NCLAT upholds rejection of Section 10 insolvency plea filed to derail SARFAESI recovery after hypothecated machinery went missing; reduces penalty to ₹5 lakh

The appellant, a designated partner of Panshul Agro Food LLP (“Corporate Applicant”), filed an application under Section 10 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) seeking initiation of CIRP, appointment of an IRP and moratorium, claiming default of approximately ₹42.20 crore to multiple creditors.

SBI had extended credit facilities of ₹28.44 crore, later renewed to ₹40.19 crore; the account was classified as NPA on 18 April 2025.

SBI issued a demand notice under Section 13(2) of the SARFAESI Act on 20 June 2025 and filed proceedings before the DRT on 20 August 2025. The Section 10 application was filed on 26 August 2025, followed by SBI’s symbolic possession of the secured property on 6 September 2025.

During inspection, substantial plant and machinery allegedly hypothecated to SBI were found missing.

The Adjudicating Authority dismissed the Section 10 application and imposed a penalty of ₹10 lakh, finding that the application was filed with malicious intent to obstruct recovery proceedings.

Whether an application under Section 10 of the IBC must be admitted merely upon proof of debt and default, or whether the Adjudicating Authority may examine whether the application is a bona fide attempt at insolvency resolution.

Whether the pendency of SARFAESI/DRT recovery proceedings and the unexplained removal of hypothecated plant and machinery justified dismissal of the Section 10 application on the ground of malicious or fraudulent intent.

Whether the penalty of ₹10 lakh imposed under Section 65(1) of the IBC was justified and proportionate.

Section 10 of the IBC permits a corporate debtor to initiate CIRP upon occurrence of default, but the statutory remedy cannot be misused as a device to obtain a moratorium and defeat legitimate recovery proceedings.

The Adjudicating Authority is not required to act as a “rubber stamp” and may sift the material on record to determine whether the application is a genuine insolvency-resolution attempt.

Section 65(1) of the IBC permits imposition of a penalty where insolvency proceedings are initiated fraudulently or with malicious intent.

The Tribunal relied on Agroha Paper Industries Pvt. Ltd. v. Bank of Maharashtra, which recognised that the protective framework of Section 10 must not be abused.

The Tribunal also considered Pondicherry Extraction Industries Pvt. Ltd. v. Bank of Baroda, Wave Megacity Centre Pvt. Ltd. v. Rakesh Taneja & Ors., and Jakhodia Traexim Pvt. Ltd. concerning the scope of Section 10 applications.

Penalties must satisfy proportionality and be supported by reasons reflecting the gravity of the conduct.

Although the appellant relied on debt and default, the Tribunal held that the surrounding circumstances were decisive.

The Section 10 application was filed shortly after SBI commenced SARFAESI and DRT proceedings, indicating that the application was intended primarily to secure the protective effect of moratorium and derail recovery.

The unexplained removal of substantial hypothecated machinery during the pendency of recovery proceedings, the appellant’s failure to produce purchase invoices or maintain a fixed-asset register, and the unsatisfactory explanation for the missing assets substantially undermined the appellant’s bona fides.

These circumstances supported the Adjudicating Authority’s conclusion that the application was not a genuine attempt to resolve the Corporate Applicant’s debts but involved malicious intent under Section 65(1).

However, the Tribunal found that the ₹10 lakh penalty was excessive because the Adjudicating Authority had not supplied adequate reasons for that quantum.

Applying proportionality, it reduced the penalty to ₹5 lakh.

The dismissal of the Section 10 application was affirmed because the application was found to be a misuse of the insolvency process, filed in the context of ongoing SARFAESI/DRT recovery proceedings and accompanied by unexplained removal of secured assets.

The penalty was reduced from ₹10 lakh to ₹5 lakh.

If ₹10 lakh had already been deposited, the appellant was entitled to a refund of ₹5 lakh; otherwise, ₹5 lakh was directed to be deposited within 30 days in the Prime Minister’s National Relief Fund.