cautions apply. Bench allocations have been revised as new benches have been constituted, so the current notification — available through the NCLT’s official website — should be checked rather than an older list. And jurisdiction is determined by the location of the registered office of the company, not by where the parties are, where the contract was performed, or where the default occurred.

Matters under the Companies Act, 2013

The Tribunal’s company-law jurisdiction covers a defined set of proceedings. The recurring ones are these.

Oppression and mismanagement. Sections 241 and 242 permit members who satisfy the eligibility thresholds to complain that the affairs of the company are being conducted in a manner prejudicial or oppressive to any member, or prejudicial to the public interest or to the interests of the company. The Tribunal’s remedial powers under Section 242 are wide, extending to regulating the conduct of the company’s affairs, purchase of shares, and setting aside transactions.

Class action. Section 245 enables specified members or depositors to bring an action on behalf of a class where the affairs of the company are being conducted in a manner prejudicial to their interests.

Schemes of compromise, arrangement and amalgamation. Sections 230 to 232 place mergers, demergers, arrangements with creditors and similar schemes before the Tribunal for approval — a jurisdiction formerly exercised by the High Courts.

Reduction of share capital. Section 66 requires the Tribunal’s confirmation.

Rectification of the register of members. Section 59 provides the remedy where a person’s name is entered in, or omitted from, the register without sufficient cause — the route for many share-transfer and transmission disputes.

Winding up. Section 271 sets out the grounds on which a company may be wound up by the Tribunal, other than under the insolvency route.

Conversion of a public company into a private company, along with a range of statutory applications, approvals, extensions and compliance matters that the Act specifically assigns to the Tribunal.

Matters under the Insolvency and Bankruptcy Code, 2016

For corporate persons, the NCLT is the Adjudicating Authority. Its insolvency jurisdiction includes:

• applications to initiate the corporate insolvency resolution process — by a financial creditor under Section 7, by an operational creditor under Section 9, and by the corporate applicant itself under Section 10;
• approval or rejection of a resolution plan, and the consequential orders;
• orders directing liquidation, and applications arising during liquidation;
• voluntary liquidation of corporate persons;
• applications concerning avoidance of preferential, undervalued, extortionate or fraudulent transactions; and
• insolvency resolution and bankruptcy of personal guarantors to corporate debtors, in the circumstances for which the Code provides.

What does not go to the NCLT

This is where most misdirected filings arise.

An ordinary breach of contract between two companies is a civil or commercial court matter, or an arbitration, depending on the contract. It does not become an NCLT matter because both parties are companies.

A genuine and pre-existing dispute about an operational debt is a bar to admission of a Section 9 application; the Code is not a debt-collection mechanism, and a creditor who uses it as one is likely to be turned away and may face costs.

Employment and service disputes go to the labour and industrial forums or the civil court. Consumer complaints go to the consumer commissions. Tax disputes go to the machinery under the relevant tax statute. Criminal complaints, including those alleging fraud, go to the criminal courts, although the Tribunal may make references where the Companies Act or the Code so provides.

Disputes between shareholders that are in substance contractual — a share purchase agreement, a shareholders’ agreement containing an arbitration clause — may fall outside Sections 241 and 242 unless the conduct complained of amounts to oppression or mismanagement of the company’s affairs.

Choosing the right entry point

Three questions resolve most cases.

Is the grievance about the conduct of the company’s affairs, or about a debt? Conduct points to the Companies Act jurisdiction; an unpaid, undisputed debt above the statutory threshold points to the Code.

Is there a genuine pre-existing dispute? If so, the insolvency route is likely closed, and the remedy lies in the civil court or in arbitration.

Where is the registered office? That determines the bench.

Selecting the wrong forum is expensive in a way that is easy to underestimate. An insolvency application filed to pressure a counterparty in a disputed contractual claim is not merely dismissed; it can attract adverse costs and can prejudice the applicant’s position in the underlying dispute. Conversely, a shareholder with a genuine oppression grievance who files a civil suit may find years pass before the question of forum is even resolved.

Frequently Asked Questions 

What matters can be filed before the NCLT?

The NCLT hears matters specifically assigned to it under the Companies Act, 2013 and the Insolvency and Bankruptcy Code, 2016, including insolvency proceedings, oppression and mismanagement, company schemes and certain shareholder disputes.

Does every dispute between two companies go to the NCLT?

No. A contractual or commercial dispute between companies does not automatically fall within NCLT jurisdiction. Depending on the nature of the dispute, it may belong before a civil or commercial court or an arbitral tribunal.

Which NCLT Bench has jurisdiction over a company?

Generally, territorial jurisdiction is determined by the company’s registered office, subject to the applicable notification governing NCLT bench jurisdiction.

What is the NCLT Ahmedabad Bench?

The NCLT Ahmedabad Bench is the Tribunal bench exercising jurisdiction over companies and matters assigned to it under the applicable territorial jurisdiction notification, including companies having their registered offices in Gujarat.

Can a Section 9 IBC application be filed when there is a pre-existing dispute?

Generally, no. A genuine pre-existing dispute regarding an operational debt can prevent admission of a Section 9 IBC application, because the insolvency process cannot be used as a debt-recovery mechanism.

Legal Information Disclaimer

This article is published for general legal information and educational purposes only. It reflects the position of Indian law as researched up to 10 August 2026 and may not account for subsequent amendments, notifications, rule changes or judicial developments. It is not legal advice, does not take into account any individual’s particular facts or circumstances, and no advocate-client relationship arises from reading it. Outcomes in litigation depend on the specific facts of each case and on procedural requirements in force at the relevant time. Readers dealing with an actual dispute should obtain independent professional advice from a qualified advocate of their own choosing before acting on any information contained here.

Sources / Authorities

• Companies Act, 2013 — Sections 59, 66, 230 to 232, 241, 242, 245 and 271 — India Code, https://www.indiacode.nic.in
• Insolvency and Bankruptcy Code, 2016 — Sections 7, 9 and 10 and the provisions governing liquidation, voluntary liquidation, avoidance transactions and personal guarantors — India Code, https://www.indiacode.nic.in
• National Company Law Tribunal — constitution, benches and territorial jurisdiction as notified; current bench allocation available at https://www.nclt.gov.in

The post NCLT Ahmedabad Jurisdiction: Which Disputes Can Be Filed Before the Bench? appeared first on Bhatt & Joshi Associates.

Executive Summary

The distinction between an operational creditor and a financial creditor under the Insolvency and Bankruptcy Code, 2016 (“IBC” or “the Code”) is one of the most consequential classifications in contemporary Indian insolvency law. Understanding the nuances of the operational vs financial creditor IBC framework determines not merely the procedural pathway a creditor must adopt when initiating a corporate insolvency resolution process (“CIRP”), but also the substantive rights that creditor enjoys throughout the resolution and, if necessary, liquidation proceedings. The Code draws a sharp and deliberate line between these two categories, conferring markedly different thresholds, procedural obligations, evidentiary standards, participatory rights, and priority entitlements upon each. This article offers a systematic, academically rigorous examination of the statutory definitions, applicable thresholds, procedural requirements, and leading judicial interpretations governing the operational creditor vs financial creditor under IBC distinction in India as of June 2026.

Statutory Framework

Definitional Foundations

The IBC, as originally enacted by Parliament in 2016 and subsequently amended, defines the two categories of creditors in Section 5 of the Code. Section 5(7) defines a “financial creditor” as any person to whom a “financial debt” is owed, and includes a person to whom such debt has been legally assigned or transferred. Section 5(8) defines “financial debt” as a debt along with interest, if any, which is disbursed against the consideration for the time value of money. This definition is notable for its breadth: it encompasses money borrowed against repayment, amounts raised by acceptance under any instrument, amounts raised pursuant to any note purchase facility or the issue of bonds, notes, debentures, loan stock, or similar instruments, amounts raised under letters of credit or banker’s acceptances, amounts raised under a hire purchase or finance lease, receivables sold or discounted other than on a non-recourse basis, amounts raised under any forward sale or purchase agreement, liabilities under any derivative transaction, debenture holder protections, amounts raised by financial institutions and certain regulatory bodies, and any other transaction having the commercial effect of a borrowing.

Section 5(20) defines an “operational creditor” as a person to whom an “operational debt” is owed, and includes any person to whom such debt has been legally assigned or transferred. Section 5(21) defines “operational debt” as a claim in respect of the provision of goods or services, including employment, or a debt in respect of repayment of dues arising under any law for the time being in force and payable to the Central Government, any State Government, or any local authority. The critical distinction, therefore, rests not on the legal character of the creditor but on the nature of the underlying obligation: whether it arises from a financing transaction premised on the time value of money or from a commercial transaction involving the supply of goods, rendering of services, or an employment relationship.

Threshold Requirements

Parliament significantly raised the minimum pecuniary threshold for filing an application under the Code through the Insolvency and Bankruptcy (Amendment) Ordinance, 2020, which was subsequently enacted into law. As of June 2026, both financial creditors under Section 7 and operational creditors under Section 9 of the Code must satisfy a minimum default threshold of rupees one crore before the National Company Law Tribunal (“NCLT”) will entertain their application. This threshold was raised from the original figure of rupees one lakh, representing a hundred-fold increase designed to filter out applications concerning relatively minor commercial disputes and to reduce the burden on the tribunal system.

Section 7: The Financial Creditor’s Application

Section 7 of the Code governs applications by financial creditors to initiate CIRP against a corporate debtor. The section permits a financial creditor, either alone or jointly with other financial creditors, to file an application before the NCLT when a corporate debtor has committed a default in repayment of a financial debt. The NCLT, upon receipt of such an application, must ascertain whether a default has occurred, verify that the application is complete, and satisfy itself that no disciplinary proceeding is pending against the proposed resolution professional. Crucially, Section 7 imposes no prior notice requirement upon financial creditors. The financial creditor may proceed directly to the NCLT upon the occurrence of a default without first demanding payment from the corporate debtor or awaiting a specified response period.

Section 9: The Operational Creditor’s Application

Section 9 of the Code, read alongside Section 8, prescribes a more structured and sequentially layered procedural mechanism for operational creditors. An operational creditor is not permitted to approach the NCLT directly upon default. Section 8 mandates that the operational creditor must first deliver a demand notice to the corporate debtor, or deliver a copy of an invoice demanding payment, before filing any application. This demand notice must be delivered to the corporate debtor in the manner prescribed under the Code. Upon receipt of such a demand notice, the corporate debtor has ten days within which to either bring the default to the notice of the operational creditor and notify the creditor of the pendency of a dispute, or repay the unpaid operational debt. Only after this mandatory ten-day period has elapsed, and the corporate debtor has neither disputed the claim nor made repayment, may the operational creditor approach the NCLT under Section 9.

Procedural Landscape

The Section 7 Pathway: A Streamlined Route

The procedural architecture for financial creditors under Section 7 reflects Parliament’s recognition that financial debt ordinarily arises from formally documented lending transactions characterised by precise terms, interest rates, repayment schedules, and default clauses. Given this documentary clarity, the legislature dispensed with any pre-filing notice requirement for financial creditors. The financial creditor files an application before the NCLT in the prescribed form, accompanied by the record of default maintained with an information utility, or such other evidence of default as may be prescribed by the Insolvency and Bankruptcy Board of India (“IBBI”). Once the application is filed and the NCLT is satisfied that a default has occurred, the tribunal is required to admit the application within fourteen days of its receipt, subject to the application being complete and no disciplinary proceeding being pending against the proposed insolvency professional.

The Section 9 Pathway: Mandatory Demand Notice and Pre-Filing Conditions

The procedural journey for operational creditors involves three distinct stages. In the first stage, the operational creditor delivers a demand notice under Section 8(1) to the registered office of the corporate debtor, claiming the unpaid operational debt. In the second stage, a period of ten days must elapse from the date of delivery of the demand notice. During this period, the corporate debtor may either repay the debt or communicate to the operational creditor the existence of a dispute that was raised before the date of the demand notice. In the third stage, if neither repayment nor a credible notice of dispute is received, the operational creditor may file an application before the NCLT under Section 9 in the prescribed form.

The NCLT, upon receipt of a Section 9 application, must ascertain whether the application is complete, verify that no notice of dispute has been received from the corporate debtor, and confirm that no disciplinary proceeding is pending against the proposed insolvency professional. Unlike the Section 7 framework, the NCLT in a Section 9 proceeding must also satisfy itself that the undisputed amount of the operational debt exceeds the prescribed threshold and that the debt has not been repaid.

Rights Within the CIRP: The Committee of Creditors

One of the most consequential distinctions between financial creditors and operational creditors under the IBC manifests itself not at the application stage but during the conduct of the CIRP. Under Section 21 of the Code, the insolvency resolution professional is required to constitute a Committee of Creditors (“CoC”) comprising all financial creditors of the corporate debtor, with voting shares assigned in proportion to the financial debts owed to each financial creditor. Operational creditors are entirely excluded from voting membership of the CoC. They are granted a limited right of representation and participation in CoC meetings only where their aggregate dues meet or exceed ten percent of the total debt, but even in this circumstance, they do not possess any voting rights. All substantive decisions during the CIRP — including approval of the resolution plan, extension of the resolution period, and replacement of the resolution professional — are made exclusively by the financial creditors through the CoC.

Key Judicial Precedents

Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018) 1 SCC 353

The single most important judicial pronouncement concerning the rights of operational creditors under the Code is the Supreme Court’s judgment in Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd., reported at (2018) 1 SCC 353. In this case, the Supreme Court was called upon to interpret the phrase “existence of dispute” as it appears in Sections 8 and 9 of the Code. The court definitively held that the expression “existence of dispute” must be construed broadly and not narrowly. The threshold for establishing the existence of a dispute, for the purpose of defeating a Section 9 application, is not the same as the threshold required to prove the dispute itself. The Supreme Court clarified that the NCLT must be satisfied merely that there is a plausible contention requiring further investigation, not that the corporate debtor must prove that the operational debt is, in fact, disputed. Once a genuine pre-existing dispute has been raised — meaning a dispute that existed prior to the delivery of the demand notice — the NCLT must reject the Section 9 application. The court used the test of whether the dispute was “spurious, hypothetical, illusory, or not bona fide” to determine whether it ought to be treated as raising a genuine dispute. This expansive interpretation of “existence of dispute” has proved to be the most potent and frequently invoked defence available to corporate debtors facing Section 9 applications.

Swiss Ribbons Pvt. Ltd. v. Union of India (2019) 4 SCC 17

In Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17, the Supreme Court was called upon to adjudicate a constitutional challenge to, among other provisions, the differential treatment accorded to financial and operational creditors under the Code. The court upheld the constitutional validity of this differential treatment, observing that the Code’s classification rests on intelligible differentia having a rational nexus with the object of the legislation. The court noted that financial creditors are typically sophisticated institutional lenders who engage with the corporate debtor from the inception of the financial arrangement, and that their class-based exclusivity in the CoC serves the Code’s overarching objective of facilitating time-bound resolution of corporate insolvency.

Priority Under Section 53: The Liquidation Waterfall

Section 53 of the Code prescribes the order of priority for distribution of proceeds in liquidation. Secured financial creditors are accorded the highest priority following the expenses of liquidation. Unsecured financial creditors and workmen’s dues for the preceding twenty-four months rank next. Operational creditors rank below financial creditors in the liquidation waterfall, receiving distribution from the residual proceeds after financial creditors have been substantially satisfied. This statutory priority structure reinforces the primacy of financial creditors not merely in governance during the CIRP but also in the recovery of dues upon liquidation.

Comparative Table: Financial Creditor vs. Operational Creditor Under IBC

Conclusion

The operational vs financial creditor IBC framework represents one of the most carefully calibrated and consequential classifications in Indian insolvency law. Parliament has constructed a system in which the nature of the underlying debt — rather than the identity or economic significance of the creditor — determines both the procedural obligations attending the initiation of CIRP and the substantive rights available throughout the resolution lifecycle. Financial creditors, by virtue of their foundational role in corporate financing, are accorded a streamlined path to the NCLT, full governance rights through the CoC, and superior priority in liquidation. Operational creditors, whose claims arise from the supply of goods, services, or employment, must navigate a mandatory pre-filing notice regime and face the formidable “existence of dispute” defence as interpreted by the Supreme Court in Mobilox Innovations.

The minimum threshold of rupees one crore, uniformly applicable to both categories since the 2020 amendment, ensures that the CIRP mechanism is directed towards economically significant defaults rather than routine commercial recovery disputes. The constitutional validity of the differential treatment accorded to the two categories has been affirmed by the Supreme Court in Swiss Ribbons, lending doctrinal stability to the architecture.

