When the Insolvency and Bankruptcy Code Turns into an Instrument of Business Pressure Tactics

Introduction

In certain circumstances, there is a peculiar risk in giving a hammer to a person who needs a scalpel. The Insolvency and Bankruptcy Code, 2016, intended as a surgical scalpel to help resolve financial distress issues, has repeatedly been used as a heavy hammer of commercial pressure. Recently, in a case decided in May 2026, namely Dhanlaxmi Bank Ltd. v. Mohammed Javed Sultan & Ors., the Supreme Court of India was yet again forced to trace that line which does not seem to need to be traced anymore. The issue raised was whether the IBC could be used to solve a problem that was nothing but a simple commercial controversy. Yet, here we are.

This paper explores that line and analyzes why crossing it may become dangerous not only to lawyers, but to any commercial actor in India.

The IBC’s Original Design: Resolution, Not Recovery

Before considering the question of misuse, it is necessary to appreciate the nature of the beast. The Insolvency and Bankruptcy Code of 2016 did not emerge as a tool for recovery; rather, it was designed as a rescue code – a systematic response to India’s age-old issue of distressed assets, locked credit markets, and a legal system that required decades to address the matter of a default.

In its seminal judgment interpreting the Code in Innoventive Industries Ltd. v. ICICI Bank, the Supreme Court noted how the IBC represented a paradigm shift in law by shifting India from a debtor-in-possession insolvency scheme to that of creditor-in-possession resolution within a fixed time-frame. The key element all along had been resolution, collectively planned, purposefully executed. The Corporate Insolvency Resolution Process was never meant to be a short cut through which individual creditors could recover their dues under a failed contract.

And yet, the misuse – ingenious, commercial, and logical in the eyes of the creditor has pursued the Code like a shadow it cannot shake.

Anatomy of Misuse: When an Operational or Financial Resolution Tool Turns into a Collection Tool

The dynamics behind the abuse can easily be explained. The creditor brings an application under Section 9 or Section 7 of the IBC in case of an operational or financial claim respectively. With the filing of the application leading to the initiation of the CIRP, there are drastic implications for the corporate debtor; a moratorium order under Section 14 puts a hold on any other legal proceedings, the Board gets suspended, and the Insolvency Resolution Professional steps in. For an otherwise healthy firm involved in a contractual dispute, such a measure is not a remedy but a nuclear option.

The mere possibility works as a deterrent. Either pay the amount that is being disputed or be faced with the threat of insolvency. There is no need for the creditor to prove its case in the court of law. It only needs to initiate the process.

This practice too has a label in law and the Supreme Court has not minced words when referring to it. In the case of Dhanlaxmi Bank Ltd. v. Mohammed Javed Sultan & Ors., the Court highlighted that “in cases where the objective of resorting to the Code is not for the purpose of solving any genuine financial difficulties but for compelling payments, then such resort shall amount to an abuse of process.”

The pertinent question that needs to be asked is, how is it that we find ourselves in a state where we have to remind the apex court time and again of such principles?

Dhanlaxmi Ruling: Doctrine in Application

One can learn more from the circumstances surrounding the Dhanlaxmi Bank matter since it is quite common. The controversy was sparked by a complicated business transaction where a loan granted by the appealing bank to a corporate borrower for buying a property from a developer was at stake. It was determined that in the matter at hand, there existed more of an issue related to contracts and not just an act of default on finance. Furthermore, the Supreme Court reaffirmed that IBC is intended to be a collective insolvency resolution process, not a means to settle personal contractual disputes.

Most importantly, the Court noticed that the proceedings at DRT were active, and an amount of ₹1.50 crore had already been deposited following the decision of DRT. Hence, invoking the process of IBC was not necessary, and moreover, it was improper to do so. In any case, the matter did not pertain to a financial debt default case calling for CIRP and permitting IBC invocation in such matters would make the entire process a means of recovery.

The Court also relied on the significant constitutional doctrine of its own precedents. In referring to Glas Trust Co. LLC v. BYJU Raveendran (2025) and Anjani Technoplast Ltd. v. Shubh Gautam (2026), the Court held that “IBC cannot be employed as ‘a tool for coercion and debt recovery by individual creditors.’”

What emerges from these decisions is not only a procedural principle, but a constitutional theory of the function of the legislation, the Code is meant to benefit the creditors collectively, workers, the economy, not as a tool for individual creditors holding disputed invoices.

Plausible Contentions Standard: The Doctrinal Barrier

Nevertheless, the arsenal of measures in law that seeks to prevent any misuse of the IBC in case of contractual disputes includes the precedent set by Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018). In it, the Court held that so long as a dispute does exist in reality and is not merely fictitious, the authority hearing the case will have to refuse to accept the application.

