A without-prejudice deposit cannot justify Section 7 closure without adjudicating debt, default, and maintainability.

The Appellant entered into a Facility Agreement dated 05.04.2021 with the Respondent. The Respondent subsequently filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), claiming approximately ₹4.15 crore towards principal, interest and tax penalty. The Appellant disputed the maintainability of the petition, the authority of the person instituting it, and the existence of financial debt and default, and sought production of relevant documents.

After the petition was heard and reserved for orders on 12.08.2025, the Appellant deposited two demand drafts totalling ₹3,49,55,172, expressly without prejudice to its rights, remedies and contentions, stating that the deposit was intended to demonstrate solvency.

On 19.08.2025, the NCLT released the amount to the Respondent, recorded payment of principal and interest, noted withdrawal of the tax-penalty and default-interest claims, and closed the Section 7 petition without adjudicating the Appellant’s objections.

During the pendency of the matter, the Respondent issued a demand notice claiming ₹2,77,72,206 towards interest, default interest and legal expenses.

Section 7 of the IBC requires the Adjudicating Authority to determine whether a financial debt exists and whether a default has occurred before admitting or otherwise disposing of the insolvency application.

A payment or deposit expressly made without prejudice cannot, by itself, be treated as an unconditional admission of liability, particularly where the debtor has specifically disputed the debt, default or maintainability of the proceedings.

A deposit may indicate solvency, but it cannot substitute the adjudication required in a Section 7 proceeding.

Further, a Section 7 proceeding is not a recovery proceeding, and any subsequent claim must independently possess a contractual or statutory foundation and be legally recoverable; liberty to pursue legally maintainable claims does not amount to adjudication of those claims.

The NCLAT held that the Appellant’s deposit was expressly conditional and made without prejudice after the matter had already been reserved for orders. Accordingly, it could not automatically be construed as an admission of the financial debt or default, nor could it extinguish the objections already raised before the NCLT.

Although the deposit could be considered as evidence of solvency, the NCLT was still required to adjudicate the Appellant’s challenges to maintainability, authority, debt and default.

By releasing the amount and closing the petition without deciding those issues, the NCLT treated the deposit as a substitute for the statutory determination required under Section 7.

The later demand notice also involved materially different components from the original Section 7 claim and therefore required an independent contractual and legal basis; the liberty granted by the NCLT did not validate or adjudicate that demand.

The appeal was allowed, the NCLT’s order dated 19.08.2025 was set aside, and the matter was remanded for fresh consideration of the Section 7 petition.

The Respondent was directed to re-deposit the amount to the credit of the case before the Adjudicating Authority.

The NCLAT expressed no opinion on the merits of the Respondent’s subsequent monetary claim and awarded no costs.