For practitioners, academics, and creditors engaged with the Indian insolvency framework, a precise understanding of these distinctions is indispensable. The choice of statutory mechanism, the timing of demand notices, the manner of preserving or challenging the existence of disputes, and the strategic implications of CoC exclusion are all questions that flow directly from the foundational classification established by Sections 5(7) and 5(20) of the Code. As India’s insolvency jurisprudence continues to mature through ongoing judicial pronouncements and regulatory evolution under the IBBI, the financial creditor and operational creditor distinction will remain the load-bearing axis around which creditor rights and corporate resolution strategy are organised.

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The Supreme Court of India’s handling of the Bhushan Power and Steel Limited (“BPSL”) insolvency has triggered one of the most consequential debates in Indian corporate law: whether a court can recall a liquidation order already passed under the Insolvency and Bankruptcy Code, 2016 (“IBC”) in order to preserve market confidence in the resolution framework. On 2 May 2025, a two-judge bench ordered liquidation of BPSL, rejecting JSW Steel’s ₹19,700 crore resolution plan as non-compliant with the IBC. [1] The judgment caused JSW Steel’s shares to fall nearly 7% within the trading session. Within weeks, the Court stayed the order; and on 31 July 2025, it recalled the liquidation judgment entirely. [2] The September 2025 reconstituted bench reinstated the resolution plan, holding the earlier ruling suffered from factual and jurisdictional omissions. [3] This article examines the legal framework governing recall of liquidation orders in India, the doctrinal basis for the inherent powers exercised, the tension between procedural finality and economic pragmatism, and whether the recall constituted legitimate judicial economy or impermissible judicial overreach.

I. Introduction

The Insolvency and Bankruptcy Code, 2016 was designed as a time-bound, creditor-driven mechanism to rescue viable enterprises from insolvency and to ensure that liquidation remained a remedy of last resort. Section 33(1) of the IBC empowers the National Company Law Tribunal (“NCLT”) to pass a liquidation order where the committee of creditors fails to approve a resolution plan or where an approved plan is not compliant with the Code. [9] Yet what happens when a liquidation order, once passed, begins to destabilise the very market the IBC was meant to revive? The question is not merely academic. The BPSL saga — spanning seven years of insolvency proceedings, multi-crore investments, 25,000 jobs, and a volatile Supreme Court judgment — laid bare the tension between strict statutory compliance and the economic consequences of judicial pronouncements.

The power to recall a judicial order is doctrinally distinct from the power of review. While review requires re-evaluation of the merits on discoverable errors of law, recall — sometimes called procedural review — is exercised to correct a defect in the process by which the order was made: most commonly, violation of natural justice or misrepresentation. This distinction, settled in Indian jurisprudence over decades, has now been transplanted into the insolvency domain with notable force.

This article traces the legal architecture around recalling liquidation orders in India, examines the statutory provisions and case law governing this power, analyses the BPSL episode as a case study, and evaluates competing arguments about judicial economy and overreach.

II. The Regulatory Framework: IBC, NCLT, and the Architecture of Finality

The IBC consolidated India’s fragmented insolvency laws into a single code. Under Chapter III of the IBC, once the CIRP process fails to yield a resolution plan, the adjudicating authority — the NCLT — initiates liquidation proceedings under Section 33. The IBC imposes strict timelines: the CIRP must conclude within 330 days, and any deviation requires judicial sanction under Section 12.

Section 30(2) of the IBC mandates that a resolution plan must provide for payment of insolvency resolution process costs, payment to operational creditors in a manner not lower than their entitlement in liquidation under Section 53, and must not contravene applicable laws. Section 31 of the IBC further requires that the plan comply with all conditions under Section 30 before the NCLT can grant approval. These are not aspirational provisions — they are mandatory, and non-compliance renders the plan void ab initio. [9] The IBC further mandates that resolution applicants meet eligibility criteria under Section 29A, which was inserted in 2017 precisely to prevent undesirable persons from acquiring stressed assets through the insolvency framework.

Critically, however, the IBC does not explicitly confer upon the NCLT or NCLAT the power to review, recall, or set aside their own orders. This legislative silence generated confusion at both tribunals — particularly across coordinate benches — until the Supreme Court and a five-judge bench of the NCLAT resolved the matter. The Supreme Court in Greater Noida Industrial Development Authority v. Prabhjit Singh Soni held that the NCLT possesses inherent powers to recall its own order under Section 60(5)(c) of the IBC, read with Rule 11 of the NCLT Rules, 2016 — which explicitly preserves inherent powers to prevent abuse of process and to meet the ends of justice. [4]

Rule 11 of the NCLT Rules, 2016 reads: “Nothing in these rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal to make such orders as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal.” This provision is the anchor of the tribunal’s recall jurisdiction and operates as a safety valve in the statutory architecture.

III. The Judicial Foundation: Recall as Inherent Jurisdiction

The roots of the recall power in Indian law run deep. In Sudarsan Chits (I) Ltd. v. O. Sukumaran Pillai, AIR 1984 SC 1579, the Supreme Court articulated a principle that has since anchored all subsequent discussion on the revocability of winding-up orders: “a winding up order once made can be revoked or recalled but till it is revoked or recalled it continues to subsist.” [8] This dictum — rooted in the old Companies Act framework — was not merely procedural; it embodied a substantive recognition that the finality of judicial orders must coexist with the imperatives of justice.

This principle was sharpened in Indian Bank v. Satyam Fibres India Pvt. Ltd., AIR 1996 SC 2592, where the Supreme Court held that courts possess inherent power to recall and set aside an order obtained by fraud practiced upon the Court, where the Court is misled by a party, or where the Court itself commits a mistake which prejudices a party. [6] The Court drew a categorical line: fraud unravels everything, and no judgment — however final in form — is immune from recall if it rests on deceit or fundamental procedural error.

The five-judge bench of the NCLAT in Union Bank of India (Erstwhile Corporation Bank) v. Dinkar T. Venkatasubramanian & Ors. (2023) definitively settled the position: the NCLAT does not have the power of review (which must be expressly conferred by statute), but it does possess the inherent power to recall a judgment in exercise of its jurisdiction under Rule 11 of the NCLAT Rules, 2016, when sufficient grounds exist — including violation of natural justice, fraud, or jurisdictional error. [5] The Supreme Court affirmed this position, cementing the institutional architecture: tribunals under the IBC may recall their own orders on procedural grounds, but may not review them on merits unless statutes specifically permit it.

The distinction between review and recall is therefore not merely semantic. Review reopens the merits; recall corrects a procedural defect without re-evaluating the substance. This distinction is important because it determines the scope of what tribunals can do after their orders have been implemented, partially or fully.

IV. Bhushan Power and Steel Limited: A Case Study in Recalling a Liquidation Order and Market Sentiment

A. Background of the Insolvency

BPSL was part of the Reserve Bank of India’s notorious “dirty dozen” — the twelve major non-performing accounts directed into insolvency proceedings by the RBI in June 2017. The NCLT admitted the insolvency application of Punjab National Bank on 26 July 2017. Total financial creditor claims admitted exceeded ₹47,000 crore. JSW Steel emerged as the successful resolution applicant with a plan valued at approximately ₹19,700 crore. The NCLT approved the Resolution Plan in September 2019, followed by NCLAT affirmation in February 2020. [1] By the time the plan was finally implemented — with payments to financial creditors made in March 2021 and to operational creditors only in March 2022 — the enterprise had been operational under JSW’s management for several years, with a steelmaking capacity expanded to 4.5 million tonnes per annum.

B. The May 2025 Liquidation Order

On 2 May 2025, a two-judge bench of the Supreme Court comprising Justices Bela M. Trivedi and Satish Chandra Sharma passed the impugned judgment (2025 INSC 621), declaring the JSW Steel resolution plan “illegal” and ordering the liquidation of BPSL under Section 33(1) of the IBC, additionally invoking Article 142 of the Constitution. The Court identified multiple violations: first, JSW had not filed the mandatory affidavit of eligibility under Section 29A, nor had the Resolution Professional independently verified JSW’s eligibility by way of Form H; second, the CIRP had exceeded the statutory 270-day outer limit under the unamended Section 12 of the IBC without a proper application for extension; third, the resolution plan discriminated against operational creditors in violation of Section 30(2) and Regulation 38 of the CIRP Regulations; and fourth, JSW had wilfully delayed implementation, creating what the Court called a “fait accompli.” [9]

The market’s reaction was immediate and unambiguous. JSW Steel’s shares fell 7% on the BSE within the trading session following the judgment. The ruling shook investor confidence not only in JSW Steel but across the broader IBC framework: if a CoC-approved, tribunal-confirmed, and largely implemented resolution plan could be voided five years after approval, the entire edifice of investment certainty under the IBC appeared precarious.

C. The Recall and Its Legal Basis

The fallout triggered rapid legal action. JSW Steel filed an application before the Supreme Court, and on 26 May 2025, the Court ordered a status quo on liquidation proceedings. On 31 July 2025, a different bench — headed by Chief Justice B.R. Gavai — recalled the May 2025 judgment, finding that the earlier bench had failed to correctly consider established legal principles and had introduced arguments not advanced by any of the parties. [2] The Court also emphasised the human cost: the resolution plan had been approved by nearly all creditors, the company was operational and solvent, and 25,000 employees depended on its continued functioning.

The recall rested on what the new bench characterised as errors going to the root of the May 2025 decision: it was not a fresh consideration of the merits but a correction of fundamental procedural and jurisdictional errors in the original judgment. [3] By September 26, 2025, after fresh hearings by the three-judge bench, the Court reinstated JSW Steel’s resolution plan in full, holding that the earlier ruling contained serious factual and jurisdictional omissions, and reaffirming that liquidation is a last resort under the IBC.

V. Relevant Statutory Provisions

Section 33(1) of the Insolvency and Bankruptcy Code, 2016 provides: “Where the Insolvency Resolution Process period expires in accordance with section 12, or where the Adjudicating Authority does not receive a Resolution Plan under sub-section (6) of Section 30 before the expiry of the Insolvency Resolution Process period or the Adjudicating Authority rejects the Resolution Plan under Section 31, it shall pass an order requiring the corporate debtor to be liquidated in the manner specified under this Chapter.”

Section 30(2) of the IBC provides that a resolution plan shall provide for: “(a) payment of insolvency resolution process costs in a manner specified by the Board in priority to the repayment of other debts of the corporate debtor; (b) repayment of the debts of operational creditors, which shall not be less than the amount to be paid to the operational creditors in the event of a liquidation of the corporate debtor under section 53…” The Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India (2019 SCC OnLine SC 73) expressly held that the primary focus of the IBC is to ensure revival and continuation of the corporate debtor and that liquidation is treated by the preamble of the Code “as a last resort only” when resolution fails. [7]

Section 60(5) of the IBC reads: “Notwithstanding anything to the contrary contained in any other law for the time being in force, the Adjudicating Authority shall have jurisdiction to entertain or dispose of — … (c) any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code.” The Supreme Court in Greater Noida linked this broad jurisdiction directly to the NCLT’s power to recall — treating it as the statutory vessel for the tribunal’s inherent powers.

VI. Judicial Economy or Judicial Overreach?

A. The Case for Judicial Economy

Those who defend the recall argue that allowing the May 2025 liquidation order to stand would have caused irreversible systemic harm disproportionate to the procedural violations identified. The principle of judicial economy counsels courts to avoid outcomes that nullify completed transactions and inflict widespread injury without commensurate corrective benefit. [10] As the September 2025 bench found, the original judgment introduced arguments that no party had made and mis-applied settled principles of IBC law — most critically, conflating procedural non-compliance with substantive ineligibility under Section 29A.

There is also doctrinal weight on this side. The action to recall a liquidation order was not a review of the merits in the traditional sense. It was a correction of a jurisdictional error: the May bench had decided issues that were not before it, misread the timeline provisions under Section 12, and imposed consequences — liquidation and fund restitution — that no party had sought before the Court. This is squarely within the Satyam Fibres principle: where the Court itself commits a mistake which prejudices a party, inherent recall power may be invoked.

Furthermore, the IBC’s explicit policy preference for resolution over liquidation means that to recall a liquidation order aligned with the Code’s own statutory hierarchy. The preamble to the IBC prioritises reorganisation; Section 33 is the exception, not the rule. Recalling a liquidation order that improperly invoked the exception is, in this light, faithful to legislative intent rather than subversive of it.

B. The Case for Judicial Overreach

The counterargument is troubling and cannot be dismissed. The very fact that a Supreme Court judgment — passed by a coordinate bench after extensive hearings — could be recalled by a subsequent bench within three months raises profound questions about judicial coherence. Critics point out that Article 137 of the Constitution and Order XLVII of the Supreme Court Rules, 2013, permit review only on very narrow grounds: discovery of new and important evidence, error apparent on the face of the record, or any other sufficient reason. Recalling a judgment based on the view that it “failed to correctly consider established legal principles” arguably blurs the line between recall and substantive review — the very distinction the NCLAT jurisprudence has laboured to maintain.

There is also a concern about the signalling effect. If market pressure — including a 7% fall in a listed company’s shares — becomes a judicially cognisable factor in deciding whether to recall an insolvency order, a new and unstable variable enters the IBC ecosystem. [10] Creditors and resolution applicants might reasonably ask whether the finality of NCLT and NCLAT orders is contingent not only on legal correctness but also on stock market reactions. This would fundamentally alter the risk calculus for IBC participants.

Senior advocates appearing in the matter raised the functus officio principle: once a resolution plan is approved by the NCLT, the CoC loses its authority to revisit it. By the same logic, once the Supreme Court has passed a final order directing liquidation, the proper remedy for an aggrieved party is a review petition on Article 137 grounds or a fresh CIRP — not a recall by a subsequent bench exercising inherent jurisdiction. The recall, on this view, was substantive in effect even if procedural in form.

VII. How the Power is Regulated: Institutional Safeguards for Recalling a Liquidation Order

The Supreme Court’s jurisprudence on recall a liquidation order — most recently crystallised in Greater Noida Industrial Development Authority v. Prabhjit Singh Soni — has identified specific grounds on which such recall applications are maintainable, and has stressed that this power must be used “sparingly” and only in “very limited circumstances.” [4] The grounds recognised are: where the aggrieved party was not served with notice of the proceedings; where the order was obtained by misrepresentation or fraud upon the tribunal; where there is an inherent lack of jurisdiction; or where the Court itself has committed a material error that prejudices a party. These limitations are not merely hortatory — they are designed to prevent recall of a liquidation order from becoming a routine tool for re-litigation and delay, which would directly undermine the IBC’s time-bound objectives.

The IBBI (Insolvency and Bankruptcy Board of India), as the regulatory authority under Section 188 of the IBC, oversees the conduct of resolution professionals and maintains oversight of CIRP timelines through quarterly newsletters and regulatory circulars. The IBBI Quarterly Newsletter (October–December 2024) noted that the average duration of CIRPs yielding resolution plans had reached 585 days, against a statutory limit that contemplates 330 days. This systemic delay — endemic to the BPSL case — is a product of multiple appeal layers and now, it appears, the unpredictability of post-approval judicial intervention.

VIII. Conclusion

The recall of the May 2025 liquidation order in the Bhushan Power and Steel saga is a watershed moment in Indian insolvency jurisprudence — not because recalls are novel, but because the stakes involved were exceptional and the consequences of judicial error were market-wide rather than party-specific. The episode reveals that the IBC, for all its architectural sophistication, operates within a judicial ecosystem where even final orders are vulnerable to revision when the process that generated them was fundamentally flawed.

Whether the recall constituted judicial economy or overreach ultimately depends on one’s theory of judicial role. If courts are guardians of systemic integrity — including the integrity of the insolvency market — then correcting a judgment that introduced unargued issues and misapplied settled law is both necessary and economically justified. If courts are strictly bound by the doctrine of procedural finality, the recall crossed a doctrinal line that earlier jurisprudence had carefully drawn. [5] What is certain is that the BPSL case will define, for a generation, the outer limits of the NCLT’s and Supreme Court’s inherent jurisdiction over IBC orders — and will compel legislators and regulators to consider whether explicit statutory guidance on post-approval judicial intervention is overdue.

References

[1] Business Standard, ‘SC Rejects JSW Steel’s Bhushan Power Resolution Plan, Liquidation Ordered’ (2 May 2025)

[2] TaxTMI, ‘Supreme Court Recalls Liquidation Order Under IBC Section 33(1), Reconsiders Steel Company Resolution Plan’

[3] Law.asia / Numen Law Offices, ‘Kalyani Transco v. Bhushan Power & Steel: Court Clarifies IBC Priority is Revival’ (October 2025)

[4] JSA Law, ‘NCLT Has Inherent Power to Recall an Order Passed by It for Approving a Resolution Plan’ (March 2024)

[5] Acuity Law, ‘NCLT and the Power to Recall’ (June 2025)

[6] IBC Laws, ‘NCLAT: Whether Vested with Power to Review or Recall Its Own Judgement?’ (by Adv. V.V.S.N. Raju)

[7] Indian Kanoon, Swiss Ribbons Pvt. Ltd. v. Union of India (2019 SCC OnLine SC 73)

[8] Vinod Kothari Consultants, ‘Reversibility of Liquidation Order’ (September 2018)

[9] Lexology, ‘Supreme Court Judgment in Bhushan Power and Steel Ltd — A New Era of Strict Compliance Under the IBC?’ (May 2025)

[10] Legal Business Online (Asian Legal Business), ‘Insolvency: SC Reversal on Bhushan Steel Restores Investor Confidence in IBC Process’ (2025)

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The present legal analysis evaluates the defense strategy for a Writ Petition challenging the invocation of Section 74 of the CGST Act on allegations of willful suppression against an architect (the “Petitioner”). The factual matrix involves the supply of non-contingent professional services for which the architect received no consideration, leading to the initiation of insolvency proceedings under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) against the corporate debtor. The core allegation by the Revenue Department is that the Petitioner engaged in willful suppression of facts to evade tax, thereby justifying the invocation of the extended period of limitation and the imposition of a 100% penalty.

