“Sham” Loan to Trigger CIRP: NCLT Recalls Admission Order And Imposes Penalty for Fraudulent Initiation

The Hon’ble National Company Law Tribunal (NCLT), New Delhi Bench, in its order dated November 27, 2025, addressed the issue of whether a Section 7 application can be admitted based on a debt that was allegedly manufactured to abuse the insolvency framework and bypass a High Court execution order.

The Applicant, Jindal Biochems, held an arbitration award of approximately INR 10.29 Crores against the Corporate Debtor, V4 Infrastructure Pvt. Ltd. The Corporate Debtor, a defunct entity with no business operations since 2010, was facing execution proceedings where the Hon’ble Delhi High Court had restrained it from transferring assets.

To apparently circumvent these proceedings, the Corporate Debtor borrowed exactly INR 1 Crore from the Financial Creditor (an NBFC) on October 29, 2021. Shortly thereafter, the Corporate Debtor defaulted on the interest payments, leading the Financial Creditor to file a Section 7 petition, which was admitted by the NCLT on July 20, 2022. The Applicant sought a recall of this admission, alleging collusion and fraud.

The Applicant argued that the loan was a conspiracy, highlighted by the fact that the loan amount was exactly INR 1 Crore—meeting the precise minimum threshold required to trigger CIRP under Section 4 of the IBC. Furthermore, the loan was unsecured and carried an interest rate of only 8%, which was suspiciously low for a financially distressed company, compared to market rates of 24-30% for similar risk profiles.

The Respondents countered that the loan was genuine and taken to settle tax dues under the Vivad Se Vishwas Scheme.

Allowing the application and recalling the admission order, the NCLT observed the following:

1. The NCLT noted that the Corporate Debtor had no functional revenue streams. The sudden borrowing of exactly INR 1 Crore was unsupported by commercial rationale. While the Respondents claimed the loan was for tax settlement, the actual tax liability was only INR 89.33 Lakhs. The NCLT found no explanation for why the Corporate Debtor borrowed an amount “far in excess” of the liability, terming the explanation an “afterthought”.

2. The NCLT held that the transaction bore “unmistakable characteristics of a sham arrangement” designed to defeat the legitimate claims flowing from the Arbitral Award. By orchestrating a default on an artificially created debt, the parties attempted to use the IBC as a “shield” against enforcement proceedings.

3. The NCLT emphasized that the jurisdiction under Section 7 cannot be invoked to nullify existing judicial determinations of liability. It ruled that such conduct falls squarely within the mischief of Section 65 of the IBC (fraudulent or malicious initiation). Consequently, the admission order was liable to be recalled under Rule 11 to prevent the abuse of process.

4. Finding the Section 7 application to be a “gross abuse of the process of law,” the NCLT imposed a penalty of INR 5,00,000/- on the Financial Creditor, directing it to be deposited in the Prime Minister’s National Relief Fund.

This judgment serves as a precedent that the NCLT will look beyond the mere technical existence of a “debt” and “default.” It reinforces that the IBC cannot be weaponized by corporate debtors to derail enforcement of arbitration awards or court decrees through collusive insolvency filings. The ruling confirms that the NCLT retains the power to recall admission orders ab initio when fraud and malicious intent are established.