2026 (3) TMI 1208 - AT - IBC

Financial debt can be proved by records without a written loan agreement; fresh Section 7 petition survives settlement breach.

A written loan agreement is not an absolute prerequisite to prove financial debt under the Insolvency and Bankruptcy Code where bank statements, ... Written financial contract not a pre-condition for establishing financial debt under the IBC - breach of settlement gives rise to a fresh cause of action for insolvency proceedings - adjudicating authority's limited duty under Section 7 is to determine existence of debt and default from recordsWritten financial contract not a pre-condition for establishing financial debt under the IBC - No written loan agreement is mandatory for an NBFC Financial Creditor to establish a financial debt under the IBC - HELD THAT: - The Tribunal held that the IBC does not prescribe a written financial contract as a sine qua non for proving a financial debt and that the RBI Master Circular cannot override the Code. Applying precedent, the court accepted that debt and default may be established from bank statements, acknowledgements, promissory notes, TDS on interest, post dated cheques and other contemporaneous records. The Adjudicating Authority erred in rejecting the claim solely for lack of a written loan agreement. [Paras 11, 13, 14]The absence of a written loan agreement did not preclude the Appellant from proving financial debt and the Adjudicating Authority's finding to the contrary was unsustainable.Breach of settlement gives rise to a fresh cause of action for insolvency proceedings - Withdrawal of an earlier Section 7 petition without leave did not bar filing a fresh Section 7 petition after the Corporate Debtor breached the settlement - HELD THAT: - The Tribunal concluded that where a petition is withdrawn, proceedings stand wiped out and principles of res judicata cannot be invoked to prohibit a fresh petition based on a subsequent breach of the settlement. The court relied on Tribunal precedents holding that permitting a rule of absolute bar would enable debtors to evade liability through sham settlements; therefore a fresh cause of action arose on breach and the subsequent Section 7 petition was maintainable. [Paras 15, 18, 21]The Adjudicating Authority erred in applying res judicata and in treating the second petition as barred; the breach of settlement entitled the Appellant to file a fresh Section 7 petition.Adjudicating authority's limited duty under Section 7 is to determine existence of debt and default from records - The Adjudicating Authority failed to discharge its statutory duty under Section 7 by not admitting the petition despite material proving debt and default - HELD THAT: - Relying on the statutory scheme in Innoventive Industries, the Tribunal reiterated that the adjudicating authority's role is confined to ascertaining from records whether a debt and default exist; if satisfied, admission is required unless the application is incomplete. The Tribunal found the Appellant had furnished sufficient evidence of disbursements, acknowledgements and default, and therefore the NCLT erred in rejecting the Section 7 petition. [Paras 22, 24, 25]The rejection of the Section 7 petition was erroneous; the petition should be admitted and CIRP proceeded with as per law.Final Conclusion: The appeal is allowed; the impugned order is set aside. The Adjudicating Authority is directed to admit the Section 7 application and take further steps in accordance with law within the timeframe ordered by the Tribunal. Issues: (i) Whether absence of a written loan agreement prevents a financial creditor (NBFC) from proving existence of a financial debt under Section 5(8) of the Insolvency and Bankruptcy Code, 2016; (ii) Whether withdrawal of a prior Section 7 petition without express liberty to file afresh bars the financial creditor from instituting a subsequent Section 7 petition on breach of the settlement; (iii) Whether the Section 7 petition should be admitted where records and acknowledgements establish debt and default.Issue (i): Whether a written financial contract is a mandatory prerequisite to establish financial debt for the purposes of initiation of CIRP under the Insolvency and Bankruptcy Code, 2016.Analysis: The legal framework under the Code and allied Rules and Regulations permits proving financial debt by reference to relevant documents and records evidencing disbursement and accrual of interest; the IBC has overriding effect over other instruments. Precedents of this Tribunal establish that written contract is not an indispensable pre-condition where the nature of the transaction is otherwise demonstrated by bank statements, acknowledgements, promissory notes, TDS on interest, post-dated cheques and ledger entries.Conclusion: A written loan agreement is not mandatory; absence of a formal written contract does not preclude a financial creditor from proving financial debt where other evidentiary material establishes disbursement and time value of money.Issue (ii): Whether withdrawal of an earlier Section 7 petition without express leave bars filing a fresh Section 7 petition on subsequent breach of the settlement giving rise to renewed cause of action.Analysis: Withdrawal of the earlier petition wiped out the proceedings in that petition; where the corporate debtor breaches the settlement terms, such breach gives rise to a new cause of action. Principles invoked from suits and public-policy extensions are not automatically applicable to IBC proceedings to deny remedy where a bona fide breach occurs. Tribunal precedents recognize that permitting barring of fresh petitions on such technical grounds would incentivize sham settlements and defeat creditor rights.Conclusion: Withdrawal of the earlier petition without liberty does not bar a fresh Section 7 petition founded on breach of the settlement; res judicata and related principles are inapplicable to prevent a new petition where a fresh cause of action has arisen.Issue (iii): Whether the Section 7 petition should be admitted where records on file establish debt and default above the statutory threshold.Analysis: Under the Code the Adjudicating Authority's limited task is to be satisfied on the existence of debt and default from records or evidence produced; where bank statements, acknowledgements, promissory notes, TDS entries and dishonoured post-dated cheques reflect disbursement, accrual of interest and acknowledgement by the corporate debtor, the prerequisites for admission are satisfied and the application cannot be rejected on technical grounds.Conclusion: The material on record established debt and default and the Section 7 petition should be admitted.Final Conclusion: The appeal is allowed; the impugned order is set aside and the matter is remitted for admission of the Section 7 petition and further action in accordance with the Code.Ratio Decidendi: For the purposes of admission under Section 7 of the Insolvency and Bankruptcy Code, 2016, a financial debt may be proved by admissible records and acknowledgements evidencing disbursement and time value of money; a formal written loan agreement is not an absolute prerequisite, and a fresh Section 7 petition is maintainable upon breach of a settlement giving rise to a new cause of action despite prior withdrawal of a petition.