This report posits that the invocation of Section 74 of the CGST Act for alleged willful suppression is legally unsustainable and constitutes a jurisdictional error. The non-payment of GST, arising directly from the non-realisation of professional fees and the subsequent legal action taken by the architect to recover said dues, constitutes a bona fide inability to perform a statutory obligation due to external commercial factors, rather than a fraudulent intent to evade tax.

The defense is constructed on four primary legal pillars:

1. Absence of Mens Rea: Jurisprudential definitions of “suppression” established by the Supreme Court in Uniworth Textiles, Pushpam Pharmaceuticals, and Anand Nishikawa require a positive, deliberate act of concealment. The Petitioner’s initiation of public insolvency proceedings under Section 9 of the IBC is diametrically opposed to the concept of suppression, serving as irrefutable evidence of transparency and diligence.
2. The Doctrine of Lex Non Cogit Ad Impossibilia: The law does not compel the impossible. The financial impossibility of discharging tax liability on unrealized income, exacerbated by the structural lacuna in the GST framework regarding “bad debt” relief and the strict time limits for Credit Notes under Section 34, renders strict compliance impossible.
3. The “Clean Slate” Theory: The Supreme Court’s ruling in Ghanashyam Mishra establishes that approved resolution plans extinguish past liabilities of the corporate debtor. Penalizing the operational creditor (Petitioner) for the extinguished liability of the debtor amounts to unjust enrichment by the State and violates Article 14 of the Constitution.
4. Jurisdictional Overreach: The conditions for invoking Section 74—specifically “fraud” or “willful misstatement”—are not met. Consequently, the proceedings should, at best, fall under Section 73, which may be time-barred, or be quashed entirely due to the impossibility of performance.

This report provides an exhaustive examination of these grounds, integrating statutory analysis, binding judicial precedents, and comparative global tax standards to formulate a robust defense for the Writ Petition.

1. The Statutory Architecture of Willful Suppression: Section 74 CGST Act and the Requirement of Mens Rea

The central dispute in the proposed Writ Petition concerns the legitimacy of the Revenue’s invocation of Section 74 of the CGST Act, which is predicated on allegations of willful suppression, requiring a strict examination of the statutory language and the high threshold of mens rea necessary to sustain such a charge.

1.1 Statutory Distinction: Section 73 vs. Section 74

The CGST Act creates a dichotomy between non-payment of tax due to bona fide error (Section 73) and non-payment due to malafide intent (Section 74). This distinction is not merely procedural but substantive, determining the limitation period, the penalty quantum, and the burden of proof.

Section 73 applies to cases where tax has not been paid or short paid for any reason other than fraud, willful misstatement, or suppression of facts. It envisions scenarios of inadvertent error, interpretation differences, or simple negligence.

Section 74, conversely, is a punitive provision. It applies where tax evasion is alleged due to fraud, willful misstatement, or willful suppression under Section 74 of the CGST Act, as illustrated below:

1. Fraud: Active deception.
2. Willful Misstatement: Deliberately making false statements.
3. Suppression of Facts: Intentionally withholding information.

The limitation period for issuing a Show Cause Notice (SCN) under Section 74 is five years from the due date of the annual return, whereas Section 73 limits this period to three years.[1] The penalty under Section 74 is 100% of the tax due, compared to 10% under Section 73.

1.2 Defining “Willful Suppression”

Explanation 2 to 74 of the CGST Act defines “willful suppression” as the “non-declaration of facts or information which a taxable person is required to declare in the return, statement, report or any other document furnished under this Act or the rules made thereunder, or failure to furnish any information on being asked for, in writing, by the proper officer”. [2]

However, this statutory definition is not absolute. It acts as a deeming fiction that must be read in consonance with the principles of natural justice and the requirement of intent. The mere act of “non-declaration” does not automatically equate to “suppression” under Section 74 unless it is accompanied by the intent to evade.

The Supreme Court of India, in the landmark judgment of Uniworth Textiles Ltd. v. Commissioner of Central Excise, adjudicated on the analogous provision in the Customs Act (Section 28). The Court observed that “mere non-payment of duties is not equivalent to collusion or willful misstatement or suppression of facts”. [3] The Court reasoned that if every non-payment were treated as suppression, the distinction between the ordinary limitation period and the extended limitation period would be obliterated, rendering the shorter limitation period redundant.5

For the Petitioner, this is the first line of defense: The non-payment of GST was not a clandestine act. The Petitioner did not divert funds or hide the transaction. The transaction was likely recorded in the books of accounts, and potentially even declared in GSTR-1 (as an invoice issued), but the tax was not paid in GSTR-3B due to the non-receipt of funds. This constitutes “mere non-payment” or “default,” which falls squarely under Section 73 (or is excusable), but certainly does not meet the high threshold of Section 74.

1.3 The Necessity of a “Positive Act”

Judicial interpretation has consistently held that for “suppression” to be invoked, there must be a positive act betraying a negative intention. Passive omission does not suffice.

In Pushpam Pharmaceuticals Company v. Collector of Central Excise, [5] the Supreme Court interpreted the proviso to Section 11A of the Central Excise Act (pari materia with Section 74 GST). The Court held:

“In taxation, it (‘suppression of facts’) can have only one meaning that the correct information was not disclosed deliberately to escape payment of duty. Where facts are known to both the parties the omission by one to do what he might have done and not that he must have done, does not render it suppression.” [5]

This “Positive Act” doctrine was reinforced in Anand Nishikawa Co. Ltd. v. Commissioner of Central Excise, where the Supreme Court held that “suppression of facts” refers to the intentional withholding or deliberate misrepresentation of information. Mere failure to disclose details does not amount to suppression unless there is clear intent to deceive.8

Application to the Architect:

The Petitioner’s conduct must be analyzed through this lens. Did the Petitioner engage in a “positive act” to hide the supply?

• Fact: The Petitioner issued an invoice (presumably).
• Fact: The Petitioner recognized the revenue in books (accrual basis).
• Fact: The Petitioner initiated legal proceedings (Section 9 IBC) to recover the amount.

These are positive acts of compliance and recovery, not of evasion. The failure to pay the tax was a passive consequence of the failure to receive payment. Unlike a tax evader who keeps transactions “off the books,” the architect has put the transaction “on the record” in a court of law (NCLT). Therefore, the essential ingredient of a “positive act of suppression” is absent.

1.4 Burden of Proof

In proceedings under Section 74, the burden of proving the mens rea lies heavily on the Revenue. The Madhya Pradesh High Court has recently held that an SCN issued under Section 74 is liable to be quashed if it is bereft of material particulars regarding allegations of fraud.[8] The Revenue cannot simply allege suppression; they must prove that the architect intended to defraud the exchequer.

The following table synthesizes the judicial differentiation between “Non-Payment” and “Suppression” which forms the bedrock of the Writ Petition’s maintainability:

2. The Factual Matrix: Architect Services and the Insolvency Trigger

To defend the Writ Petition effectively, the legal arguments must be deeply rooted in the specific factual context of architectural services and the insolvency proceedings. The nature of the supply and the subsequent legal actions taken by the Petitioner are not merely background details; they are exculpatory evidence.

2.1 Continuous Supply of Services and Time of Supply

Architectural services often fall under the category of “Continuous Supply of Services” as defined in Section 2(33) of the CGST Act, provided the contract exceeds three months and has periodic payment obligations.[10]

Under Section 31(4) of the CGST Act, the invoice for continuous supply must be issued:

• (a) On or before the due date of payment, if ascertainable from the contract.
• (b) Before or at the time of receipt of payment, if the due date is not ascertainable.
• (c) On or before the completion of an event, if payment is linked to the completion of that event.[11]

The Trap of Accrual Taxation:

In standard architectural contracts, payments are often linked to milestones (e.g., “Submission of Concept Design,” “Municipal Approval,” “Tender Drawings”).

• Scenario: The architect completes the “Municipal Approval” stage.
• Legal Consequence: Under Section 31(4)(c), the invoice must be issued because the event is complete.
• Tax Consequence: Under Section 13(2), the Time of Supply is the date of invoice issuance. The liability to pay GST crystallizes immediately.[12]
• Commercial Reality: The client (Corporate Debtor) delays payment, disputes the approval, or simply runs out of cash.

The Petitioner, following the law, issues the invoice upon completion of the milestone. This act triggers the GST liability. However, the funds never arrive. The Petitioner is now legally obligated to pay 18% of the invoice value to the government from their own pocket. When the Petitioner fails to do so—because the client has defaulted—the Revenue labels this as “suppression.”

This factual sequence demonstrates that the “default” is forced by the statutory framework’s reliance on accrual/invoice-based taxation, which does not account for payment default. It is not a suppression of the transaction, but a failure to discharge the liability due to liquidity crisis caused by the recipient.

2.2 Section 9 IBC: The Ultimate Proof of Bona Fides

The Petitioner initiated insolvency proceedings under Section 9 of the IBC against the corporate debtor. This legal step is the single most important piece of evidence in the Petitioner’s defense against Section 74.

The Process of Section 9 Filing:

1. Demand Notice (Section 8): The Operational Creditor must deliver a demand notice for the unpaid operational debt.
2. Application to Adjudicating Authority (Section 9): If the demand is not met within 10 days, the application is filed with the NCLT.
3. Public Announcement (Section 13): Once admitted, a public announcement is made inviting claims.

Implications for “Suppression”:

• Public Record: A Section 9 petition is a public judicial record. One cannot “suppress” a transaction while simultaneously suing on it in open court.
• Affirmation of Debt: The filing confirms that the Petitioner considers the amount (including GST) as “due and payable.” It negates any suggestion that the Petitioner agreed to an off-the-books settlement or waived the amount to evade tax.
• Intent to Recover: The legal cost and effort of filing an IBC petition demonstrate a desperate intent to recover the dues. If the Petitioner recovers the dues, they would presumably pay the tax. The failure to pay is thus contingent on the failure to recover, not on an intent to evade.

In Uniworth Textiles, the Supreme Court noted that when an assessee writes to the department or seeks clarification, it shows a bona fide mind.[4] Similarly, seeking judicial intervention to recover dues (which include the tax component) is the highest form of bona fide conduct.

2.3 The “Clean Slate” Theory and Extinguishment of Debt

The IBC proceedings introduce a complex conflict with GST recovery. The Supreme Court in Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd. established the “Clean Slate Theory.” The Court held that once a Resolution Plan is approved by the Adjudicating Authority, all claims that are not part of the Resolution Plan stand extinguished.[13]

The Conundrum:

• The Petitioner (Operational Creditor) submits a claim for ₹1 Crore + ₹18 Lakhs GST.
• The Resolution Plan is approved with a 90% haircut. The Petitioner receives only ₹11.8 Lakhs total.
• The original GST liability was ₹18 Lakhs.
• Question: Is the Petitioner still liable to pay the full ₹18 Lakhs to the government, even though the underlying debt has been legally extinguished by the Supreme Court-mandated process?

If the Revenue invokes Section 74 to demand the full ₹18 Lakhs (plus penalty) on a debt that the law itself (IBC) has declared settled/extinguished, it creates an absurdity. The Revenue is effectively demanding a share of a “value” that no longer exists. While Ghanashyam Mishra primarily protects the Corporate Debtor [14], the Petitioner can argue that the “extinguishment” of the debt renders the collection of tax on the original value “arbitrary” and “impossible.”

3. Jurisprudential Analysis of “Willful Suppression”

To withstand the scrutiny of the High Court, the Writ Petition must be fortified with binding precedents that specifically interpret willful suppression under Section 74 of the CGST Act in the context of tax statutes. The courts have established a rigorous standard for the Revenue to meet before Section 74 can be applied.

3.1 The “Positive Act” Requirement: Pushpam Pharmaceuticals

In Pushpam Pharmaceuticals Company v. Collector of Central Excise 6, the Supreme Court dealt with the proviso to Section 11A of the Central Excise Act. The Court held:

“Since ‘suppression of facts’ has been used in the company of strong words such as fraud, collusion or willful default, suppression of facts must be deliberate and with an intent to escape payment of duty.”

The Court distinguished between “omission” and “suppression.” Omission is passive; suppression is active. For an architect who has simply failed to file a return or pay tax because of a lack of funds, this is an omission. It becomes suppression only if they took active steps to hide the transaction (e.g., falsifying invoices, creating parallel books).

Defense Argument: The Petitioner represents a case of “omission to pay due to financial constraint,” which is categorically distinct from “suppression to evade.”

3.2 The “Deliberate Withholding” Test: Anand Nishikawa

In Anand Nishikawa Co. Ltd. v. Commissioner of Central Excise 8, the Supreme Court reinforced that “mere failure to declare does not amount to willful suppression.” The Court required a “deliberate withholding” of information.

The Writ Petition should highlight that the initiation of insolvency proceedings negates “deliberate withholding.” The Petitioner is literally shouting from the rooftops (NCLT) that the debt exists and is unpaid. This public declaration is incompatible with the secrecy required for suppression.

3.3 The “Intent to Evade” Test: Cosmic Dye Chemical

In Cosmic Dye Chemical v. Collector of Central Excise [9], the Supreme Court held that the existence of “intent to evade duty” is a sine qua non (indispensable condition) for invoking the extended limitation period. The Court ruled that it is not enough for the facts to be suppressed; the suppression must be motivated by the intent to evade.

Defense Argument: The Petitioner’s motive is transparent—they filed for insolvency to recover the dues. A person intending to evade tax would avoid legal scrutiny. This shows that any non-payment was due to debtor insolvency, not willful suppression of facts under Section 74 CGST Act.

3.4 Uniworth Textiles: The Burden on Revenue

In Uniworth Textiles Ltd. v. CCE [3], the Court held that the burden of proving mala fides lies on the Revenue. The Revenue cannot merely assume suppression because the tax wasn’t paid. They must evince evidence of a “conscious or deliberate withholding.”

Defense Argument: The SCN likely relies solely on the fact of non-payment to allege suppression. Under Uniworth, this is insufficient. The SCN must be quashed for failing to provide specific evidence of the Petitioner’s deceptive intent.

4. The Insolvency and Bankruptcy Code (IBC) as a Shield

The interaction between the IBC and the CGST Act is a developing area of law. However, for the purpose of defending against Section 74, the IBC provides powerful arguments regarding the bona fides of the Petitioner and the legal impossibility of recovery.

4.1 The Moratorium (Section 14 IBC)

Upon the admission of a Section 9 petition, a moratorium is declared under Section 14 of the IBC. [15] This moratorium prohibits:

“The institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority.”

While the moratorium technically protects the Corporate Debtor, it creates a legal disability for the Petitioner. The Petitioner is legally barred from recovering the debt (and the tax component) outside the IBC process.

• Argument: The Petitioner is legally restrained by a Central Statute (IBC) from collecting the tax. Can another Central Statute (CGST Act) penalize the Petitioner for failing to collect/pay that very tax? This creates a statutory conflict where the Petitioner is caught in the middle. The failure to pay is thus a result of “obedience to the IBC process” rather than “evasion of GST.”

4.2 The “Clean Slate” Doctrine (Ghanashyam Mishra)

The Ghanashyam Mishra judgment 15 finalized the principle that once a Resolution Plan is approved, the Corporate Debtor starts with a “clean slate.” The claims of the Operational Creditor (Petitioner) are settled according to the plan.

• Impact on Section 74: If the tax demand pertains to an amount that has been “haircut” (written off) under the IBC, the Petitioner can argue that the taxable value itself has been modified by operation of law.
• Case Law Support: In Ultra Tech Nathdwara Cement Ltd. v. Union of India [16], the Rajasthan High Court held that the GST department cannot raise demands for the period prior to the plan approval against the debtor. The defense here extends this logic: if the Department cannot recover from the Debtor, and the Petitioner could not recover from the Debtor, penalizing the Petitioner for the Debtor’s default violates equity.

