For several years after the Insolvency and Bankruptcy Code, 2016 (“IBC”) came into force, creditors often viewed it as a swift and effective remedy for unpaid dues. The consequences of admission under the IBC are serious and immediate, and therefore, the filing of an insolvency application itself frequently carried significant commercial pressure. As a result, creditors often proceeded on a relatively simple premise: if there is a debt, and if there is a default, the IBC may be invoked.

However, that approach is now being examined with far greater scrutiny. Courts have repeatedly clarified that the IBC is not intended to be a substitute for recovery proceedings, nor can it be used as a pressure tactic to compel payment in ordinary commercial or contractual disputes. The Supreme Court’s decision in Dhanlaxmi Bank Ltd. v. Mohd. Javed Sultan & Ors. (2026 INSC 460) reinforces this position by reminding creditors that the IBC is a collective insolvency resolution framework, and not a forum for adjudication of individual recovery claims.

The practical implication is significant. Before filing an application under the IBC, a creditor must look beyond the unpaid amount. It must assess the transaction in its entirety, the nature of the debt, the structure of the arrangement, whether third-party obligations are involved, whether the dispute is genuinely one of insolvency or essentially contractual in nature, and whether parallel proceedings before another appropriate forum are already pending.

In other words, the question is no longer merely: “Is there a debt and default?” The more important question is: “Is this truly a fit case for insolvency resolution?” If the real objective is recovery of money, enforcement of contractual rights, or exerting pressure on the debtor, the IBC may not be the appropriate route.

The Judgment in Brief

  1. In this case, Dhanlaxmi Bank had sanctioned a loan of ₹1.50 crore to the corporate debtor for purchasing a commercial unit in Kolkata. The amount, however, was disbursed directly to the builder under a quadripartite arrangement involving the Bank, the corporate debtor, the builder and the housing authority. When the account became irregular, the Bank initiated recovery proceedings before the Debt Recovery Tribunal and later also invoked Section 7 of the IBC.
  2. The National Company Law Tribunal admitted the Section 7 application. However, the National Company Law Appellate Tribunal set aside the admission order. The Supreme Court ultimately upheld the National Company Law Appellate Tribunal’s view and dismissed the Bank’s appeal.
  3. The Court’s reasoning is significant. It held that this was not a straightforward case of financial debt and default. The loan disbursement was closely linked with the builder’s obligations relating to construction, delivery and transfer of the property. The dispute was therefore predominantly contractual in nature and was already the subject matter of proceedings before the Debt Recovery Tribunal. In such circumstances, allowing IBC proceedings would effectively convert insolvency into a coercive recovery mechanism.

Debt and Default May Open The Door: But Not Every Case Enters IBC

  1. In a Section 7 proceeding under the IBC, the threshold inquiry has traditionally been whether there is a financial debt and whether default has occurred. These remain essential statutory requirements. However, the existence of debt and default does not mean that insolvency proceedings must follow as a matter of course.
  2. The distinction is important. Where the transaction is a straightforward lending arrangement, with a clear repayment obligation and an admitted default, the IBC may operate in its intended manner. But where the transaction is commercially layered, dependent on performance by multiple parties, or gives rise to overlapping contractual obligations, the Adjudication Authority may be required to look beyond the unpaid amount and examine the real nature of the dispute.
  3. This is consistent with the broader purpose of the IBC. The Code is designed as a collective insolvency resolution framework; it is not meant to function as an alternative recovery forum or as a mechanism to adjudicate individual contractual disputes. Therefore, even if a creditor can show that money is payable, that fact alone may not automatically justify admission of an insolvency application.
  4. This becomes particularly relevant in transactions where the alleged default cannot be separated from wider contractual arrangements, for example, where repayment is linked to construction, delivery of property, creation of security, transfer documentation, refund obligations, or performance by a third party. In such cases, the dispute may require a detailed examination of contractual rights, competing obligations and the conduct of parties.
  5. Where that is so, the appropriate remedy may lie before a civil court, arbitral tribunal, Debt Recovery Tribunal or another recovery forum, not necessarily before the National Company Law Tribunal. The IBC cannot be used to bypass those remedies merely because it may offer greater leverage or quicker commercial pressure.
  6. The broader takeaway is clear that debt and default may open the door to the IBC, but they do not always decide whether that door should be entered. Creditors must assess whether the case genuinely calls for insolvency resolution, or whether it is essentially a contractual or recovery dispute better suited to another forum.

Complex Transactions Require Greater Caution

The judgment is particularly relevant for banks, financial institutions, non-banking financial companies, asset reconstruction companies and other lenders dealing with structured or multi-party transactions.

Where the transaction involves:

  1. direct disbursement to a third party;
  2. builder-buyer-lender arrangements;
  3. escrow or tripartite/quadripartite structures;
  4. security creation dependent on future performance;
  5. property transfer obligations;
  6. refund obligations of third parties;
  7. pending recovery proceedings; or
  8. allegations of contractual breach,

the creditor must carefully carve out a clear creditor-debtor relationship in the contract and an intention that qualifies for insolvency resolution.

In such cases, the issue may not be limited to “Has the borrower defaulted?” The more important question may be: Is this really an insolvency default, or is it a contractual/recovery dispute?

