IBC Cannot Be Used as Coercive Debt Recovery Tool in Contractual Disputes: Supreme Court Dismisses Dhanlaxmi Bank Appeal

The Supreme Court of India has dismissed an appeal by Dhanlaxmi Bank Limited, affirming that the Insolvency and Bankruptcy Code, 2016, cannot serve as a coercive debt recovery tool in cases involving predominantly contractual obligations. In Dhanlaxmi Bank Limited v. Mohammed Javed Sultan (2026 INSC 460), decided on 7 May 2026, the Court upheld the NCLAT order and held that the dispute was essentially contractual in nature and fell within the jurisdiction of the Debt Recovery Tribunal.

Facts of the Case

The dispute originated from a loan of Rs 1.50 crore sanctioned by Dhanlaxmi Bank in June 2011 in favour of Emerald Mineral Exim Pvt. Ltd. for the purchase of a unit in the Synthesis Business Park in Kolkata. When the borrower defaulted, the bank initiated proceedings under Section 7 of the IBC before the NCLT, seeking to trigger the Corporate Insolvency Resolution Process against the corporate debtor.

The NCLAT had rejected the application, finding that the dispute was predominantly contractual in nature and was already the subject of proceedings before the DRT, which is the appropriate forum for debt recovery. Dhanlaxmi Bank appealed to the Supreme Court.

Supreme Court's Ruling

A bench comprising Justice Pamidighantam Sri Narasimha and Justice Alok Aradhe held that the IBC is not a forum for the adjudication of individual contractual claims and it cannot be used as a tool for coercion and debt recovery by individual creditors. The Court observed that the facts disclosed a dispute which is predominantly contractual in nature and is the subject matter of the proceedings before the DRT, the appropriate forum for recovery.

The Court emphasised that permitting the invocation of the IBC in such cases would amount to converting insolvency proceedings into a coercive mechanism for recovery, which is impermissible under the statutory scheme of the Code.

Significance for Creditors and Debtors

This ruling reinforces the distinction between genuine insolvency proceedings and debt recovery actions. The IBC was enacted to provide a time-bound mechanism for the resolution of insolvency, not to serve as an alternative to the Debt Recovery Tribunal or the SARFAESI Act. Creditors must demonstrate that the corporate debtor is genuinely insolvent and that the resolution process serves the broader purpose of maximising value for all stakeholders.

For corporate debtors, the judgment provides a defence against the misuse of IBC proceedings as a pressure tactic by creditors who have alternative and appropriate remedies available. The ruling clarifies that contractual disputes with specific factual controversies are better adjudicated by forums designed for that purpose, rather than through the drastic mechanism of corporate insolvency.