5. The Doctrine of Lex Non Cogit Ad Impossibilia

A potent defense in the Writ Petition is the application of the legal maxim Lex non cogit ad impossibilia—”The law does not compel the doing of impossibilities”.[17]

5.1 Judicial Acceptance in Tax Matters

Indian Courts have repeatedly applied this maxim to relieve taxpayers from liability where compliance was impossible.

• Meenu Trading Co. v. Government of NCT of Delhi [18]: The Delhi High Court held that a purchasing dealer cannot be denied ITC due to the selling dealer’s failure to deposit tax, as it is impossible for the purchaser to ensure the seller’s compliance.
• Arise India Ltd. v. Commissioner of Trade & Taxes: The Court struck down provisions that made the purchaser strictly liable for the seller’s default, citing the doctrine of impossibility.

Application to the Architect:

It is “impossible” for the Architect to pay 18% GST on a project where 0% consideration has been received, especially when the project size is significant. If the GST liability exceeds the Architect’s net worth or liquid assets, compelling payment forces the Architect into insolvency. The law cannot be interpreted to destroy the taxpayer’s business for the default of another.

5.2 The Statutory Trap: Section 34 and Bad Debts

Unlike the Income Tax Act, which allows for “Bad Debts” to be written off as an expense, the CGST Act has no explicit provision for “Bad Debt Relief” once the time limit for Credit Notes has passed.

• Section 34(2): A Credit Note must be issued by the 30th of November following the end of the financial year. [19]
• Insolvency Timeline: IBC cases often take years to resolve. By the time the debt is confirmed as “bad” (e.g., liquidation or haircut), the time limit under Section 34 has long expired.

The “Impossibility” Argument: The Petitioner is trapped. They cannot issue a Credit Note because of the time bar. They cannot recover the money because of the IBC moratorium. They cannot pay the tax because they haven’t received the funds.

Invoking Section 74 (Fraud) in this scenario is not just incorrect; it is perverse. The Writ Petition should argue that the High Court, under Article 226, must intervene to prevent this “statutory impossibility” from being labeled as “fraud.”

6. Global Comparative Analysis & Constitutional Arguments

To bolster the argument that the Indian GST department’s stance is unreasonable, the Writ Petition can draw on global best practices and constitutional principles.

6.1 Global Best Practices on Bad Debts

Most modern VAT/GST regimes recognize that tax is a tax on consumption, and if the consideration is not paid, the tax should be relieved.

• Australia: Division 21 of the A New Tax System (Goods and Services Tax) Act 1999 explicitly allows for “Bad Debt Adjustments.” If a debt is written off, the supplier can claim a decreasing adjustment (refund of GST paid).[20]
• New Zealand: Section 26 of the Goods and Services Tax Act 1985 allows a deduction from output tax for bad debts written off.[21]
• United Kingdom: The VAT Act 1994 allows for bad debt relief if the debt remains unpaid for six months.

The absence of such a provision in India (except via the time-limited Credit Note) creates a harsh anomaly. While the Court cannot legislate, it can interpret Section 74 strictly to ensure that this anomaly does not result in criminal-like penalties for civil misfortunes.

6.2 Unjust Enrichment by the State

The concept of GST is that the supplier collects tax from the recipient and deposits it with the government. The supplier is a pass-through agent.

If the supplier never collects the tax (due to recipient default), but the Government forces the supplier to pay it, the Government is enriching itself at the cost of the supplier’s capital, not the consumer’s consumption. This amounts to “Unjust Enrichment” by the State.

• Argument: Penalizing the Petitioner under Section 74 for resisting this unjust enrichment is violative of Article 14 (Arbitrariness).

6.3 Article 19(1)(g): Right to Carry on Business

In Suncraft Energy Private Limited v. Assistant Commissioner [22], the Calcutta High Court (affirmed by the Supreme Court) held that the Department cannot reverse ITC from a buyer merely because the seller didn’t pay, without first exhausting recovery against the seller.

• Reverse Logic: The same equitable principle applies here. The Department should ideally file a claim as an Operational Creditor in the IBC proceedings of the Corporate Debtor (the actual defaulter) rather than harassing the unpaid Architect. Forcing the Architect to pay tax on unpaid invoices destroys their right to carry on business under Article 19(1)(g).

7. Procedural Defenses and Alternative Remedies

Beyond the substantive arguments, the Writ Petition must address procedural bars such as the existence of alternative remedies.

7.1 Maintainability of Writ Petition (Article 226)

Normally, courts require petitioners to exhaust statutory appeals (Section 107). However, a Writ Petition is maintainable despite alternative remedies if:

1. Violation of Natural Justice: The SCN is issued without jurisdiction or in violation of natural justice.
2. No Jurisdiction: If the “jurisdictional fact” (willful suppression) is absent on the face of the record (due to the IBC filing), the officer lacks jurisdiction to invoke Section 74.
3. Tribunal Non-Constitution: As of the current date, the GST Appellate Tribunal is not fully functional in many states. This vacuum justifies approaching the High Court directly.

7.2 Challenge to Limitation (Section 73 vs. 74)

If the Court finds that there is no “willful suppression,” the demand falls back to Section 73.

• Limitation Bar: Section 73 has a 3-year limitation period. If the invoices in question are older than 3 years (which is likely in IBC cases where disputes drag on), the demand becomes time-barred immediately upon the quashing of Section 74 applicability.
• Strategic Goal: The primary goal is to knock out the “fraud” tag. Once Section 74 is removed, the limitation period of Section 73 often wipes out the majority of the demand.

8. Strategic Roadmap for the Writ Petition

Based on the research, the Writ Petition is structured to clearly set out the grounds challenging the invocation of Section 74 of the CGST Act and the prayers for quashing the notice, declaratory relief, and interim protection.

8.1 Grounds

• Ground A: The Impugned SCN is without jurisdiction as the invocation of Section 74 is based on mere non-payment, which is contrary to the Supreme Court’s law in Uniworth Textiles and Anand Nishikawa.
• Ground B: The Petitioner’s act of filing Section 9 IBC proceedings is evidence of a “Positive Act” of compliance/recovery, negating any “mens rea” or “willful suppression.”
• Ground C: The demand is barred by the doctrine of Lex non cogit ad impossibilia as the recovery of the tax amount is legally barred by the IBC moratorium and practically impossible due to the debtor’s default.
• Ground D: The “Clean Slate” theory under IBC extinguishes the underlying debt, rendering the tax demand on such extinguished debt arbitrary and violative of Article 14.
• Ground E: The penalty of 100% is disproportionate and violative of Section 126 of the CGST Act, which mandates penalties to be commensurate with the breach.

8.2 Prayers

1. Issue a Writ of Certiorari quashing the Impugned Show Cause Notice issued under Section 74 as being illegal, arbitrary, and without jurisdiction.
2. Issue a Writ of Mandamus declaring that the non-payment of GST due to bona fide non-realization of professional fees, evidenced by the initiation of insolvency proceedings, does not constitute “willful suppression” under section 74 CGST Act.
3. Alternative Prayer: Direct the Respondent to adjudicate the matter under Section 73 (Normal Limitation), subject to the Petitioner’s right to challenge the same on grounds of impossibility.
4. Stay: Grant an interim stay on the proceedings and any coercive recovery actions pending the disposal of the Writ Petition.

9. Conclusion

The invocation of Section 74 of the CGST Act on allegations of willful suppression against an architect who has supplied services but received no payment, and who has proactively sought legal recourse under the IBC, is a classic example of the mechanical application of tax laws, ignoring the mandatory requirement of mens rea for fraud-based provisions.

By anchoring the defense in the Supreme Court’s rigorous definitions of “suppression” (Uniworth, Pushpam), leveraging the transparency evidenced by the Section 9 IBC filing, and invoking the doctrine of impossibility (Lex non cogit ad impossibilia), the Petitioner presents a compelling case. The State cannot demand a share of a pie that was never baked, nor can it label a victim of commercial insolvency as a tax evader. The Writ Petition, structured on these lines, stands a strong chance of succeeding in quashing the Section 74 proceedings and protecting the Petitioner from unjust penalties.

Table of Authorities

References

[1] GST notices: Recent activities and next steps for taxpayers – Deloitte | tax@hand, accessed on January 18, 2026, https://www.taxathand.com/article/32654/India/2023/GST-notices-Recent-activities-and-next-steps-for-taxpayers

[2] Section 74 CGST: No SCN for Multiple Years If No Wilful Suppression Found – TaxGuru, accessed on January 18, 2026, https://taxguru.in/goods-and-service-tax/section-74-cgst-scn-multiple-years-wilful-suppression.html

[3] Uniworth Textiles Ltd v. Commissioner Of Central Excise Raipur | CESTAT | Judgment | Law, accessed on January 18, 2026, https://www.casemine.com/judgement/in/574bdfaee561095bc6d36911

[4] 28(4) SC Case Uniworth vs Commissioner | PDF – Scribd, accessed on January 18, 2026, https://www.scribd.com/document/977264616/28-4-SC-Case-Uniworth-vs-Commissioner

[5] M/S. Uniworth Textiles Ltd vs Commnr. Of Central Excise, Raipur on 22 January, 2013, accessed on January 18, 2026, https://indiankanoon.org/docfragment/104312764/?big=3&formInput=suppression%20of%20facts

[6] Pushpam Pharmaceuticals Company vs Collector Of Central Excise, Bombay on 28 March, 1995 – Indian Kanoon, accessed on January 18, 2026, https://indiankanoon.org/doc/1073828/

[7] Rigorous Standards for ‘Suppression of Facts’ Under Section 11-A Established in Anand Nishikawa Co. Ltd. v. Commissioner Of Central Excise – CaseMine, accessed on January 18, 2026, https://www.casemine.com/commentary/in/rigorous-standards-for-‘suppression-of-facts’-under-section-11-a-established-in-anand-nishikawa-co.-ltd.-v.-commissioner-of-central-excise/view

[8] SC stays further proceedings as SCN under Section 74 finding it prima facie bereft of material particulars beyond mere figures | TaxTMI, accessed on January 18, 2026, https://www.taxtmi.com/article/detailed?id=15680

[9] Cosmic Dye Chemical v. Collector Of Central Excise, Bombay . | Supreme Court Of India | Judgment | Law | CaseMine, accessed on January 18, 2026, https://www.casemine.com/judgement/in/5609ac9ee4b014971140f522

[10] As on 30.09.2020 THE CENTRAL GOODS AND SERVICES TAX ACT, 2017 (12 OF 2017) AS AMENDED BY THE – CBIC-GST, accessed on January 18, 2026, https://cbic-gst.gov.in/pdf/CGST-Act-Updated-30092020.pdf

[11] MODEL GST LAW – COMMERCIAL TAXES DEPARTMENT, accessed on January 18, 2026, https://tgct.gov.in/tgportal/Docs/Model_GST_Law.pdf

[12] TIME OF SUPPLY – CA Kishan Kumar, accessed on January 18, 2026, https://cakishankumar.com/wp-content/uploads/2022/09/GST-Divyastra-Ch-5-Time-of-Supply-R.pdf

[13] Clean slate doctrine and its effect on sub-judice disputes of debtors – Shardul Amarchand Mangaldas & Co, accessed on January 18, 2026, https://www.amsshardul.com/insight/clean-slate-doctrine-and-its-effect-on-sub-judice-disputes-of-debtors/

[14] Debt Detox: Clean Slate, New Fate? – Metalegal Advocates, accessed on January 18, 2026, https://www.metalegal.in/post/debt-detox-clean-slate-new-fate

[15] Moratorium Period under the Insolvency and Bankruptcy Code (IBC), 2016 – Legal 500, accessed on January 18, 2026, https://www.legal500.com/developments/thought-leadership/moratorium-period-under-the-insolvency-and-bankruptcy-code-ibc-2016/

[16] Washout of Prior-period Claims in Resolution Plans: Rajasthan HC closes the door for pre-CIRP claims after revival of Corporate Debtor – Vinod Kothari Consultants, accessed on January 18, 2026, https://vinodkothari.com/2020/04/washout-of-prior-period-claims-in-resolution-plans/

[17] Practical Guide to GST Disputes – Cloudfront.net, accessed on January 18, 2026, https://d23z1tp9il9etb.cloudfront.net/download/pdf25/Practical_Guide_to_GST_Disputes.pdf

[18] INPUT TAX CREDIT AND THE PERCEIVED DEPENDENCE ON THE SUPPLIER TO AVAIL THE BENEFIT OF SUCH CREDIT IN TERMS OF SECTION 16(2)(c) OF THE CGST ACT | TaxTMI, accessed on January 18, 2026, https://www.taxtmi.com/article/detailed?id=11802

[19] Section 34 – CBIC Tax Information, accessed on January 18, 2026, https://taxinformation.cbic.gov.in/content/html/tax_repository/gst/acts/2017_CGST_act/active/chapter7/section34_v1.00.html

[20] 2019FCA2177.docx – Federal Court of Australia, accessed on January 18, 2026, https://www.fedcourt.gov.au/file-store/Judgments/Federal%20Court/Single%20Court/2019/2019FCA2177/2019FCA2177.docx

[21] Tax Information Bulleting Vol 35 No 7 August 2023, accessed on January 18, 2026, https://www.taxtechnical.ird.govt.nz/-/media/project/ir/tt/pdfs/tib/volume-35—2023/tib-vol35-no7.pdf?modified=20251119233103

[22] M/S Malaya Rub-Tech Industries vs Union Of India And Others, accessed on January 18, 2026, https://www.latestlaws.com/judgements/tripura-high-court/2025/april/2025-latest-caselaw-1007-tri

[23] GSTǧON BEAT, OFFǧBEAT AND BACK BEAT INPUT TAX CREDIT: DEFAULT BY SUPPLIER – ICMAI, accessed on January 18, 2026, https://icmai.in/TaxationPortal/upload/IDT/Article_GST/232.pdf

The post Comprehensive Legal Defense Against Invocation of Section 74 of the CGST Act, 2017: Analyzing ‘Willful Suppression’ in the Context of Insolvency and Non-Realization of Professional Fees appeared first on Bhatt & Joshi Associates.

The Supreme Court of India recently delivered a significant judgment that clarifies the legal distinction between a promoter’s undertaking to arrange funds for a borrowing company and a formal contract of guarantee under Section 126 of the Indian Contract Act, 1872. In the matter of UV Asset Reconstruction Company Limited v. Electrosteel Castings Limited[1], the Apex Court held that a contractual clause obligating a promoter to arrange infusion of funds into a borrower to meet financial covenants does not amount to a contract of guarantee under Section 126 of the Indian Contract Act, 1872. This judgment, delivered by a Bench comprising Justice Sanjay Kumar and Justice Alok Aradhe, has far-reaching implications for the interpretation of guarantee obligations in corporate financing arrangements and insolvency proceedings under the Insolvency and Bankruptcy Code, 2016.

The Court observed that an undertaking to infuse funds into a borrower, enabling it to meet its obligations, cannot be equated with a promise to discharge the borrower’s liability to the creditor directly. This distinction is critical in understanding the nature of obligations undertaken by promoters in financing transactions and their potential liability under insolvency proceedings. The judgment also addressed the question of whether approval of a resolution plan under the Insolvency and Bankruptcy Code automatically extinguishes the liability of third-party guarantors, thereby providing clarity on multiple fronts of commercial law.

Understanding Contract of guarantee under Section 126 of the Indian Contract Act, 1872

Section 126 of the Indian Contract Act, 1872 defines a contract of guarantee with precision and establishes the foundational framework for understanding the tripartite relationship between the surety, principal debtor, and creditor. The provision states: “A ‘contract of guarantee’ is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the ‘surety’; the person in respect of whose default the guarantee is given is called the ‘principal debtor’, and the person to whom the guarantee is given is called the ‘creditor’. A guarantee may be either oral or written.”

This statutory definition establishes several essential elements that must be present for an obligation to constitute a valid contract of guarantee. The first essential element is the existence of a principal debt owed by the principal debtor to the creditor. Without an underlying obligation, there can be no guarantee, as the surety’s promise is contingent upon the default of the principal debtor in discharging an existing liability. The second element is the occurrence of default by the principal debor in fulfilling their primary obligation to the creditor. The guarantee becomes operative only upon such default, making it a secondary or contingent obligation rather than a primary one.

The third and most critical element, as emphasized repeatedly by Indian courts, is an unambiguous and direct promise by the surety to discharge the liability of the principal debtor to the creditor upon default. This promise must be explicit and must contemplate the surety stepping into the shoes of the principal debtor to satisfy the creditor’s claim. The mere undertaking to enable the principal debtor to perform does not satisfy this requirement, as it does not create a direct obligation from the surety to the creditor. The contractual privity in a guarantee exists between the surety and the creditor, with the surety promising to answer for the debt of the principal debtor in the event of default.

The Principle of Coextensive Liability Under Section 128

Section 128 of the Indian Contract Act, 1872 establishes the extent of a surety’s liability in unequivocal terms. The provision states: “The liability of the surety is co-extensive with that of the principal debtor, unless it is otherwise provided by the contract.” This principle of coextensive liability means that the surety’s obligation mirrors that of the principal debtor in both quantum and nature, subject to any express limitations contained in the guarantee agreement itself.

