2026 (2) TMI 134 - AT - IBC

Section 7 debt recovery initiation based on admitted default; malafide challenge rejected; Section 12A settlement permitted.

A financial creditor filed a Section 7 petition based on admitted debt and default; multiple OTS proposals by the corporate debtor corroborated default, ... Debt and default - One Time Settlement (OTS) and Swiss Challenge Method - Fraudulent or malicious initiation of proceedings - Assignment of debt and transfer of loan exposure - Adjudicating Authority admission and appointment of IRP - RBI Master Directions (Transfer of Loan Exposure) Directions 2021 - HELD THAT:- The present is a case where Section 7 application was filed on 29.09.2024 and the application was founded on debt and default committed by Corporate Debtor. The debt and default is not even questioned and submission of number of OTS proposals by the Corporate Debtor fully proves debt and default. Financial Creditor is fully entitled under the IBC to initiate process under Section 7 when debt and default is committed. Adjudicating Authority has heard the application and has rejected the same vide order dated 17.11.2025 holding that the initiation of application cannot be said to be malafide or fraudulent purpose. We, thus, do not find any error in the order of the Adjudicating Authority rejecting an application filed by the Corporate Debtor under Section 65. Appellant has submitted that even as on date Appellant is ready to settle all debt of the Prudent ARC and it has made an offer to deposit the entire amount by 31.03.2026, as noted above, the CoC has already been constituted in December 2024. Any proposal for settlement has to be now gone into and considered as per Section 12A as per law laid down by the Hon’ble Supreme Court in “Glas Trust Company LLC vs Byju Raveendran & Ors. [2024 (10) TMI 1185 - SUPREME COURT (LB)]”. It shall be thus, open for the parties to take steps under Section 12A which submission has also been advanced by Respondent No.3 that course open is to proceed under Section 12A. Issues: (i) Whether debt and default were established and the Section 7 application was rightly admitted by the Adjudicating Authority; (ii) Whether the One Time Settlement (OTS) proposed by the Corporate Debtor resulted in a binding contract or its annulment and subsequent assignment of debt were valid; (iii) Whether the Section 7 proceedings were malicious or fraudulently initiated (Section 65 challenge); (iv) Whether IA No.5205/2025 and IA No.5206/2025 seeking substitution/stay and liquidation/repayment were maintainable after the Adjudicating Authority had reserved judgment.Issue (i): Whether debt and default were established and Section 7 admission was correct.Analysis: The financial creditor's records, recall notices, acknowledged disbursements and repeated OTS proposals by the Corporate Debtor demonstrate existence of debt and default exceeding the statutory threshold. The Adjudicating Authority applied the legal standard for admission under Section 7 and relied on established precedent that exact quantification is to be verified by the IRP/RP during CIRP.Conclusion: In favour of Respondent. Debt and default were established and admission under Section 7 was properly upheld.Issue (ii): Whether the OTS created a concluded binding contract and whether annulment of the OTS and assignment of debt were valid.Analysis: The OTS proposals were expressly subject to conditions, including unanimous approval of all consortium lenders and specific terms in the BPD and sanction letters. The record shows the OTS remained a contingent proposal and was annulled pursuant to those terms; subsequent assignment followed applicable RBI Master Directions. The Delhi High Court's interim and final observations corroborated absence of a concluded contract without requisite approvals.Conclusion: In favour of Respondent. The OTS did not become a binding contract; annulment and assignment were valid.Issue (iii): Whether the Section 7 proceedings were malicious or fraudulently initiated such that relief under Section 65 is warranted.Analysis: Section 65 requires proof of initiation with malicious intent or for purposes other than insolvency resolution. The admitted debt and default, the lenders' conduct within BPD terms, the timing of assignment and the Delhi High Court's findings that the process prima facie appeared bona fide negate a finding of malafide initiation. The Adjudicating Authority examined subsequent events and rejected the Section 65 plea.Conclusion: In favour of Respondent. Section 65 relief was rightly refused; proceedings were not shown to be malicious or fraudulent.Issue (iv): Whether IA Nos.5205/2025 and 5206/2025 seeking substitution, stay and repayment directions were maintainable after judgment was reserved.Analysis: The Adjudicating Authority noted legal principles limiting entertainability of fresh pleadings after reservation, considered subsequent events (including assignment and rejection of redemption offers) and found the applications asserted remedies that were not effectuated (assignee rejected offers) and therefore not maintainable in the pending Section 7 adjudication. The Tribunal accepted that material subsequent events may be considered but found none that altered admission maintainability.Conclusion: In favour of Respondent. IA Nos.5205/2025 and 5206/2025 were not maintainable and were correctly rejected.Final Conclusion: The impugned orders admitting the Section 7 petition and rejecting IA Nos.4439/2025, 5205/2025 and 5206/2025 are upheld and the appellant's challenges fail; the appellant remains at liberty to place any settlement proposal before the Resolution Professional under Section 12A for CoC consideration.Ratio Decidendi: Where debt and default are established and an OTS remains conditional on unanimous lender approval, the Adjudicating Authority may admit a Section 7 petition; subsequent contingent offers that did not ripen into a binding settlement do not negate the validity of the Section 7 admission nor establish malafide initiation under Section 65.