In this regard, the dispute giving the appearance of being genuine should not be considered as an illusory dispute raised in order to avoid legal responsibilities. The role of the NCLT at the stage of Section 9 is not that of a regular trial court, which would examine the evidence presented. Instead, it is limited to determining whether a genuine dispute does exist.

This is crucial as a doctrinal barrier. However, at this point in time, it may be viewed as an imperfect solution. Indeed, the process in question happens after the application has been filed, after the reputation of the corporate debtor has already suffered due to the mere fact that legal action had been initiated.

Moreover, there have been instances when NCLAT in several judgments has established the fact that Section 9 petitions should not be admitted unless the amount claimed is undisputed; otherwise, there is a genuine issue of liability, which would result in the rejection of the petition. The petitions for the admission of the IBC are still being filed. It indicates that it is not a case of the doctrine’s inability to solve this problem, but more of an incentive issue. In other words, for the creditor, whose contract is disputed, the IBC will always remain a cheap, yet powerful mechanism.

The Line That Needs to Be Upheld: Commercial Recovery and Insolvency Resolution

Central to this debate is a line between two very different concepts, theoretically easy but practically hard to draw. One concerns itself with whether a party is indeed insolvent, the domain of insolvency law. The other, with whether a particular party owes me money, the domain of commercial recovery law.

The distinction drawn by the Supreme Court is clear: “The NCLT and NCLAT are not the appropriate fora for this exercise, and the insolvency jurisdiction under the IBC was not designed to resolve disputes about the quantum of a decretal amount.”

If the creditor invokes the provisions of the IBC to resolve issues that in essence are contractual disputes, whether a service has been provided, if the goods have been as promised, if a construction has been completed then he does not seek insolvency resolution. He seeks to gain an upper hand, something the court is constantly being forced to consider.

One can also consider the case of speculative investors. According to the Supreme Court decision, speculation cannot use insolvency proceedings as a means of recovery from borrowers according to Section 7. Certain parameters were established for determining whether an individual qualifies as a homeowner or speculative investor, stressing that the IBC cannot be misused as a debt recovery tool. There is a fine line between being a creditor who genuinely has insolvency problems and being a commercial recovery creditor, with repercussions mainly felt by the corporation in question.

Where Do We Go from Here: Deterrence in Structure Rather Than Through Repetitive Judgments

The message from the highest court in India is being conveyed like clockwork now. And in every case, there is a repeated reinforcement of the limitation. Every year, new violations come up.

This means that judicial rulings, no matter how important and authoritative, do not solve the problem alone. It means that there should be structural changes. The Code should provide through amendment or IBBI guidelines some sort of penalty regime in relation to coercive IBC petitions. At present, a party which makes a frivolous IBC petition suffers minor penalties in comparison to the disruption suffered by the corporate debtor as a result of such action.

Further, a more robust threshold analysis should be undertaken during the pre-admission stage of any such IBC proceedings. NCLT needs to have sufficient resources in terms of judges, technical assistance, and process to ensure that the pre-admission stage is a thorough process to determine if a dispute involves a contract. The very admission has consequences.

Conclusion: Putting Away the Scalpel

IBC is one of the most significant laws on India’s economic statutes. It has changed the country’s credit culture, regained creditors’ confidence, and resolved countless distressed debts. Such achievements require protecting them, not just against dishonest debtors but even against dishonest creditors who wish to take advantage of a rescue provision for debt recovery purposes.

In situations where parties have a disagreement regarding the enforcement of the terms of a contract, the law offers a variety of avenues in order to settle the dispute – civil courts, DRTs, and arbitration. These are scalpels used for cutting open contracts. The IBC, however, is an altogether different tool meant for the theatre of a distressed financial situation rather than the arena of disputed invoices.

The clarification by the Supreme Court in Dhanlaxmi Bank Case is indeed much appreciated. What is required, however, is not clarification but resolution to the actual question posed – why does it require such a clarification at all.

Author: Vidisha Thakur, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

References:

• Insolvency and Bankruptcy Code, 2016

• Recovery of Debts and Bankruptcy Act, 1993

• Innoventive Industries Ltd. v. ICICI Bank (2018) 1 SCC 407

• Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. (2018) 1 SCC 353

• Pioneer Urban Land & Infrastructure Ltd. v. Union of India (2019) 8 SCC 416

• Glas Trust Co. LLC v. BYJU Raveendran (2025) 3 SCC 625

• Anjani Technoplast Ltd. v. Shubh Gautam 2026 SCC OnLine SC 668

• Dhanlaxmi Bank Ltd. v. Mohammed Javed Sultan & Ors. (May 7, 2026).

The above opinions are purely academic and intended to contribute to scholarly discourse on insolvency law reform.