The coextensive nature of surety liability has been consistently upheld by Indian courts as a fundamental principle governing contracts of guarantee. In Bank of Bihar Ltd v. Damodar Prasad and Another[2], the Supreme Court emphasized that when the principal debtor defaults on payment obligations, the surety becomes immediately liable for the entire amount due, including interest and charges. The Court clarified that the sole condition required for the implementation of the bond was a demand for payment pertaining to the principal debtor’s liability, and upon fulfillment of this condition, both the principal debtor and the surety were obligated to discharge the debt.

The principle of coextensive liability, however, is not absolute and admits of modification through express contractual stipulation. A surety may limit the extent of liability by clearly specifying in the guarantee agreement the maximum amount for which they can be held responsible, or by imposing conditions precedent to the invocation of the guarantee. The burden of proving such limitation rests squarely on the surety, and courts will not read restrictions into a guarantee unless they are expressly and unambiguously stated in the contract. This flexibility allows parties to tailor guarantee arrangements to their specific commercial needs while maintaining clarity about the scope of the surety’s obligations.

The Factual Matrix of the Electrosteel Castings Case

The dispute in UV Asset Reconstruction Company Limited v. Electrosteel Castings Limited arose from a complex financing arrangement involving multiple corporate entities. Electrosteel Steels Limited, the principal borrower, obtained financial assistance of Rs. 500 crores from SREI Infrastructure Finance Limited pursuant to a sanction letter dated July 26, 2011. The sanction letter explicitly did not stipulate any personal or corporate guarantee from Electrosteel Castings Limited, which was the promoter of the borrowing company. Instead, the securities for the facility were confined to a demand promissory note and post-dated cheques.

As part of the overall financing structure, Electrosteel Castings Limited executed a deed of undertaking in favor of the lender. Clause 2.2 of this deed imposed an obligation on the promoter to arrange for infusion of funds into Electrosteel Steels Limited at the end of each financial year in the event the borrower failed to comply with stipulated financial covenants. The clause specifically obligated the promoter to arrange such infusion in a form and manner acceptable to the lender, thereby ensuring the borrower’s continued compliance with the agreed-upon financial parameters.

Electrosteel Steels Limited subsequently committed default in repaying the financial facilities in 2013. Following restructuring efforts, the borrower underwent a corporate insolvency resolution process under the Insolvency and Bankruptcy Code, 2016, when the Kolkata bench of the National Company Law Tribunal admitted an application by State Bank of India to initiate insolvency proceedings. During the insolvency process, SREI Infrastructure Finance Limited filed its claim of Rs. 5.78 billion, which was duly admitted by the resolution professional. In 2018, the National Company Law Tribunal approved Vedanta Limited’s resolution plan for Electrosteel Steels Limited, and SREI issued a no-objection certificate confirming receipt of Rs. 2.42 billion for its dues along with allotment of equity shares.

Subsequently, SREI executed an assignment deed in favor of UV Asset Reconstruction Company Limited, assigning the loans and related rights under the financing documents. UV Asset Reconstruction then filed an application under Section 7 of the Insolvency and Bankruptcy Code, 2016, before the National Company Law Tribunal, Cuttack, seeking initiation of corporate insolvency resolution proceedings against Electrosteel Castings Limited. The appellant contended that the deed of undertaking executed by the promoter constituted a corporate guarantee, thereby creating a financial debt that could be enforced through insolvency proceedings. The National Company Law Tribunal dismissed this application, holding that Electrosteel Castings Limited was not a guarantor for the facilities availed by Electrosteel Steels Limited. This finding was subsequently affirmed by the National Company Law Appellate Tribunal, leading to the appeal before the Supreme Court.

Supreme Court’s Analysis and Interpretation

The Supreme Court undertook a detailed and methodical analysis of the legal principles governing contracts of guarantee while examining the specific terms of the deed of undertaking executed by Electrosteel Castings Limited. The Court began by reiterating that a guarantee, being a mercantile contract, must be construed in a manner that reflects the real intention and understanding of the parties as expressed in writing, rather than by applying merely technical rules of interpretation. The Court emphasized that the construction of guarantee contracts must give effect to the commercial purpose underlying the arrangement while remaining faithful to the language actually employed by the parties.

In analyzing Clause 2.2 of the deed of undertaking, the Supreme Court noted several critical aspects of its language and structure. The clause obligated the promoter to arrange for infusion of funds into the borrower company to enable compliance with financial covenants. Significantly, the Court observed that the clause did not contain any undertaking by the promoter to discharge the debt owed by the borrower to the creditor, nor did it contemplate direct payment to the lender in the event of default. The obligation under the clause was characterized as a promise by the promoter to the borrower to facilitate compliance with financial covenants, rather than a promise to the creditor to discharge the borrower’s liability upon default.

The Court held that for an obligation to be construed as a guarantee under Section 126 of the Indian Contract Act, there must be a direct and unambiguous obligation of the surety to discharge the obligation of the principal debtor to the creditor. The absence of such direct obligation was fatal to the characterization of the deed of undertaking as a guarantee. The Supreme Court further noted that the original sanction letter did not envisage any personal or corporate guarantee and expressly identified specific securities for the facility, thereby reinforcing the conclusion that the parties did not intend to create a guarantee relationship.

The Concept of ‘See to It’ Guarantee

UV Asset Reconstruction Company Limited argued that Clause 2.2 of the deed of undertaking constituted what is known in English common law as a ‘see to it’ guarantee. This form of guarantee involves a two-step process wherein the surety undertakes to ensure that the principal debtor performs its obligations, and if the principal debtor fails to perform, the surety itself must perform those obligations. The appellant relied on English precedents, particularly the decision in Moschi v. Lep Air Services Ltd.[3], to support the contention that such undertakings constitute valid guarantees even though they are framed in terms of ensuring performance rather than directly promising to pay upon default.

The Supreme Court, while acknowledging that ‘see to it’ guarantees are recognized in English common law, drew a careful distinction between such guarantees and mere undertakings to enable performance by the principal debtor. The Court held that a ‘see to it’ guarantee does not include an obligation merely to enable the principal debtor to perform its own obligation; rather, it contemplates that the surety will itself step in to perform if the principal debtor fails to do so. The Court observed that such an arrangement would constitute a guarantee under English law principles, but emphasized that the language of Clause 2.2 did not rise to this level of commitment.

The Supreme Court concluded that the obligation to arrange for infusion of funds into the borrower was fundamentally different from an obligation to ensure performance or to perform in the event of default. Arranging for funds is an enabling activity that facilitates the borrower’s own performance, whereas a guarantee contemplates that the surety will discharge the creditor’s claim directly if the borrower defaults. This distinction was critical to the Court’s ultimate conclusion that the deed of undertaking did not create a guarantee relationship within the meaning of Section 126 of the Indian Contract Act, and that such an arrangement would not constitute a guarantee under Indian contract law principles.

Voluntary Payments and Admissions in Pleadings

During the course of arguments, UV Asset Reconstruction Company Limited sought to rely on two additional circumstances to support its contention that Electrosteel Castings Limited was a guarantor. First, the appellant pointed to certain payments made by the promoter during the insolvency proceedings of the borrower company as evidence of acknowledgment of guarantee liability. Second, the appellant relied on statements made by Electrosteel Castings Limited in pleadings before other courts, arguing that these statements amounted to judicial admissions of guarantor status.

The Supreme Court rejected both these contentions with clear reasoning rooted in established principles of contract law and evidence. Regarding the payments made during the insolvency proceedings, the Court held that voluntary payments made in the capacity of a promoter, in the absence of a contractual obligation to make such payments, do not give rise to a contract of guarantee. The Court observed that a promoter may have various commercial and strategic reasons for making payments on behalf of a borrowing company, including preserving its investment, maintaining relationships with creditors, or protecting the corporate group’s reputation. Such payments cannot, by themselves, transform the nature of the legal relationship between the parties or create contractual obligations that did not previously exist.

With respect to the reliance on statements in pleadings, the Supreme Court reiterated the fundamental principle that pleadings must be read as a whole and in their proper context. The Court held that selective reliance on portions of pleadings to infer admissions of liability, where none exist when the pleadings are read holistically, is impermissible. The Court emphasized that statements made in pleadings must be interpreted in light of the entire factual and legal contentions advanced by the party, and that isolated phrases or sentences cannot be divorced from their context to manufacture admissions. This approach ensures that parties are not penalized for making factual statements or advancing alternative arguments in the course of litigation, and that the true nature of their legal position is assessed comprehensively rather than selectively.

Impact on Resolution Plans Under the Insolvency and Bankruptcy Code

The second appeal before the Supreme Court raised the important question of whether approval of a resolution plan under the Insolvency and Bankruptcy Code automatically extinguishes the liability of third-party security providers or guarantors. This question has significant implications for the rights of creditors who have taken guarantees or other security from third parties in addition to the corporate debtor that undergoes insolvency resolution. The resolution plan approved for Electrosteel Steels Limited contained a clause that stated: “all rights/remedies of the creditors shall stand permanently extinguished except any rights against any third party (including the Existing promoter) in relation to any portion of Unsustainable Debt secured or guaranteed by third parties.”

The Supreme Court unequivocally held that the approval of a resolution plan does not ipso facto discharge a security provider of their liabilities under the contract of security. The Court emphasized that it is well-settled law that the approval and implementation of a resolution plan for a corporate debtor does not automatically absolve guarantors or security providers of their contractual obligations to the creditors. The Court noted that the resolution plan in this case explicitly reserved the rights of creditors against third-party security providers, thereby making it clear that such rights were not intended to be extinguished through the resolution process.

This aspect of the judgment reinforces the principle established in the landmark case of Lalit Kumar Jain v. Union of India[4], where the Supreme Court held that the sanction of a resolution plan and the finality imparted to it by Section 31 of the Insolvency and Bankruptcy Code does not per se operate as a discharge of the guarantor’s liability. The Court in that case explained that as to the nature and extent of the liability, much would depend on the terms of the guarantee itself, and that an involuntary act of the principal debtor leading to loss of security would not absolve a guarantor of its liability. The principle underlying these judgments is that the insolvency resolution of the principal debtor is an involuntary process imposed by statute, and guarantors cannot escape their contractual obligations merely because the principal debtor has undergone insolvency proceedings.

Regulatory Framework Governing Guarantees and Insolvency Proceedings

The legal framework governing guarantees in India is primarily contained in Chapter VIII of the Indian Contract Act, 1872, which deals with indemnity and guarantee. Sections 126 to 147 of the Act provide a complete code governing various aspects of guarantee contracts, including the definition of guarantee, the extent of surety’s liability, circumstances under which a surety is discharged from liability, and the rights of sureties against principal debtors and co-sureties. This statutory framework has been supplemented by extensive judicial interpretation over more than a century, creating a rich body of case law that guides the application of these principles to diverse commercial situations.

The Insolvency and Bankruptcy Code, 2016 represents a paradigm shift in India’s approach to insolvency resolution, replacing the earlier fragmented legislative framework with a unified and time-bound process for addressing corporate distress. The Code establishes distinct mechanisms for different categories of stakeholders to initiate insolvency proceedings. Section 7 of the Code enables financial creditors to file applications for initiation of Corporate Insolvency Resolution Process before the National Company Law Tribunal when a default has occurred. The definition of financial creditor and financial debt under Sections 5(7) and 5(8) of the Code is critical, as only those who fall within these definitions can invoke the Section 7 mechanism.

The interaction between the Indian Contract Act and the Insolvency and Bankruptcy Code in the context of guarantees has been the subject of significant judicial consideration. The Supreme Court has clarified that while the insolvency resolution of a corporate debtor may result in a haircut to the claims of creditors through an approved resolution plan, this does not automatically extinguish the liability of guarantors who have provided independent security for the corporate debtor’s obligations. The guarantor’s liability continues to subsist, though it may be revised to reflect the amount that remains unpaid after implementation of the resolution plan. This principle ensures that creditors are not left without recourse simply because they agreed to a resolution plan that provided for less than full recovery from the corporate debtor, particularly when they had the foresight to obtain additional security from guarantors.

Practical Implications for Corporate Financing and Promoter Obligations

The Supreme Court’s judgment in UV Asset Reconstruction Company Limited v. Electrosteel Castings Limited has significant practical implications for the structuring of corporate financing transactions and the drafting of promoter undertakings. Financial institutions and other lenders must now be extremely careful in distinguishing between genuine guarantee arrangements and mere undertakings by promoters to facilitate the borrower’s performance. If lenders wish to hold promoters personally or corporately liable for the borrower’s defaults, they must ensure that the documentation clearly and unambiguously creates a direct obligation from the promoter to the lender to discharge the borrower’s liability upon default.

The judgment also provides important guidance on what does not constitute a guarantee. Undertakings to infuse funds into a borrowing company, to ensure compliance with financial covenants, to maintain certain financial ratios, or to take other enabling actions do not, by themselves, create guarantee liability. These undertakings create obligations from the promoter to the borrower, rather than from the promoter to the lender. While such undertakings may have commercial value in ensuring that the borrower remains financially healthy and capable of servicing its debts, they do not provide lenders with the same legal remedies available under a contract of guarantee Under Section 126, including the right to proceed directly against the promoter for recovery of the borrower’s debts.

The distinction drawn by the Supreme Court between different types of promoter commitments is particularly significant in the context of insolvency proceedings under the Insolvency and Bankruptcy Code. The right to initiate Corporate Insolvency Resolution Process under Section 7 of the Code is available only to financial creditors who are owed a financial debt. A guarantor who has executed a valid guarantee can be treated as having a contingent financial debt relationship with the corporate debtor, thereby potentially bringing them within the ambit of insolvency proceedings. However, a promoter who has merely undertaken to facilitate the borrower’s performance does not stand in the position of a debtor to the creditor and cannot be subjected to insolvency proceedings on the basis of such undertaking alone.

Comparative Analysis with English Common Law Principles

The Supreme Court’s discussion of the ‘see to it’ guarantee concept and its rejection in the Indian context highlights important differences between English common law approaches and Indian statutory principles governing guarantees. English law recognizes various forms of secondary obligations, including guarantees framed as undertakings to see to it that the principal performs. The leading authority on this point is the House of Lords decision in Moschi v. Lep Air Services Ltd., where it was held that a covenant to ensure that another person performs an obligation is enforceable as a guarantee even if not framed in traditional guarantee language.

The Indian approach, as clarified by the Supreme Court in the Electrosteel Castings case, is more formalistic and requires adherence to the statutory definition contained in Section 126 of the Indian Contract Act. The Court’s emphasis on the need for a direct and unambiguous obligation to discharge the principal debtor’s liability to the creditor reflects a stricter interpretation of what constitutes a guarantee. This approach provides greater certainty and predictability in determining when a guarantee relationship exists, but it also places greater responsibility on lenders to ensure that their documentation explicitly creates the intended legal relationship.

The divergence between English and Indian approaches can be attributed to differences in the underlying legal frameworks. England follows a common law system where contractual principles have evolved through judicial decisions over centuries, allowing for greater flexibility in recognizing different forms of contractual obligations based on the parties’ intentions as discerned from the agreement as a whole. India, while drawing inspiration from English common law, has a comprehensive statutory code governing contracts, including specific provisions defining guarantees. Indian courts must interpret contracts in light of these statutory definitions, which constrains the ability to recognize novel forms of guarantee arrangements that do not fit within the statutory framework.

Conclusion

The Supreme Court’s judgment in UV Asset Reconstruction Company Limited v. Electrosteel Castings Limited represents a significant contribution to the jurisprudence on contracts of guarantee and their intersection with insolvency law. The Court has clarified that a promoter’s undertaking to arrange for infusion of funds into a borrowing company, while commercially significant, does not constitute a contract of guarantee within the meaning of Section 126 of the Indian Contract Act unless it creates a direct and unambiguous obligation to discharge the borrower’s liability to the creditor upon default. This distinction is critical for determining the rights and remedies available to creditors when borrowers default on their obligations.

The judgment also reinforces the principle that approval of a resolution plan under the Insolvency and Bankruptcy Code does not automatically extinguish the liability of guarantors and security providers who are third parties to the corporate debtor. This ensures that creditors can continue to pursue their rights against such third parties even after the corporate debtor has undergone insolvency resolution, subject to the specific terms of the resolution plan and any express provisions regarding the treatment of third-party obligations. The preservation of creditor rights against guarantors highlights the continuing relevance of a well-drafted contract of guarantee under Section 126, ensuring that such guarantees retain their enforceability and value as security instruments.