Parallel Proceedings Are Not Always Fatal : But may decide the Fate

  1. The judgment does not suggest that a creditor is barred from pursuing more than one statutory remedy. In commercial disputes, it is not unusual for creditors to explore remedies under different laws, particularly where the same transaction gives rise to rights of recovery, enforcement of security, contractual claims and insolvency-related consequences.
  2. However, the existence of parallel proceedings can no longer be treated as irrelevant. Where a creditor has already invoked a recovery forum, and that forum is actively examining the dispute, a subsequent IBC filing may be viewed more closely. The court may ask whether the insolvency application is truly aimed at resolving corporate insolvency, or whether it is being used to add pressure in an ongoing recovery dispute.
  3. This distinction is important. The mere pendency of proceedings before a Debt Recovery Tribunal, civil court, arbitral tribunal or any other forum may not, by itself, defeat an IBC application. But it can influence how the Adjudicating Authority views the nature of the dispute, the creditor’s objective, and the appropriateness of the insolvency route.
  4. Creditors must therefore be able to justify why the IBC is being invoked despite other remedies already being pursued. If the underlying controversy is substantially contractual or recovery-oriented, and another forum is already seized of the matter, the IBC filing may invite objections that it is being used as a parallel pressure tactic rather than as a genuine resolution mechanism.
  5. The practical consequence is that creditors must now be more strategic in choosing remedies. Filing before every available forum may appear aggressive, but it may not always be legally sound or commercially prudent. A disciplined remedy strategy, one that matches the nature of the dispute with the appropriate forum, is likely to be more effective than a scattered multi-forum approach.
  6. In short, parallel proceedings are not necessarily fatal. But they matter. They form part of the larger factual matrix that courts may consider while deciding whether the IBC has been invoked for its intended purpose, or whether it is being used as another route for recovery.

What Creditors Should Examine Before Filing Under IBC

  1. For creditors, the takeaway is practical, IBC filing should no longer be treated as the automatic next step once payment is not received. Before approaching the Adjudication Authority, creditors must pause and examine whether the dispute genuinely belongs in the insolvency framework.
  2. This means looking at the transaction as a whole. Is the claim clearly a financial or operational debt? Is the default supported by clear documents and contemporaneous records? Is the dispute a simple case of non-payment, or does it involve wider issues such as contractual breaches, property obligations, third-party performance, creation of security or competing claims? These questions matter because the IBC is not meant to resolve every commercial dispute merely because money is due.
  3. Creditors must also consider whether other proceedings are already pending in relation to the same transaction. The existence of proceedings before a Debt Recovery Tribunal, civil court, arbitral tribunal or another forum may not automatically prevent an IBC filing, but it can influence how the tribunal views the creditor’s objective. If the insolvency application appears to be a means of adding pressure in an ongoing recovery dispute, it may invite closer scrutiny.
  4. Equally important is the purpose behind the filing. If the objective is genuine insolvency resolution, the IBC remains a powerful remedy. But if the real purpose is recovery, enforcement of contractual rights, or creating settlement pressure, the creditor may need to reconsider whether the insolvency route is appropriate.
  5. In short, creditors must move beyond a narrow “debt and default” analysis. The better approach is to conduct an IBC suitability assessment, one that considers the nature of the debt, the quality of evidence, the surrounding disputes, the role of third parties, pending proceedings and the commercial purpose of the filing. This disciplined pre-filing exercise may often determine whether the application survives threshold scrutiny.

The Larger Message

  1. The larger message from the judgment is not that creditors must avoid the IBC. Rather, it is that the IBC must be invoked with greater caution, and only in cases where the remedy truly fits the nature of the dispute.
  2. Debt and default continue to remain important statutory thresholds. However, they may not, in every case, be sufficient to justify commencement of insolvency proceedings. The transaction must be viewed in its entirety, how it was structured, what obligations were undertaken by each party, whether third-party performance was central to the arrangement, whether the dispute is essentially contractual, and whether another forum is already seized of the matter.
  3. This requires a shift in approach. Creditors can no longer treat the IBC as an automatic next step once payment is not received. A more considered assessment is necessary, not only of the legal maintainability of the application, but also of the commercial purpose it seeks to achieve. If the object is essentially to recover money, enforce contractual rights, or create settlement pressure, the insolvency route may invite closer scrutiny.
  4. A creditor’s assessment must now be more nuanced: not simply whether the statutory threshold can be met, but whether the insolvency process is the correct forum for the dispute.
  5. The IBC remains one of the most effective creditor remedies under Indian law. But its effectiveness lies in its proper use, as a mechanism for collective resolution, value preservation and stakeholder balancing. The judgment serves as a timely reminder that insolvency is not meant to be a pressure strategy. It is a resolution process, and courts are likely to be increasingly mindful of that distinction.

Authors:

Jinal Shah

Associate Partner,

Juris Corp

Email: [email protected]

Palak Nenwani

Associate Partner,

Juris Corp

Email: [email protected]

Disclaimer:    

This article is intended for informational purposes only and does not constitute a legal opinion or advice. Readers are requested to seek formal legal advice prior to acting upon any of the information provided herein. This article is not intended to address the circumstances of any particular individual or corporate body. There can be no assurance that the judicial / quasi-judicial authorities may not take a position contrary to the views mentioned herein.