NCLAT Holds Non-Issuance of NOCs by Financial Creditor Is Not Fraud, Upholds Vatika CIRP Admission

NCLAT Holds Non-Issuance of NOCs by Financial Creditor Is Not Fraud, Upholds Vatika CIRP Admission

Introduction

The National Company Law Appellate Tribunal has held that non-issuance of No Objection Certificates (NOCs) by a financial creditor after the occurrence of default cannot amount to fraud or malicious initiation of insolvency proceedings under Section 65 of the Insolvency and Bankruptcy Code, 2016. The Tribunal ruled that once a valid default exists, subsequent contractual disputes with homebuyers cannot invalidate a Section 7 petition.

Factual Background

Vatika Limited was developing its “Aspirations” real estate project in Gurugram, which was registered with the Haryana RERA in December 2022. The homebuyers entered into allotment letters with the developer on 17 October 2023 and made payments in terms of the project agreements. Despite this, possession and conveyance deeds were not executed.

Meanwhile, IDBI Trusteeship Services Ltd., acting as debenture trustee under a Debenture Trust Deed dated 30 June 2017, initiated Section 7 proceedings in June 2024 alleging default in repayment obligations by the corporate debtor.

The homebuyers later alleged that the financial creditor failed to issue NOCs, which according to them affected the conveyance and transfer process in the project.

Procedural Background

The homebuyers filed an application under Section 65 of the IBC before the NCLT Chandigarh in September 2025, nearly 20 months after the Section 7 petition had been filed and after the matter had already reached the stage of final arguments. The NCLT rejected the Section 65 application, holding that it was belated and did not disclose any fraudulent or malicious intent behind initiation of CIRP. Two appeals were thereafter filed before the NCLAT challenging rejection of the Section 65 application; and challenging admission of the Section 7 petition itself.

Issues

1. Whether non-issuance of NOCs by the financial creditor can amount to fraud or malicious conduct under Section 65 IBC.

2. Whether post-default contractual disputes with homebuyers can invalidate a Section 7 admission.

3. Whether the delayed Section 65 application was maintainable.

Contentions of the Parties

The appellants-homebuyers argued that the debenture trustee’s refusal to issue NOCs was in breach of the contractual structure of the project, particularly because allottee payments were routed through an escrow arrangement allegedly controlled by the financial creditor. According to them, such conduct demonstrated mala fide intent and made the insolvency proceedings fraudulent.

The respondent-financial creditor argued that the Section 65 plea was grossly belated, having been filed almost 20 months after initiation of Section 7 proceedings and only when the matter was ripe for final arguments. It was contended that the alleged non-issuance of NOCs was purely a contractual issue arising after default and could not erase the statutory consequences of a valid financial default. It was further suggested that the homebuyers were acting in collusion with the corporate debtor to obstruct CIRP.

Reasoning and Analysis

The NCLAT upheld the NCLT’s reasoning and noted that the issue relating to non-issuance of NOCs had admittedly arisen after the default had already occurred. The Tribunal held that once a financial default under the Debenture Trust Deed was established, later disputes regarding NOCs or escrow operations could not retrospectively convert a valid Section 7 petition into a fraudulent proceeding.

The Bench relied on the Supreme Court’s decision in Elegna Co-Op Housing and Commercial Society Ltd. v. Edelweiss Asset Reconstruction Company Ltd., where it was held that post-default events cannot dilute the legal consequences flowing from an admitted default.

The Tribunal also took note of the delayed timing of the Section 65 application. Filing such an application only after the Section 7 matter had reached final hearing was viewed as an attempt to derail the insolvency process rather than a bona fide challenge.

Accordingly, the Appellate Tribunal concluded that the homebuyers had failed to establish either fraud, malicious intent, or abuse of process by the financial creditor.

Decision

The NCLAT dismissed the appeal challenging rejection of the Section 65 application, and

Disposed of the appeal challenging the admission of the Section 7 petition, thereby affirming the CIRP against Vatika Limited