For practitioners, this judgment underscores the critical importance of precise drafting when creating a contract of guarantee under Section 126. Lenders who wish to hold promoters or other parties liable as guarantors must ensure that the documentation establishes an explicit and unambiguous obligation to discharge the borrower’s liability to the lender upon default, rather than merely undertaking to facilitate the borrower’s own performance. Conversely, promoters and other parties providing comfort to lenders must carefully review the language of any undertakings they provide to ensure they understand the full extent of the obligations they are assuming and whether those obligations could give rise to liability under a contract of guarantee under Section 126.

References

[1] UV Asset Reconstruction Company Limited v. Electrosteel Castings Limited, 2026 INSC 14, available at: https://www.verdictum.in/court-updates/supreme-court/uv-asset-reconstruction-company-limited-v-electrosteel-castings-limited-2026-insc-14-1603910 

[2] Bank of Bihar Ltd. v. Damodar Prasad and Another, (1969) 1 SCC 620, available at: https://indiankanoon.org/doc/1377136/ 

[3] Moschi v. Lep Air Services Ltd., [1973] AC 331 (House of Lords)

[4] Lalit Kumar Jain v. Union of India, (2021) 9 SCC 321, available at: https://www.amsshardul.com/insight/liability-of-guarantors-after-landmark-india-verdict/ 

[5] Section 126 of the Indian Contract Act, 1872, available at: https://indiankanoon.org/doc/53550/ 

[6] Section 128 of the Indian Contract Act, 1872, available at: https://indiankanoon.org/doc/1377136/ 

[7] Section 7 of the Insolvency and Bankruptcy Code, 2016, available at: https://ibclaw.in/section-7-initiation-of-corporate-insolvency-resolution-process-by-financial-creditor-chapter-ii-corporate-insolvency-resolution-processcirp-part-ii-insolvency-resolution-and-liquidation-for-corpor/ 

The post Promoter’s Undertaking to Infuse Funds Does Not Amount to a Contract of Guarantee Under Section 126 of the Indian Contract Act: A Critical Analysis of the Supreme Court’s Ruling appeared first on Bhatt & Joshi Associates.

Executive Summary

The modern Indian financial ecosystem operates on a dual-axis framework: the regulatory rigidity of banking norms and the restorative flexibility of insolvency laws. At the heart of this intersection lies a critical paradox affecting Micro, Small, and Medium Enterprises (MSMEs). While the Insolvency and Bankruptcy Code, 2016 (IBC) was amended—specifically through Section 240A—to allow MSME promoters to retain control of their entities post-insolvency and ensure business continuity, the credit reporting infrastructure governed by the Reserve Bank of India (RBI) often fails to reflect this revival in the MSME CIBIL score after insolvency.

This report provides an exhaustive examination of two distinct but interconnected pillars of commercial finance. First, it dissects the official mechanisms available for challenging Commercial Credit Information Reports (CCR) and CIBIL Ranks. It explores the statutory framework of the Credit Information Companies (Regulation) Act, 2005 (CICRA), detailing the granular procedures for rectifying data inaccuracies, ownership conflicts, and duplication errors. It further analyzes the recently introduced RBI compensation framework for delayed dispute resolution, positioning it as a tool for borrower leverage.

Second, the report addresses the complex legal conundrum faced by MSMEs undergoing the Corporate Insolvency Resolution Process (CIRP). When an MSME promoter successfully submits a resolution plan and retains management, they often encounter a “credit deadlock.” Banks, adhering to Income Recognition and Asset Classification (IRAC) norms, frequently refuse to upgrade the company’s account from “Non-Performing Asset” (NPA) to “Standard” because there has been no “change in ownership”—a standard prerequisite for upgradation. As a result, the legally revived MSME may have a “Written Off” or “Settled” status on their CIBIL report, restricting access to working capital and affecting the company’s MSME CIBIL score after insolvency.

Through a detailed analysis of landmark jurisprudence—principally the Ramesh D. Shah v. Vijay Pitamber Lulla and Shreenathji Rasayan judgments—this report establishes the legal remedy. It elucidates how the “Clean Slate” doctrine, when invoked through specific NCLT directions, creates a “legal fiction” of fresh management, overriding standard banking circulars and mandating the restoration of creditworthiness.

Part I: The Architecture of Credit Information and Dispute Resolution

The integrity of the financial system relies heavily on the accuracy of data maintained by Credit Information Companies (CICs). In India, four major CICs—TransUnion CIBIL, Equifax, Experian, and CRIF High Mark—act as the repositories of credit history. For commercial entities, particularly MSMEs, the Commercial Credit Report (CCR) and the CIBIL Rank (CMR) are not merely administrative records; they are determinative factors for the cost of capital and market survival.

1.1 The Legal and Regulatory Framework

To understand how to challenge a CIBIL score, one must first grasp the legal architecture that governs it. The system is underpinned by the Credit Information Companies (Regulation) Act, 2005 (CICRA), which defines the triangular relationship between the Borrower, the Credit Institution (CI), and the Credit Information Company (CIC). For MSMEs emerging from insolvency, this framework is particularly critical, as it provides the legal foundation to ensure that their CIBIL score and credit history accurately reflect approved resolution plans and repayment settlements, safeguarding access to working capital and preserving the company’s financial credibility.

1.1.1 The Principle of Data Ownership

A fundamental tenet of CICRA is that CICs like TransUnion CIBIL are custodians, not owners, of the data. Section 21 of the Act mandates that a CIC cannot unilaterally alter data in its database. The data is “furnished” by Member Credit Institutions (Banks/NBFCs).1

• Implication for Disputes: When a commercial entity challenges its CIBIL score, CIBIL acts as an intermediary platform. It does not adjudicate the dispute. It transmits the dispute to the furnishing bank, which then verifies the records against its Core Banking Solution (CBS). Only upon confirmation from the bank can CIBIL modify the record.1 This “Maker-Checker” model ensures data integrity but often prolongs the dispute resolution process if the bank is unresponsive.

1.1.2 The CIBIL Rank (CMR) and Its Impact

For MSMEs, the CIBIL Rank (CMR) is a probabilistic score ranging from CMR-1 (lowest risk) to CMR-10 (highest risk). This rank is derived from a complex algorithm that weighs repayment history, credit utilization, and the “vintage” of credit facilities.2

• Delinquency vs. Default: Data analysis indicates that a significant proportion of MSMEs may be delinquent (late on payments) without being classified as NPA. However, even minor data inaccuracies—such as a delayed reporting of a payment—can trigger a downgrade in rank, pushing the MSME into a high-risk bracket and triggering higher interest rates from lenders.2

1.2 Categorization of Commercial Disputes

Commercial disputes are far more complex than consumer disputes due to the multiplicity of credit facilities (term loans, working capital, bank guarantees, letters of credit) and the intricate structures of corporate ownership. Disputes generally fall into three primary categories.3

1.2.1 Data Inaccuracy Disputes

These are the most common disputes, arising from clerical errors, system migration issues during bank mergers, or failure to update “closed” accounts.

• Account Details: Errors in the ‘Sanctioned Amount’ or ‘Current Balance’ fields artificially inflate the company’s leverage ratio. For instance, a term loan that has been fully repaid might still show a residual balance of a few rupees due to interest calculation errors, keeping the account “Active” rather than “Closed”.5
• Status Flags: Crucial fields like “Suit Filed” or “Wilful Defaulter” have severe consequences. A “Suit Filed” tag, often left remaining after a settlement has been reached and the suit withdrawn, acts as a hard stop for automated underwriting systems.5
• Asset Classification: An account might be classified as ‘Sub-Standard’ or ‘Doubtful’ in the CIBIL report even after it has been regularized. This mismatch often occurs because the bank’s system updates the balance instantly but the asset classification flag is updated only during the quarter-end reporting cycle.5

1.2.2 Ownership and Linkage Disputes

Ownership disputes strike at the identity of the corporate entity.

• Guarantor Linkages: A major source of CMR degradation is the erroneous linkage of the MSME as a guarantor for a defaulting third party. If Company A guaranteed a loan for Company B years ago, and Company B defaults, Company A’s credit report will reflect this default. Disputes often arise when the guarantee was revoked or discharged, but the bank failed to delink the entities in the reporting format.3
• Sister Concern Mapping: Credit institutions often group companies based on common directors. If one sister concern defaults, the “Group Exposure” logic may taint the reports of profitable entities within the group. Disputing this requires proving that the entities are legally distinct and no cross-guarantee exists.4

1.2.3 Duplicate Account Errors

This is a technical error where a single credit facility is reported multiple times.

• Scenario: This frequently happens when a loan is sold to an Asset Reconstruction Company (ARC). The original bank might fail to mark the account as “Sold/Closed,” while the ARC starts reporting the same debt as a new account.
• Impact: This duplication doubles the debt burden on paper, destroying the Debt-to-Equity ratio and plummeting the CIBIL score.4

1.3 The Procedural Mechanism for Challenging Scores

The industry has standardized the dispute resolution process to ensure traceability. The procedure can be initiated through online or offline channels.

1.3.1 The Online Dispute Resolution (ODR) Process

The ‘myCIBIL’ portal is the primary interface for commercial disputes.

1. Authentication and Access: The authorized signatory must log in using the company’s credentials. The system requires authentication to ensure that only legitimate representatives can view sensitive credit data.3
2. Navigation to Dispute Center: Within the ‘Credit Reports’ section, the user navigates to the ‘Dispute Center’. The interface is segmented by data types: ‘Company Details’, ‘Account Details’, and ‘Ownership’.3
3. Initiating the Challenge: The user selects the specific line item (e.g., a specific Term Loan account). The system allows the user to flag the value that is incorrect (e.g., “Date of Last Payment reported as 01/01/2023, actual is 01/01/2024”).
4. Dispute ID Generation: Upon submission, a unique Dispute ID is generated. This ID is the legal anchor for the timeline of the dispute.3

1.3.2 The Offline Dispute Mechanism

For complex commercial cases involving legal documents (like court orders or settlement decrees), the online portal’s character limits and upload restrictions may be insufficient.

• Form Submission: The entity must download the ‘Commercial Dispute Resolution Form’ from the CIBIL website.
• Documentation: A formal letter on the company letterhead, accompanied by the Dispute Form and supporting evidence (e.g., NCLT Order, No Dues Certificate), must be physically mailed to TransUnion CIBIL’s registered office in Mumbai.5
• Verification: CIBIL digitizes this request and initiates the same verification loop with the bank as the online process.

1.3.3 The Verification Loop and Timeline

Once a dispute is raised, the clock starts ticking on a strictly regulated timeline.

• Transmission: CIBIL transmits the dispute details to the Nodal Officer of the relevant Credit Institution (CI).
• CI Action: The bank is legally obligated to verify the data against its internal ledgers. If the data is incorrect, the bank must submit a correction file (usually in the ‘CDU’ or Consumer Data Update format) to CIBIL.8
• Closure: Upon receipt of the correction, CIBIL updates the master database and sends a “Dispute Resolution Summary” to the MSME. The entire process is mandated to be completed within 30 days.4

1.4 The RBI Compensation Framework (2023)

Recognizing the rampant delays in this verification loop, the Reserve Bank of India issued a landmark circular (RBI/2023-24/72) in October 2023, operationalizing a compensation framework.

• The Penalty: If a CI or CIC fails to resolve a dispute within 30 calendar days, they are liable to pay the complainant ₹100 per day for every day of delay.9
• Mechanism: This compensation is not theoretical; it must be credited directly to the borrower’s bank account. This framework has significantly shifted the leverage in favor of the borrower, forcing banks to take CIBIL disputes seriously rather than treating them as low-priority administrative tasks.6
• Strategic Use: For MSMEs, citing this circular in the initial dispute letter can act as a powerful accelerant, signaling that the entity is aware of its rights and ready to escalate.9

Part II: The MSME Insolvency Paradox

The second dimension of this report addresses a sophisticated conflict between insolvency resolution and credit reporting, highlighting the challenges MSMEs face in ensuring their CIBIL score accurately reflects post-insolvency outcomes. To understand the remedy, we must first deeply analyze the statutory conflict that necessitates it.

2.1 The IBC and the “Fresh Start” Mandate

The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted to maximize the value of assets and revive distressed entities. A central pillar of this revival is the “Clean Slate” doctrine.

• The Doctrine: Articulated by the Supreme Court in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta and reaffirmed in Ghanshyam Mishra & Sons v. Edelweiss Asset Reconstruction Company, this doctrine holds that once a Resolution Plan is approved by the Adjudicating Authority (NCLT), the Corporate Debtor is “reborn.” All past claims not part of the plan are extinguished. The successful resolution applicant (buyer) takes over the company on a “Clean Slate,” free from the “hydra head” of past liabilities.10

2.2 Section 240A: The MSME Exception

In the general corporate world, Section 29A of the IBC prohibits defaulting promoters from bidding for their own companies to prevent moral hazard. However, the legislature recognized that MSMEs are different. They are often dependent on the personal expertise and goodwill of their promoters. Excluding the promoter often means liquidation, which destroys value and jobs.

• The Amendment: Section 240A was introduced to exempt MSMEs from the disqualifications under Section 29A(c) and (h).12
• The Effect: This allows the original promoter (the old management) to submit a resolution plan. If the Committee of Creditors (CoC) approves it, the promoter retains control of the company, but the debt is restructured (often with significant “haircuts” or waivers).

2.3 The Conflict with RBI IRAC Norms

Here lies the paradox. While the IBC allows the promoter to retain control to ensure business continuity, the RBI’s banking norms penalize this continuity in the context of credit rating.

• IRAC Norms: The RBI Master Circular on Income Recognition and Asset Classification (IRAC) governs how banks classify loans. A loan classified as NPA can typically be upgraded to “Standard” only if:

1. All arrears of interest and principal are fully paid; OR
2. The account is restructured and there is a change in ownership.15

• The MSME Deadlock: In a Section 240A resolution, the debt is restructured (the plan is approved), but there is no change in ownership (the promoter remains). Therefore, strictly applying IRAC norms, banks continue to classify the account as NPA or “Sub-Standard” even after the Resolution Plan is approved.17
• Consequence: The MSME emerges from CIRP with a legally binding “Fresh Start” but a credit report that screams “Defaulter.” The CIBIL report will likely show the account as “Written Off” or “Settled” (derogatory statuses), preventing the MSME from obtaining the fresh working capital needed to implement the very resolution plan the court just approved.19

2.4 The “Zombie Entity” Problem

This regulatory mismatch creates a “Zombie Entity”—a company that is legally alive and solvent under the IBC but financially dead in the credit market.

• Written Off Status: When a resolution plan involves a haircut (e.g., paying 40% of the debt), the bank writes off the remaining 60%. In standard banking practice, a “Write Off” is a negative indicator, signaling that the bank gave up on recovery.
• The Trap: The bank, fearing RBI audits, refuses to upgrade the account to “Standard” until it sees a “satisfactory performance” over a “monitoring period” (usually 1 year). During this year, the MSME is starved of capital, increasing the likelihood of a second default.17

Part III: Legal Remedies for CIBIL Score Upgradation Post-Corporate Insolvency Resolution Process

The remedy for this deadlock is not administrative; it is judicial. Since the automated banking algorithms cannot process the nuance of a “Section 240A Fresh Start,” the MSME must obtain a specific judicial order to ensure their CIBIL score post-insolvency accurately reflects the approved resolution plan, effectively forcing the system to override the default IRAC logic.

3.1 Judicial Intervention: The “Legal Fiction” of Fresh Management

The National Company Law Tribunals (NCLTs) have recognized this conflict and have stepped in to enforce the spirit of the IBC over the letter of the IRAC norms.

3.1.1 Landmark Precedent: Ramesh D. Shah v. Vijay Pitamber Lulla

The definitive remedy stems from the judgment of the NCLT Mumbai Bench in Ramesh D. Shah vs. Vijay Pitamber Lulla & Ors. (IA No. 1100/2022 in CP(IB) No. 1111/MB/2019).18

• Case Facts: Etco Industries Pvt. Ltd. (an MSME) underwent CIRP. The promoter, Mr. Ramesh D. Shah, submitted a resolution plan under Section 240A, which was approved. The plan involved a settlement of dues. Post-approval, the Union Bank of India refused to upgrade the account status to “Standard,” citing the RBI circular requirement for a “change in ownership.”
• The Promoter’s Argument: The applicant argued that the “Clean Slate” doctrine implies a rebirth of the corporate debtor. To deny “Standard” status is to deny the “fresh start” promised by the Code.
• The Tribunal’s Ruling: The NCLT ruled in favor of the MSME, creating a legal fiction. It held:”The objective of this is to provide a clean start to the unit/Corporate Debtor. Therefore, once the resolution plan is approved by the Adjudicating Authority, the management/ownership of the Corporate Debtor shall be considered as fresh, even if the directors/promoters of the Corporate Debtor (MSME) remain the same.” 18
• The Remedy Granted: The Tribunal directed the bank to “change the asset classification of the company’s accounts to ‘Standard'” immediately, bypassing the monitoring period.

