Pending DRT Challenge No Bar to CIRP: NCLAT Chennai Refuses Interim Stay in Section 7 Admission

Pending DRT Challenge No Bar to CIRP: NCLAT Chennai Refuses Interim Stay in Section 7 Admission

Introduction

The Chennai Bench of the National Company Law Appellate Tribunal considered whether admission of a Section 7 application could be stayed on the ground that proceedings challenging a Recovery Certificate were pending before the Debt Recovery Tribunal. The Appellate Tribunal declined interim relief, reiterating that pendency of DRT proceedings does not bar initiation of CIRP once debt and default are established.

Factual Background

The Appellant, an erstwhile Director and shareholder of Pravista Infra Pvt. Ltd., challenged the admission of the Corporate Debtor into Corporate Insolvency Resolution Process (CIRP) by the NCLT, Hyderabad Bench-II under Section 7 of the Insolvency and Bankruptcy Code, 2016.

The Corporate Debtor was engaged in development of a residential real estate project at Karimnagar, Telangana, comprising approximately 500 flats across five towers. According to the Appellant, two towers with 180 flats had been constructed up to the semi-finished stage, 120 flats had been sold, and the project’s asset value exceeded ₹85 crore, whereas the alleged liability was below ₹7 crore.

Indian Bank had sanctioned a Secured Overdraft facility of ₹10 crore in 2012, of which ₹7.5 crore was disbursed. The account was classified as NPA on 01.04.2018. The Appellant asserted that ₹3.59 crore had been repaid between 2017 and 2022, including repayments post-NPA, demonstrating the financial viability of the Corporate Debtor.

The Bank initiated recovery proceedings before the DRT, Hyderabad under the RDDBFI Act, resulting in an ex-parte decree dated 12.02.2022 and issuance of a Recovery Certificate for ₹10.82 crore on 26.07.2022. The Appellant claimed improper service of summons and filed an application to set aside the ex-parte decree, which remained pending.

Procedural Background

While DRT proceedings were pending, Indian Bank filed an application under Section 7 of the IBC before the NCLT, Hyderabad (CP (IB) No. 120/7/HDB/2024), relying upon the Recovery Certificate. The Adjudicating Authority admitted the petition on 07.10.2025, holding that the existence of financial debt and default stood established and that pendency of DRT proceedings was not a bar to CIRP.

The Appellant filed the present appeal before the NCLAT, Chennai Bench, along with an interlocutory application seeking interim stay of the CIRP and permission to continue operating the Corporate Debtor.

Issues

1. Whether pendency of proceedings before the DRT challenging an ex-parte decree and Recovery Certificate bars initiation or continuation of CIRP under Section 7 of the IBC?

2. Whether alleged financial viability and partial repayments negate the existence of debt and default?

3. Whether a prima facie case was made out for grant of interim stay of the admission order?

Contentions of the Parties

The Appellant contended that the Section 7 application was filed with a recovery motive rather than resolution, contrary to the objectives of the Code. It was argued that the Corporate Debtor was solvent, as evidenced by repayments and asset value. The Recovery Certificate, being under challenge before the DRT, was asserted to lack finality and therefore could not form the sole basis for admission into CIRP.

It was further contended that continuation of CIRP would irreparably harm the Corporate Debtor, jeopardize homebuyers’ interests, and prevent effective representation before the DRT.

The Respondent Bank maintained that the Recovery Certificate crystallized the liability, constituting “financial debt” under Section 5(8) of the Code. It was argued that pendency of parallel recovery proceedings does not deprive a financial creditor of its statutory right to initiate CIRP once debt and default are established.

Reasoning and Analysis

The bench of Mr. Justice Sharad Kumar Sharma (Judicial Member) and Mr. Jatindranath Swain (Technical Member) concurred with the Adjudicating Authority’s findings. It observed that the Recovery Certificate issued by the DRT constitutes a crystallized liability and qualifies as financial debt within the meaning of Section 5(8), consistent with the Supreme Court’s decision in Kotak Mahindra Bank Limited v. A. Balakrishnan.

The Appellate Tribunal also relied on the principle laid down by the Supreme Court in Tottempudi Salalith v. State Bank of India, affirming that pendency of proceedings before the DRT does not bar initiation of CIRP. The IBC provides an independent statutory remedy, and once the existence of debt and default is demonstrated, the Adjudicating Authority is obliged to admit the petition.

The Tribunal noted that the Appellant failed to demonstrate prima facie that no debt or default existed. Alleged errors in the Recovery Certificate or pendency of an application to set aside the ex-parte decree did not negate the subsistence of liability at this stage. The Tribunal further found no sufficient material to establish that the Corporate Debtor’s repayments or asset valuation extinguished or neutralized the default.

In the absence of a strong prima facie case or balance of convenience, the Tribunal declined to stay the CIRP.

Decision

The NCLAT dismissed I.A. No. 1534/2025 seeking interim stay of the admission order. The CIRP against Pravista Infra Pvt. Ltd. was allowed to continue. The appeal was directed to be listed for further hearing on 26.02.2026.

In this case the appellant was represented by Mr. PH. Arvindh Pandian, Senior Advocate for Mr. KP. Pramodh Kumar, Advocate. Meanwhile the respondent was represented by Mr. Rajashekar Rao Salvaji, Advocate.