Post-default non-issuance of NOC does not constitute fraudulent or malicious initiation under Section 65.

The Corporate Debtor (CD), Vatika Ltd., was developing a project titled ‘Aspirations’ in Gurugram, registered with Haryana RERA in 2022

The Appellants are homebuyers who were allotted plots in 2023 but were unable to secure possession or conveyance deeds

Respondent No. 1 (Financial Creditor) filed an application under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016, for initiation of the Corporate Insolvency Resolution Process (CIRP) against the CD

The Appellants filed an Interlocutory Application (I.A. 1537/2025) under Section 65 of the IBC, alleging that the Financial Creditor initiated the proceedings fraudulently and with malicious intent by withholding No Objection Certificates (NOCs), thereby inducing the CD’s default and choking its cash flow

On February 3, 2026, the Adjudicating Authority (NCLT, Chandigarh) rejected the Section 65 application and admitted the Section 7 application

1. Whether the initiation of CIRP by the Financial Creditor was hit by fraud or malicious intent under Section 65 of the IBC due to the non-issuance of contractual NOCs

2. Whether the non-issuance of NOCs by a Financial Creditor constitutes a valid ground to obstruct the admission of a Section 7 application when debt and default are established

The court primarily applied Section 65 of the IBC, which penalizes the initiation of insolvency proceedings with fraudulent or malicious intent for purposes other than resolution

It also applied Section 7 of the IBC regarding the initiation of CIRP by a financial creditor.

The Tribunal relied on the precedent set by the Supreme Court in Elegna Co-Op Housing and Commercial Society Ltd. v. Edelweiss Asset Reconstruction Company Ltd. (2026), which established that post-default events, such as the refusal to issue NOCs, do not absolve a Corporate Debtor of its payment obligations and are extraneous to the statutory mandate of Section 7

Additionally, it referenced Regulation 4E of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, which permits the Resolution Professional to hand over possession of units to allottees during the CIRP

The Tribunal analyzed whether the Appellants met the high threshold of "strict and cogent proof" required to prove malicious intent under Section 65.

It observed that the Appellants’ pleadings focused solely on the Financial Creditor's refusal to issue NOCs, which they claimed prevented the execution of conveyance deeds

However, following the Elegna Co-Op Housing precedent, the Tribunal noted that the issue of non-issuance of NOCs arose only after the occurrence of the default

Therefore, such contractual disputes cannot be used to extinguish the statutory consequences of an admitted default under Section 7

The Tribunal further noted that the Appellants' interests as homebuyers were protected under Regulation 4E, which allows for the transfer of possession even during CIRP, negating the argument that the insolvency process was inherently detrimental to them

The Tribunal concluded that the Section 65 application was a tactical move to stall the insolvency process rather than a well-founded claim of fraud

Consequently, Company Appeal (AT) (Ins.) No. 268 of 2026 was dismissed

Regarding the admission of the Section 7 application, the Tribunal disposed of Company Appeal (AT) (Ins.) No. 269 of 2026 in terms of a separate order passed in a related appeal (No. 266 of 2026) filed by the Suspended Director of the CD