This judgment provides the blueprint for the remedy: An NCLT order declaring that the retention of management under Section 240A constitutes “fresh management” for the purposes of asset classification.

3.1.2 The Shreenathji Rasayan Confirmation

The NCLT Ahmedabad Bench in Shreenathji Rasayan Pvt Ltd v. Reliance Asset Reconstruction Company further solidified this position.23

• The applicant specifically prayed for directions to update CIBIL.
• The Tribunal directed the respondents to “inform and update all Credit Information Companies… regarding the corrected and upgraded status… so as to reflect a clean credit record.”
• Key Takeaway: This confirms that the NCLT views the CIBIL record as an integral part of the “assets” and “viability” of the Corporate Debtor, bringing it within its jurisdiction under Section 60(5) of the IBC.

3.2 Distinguishing the Madras High Court View

It is vital to address a counter-narrative to manage legal risk. The Madras High Court, in a recent ruling, held that the “Clean Slate” doctrine does not protect continuing promoters (under s. 240A) from undisclosed liabilities.10

• The Distinction: The High Court differentiated between a third-party buyer (who gets total immunity) and a continuing promoter (who cannot benefit from their own suppression of facts).
• Implication for CIBIL: While this ruling specifically targeted hidden operational debts (like electricity dues), banks might try to use it to argue that the “stigma” of default also survives for promoters.
• Rebuttal: The remedy in Ramesh D. Shah is distinct. It does not absolve the promoter of hidden crimes; it classifies the disclosed and restructured debt as “Standard” to enable business viability. The asset classification (Standard vs. NPA) is a regulatory tag, not a moral judgment, and the NCLT has jurisdiction to modify it to save the company.

3.3 The “Disjoint Sets” Argument

In some cases, banks argue that NCLT orders cannot override RBI circulars because they operate in “disjoint sets” (one governs insolvency, the other banking regulation).25

• The Override: Section 238 of the IBC contains a “non-obstante” clause, stating that the IBC prevails over any other law in force. NCLTs have consistently held that if an RBI circular prevents the implementation of a resolution plan (by starving the company of credit), the IBC’s mandate for revival overrides the circular’s mandate for classification.

Part IV: MSME CIBIL Score Upgradation (Post-Insolvency)

Based on the legal landscape analyzed above, the following is the step-by-step remedy for an MSME promoter to upgrade their CIBIL score post-Corporate Insolvency Resolution Process (CIRP).

Step 1: Embedding the Remedy in the Resolution Plan

Prevention is better than cure. The remedy should be baked into the Resolution Plan document itself before it is even voted on by the CoC.

• Drafting Requirement: The Resolution Plan must contain a specific section titled “Regulatory Compliances and Reliefs.”
• Specific Clause: “Upon the approval of this Plan, the Financial Creditors shall reclassify the account of the Corporate Debtor as ‘Standard’ in their books and report the same to all Credit Information Companies (CIBIL, Equifax, etc.). The status ‘Written Off’ or ‘Settled’ shall be removed, and the account shall reflect as ‘Standard’ with the restructured balance. The ‘Monitoring Period’ requirement under RBI Circulars is waived in light of the ‘Fresh Start’ nature of this Plan.”
• Effect: Once the NCLT approves the plan, this clause becomes a court order.

Step 2: The Post-Approval Legal Notice

If the plan was approved without such a specific clause, or if the bank ignores it:

• Action: Send a formal legal notice to the bank’s Nodal Officer and Legal Head.
• Content: Cite the NCLT Approval Order and the Ramesh D. Shah judgment. Explicitly state that maintaining an NPA status is a violation of the “Clean Slate” doctrine and constitutes “Unjust Enrichment” (taking the settlement money while denying the credit benefit).26
• Ultimatum: Give a 15-day window for rectification before initiating contempt proceedings.

Step 3: Filing the Interlocutory Application (IA)

If the bank refuses (often citing “System constraints”):

• Filing: File an IA under Section 60(5) of the IBC before the NCLT.
• Prayer: Seek a specific direction to the bank to:

1. Upgrade the account to “Standard”.
2. Remove “Written Off” remarks.
3. File a correction update with CIBIL immediately.

• Precedent: Attach the Ramesh D. Shah order as a precedent. The NCLT is likely to follow its own coordinate bench’s reasoning.

Step 4: The CIBIL Dispute with Court Order

Once the NCLT issues the specific direction:

• Direct Dispute: Raise a dispute on the CIBIL Commercial portal.
• Evidence Upload: Upload the NCLT Order.
• Mechanism: While CIBIL relies on bank confirmation, a Court Order is a “Public Record.” CIBIL’s compliance team can be compelled to act on a court order even if the bank drags its feet.
• RBI Ombudsman: Simultaneously, file a complaint with the RBI Ombudsman attaching the NCLT order. The Ombudsman can penalize the bank under the Compensation Framework (Rs 100/day) for failing to update credit information despite a court directive.9

Step 5: Handling the “Written Off” Remark

Specific attention must be paid to the “Written Off” flag.

• The Issue: Even if the score improves, a “Written Off” flag scares away future lenders.
• The Fix: The bank must file a data update changing the “Account Status” field.

• If the debt is fully settled: Status should be “Closed” or “Post-Write-Off Settled” (less ideal, but accurate).
• If debt continues (restructured): Status should be “Standard”.

• No Dues Certificate (NDC): The MSME must aggressively pursue the issuance of a “No Dues Certificate” or “Satisfaction of Charge” from the bank. This document is the golden ticket for any future offline disputes.28

4.1 The Pre-Packaged Insolvency (PPIRP) Alternative

For MSMEs currently facing stress but not yet in CIRP, the Pre-Packaged Insolvency Resolution Process (PPIRP) offers a potentially smoother path to ensuring their CIBIL score accurately reflect the restructuring, helping protect their creditworthiness even before formal insolvency proceedings

• Mechanism: PPIRP is a debtor-in-possession model where the promoter negotiates with creditors before going to court.
• Benefit: Since it is a consensual restructuring, banks are often more willing to agree to “Standard” classification terms as part of the negotiation to avoid the value destruction of a full CIRP.31
• Reporting: The resolution plan in a PPIRP can be structured to look more like a commercial restructuring than a default, potentially mitigating the damage to the CIBIL Rank compared to a Section 7 or Section 9 admission.14

Conclusion

The challenge of upgrading a CIBIL score for an MSME where the old management retains control is a battle between the static nature of banking data and the dynamic nature of insolvency law.

The “official” mechanism—the online dispute form—is necessary but insufficient for this specific problem. A standard dispute will be rejected by the bank’s automated backend because, technically, the ownership hasn’t changed.

The remedy, therefore, is to create a “legal exception” that forces the bank’s hand. This is achieved by obtaining an NCLT order that explicitly characterizes the post-resolution management as “fresh” for asset classification purposes, relying on the ratio of Ramesh D. Shah.

MSMEs must view the CIBIL report not as a post-facto scorecard, but as a core asset of the company. The fight for a “Standard” tag and for restoring their MSME CIBIL score after insolvency is as important as the fight for the haircut itself. Without a correctly updated credit record, the “revival” promised by the IBC remains a legal fiction; with it, leveraging the specific remedies outlined above, it becomes a commercial reality and ensures the company’s creditworthiness post-CIRP is fully recognized.

Summary of Key Tables

Table 1: Comparative Analysis of Dispute Types

Table 2: The MSME CIBIL Remedy Matrix

The post MSME CIBIL Score Upgradation After Insolvency: Insolvency Law, Credit Reporting Disputes, and MSME Remediation Under IBC appeared first on Bhatt & Joshi Associates.

Introduction

The intersection of insolvency law and criminal liability has emerged as one of the most debated areas in contemporary Indian jurisprudence. The Bombay High Court’s recent judgment delivered by Justice M.M. Nerlikar on October 1, 2025, at the Nagpur Bench has reinforced a critical legal position: directors and officers of a company cannot escape their Personal Criminal Liability of Directors Under Section 138 for offences under the Negotiable Instruments Act, 1881 (NI Act) merely because insolvency proceedings have been initiated against their company under the Insolvency and Bankruptcy Code, 2016 (IBC). This ruling addresses the growing concern among creditors about whether company directors could use insolvency proceedings as a shield against prosecution for cheque dishonour, thereby undermining commercial morality and the sanctity of negotiable instruments.

The case involved M/s. Anand Distilleries and its directors who sought discharge from a criminal complaint for cheque dishonour on the ground that insolvency proceedings were initiated against the company before the cheque bounced. The High Court’s decision clarifies that the timing of IBC proceedings—whether initiated before or after the cause of action under the Section 138 NI Act arises—is immaterial to the personal criminal liability of directors. This judgment reinforces the principle that while corporate entities may receive protection under insolvency moratorium, natural persons who were responsible for the affairs of the company when the offence was committed remain accountable under criminal law.

Understanding Section 138 of the Negotiable Instruments Act

The Negotiable Instruments Act, 1881, was enacted to provide a legal framework for the use of negotiable instruments like cheques, promissory notes, and bills of exchange in commercial transactions. Section 138 was introduced through an amendment in 1988 to address the growing problem of cheque dishonour, which was eroding trust in commercial dealings and hampering business transactions. The provision criminalizes the dishonour of cheques issued in discharge of legal liability or debt.

Section 138 states that where any cheque drawn by a person on an account maintained by him with a banker for payment of any amount of money to another person from out of that account for the discharge of any debt or other liability, is returned by the bank unpaid for reasons of insufficient funds or that it exceeds the arrangement made, and the payee or holder makes a demand for payment through notice within thirty days of receiving information from the bank, and the drawer fails to make payment within fifteen days of receipt of such notice, the drawer shall be deemed to have committed an offence. The punishment prescribed includes imprisonment for a term which may extend to two years, or with fine which may extend to twice the amount of the cheque, or with both.

The offence under Section 138 is complemented by Section 141 of the NI Act, which extends criminal liability to persons who were in charge of and responsible for the conduct of the business of the company at the time the offence was committed. This vicarious liability provision is central to how courts assess the personal criminal liability of directors under Section 138, ensuring that directors, managers, and other officers cannot hide behind the corporate veil when a company commits the offence of cheque dishonour. The provision creates a presumption of culpability against such persons unless they can prove that the offence was committed without their knowledge or that they exercised due diligence to prevent the commission of the offence.

The quasi-criminal nature of proceedings under Section 138 distinguishes them from purely civil recovery proceedings. While the primary objective is to facilitate debt recovery through the threat of criminal sanctions, the proceedings follow criminal procedure and result in criminal consequences including imprisonment. This dual character has been the subject of extensive judicial interpretation, particularly in understanding how such proceedings interact with other laws like the IBC.

The Insolvency and Bankruptcy Code and Moratorium Provisions

The Insolvency and Bankruptcy Code, 2016, was enacted as comprehensive legislation to consolidate and amend laws relating to reorganization and insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound manner. The Code represents a paradigm shift from the debtor-in-possession model to a creditor-in-control regime, aimed at maximizing the value of assets and promoting entrepreneurship by balancing the interests of all stakeholders.

Section 14 of the IBC is a crucial provision that declares a moratorium upon admission of an insolvency application. The moratorium provision states that on the insolvency commencement date, the Adjudicating Authority shall by order declare that the moratorium shall have effect from the date of such order. During the moratorium period, several actions are prohibited including the institution of suits or continuation of pending suits or proceedings against the corporate debtor, execution of any judgment, decree or order against the corporate debtor, any action to foreclose, recover or enforce any security interest created by the corporate debtor, and the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

The purpose of the moratorium is multifold. It provides breathing space to the corporate debtor to enable the resolution professional to assess the viability of the business, prepare an information memorandum, and invite resolution plans from prospective resolution applicants. It prevents a race among creditors to enforce their claims, which could lead to the dismemberment of the corporate debtor’s assets and destroy its value as a going concern. The moratorium creates a level playing field where all creditors’ claims are dealt with in a collective and orderly manner rather than through individual enforcement actions.

However, the scope and extent of the moratorium have been subjects of intense litigation and judicial interpretation. A critical question has been whether the moratorium extends to criminal proceedings, particularly those under Section 138 of the NI Act. This question becomes even more complex when examining whether the moratorium protects not just the corporate debtor but also its directors and officers who face personal liability under criminal law. The law has evolved through several landmark Supreme Court judgments that have attempted to delineate the boundaries of moratorium protection in the context of different types of proceedings.

Evolution of Judicial Interpretation: Supreme Court Precedents

The judicial understanding of the interplay between the IBC moratorium and Section 138 proceedings has evolved significantly through several landmark Supreme Court decisions. These judgments have progressively clarified the scope of moratorium protection and its applicability to different categories of defendants and different stages of proceedings.

In the landmark judgment of P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd., decided on March 1, 2021, a three-judge bench of the Supreme Court examined whether proceedings under Section 138 of the NI Act against a corporate debtor would be covered by the moratorium under Section 14 of the IBC [1]. The Court held that when a moratorium order is passed under the IBC, parallel proceedings under Section 138 of the NI Act against the corporate debtor cannot be allowed to continue. The Court reasoned that proceedings under Section 138 and 141 of the NI Act are quasi-criminal in nature and would amount to a proceeding within the meaning of Section 14(1)(a) of the IBC. The judgment emphasized that the legislative intent behind the moratorium was to provide a peaceful period for the resolution professional to attempt to revive the corporate debtor as a going concern.

The Court in P. Mohanraj analyzed the nature of proceedings under Chapter XVII of the NI Act and concluded that despite having criminal elements, these proceedings are fundamentally about debt recovery. The judgment stated that the object of the IBC is to ensure revival and continuation of the corporate debtor by protecting the corporate debtor from its own management and from a corporate death by liquidation. The moratorium provision ensures that during the resolution process, the assets of the corporate debtor remain intact and are not depleted by individual enforcement actions. The Court explicitly held that continuing with Section 138 proceedings would defeat the very purpose of the moratorium as it would deplete the financial resources of the corporate debtor through fines and legal costs.

However, the P. Mohanraj judgment specifically dealt with proceedings against the corporate debtor itself, not its directors or officers. This distinction became crucial in subsequent litigation where directors sought to extend the benefit of moratorium to themselves. The Supreme Court addressed this issue in later judgments, particularly in the context of whether natural persons could claim immunity from Section 138 proceedings by virtue of their company being under insolvency resolution.

The Supreme Court further clarified the position regarding directors and officers in multiple subsequent decisions. In Sandeep Gupta v. Shri Ram Steel Traders decided by the Delhi High Court in 2023, the court held that Section 96 of the IBC concerning pre-packaged insolvency would not apply when a person is arrayed as an accused in a complaint under Section 138 in his capacity as a director of a company [2]. The judgment emphasized that the debt in question belonged to the company, not the director personally, but Section 141 of the NI Act fastens liability on every officer who was in management and control of the company’s affairs. This vicarious liability is personal to the director and cannot be extinguished by moratorium proceedings against the company.

The principle emerging from these cases is clear: while the corporate entity receives protection under the moratorium, natural persons who are liable under Section 141 of the NI Act remain exposed to criminal prosecution [3]. The moratorium cannot be used as a device to shield individual wrongdoers from facing consequences for offences committed while they were managing the company. This interpretation ensures that the protective mechanism of insolvency law does not become a refuge for those who have acted irresponsibly or fraudulently in their capacity as company directors or officers.

The Bombay High Court’s Decision: Case Analysis

The Bombay High Court judgment in the Ortho Relief Hospital and Research Centre case presents a critical clarification on the personal criminal liability of directors under Section 138 of the Negotiable Instruments Act, particularly in relation to insolvency proceedings. This detailed application of legal principles addresses a crucial question: can directors escape their personal criminal liability by invoking insolvency proceedings against their company?

The chronology of events in this case was particularly significant. In February 2018, Punjab National Bank initiated insolvency proceedings against M/s. Anand Distilleries under the IBC. The National Company Law Tribunal (NCLT) admitted the petition on February 14, 2018, which triggered the moratorium under Section 14 and led to the appointment of an Interim Resolution Professional. The petitioner hospital, being a creditor, lodged its claim with the resolution professional as required under the IBC process.

After the moratorium was declared, the directors of the company allegedly reassured the petitioner and asked them to present the cheque for encashment. When the cheque was presented on December 14, 2018, it was dishonoured with the remark of insufficient funds. Following the statutory procedure under the NI Act, the petitioner issued a legal notice on January 5, 2019, giving the drawer an opportunity to make payment within fifteen days. When no payment was received, the petitioner filed a criminal complaint under Section 138 of the NI Act.

The trial court, however, allowed an application filed by the directors on January 31, 2025, and discharged them from the criminal proceedings. The trial court’s reasoning was that since insolvency proceedings were initiated against the company before the cheque was dishonoured, the subsequent criminal complaint was barred by the moratorium provisions of the IBC. This interpretation suggested that the timing of the initiation of IBC proceedings was determinative of whether Section 138 proceedings could be maintained.

