Why Settlement Talks and Unadjudicated Counterclaims Cannot Stall CIRP Under Section 7 of IBC

The statutory framework of the Insolvency and Bankruptcy Code, 2016 (IBC) prioritizes time-bound corporate insolvency resolution over prolonged debt recovery litigation. Under Section 7 of IBC, once a Financial Creditor establishes the existence of a financial debt and a default exceeding the statutory threshold, the Adjudicating Authority is statutorily bound to initiate Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor. Corporate Debtors frequently attempt to stave off admission by pleading ongoing restructuring negotiations or asserting unadjudicated counterclaims and set-offs.

The multi-tiered litigation trajectory in the case of Sammaan Capital Limited V. Parsvnath Developers, traversing from the National Company Law Tribunal (NCLT) to the National Company Law Appellate Tribunal (NCLAT) and ultimately the Supreme Court of India, serves as a landmark precedent on Section 7 admissions. The series of decisions in the matter firmly establish that unexecuted restructuring proposals, informal settlement discussions, and unadjudicated arbitral counterclaims cannot operate as a legal bar against CIRP initiation.

Financial Breakdown and Rival Contentions

It was contended that, under the credit facilities, Parsvnath Developers (Developer/Corporate Debtor) was sanctioned a total loan of INR 4,861.25 Crores, out of which INR 4,153.26 Crores was disbursed. Over the loan tenure, the developer had made total repayment of INR 4,696.01 Crores (comprising INR 3,689.98 Crores towards the principal and INR 1,006.03 Crores towards interest). Despite of these substantial repayments, the Financial Creditor, ARCIL (assignee of the debt), had claimed an outstanding default of INR 489.32 Crores (INR 463.28 Crores towards the principal and INR 26.04 Crores towards interest).

While resisting the application, Parsvnath argued that the lender had made unauthorized upfront deductions and interest retentions totaling to INR 394.36 Crores without proper reconciliation of accounts. Factoring the interest accrued on those deductions (viz., INR 1,054.92 Crores), Parsvnath asserted a net claim of INR 959.97 Crores as receivable Financial Creditor, thereby contending that no default existed against it.

 Conditional Withdrawal, Default, and Revival of Section 7 Proceedings

Company Petitions being C.P. (IB) No. 468/PB/2024 (against the Principal Borrower/Parsvnath) and C.P. (IB) No. 465/ND/2024 (against the Corporate Guarantor – Noida Marketing Private Limited), were filed seeking initiation of CIRP on account of default. In February 2025, the proceedings were conditionally withdrawn after Parsvnath handed over demand drafts worth INR 75 Crores and agreed to a mutually discussed repayment schedule. However, when Parsvnath subsequently defaulted on the terms of the settlement, it prompted ARCIL to exercise its express liberty to file an application before the NCLT for revival of the withdrawn Petitions. On August 20, 2025, the NCLT restored the said applications for CIRP to their original files, rejecting the Corporate Debtor’s plea that negotiations were ongoing.

 Treatment of Counterclaims and Section 9 Arbitration before Delhi High Court

During the pendency of the insolvency proceedings, Parsvnath instituted petitions under Section 9 of the Arbitration and Conciliation Act, 1996 (O.M.P. (I) (COMM) 330/2025 & O.M.P. (I) (COMM) 367/2025) before the High Court of Delhi. Parsvnath inter alia sought interim protection i.e., a stay on ARCIL’s Section 7 revival application, and reconciliation of the disputed amounts for the counter claim arising out of the upfront deductions.

The High Court of Delhi duly considered the contentions of Parsvnath which led to deferring of hearings and pronouncement by the NCLT, however, it ultimately refused to stay the NCLT proceedings. Crucially, during proceedings before the Delhi High Court, the Corporate Debtor also made an undertaking to deposit INR 75 Crores to show its bona fides.

 Judicial Decisions and Final Appellate Affirmation

Both NCLT and NCLAT had opined that the Adjudicating Authority is not required to conduct trial(s)-like reconciliation of accounts to determine the counterclaims of the Corporate Debtor prior to admission.

The NCLT had observed that, at the admission stage, the relevant inquiry is limited to the existence of a financial debt and the occurrence of default, not the quantification of the debt. Relying on B. Prashanth Hegde v. State Bank of India & Anr. [Civil Appeal No. 477 of 2022], it was held that unadjudicated counterclaims or set offs belong to the claim verification stage conducted post-admission by the Resolution Professional. It also emphasized that the specialized insolvency regime overrides general arbitral proceedings.

Following the failure of informal restructuring talks, the NCLT admitted the Section 7 applications, initiating CIRP against the Corporate Guarantor on April 24, 2026, and the Principal Borrower / Parsvnath on April 30, 2026.

The NCLT’s decisions were then challenged before NCLAT in Sanjeev Kumar Jain v. Asset Reconstruction Company (India) Limited & Anr. [Company Appeal (AT) (Insolvency) Nos. 900 & 977 of 2026], wherein the NCLAT, Principal Bench at New Delhi dismissed the appeals on May 29, 2026. The Appellate Tribunal observed that repeated requests by the Corporate Debtor before the NCLT to defer judgment in hope of settlement served as an ample proof of admitted debt and default.

The NCLAT’s decision was then challenged before the Hon’ble Supreme Court of India in Sanjeev Kumar Jain v. Asset Reconstruction Company (India) Limited & Anr. [Civil Appeal No. 8776 of 2026 & SLP (C) Diary No. 39702/2026]. However, on July 9, 2026, the Apex Court dismissed the Appeal and upheld the admission of CIRP. The Apex Court affirmed that the post-admission settlements cannot be informally negotiated and they must strictly follow the statutory procedure including under Section 12A of the IBC through the Committee of Creditors.

Key Takeaways

The Parsvnath decision(s) reaffirm a fundamental principle underlying the IBC that a clearly demonstrated default cannot be kept out of the insolvency process merely because the Corporate Debtor raises disputed counterclaims, seeks reconciliation of accounts, or continues to explore settlement or restructuring proposals. At the stage of admission under Section 7, the Adjudicating Authority is concerned with the existence of a financial debt and the occurrence of default and is not required to undertake a trial-like adjudication of competing monetary claims or counterclaims. Such disputes may be examined in accordance with the applicable statutory framework at the appropriate stage, but cannot, by themselves, defeat or indefinitely defer the commencement of CIRP. The decision also underscores that once CIRP is admitted, any settlement must be pursued strictly in accordance with the mechanism prescribed under the IBC, including Section 12A, thereby ensuring that informal negotiations do not undermine the time-bound and collective nature of the insolvency resolution process. The ruling thus reinforces the legislative intent of the IBC that insolvency proceedings cannot be converted into a forum for prolonged debt reconciliation or recovery disputes, once the statutory threshold for admission is satisfied