The Vakilkaro Brief: NCLT Rejects Section 65 Plea After Corporate Debtor Failed to Prove Malicious Intent by Financial Creditor

The National Company Law Tribunal, Jaipur Bench, recently came out with an important decision tied to the misuse allegations under Section 65 of the Insolvency and Bankruptcy Code, 2016. In short, the Tribunal said that insolvency proceedings cannot be painted as fraudulent or malicious just because the corporate debtor disputes the claim or tries to push the matter out a bit. Basically, unless there is crisp documentary proof that shows wrongful intent on the part of the financial creditor, an application under Section 65 is not going to work. The ruling also points out that One Time Settlement proposals may end up functioning as strong evidence for both debt and default, in a practical sense.

Key Takeaways

• Basically, unless there is crisp documentary proof that shows wrongful intent on the part of the financial creditor, an application under Section 65 is not going to work.
• The Vakilkaro Brief: NCLT Dismisses Section 65 Application Filed to Delay Insolvency Proceedings The Update The Jaipur bench of NCLT dismisses the Section 65 application of the corporate debtor as the allegations that the CIRP was started with a malafide intention or for harassment were found to be baseless and mere tactics of causing delay.
• Thereafter, the financial creditor moved the court under Section 7 of the IBC for starting a Corporate Insolvency Resolution Process (CIRP) for an outstanding sum of more than Rs.
• The corporate debtor stated that the financial creditor was using the insolvency resolution process under IBC as the mode of recovery and That means approaching the tribunal with a wrongful intention/malice.
• The Tribunal noticed that the Section 65 application came very late, in fact, only after the debtor signed OTS, failed its repayment, and was about to face restoration of insolvency petition.

The Vakilkaro Brief: NCLT Dismisses Section 65 Application Filed to Delay Insolvency Proceedings

The Update

The Jaipur bench of NCLT dismisses the Section 65 application of the corporate debtor as the allegations that the CIRP was started with a malafide intention or for harassment were found to be baseless and mere tactics of causing delay.

The Impact

The judgment makes it clear that insolvency application under Section 7 cannot be dismissed from just allegations of malafide intent. Corporate debtors have to substantiate their claim that the financial creditor is acting fraudulently or with malice with proper evidence.

The Action

Financially distressed companies should make all their legal points when the matter is at the stage of admission only and if they are making the claims under section 65, then such claims should not be based on procedural delays or unsubstantiated allegations but supported with strong documentary evidence.

Background of the Dispute

Over the period 2010 to 2019, Union Bank of India had supplied various credit facilities to Sanga Builders Pvt. Ltd. Eventually, the account turned irregular and was declared a Non-Performing Asset as of 31 March 2021. The bank sent a recall notice demanding payment on 3 April 2021, and as per the bank, the borrower's default date was 10 April 2021 when the borrower failed to repay even after the expiry of the scheduled period.

Thereafter, the financial creditor moved the court under Section 7 of the IBC for starting a Corporate Insolvency Resolution Process (CIRP) for an outstanding sum of more than Rs. 27 crore. While the issue was still unresolved, the corporate debtor made a proposal to the resolution professional for a One Time Settlement amounting to Rs. 20 crore, which resulted in the insolvency petition being withdrawn but with a guarantee that it could be filed again when breach.

Even so, the corporate debtor did not adhere to the OTS conditions, which led to the re-filing of the Section 7 petition. The corporate debtor, after the restoration of the petition, submitted a motion under Section 65 claiming that the insolvency proceedings had been commenced in a wrongful and fraudulent manner.

What the Corporate Debtor Argued?

The corporate debtor in their plea contested the admissibility of the plea for insolvency on various grounds. It claimed that the plea was unauthorized, not only challenged the very concept of default but also invoked Section 10A of the IBC as their shield, and as an afterthought revealed the existence of a DRT order that had earlier in fact quashed the SARFAESI notice issued by the bank without their knowledge.