The petitioner challenged this discharge order before the Bombay High Court, represented by Advocate S.S. Dewani. The petitioner’s primary argument was that proceedings under the NI Act are penal in nature and fundamentally different from recovery proceedings under the IBC. It was contended that an approved resolution plan under the IBC pertains to the corporate debtor’s liabilities and does not absolve directors from their Personal Criminal Liability of Directors Under Section 138, which flows independently through Section 141 of the NI Act. The petitioner emphasized that directors, being natural persons, remain statutorily liable for prosecution regardless of any moratorium applicable to the corporate entity.

The respondent directors, represented by Advocate S.D. Khati, placed significant emphasis on the timeline of events. They argued that the IBC proceedings and moratorium were initiated on February 14, 2018, well before the cause of action for the Section 138 complaint arose through cheque dishonour on December 14, 2018. Their contention was that Section 14 of the IBC bars the institution of any legal proceedings against the corporate debtor after a moratorium is declared, and this bar should logically extend to directors who are prosecuted solely by virtue of their connection with the company. They sought to distinguish their case from situations where the cause of action arose before IBC proceedings, arguing that the temporal sequence was material to determining liability.

Justice M.M. Nerlikar framed the central legal question succinctly: whether prior initiation of proceedings under the IBC would frustrate the claim of the petitioner under Section 138 of the NI Act. After examining the Supreme Court precedents, the High Court concluded that the law on this issue is well-settled and the timing argument advanced by the respondents was legally untenable.

The High Court held that the moratorium under Section 14 of the IBC applies only to the corporate debtor, and natural persons mentioned in Section 141 continue to remain liable, reaffirming the personal criminal liability of directors under section 138 irrespective of insolvency proceedings. The judgment emphasized that proceedings under Section 138 are not recovery proceedings but are penal in nature, aimed at upholding the integrity of commercial transactions and maintaining faith in negotiable instruments. The personal penal liability of directors continues because such liability flows from their role in managing the company when the offence was committed, not merely from their association with the company.

The court explicitly rejected the timing argument, stating: “From the above discussion it is clear that it makes no difference whether the proceedings are initiated prior to initiation of IB Code proceeding or thereafter. The Supreme Court has in unequivocal terms held that natural persons cannot escape from their personal liability under Section 138 of the NI Act.” This categorical statement eliminates any ambiguity about whether the sequence of events affects the liability of directors under the NI Act.

The judgment further clarified that criminal proceedings do not fall under the category of proceedings that are to be kept in abeyance under Section 14 of the IBC when it comes to personal liability of directors and officers. The court held that the trial court had committed a gross error in allowing the discharge application and thereby discharging the accused directors. Consequently, the High Court allowed the writ petition, quashing and setting aside the trial court’s orders, and directed that the criminal complaint against the directors would proceed to trial. The court also rejected the respondents’ request to stay the judgment, indicating confidence in the correctness of its legal position.

Regulatory Framework Governing Directors’ Liability

The liability of company directors under Indian law is governed by a complex regulatory framework that spans multiple statutes including the Companies Act, 2013, the Negotiable Instruments Act, 1881, and the Insolvency and Bankruptcy Code, 2016. Understanding this framework is essential to appreciate how directors can be held personally liable for corporate defaults.

Section 141 of the Negotiable Instruments Act creates a specific statutory regime for holding company officials accountable for offences committed by the company. The provision states that if the person committing an offence under Section 138 is a company, every person who, at the time the offence was committed, was in charge of, and was responsible to the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the offence and shall be liable to be proceeded against and punished accordingly. This creates a presumption of culpability against directors and managing directors, subject to proving that the offence was committed without their knowledge or that they had exercised all due diligence to prevent the commission of the offence.

The Supreme Court has consistently held that to make a director liable under Section 141, it must be shown that he was in charge of and responsible for the conduct of the business of the company at the relevant time. Merely being a director is not sufficient unless the role is clearly established. However, once it is shown that a person was a director and was responsible for the affairs of the company, the burden shifts to that person to prove that they had no knowledge of the offence or had exercised due diligence.

When a director signs a cheque on behalf of the company, they are acting in their official capacity as a corporate agent. However, the personal criminal liability of directors under Section 138 that may arise from the cheque’s dishonour is distinctly personal and cannot be deflected onto the corporate entity. This is because the criminal liability relates directly to the individual director’s role in the decision-making process that led to the dishonour.

The IBC adds another layer to this framework. While Section 14 provides moratorium protection to the corporate debtor, Section 32A of the IBC specifically addresses criminal liability in approved resolution plans. This provision states that where the Adjudicating Authority has approved a resolution plan, no action shall be taken against the property of the corporate debtor in relation to an offence committed prior to the commencement of the corporate insolvency resolution process. However, this protection extends only to the corporate debtor and its properties, not to any person other than the corporate debtor who is involved in the commission of such an offence.

The distinction drawn by Section 32A is critical. It recognizes that while the corporate debtor should be allowed a fresh start under an approved resolution plan, individuals who committed offences while managing the company should not escape personal accountability. This ensures that insolvency resolution does not become a mechanism for personal immunity from criminal prosecution [5].

The interplay between these provisions creates a nuanced system where corporate rehabilitation is balanced against individual accountability. The corporate entity may be protected to enable its revival, but those who were responsible for decisions leading to criminal offences remain answerable under law. This prevents moral hazard where directors might engage in reckless or fraudulent conduct knowing that subsequent insolvency proceedings would shield them from consequences.

Distinction Between Corporate and Personal Liability

One of the fundamental principles established through judicial interpretation is the clear distinction between the corporate entity and the natural persons who manage it. This distinction is rooted in the basic principle of corporate law that a company is a separate legal entity distinct from its shareholders and directors. However, this separation does not mean that individuals can always escape liability for corporate wrongdoing.

When a cheque issued by a company is dishonoured, two parallel liabilities are created under the NI Act. First, the company as the drawer of the cheque is liable under Section 138. Second, by virtue of Section 141, directors and officers who were in charge of the company’s affairs at the relevant time also become personally liable. These are distinct liabilities even though they arise from the same wrongful act.

The moratorium under Section 14 of the IBC operates only on the corporate debtor. The term corporate debtor is specifically defined in Section 3(8) of the IBC to mean a corporate person who owes a debt to any person. This definition does not include natural persons who are directors or officers of the corporate debtor. Therefore, when a moratorium is declared, it freezes actions against the corporate debtor but does not automatically extend to individuals connected with that corporate debtor.

This distinction has important practical implications. When the NCLT admits an insolvency application and declares a moratorium, creditors cannot proceed with recovery actions against the company, attach its properties, or continue litigation against it for recovery of debts. However, these restrictions do not prevent creditors from proceeding against directors who are personally liable under statutory provisions like Section 141 of the NI Act [6].

The rationale for maintaining this distinction is grounded in both legal principle and policy considerations. From a legal standpoint, criminal liability is personal and cannot be diluted by corporate insolvency. The offence under Section 138 involves elements of mens rea and actus reus that are attributable to individuals who made decisions on behalf of the company. These individuals had the power to ensure that cheques issued by the company would be honored, and their failure to do so attracts personal criminal liability.

From a policy perspective, allowing directors to escape prosecution by hiding behind corporate insolvency would undermine the entire purpose of Section 138 of the NI Act. The provision was enacted to restore credibility to negotiable instruments and ensure that parties who issue cheques do so responsibly. If directors knew they could avoid prosecution through insolvency proceedings, it would incentivize irresponsible issuance of cheques and erode commercial morality.

The Supreme Court has emphasized that the IBC is designed to provide a fresh start to the corporate entity as a going concern, not to provide immunity to individuals who may have engaged in wrongful conduct. The resolution plan under the IBC addresses the debts and liabilities of the company, not the criminal liability of individuals. An approved resolution plan may release the company from its financial obligations, but it cannot extinguish the criminal prosecution of directors who were responsible for offences committed during their tenure.

Impact on Commercial Transactions and Creditor Protection

The Bombay High Court’s judgment has significant implications for commercial transactions and creditor rights in India. By clarifying that directors remain personally liable for cheque dishonour regardless of insolvency proceedings against the company, the judgment strengthens the deterrent effect of Section 138 and enhances creditor protection.

In commercial practice, cheques serve as important instruments of credit and payment. Businesses routinely accept post-dated cheques as security for loans and advances, relying on the legal consequences of dishonour as a safeguard against default. If directors could escape liability by initiating insolvency proceedings against the company after issuing cheques, it would significantly undermine the utility of cheques as security instruments. Creditors would become reluctant to accept cheques, leading to increased transaction costs and reduced liquidity in commercial dealings.

The judgment ensures that creditors who have accepted cheques as security retain meaningful recourse against responsible individuals even when the corporate entity enters insolvency. This is particularly important for small and medium enterprises that often extend credit to larger companies based on the assurance provided by cheques signed by responsible directors. These creditors may not have the resources to conduct extensive due diligence or secure complex collateral arrangements, and they rely heavily on the deterrent effect of criminal prosecution under Section 138.

The decision also addresses a potential avenue for abuse where unscrupulous directors might deliberately trigger insolvency proceedings after issuing multiple cheques to different creditors, hoping to escape personal liability. By holding that the timing of IBC proceedings is irrelevant to directors’ liability under Section 138, the court eliminates this possibility and ensures that individuals cannot strategically use insolvency law to evade criminal consequences [7].

However, the judgment also maintains a balance by recognizing that not all directors are automatically liable. The requirement under Section 141 that the accused must have been in charge of and responsible for the conduct of business provides a safeguard against indiscriminate prosecution of all directors. Nominee directors, independent directors, or those who had no role in the financial decisions leading to the dishonour can potentially defend themselves by demonstrating their lack of involvement.

From the perspective of insolvency resolution, the judgment does not hinder the IBC process. The corporate debtor continues to receive moratorium protection, allowing the resolution professional to work on revival plans without interference from individual creditors. The continuation of criminal proceedings against directors operates on a parallel track and does not impede the collective resolution process. In fact, by maintaining pressure on directors who were responsible for the company’s financial mismanagement, it may incentivize better cooperation with the resolution process and more realistic resolution proposals.

Comparative Analysis with Personal Insolvency Provisions

An interesting dimension of the legal framework is the treatment of directors under personal insolvency provisions. Section 96 of the IBC deals with interim moratorium in personal insolvency cases. When an individual debtor files an application for initiating a resolution process, an interim moratorium period commences during which various actions against the debtor are prohibited.

Several directors who faced Section 138 prosecution have attempted to invoke Section 96 by filing personal insolvency applications, arguing that they should receive moratorium protection in their individual capacity. However, courts have consistently rejected this argument, holding that directors cannot escape their vicarious criminal liability under Section 141 of the NI Act by resorting to personal insolvency proceedings [8].

The Delhi High Court in Sandeep Gupta v. Shri Ram Steel Traders explicitly addressed this issue, holding that Section 96 of the IBC would not be applicable when a person is arrayed as an accused in a complaint under Section 138 in his capacity as a director of a company. The court reasoned that the debt for which the cheque was issued belonged to the company, not the director personally. The director’s liability under Section 141 is not because he owes the debt but because he was responsible for the company’s conduct when it committed the offence—an approach that reflects how courts have treated the personal criminal liability of directors under Section 138 as independent of any insolvency process.

This distinction is crucial. Personal insolvency provisions are designed to provide relief to individual debtors who are unable to pay their personal debts. They are not intended to shield individuals from criminal liability arising from their role in corporate management. If directors could use personal insolvency to avoid Section 138 prosecution, it would create an absurd situation where any person facing criminal prosecution could escape by declaring personal insolvency.

The courts have emphasized that criminal liability is not a debt that can be discharged through insolvency. The punishment under Section 138 includes both fine and imprisonment, and the imprisonment aspect cannot be addressed through any insolvency mechanism. Even if the fine component could theoretically be considered a debt, the criminal nature of the proceedings and the imprisonment sanction distinguish them from ordinary debt recovery.

Conclusion and Future Implications

The Bombay High Court’s judgment represents an important affirmation of established legal principles regarding the interplay between insolvency law and criminal liability under the Negotiable Instruments Act. By holding that directors cannot escape their personal liability for cheque dishonour by relying on insolvency proceedings against the company, the court has strengthened creditor protection and maintained the deterrent effect of Section 138.

The judgment resolves an important question about timing by clarifying that it is immaterial whether IBC proceedings were initiated before or after the cause of action under Section 138 arose. What matters is whether the accused was in charge of and responsible for the company’s affairs at the time the cheque was issued and dishonoured. This temporal neutrality prevents strategic manipulation of insolvency law to evade criminal liability.

Looking forward, this judgment is likely to significantly influence how directors approach their responsibilities in managing company finances. With the law now clarifying that Personal Criminal Liability of Directors Under Section 138 cannot be avoided through corporate insolvency proceedings, directors have a stronger incentive to maintain responsible financial stewardship and ensure stricter compliance in all cheque-related transactions.

For creditors, the judgment provides assurance that accepting cheques as security remains meaningful even in situations where the debtor company subsequently faces insolvency. This is particularly valuable for small creditors who may not have sophisticated security arrangements and rely primarily on the deterrent effect of criminal prosecution [9].

The decision also contributes to the evolving jurisprudence on the scope and limits of moratorium protection under the IBC. While the Code provides powerful tools for corporate rehabilitation, it does not create a zone of absolute immunity. The balance struck by courts between protecting viable businesses and ensuring individual accountability is essential for maintaining trust in both the insolvency system and the broader commercial ecosystem.

As insolvency law continues to develop in India, the principles established in this judgment will serve as important guideposts. They affirm that corporate rehabilitation and individual accountability are not mutually exclusive objectives but can coexist within a coherent legal framework. The judgment demonstrates judicial commitment to preventing the abuse of beneficial legislation while ensuring that legitimate creditor rights are protected.

References

[1] Supreme Court of India. (2021). P. Mohanraj & Ors. v. M/s. Shah Brothers Ispat Pvt. Ltd., (2021) 6 SCC 258. Available at: https://indiankanoon.org/doc/97452657/ 

[2] Delhi High Court. (2023). Sandeep Gupta v. Shri Ram Steel Traders & Anr., CRL.M.C. 381/2022. Available at: https://www.scconline.com/blog/post/2023/03/17/initiation-ibc-proceedings-does-not-absolve-company-director-signatories-of-criminal-liability-under-section-138-negotiable-instruments-act-supreme-court-legal-research-news-updates/ 

[3] LiveLaw. (2021). Moratorium Under Section 14 IBC Covers Section 138 NI Act Proceedings Against Corporate Debtor. Available at: https://www.livelaw.in/top-stories/moratorium-under-section-14-ibc-covers-section-138-ni-act-proceedings-against-corporate-debtor-supreme-court-170508 

[4] Bombay High Court. (2025). Ortho Relief Hospital and Research Centre v. M/s. Anand Distilleries & Ors., decided on October 1, 2025. Available at: https://lawtrend.in/prior-ibc-proceedings-do-not-bar-section-138-ni-act-action-against-company-directors-bombay-hc/ 

[5] Bar & Bench. (2021). Moratorium order under Section 14 IBC bars parallel proceedings against Corporate Debtor under Section 138 of NI Act. Available at: https://www.barandbench.com/news/litigation/moratorium-order-section-14-ibc-bars-parallel-proceedings-section-138-negotiable-instruments-act-supreme-court 

[6] SCC Online. (2023). Liability of the Erstwhile Directors: Section 138, Negotiable Instruments Act versus Insolvency and Bankruptcy Code, 2016. Available at: https://www.scconline.com/blog/post/2023/10/12/liability-of-the-erstwhile-directors-section-138-negotiable-instruments-act-versus-insolvency-and-bankruptcy-code-2016/ 

[7] LiveLaw. (2025). No S.138 NI Act Case Against Ex-Director Of Company When Cause Of Action Arose After IBC Moratorium Was Declared: Supreme Court. Available at: https://www.livelaw.in/supreme-court/no-s138-ni-act-case-against-ex-director-of-company-when-cause-of-action-arose-after-ibc-moratorium-was-declared-supreme-court-286691 

[8] LegitEye. (2023). Only corporate debtor is protected by moratorium while signatories/directors cannot escape from their penal liability u/s 138 of NI Act. Available at: https://legiteye.com/in-crlmc-3812022-punj-hc-only-corporate-debtor-is-protected-by-moratorium-while-signatoriesdirectors-cannot-escape-from-their-penal-liability-us-138-of-ni-act-by-filing-personal-insolvency-proceedings-delhi-hc-justice-jasmeet-singh-15-05-2023/ 

[9] iPleaders. (2021). The changing dynamics of section 14 of the IBC, 2016 vis-à-vis section 138 proceeding of NI Act,1881. Available at: https://blog.ipleaders.in/changing-dynamics-section-14-ibc-2016-vis-vis-section-138-proceeding-ni-act1881/ 

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