Tribunal holds that familial disputes alone do not prove fraudulent intent under IBC Section 65(1); financial debt claims to be adjudicated in main insolvency proceedings
In a significant ruling on 10th September 2026, the National Company Law Tribunal (NCLT), Chandigarh Bench, dismissed an application filed by Mrs. Monica Agarwal, Director and Shareholder of Narayanam Organics Private Limited, alleging that insolvency proceedings initiated by her in-laws were fraudulent and malicious.
The case arose from a petition filed by Mr. Sushil Kumar Agarwal and Mrs. Lata Agarwal, the father-in-law and mother-in-law of Mrs. Agarwal's husband, under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016. They sought initiation of the Corporate Insolvency Resolution Process (CIRP) against Narayanam Organics Private Limited on the ground of default in repayment of unsecured loans allegedly advanced by them.
Mrs. Agarwal, in her application under Section 65(1) of the IBC, contended that the insolvency petition was motivated by personal and familial disputes rather than genuine financial distress of the corporate debtor. She argued that the alleged debts did not qualify as "financial debt" under Section 5(8) of the Code and that the initiation of insolvency proceedings was a tool for coercion and arm-twisting within the family. She sought dismissal of the insolvency petition and penalties against the respondents for malicious prosecution.
The NCLT bench, comprising Mr. Khetrabasi Biswal (Judicial Member) and Mr. Shishir Agarwal (Technical Member), examined whether the insolvency proceedings were initiated fraudulently or maliciously for purposes other than resolution of insolvency, as required under Section 65(1). The tribunal emphasized that mere existence of familial relationships or strained family ties, without concrete supporting evidence, cannot establish fraudulent or malicious intent.
The bench observed that allegations of "personal vendetta", "coercion", and "malicious intent" must be substantiated by material evidence demonstrating intent beyond disputing the debt itself. The tribunal noted that challenges concerning the existence, nature, and quantum of financial debt must be addressed in the main insolvency proceedings and cannot serve as the basis for invoking Section 65(1).
Importantly, the respondents had placed on record promissory notes, notarized authorizations, and audited financial statements corroborating their claims. The tribunal found no material to suggest that the insolvency proceedings were a sham or initiated for collateral purposes unrelated to insolvency resolution.
The NCLT further clarified that Section 65(1) is not an alternative forum to dispute substantive merits of a Section 7 petition. Disputes over financial debt claims must be adjudicated during the insolvency resolution process itself.
Consequently, the tribunal held that the applicant failed to establish the necessary elements of fraudulent or malicious initiation under Section 65(1) and dismissed her application. The ruling reinforces that family disputes, even when intertwined with corporate financial matters, do not automatically translate into mala fide intent sufficient to quash insolvency proceedings.
This judgment aligns with precedents such as the NCLAT's decision in Wave Megacity Centre Pvt. Ltd. v. Rakesh Taneja & Ors., which holds that insolvency proceedings should not be dismissed merely on allegations of malice without substantive proof.
The decision serves as a caution against attempts to derail the insolvency resolution process through unsubstantiated claims of fraud or malice, upholding the integrity of the IBC framework.
Bottom Line:
Insolvency and Bankruptcy Code, 2016 Section 65(1) Allegation of fraudulent or malicious initiation of insolvency proceedings must be substantiated by material evidence demonstrating intent for purposes other than resolution of insolvency. Familial relationships or disputes do not suffice to establish malice or fraud without concrete supporting material.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 Sections 5(8), 7, 65(1)
Monica Agarwal v. Sushil Kumar Agarwal, (NCLT)(Chandigarh Bench) : Law Finder Doc Id # 2976578