The corporate debtor stated that the financial creditor was using the insolvency resolution process under IBC as the mode of recovery and That means approaching the tribunal with a wrongful intention/malice. The debtor prayed for the dismissal of the Section 7 petition and punish the financial creditor under Section 65 of the Code.

Why the NCLT Rejected the Section 65 Application?

The Tribunal noticed that the Section 65 application came very late, in fact, only after the debtor signed OTS, failed its repayment, and was about to face restoration of insolvency petition. They also saw that the objections raised at the later stage were nothing new and had already been thrown in earlier. The Tribunal expressed that this made them believe that the application was just a last-minute idea to delay the decision.

The One Time Settlement (OTS) dtd. 2 January 2024, was a big blow to the corporate debtor. As the Tribunal, the OTS itself was the debtor's acknowledgment that both the debt was there and the default was made to the extent recognized by the IBC. Since the debtor accepted the default by the settlement proposal, So the case to call the insolvency petition a fraud was no more legally maintainable.

On top of that, the NCLT did not agree with the debtor's Section 10A argument and stated that the default took place on 10th April 2021 with the expiry of the period for recall notice, and this period for recall was not even covered by the Section 10A provisions for COVID protection. Another point the Tribunal stressed was that a failure to pay the installment is a fresh breach creating a new event of default under the loan agreement.

On the point of concealment of DRT order, the Tribunal stated that SARFAESI as well as IBC proceedings are separate and independent measures. The removal of SARFAESI notice does not get rid of the debt or default itself. So, the mere charges of concealment would not be enough to prove that the insolvency proceeding was intentionally initiated.

Interpretation of Section 65 of the IBC

The Tribunal really went over the scope of Section 65, which actually aims at penalizing the fraudulent or malicious start of insolvency proceedings. As the Bench saw it, there are two basic ingredients that need to be shown, and not just loosely alleged. First, there must be a fraudulent or malicious intent. Second, there has to be wrongful gain or wrongful loss, in other words some benefit taken improperly or a loss caused in a wrongful manner.

The Tribunal leaned on earlier judicial precedents that say insolvency petitions can not be brushed aside just because the debtor claims an improper motive, or suggests some ulterior purpose. It was not enough, the record required explicit documentary proof that clearly points toward fraud or malice. Here the corporate debtor didn’t bring forward any such material evidence so, the Section 65 application got dismissed, since it was found to be without merit.

Tribunal Criticizes Delay Tactics

An important part of the ruling was the Tribunal’s criticism of the repeated adjournments and those sort of delay tactics taken on by the corporate debtor, like it was some kind of routine. The Bench noted that the debtor kept asking for time claiming settlement discussions were underway, but then it did not honor those commitments, kept pushing back the arguments, and kept filing more applications even at later stages of the proceedings.

The Tribunal also felt that this conduct just prolonged the insolvency process in a way that didn’t really help anyone, and it ended up wasting judicial time, quite unnecessarily. Although the Tribunal did not impose exemplary costs because the CIRP had already been set in motion, the observations still send a clear and strong warning against procedural misuse in insolvency litigation.

Conclusion

The Jaipur Bench of the NCLT kind of reaffirmed, that Section 65 of the IBC isn’t some sort of routine defence you can pull out against each and every insolvency petition. Just saying there was mala fide intent, isn’t enough unless it is really supported by clear documentary evidence, pointing towards fraudulent or malicious conduct by the financial creditor. The ruling also shows how admissions made in One Time Settlement proposals can end up, in a practical sense, making a creditor’s case stronger on the issues of debt and default. For corporate debtors, this judgment works like a caution sign, meaning avoid procedural tactics to stretch or delay the CIRP proceedings, unless there are real substantive legal grounds underneath.

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Official External Resources

Use these primary/official sources to verify rules, forms, fees, timelines and regulatory updates before publication.

• Ministry of Corporate Affairs (MCA)
• National Company Law Tribunal (NCLT)