Civil Courts vs NCLT: Can Companies Still Use Civil Suits to Stall Insolvency Proceedings?

Introduction

The Insolvency and Bankruptcy Code, 2016, was built on a simple premise. A single, specialised forum should decide everything connected with a company's insolvency, so that value does not bleed away while parties fight in multiple courtrooms. The years of fragmented company law that preceded the Code, spread across the Sick Industrial Companies Act, the Recovery of Debts Act, and the Companies Act, taught a hard lesson. The multiplicity of forums meant a multiplicity of appeals, and a multiplicity of appeals meant that assets rotted before anyone got paid. Sections 63 and 231 of the Code respond to this history by ousting the jurisdiction of civil courts wherever the National Company Law Tribunal is empowered to act.

Corporate debtors facing insolvency proceedings have not stopped approaching civil courts even so. A recurring pattern has emerged. A company facing a Section 7 petition for admission of the corporate insolvency resolution process files a separate civil suit, often seeking a declaration that the underlying debt, or the document assigning it, is forged, fraudulent, or otherwise void. Structured well, such a suit can appear to be a straightforward exercise of a civil court's plenary jurisdiction under Section 9 of the Code of Civil Procedure, rather than a challenge to the insolvency process itself.

A recent Delhi High Court judgment, pronounced on 5 January 2026 in Roseland Buildtech Pvt. Ltd. v. Vihaan 43 Realty Pvt. Ltd. and others (currently under appeal), takes direct aim at this pattern. The Court held that a suit seeking a declaration that a loan stood discharged, and that the assignment agreement underlying it was void, was in substance an attempt to pre-empt the NCLT's jurisdiction over a pending Section 7 petition, and was therefore barred. The ruling adds to a growing line of authority holding that companies cannot use parallel civil litigation to stall or outflank insolvency proceedings. The question worth asking is whether this line of cases strengthens the insolvency regime or forecloses remedies that some litigants may genuinely need.

The statutory architecture

Sections 63 and 231 of the IBC are ouster clauses. No civil court has jurisdiction over any matter that the NCLT or the National Company Law Appellate Tribunal is empowered to decide under the Code. Section 238 goes further, giving the Code an overriding effect over any other law that is inconsistent with it. None of this is unusual. Comparable ouster provisions exist under the SARFAESI Act and the Companies Act, and courts have long accepted that specialised tribunals need such protection to function properly.

What matters, as the Delhi High Court explained, is that the scope of an ouster clause is defined by what the specialised tribunal is actually empowered to decide, not by the mere existence of the ouster language. That inquiry sent the Court into three provisions of the IBC that are discussed far less often than Sections 7, 9, and 14. Section 65 penalises fraudulent or malicious initiation of insolvency proceedings. Section 75 penalises furnishing false information in a Section 7 application. Section 60(5)(c), the residuary clause, gives the NCLT jurisdiction over any question of law or fact arising out of, or in relation to, a corporate debtor's insolvency.

What the Delhi High Court decided

In Roseland Buildtech, the plaintiff company was resisting a Section 7 petition filed against it by a financial creditor before the NCLT in New Delhi. While that petition was pending, the plaintiff filed a civil suit asking the Delhi High Court to declare that its loan stood fully repaid, and that the assignment agreement on which the creditor relied was forged and non est. The defendant creditor sought rejection of the plaint under Order VII Rule 11 of the Code of Civil Procedure, arguing that the suit was a mala fide attempt to derail the statutory insolvency process.

The Court agreed. Relying on a detailed reading of Sections 65 and 75, it held that the NCLT already has the tools and the procedural machinery, through the NCLT Rules, 2016, to examine disputed questions of fraud, forgery, and the veracity of an assignment agreement forming the basis of a Section 7 claim. Since those very questions were what the plaintiff had dressed up as an independent declaratory suit, the Court found that the plaint was, in substance, an attempt to secure an anti-tribunal injunction under the guise of a civil claim. It rejected the plaint under Order VII Rule 11(d) and imposed costs of Rs 2,00,000 on the plaintiff, describing the litigation as an example of what it called "luxury litigation" that consumes judicial time better spent on more deserving litigants.

The judgment builds on Supreme Court precedent. In Gujarat Urja Vikas Nigam Ltd. v. Amit Gupta, the Supreme Court had already held that Section 60(5)(c) gives the NCLT jurisdiction over disputes that have a nexus with a corporate debtor's insolvency, while cautioning that the Tribunal cannot decide questions divorced from that insolvency, and that its residuary power needs a specific textual hook in the Code rather than a vague appeal to the Code's spirit. In Embassy Property Developments Pvt. Ltd. v. State of Karnataka, a three-judge bench had already confirmed that the NCLT can inquire into allegations that a CIRP was initiated fraudulently. The Delhi High Court's contribution is to draw these strands together and apply them squarely to a case where a corporate debtor tried to litigate fraud and forgery in a civil court while a Section 7 petition sat unresolved before the NCLT.

Why the timing of the challenge matters

A plaintiff in this position is not without an explanation for why it went to a civil court instead of waiting. In Innoventive Industries Ltd. v. ICICI Bank, the Supreme Court held that once a financial creditor shows a debt and a default, the NCLT has little choice but to admit a Section 7 petition, even where the debt is disputed, so long as the debt is due and payable. That position was reaffirmed in M. Suresh Kumar Reddy v. Canara Bank, which confirmed that admission cannot be resisted merely because settlement talks are ongoing. Read together, these two rulings mean that a corporate debtor cannot expect the NCLT to conduct a full trial on fraud or forgery at the admission stage itself. That is precisely the gap the plaintiff in Roseland Buildtech tried to fill with a civil suit, reasoning that if the NCLT will not investigate forgery before admission, some other forum should do so first.

The Delhi High Court answered that this reasoning misreads the timeline rather than exposing a real gap. Sections 65 and 75 exist precisely to let the NCLT examine fraud, forgery, and false information, just not necessarily before admission. The remedy for a debtor who believes a Section 7 petition rests on a forged document is to raise that objection before the NCLT itself, under Sections 65, 75, and 60(5)(c), rather than to approach a civil court for a declaration on the same question. The perceived unfairness of a limited admission enquiry, the Court noted, is an argument about the design of the Code, not a basis for a civil court to assume jurisdiction the Code has withheld from it.

Does this strengthen the insolvency regime?

There is a strong case that it does. The entire rationale for the IBC, recorded in the Bankruptcy Law Reforms Committee Report and repeated by the Supreme Court in Swiss Ribbons Pvt. Ltd. v. Union of India, was that fragmented adjudication across multiple forums delayed resolution and destroyed the value of distressed companies. If a corporate debtor could routinely halt a Section 7 petition by filing a civil suit raising the same fraud and forgery arguments that Sections 65 and 75 already let the NCLT examine, the Code's central promise of time- bound resolution would be hollow. The Delhi High Court's insistence that civil courts strip a plaint of its declaratory language and look at its real substance is a sensible check against artful drafting designed to achieve indirectly what the Code forbids directly. The costs imposed in Roseland Buildtech send an unambiguous signal to future litigants who might otherwise treat a parallel suit as a low- risk stalling tactic.

The ruling also fits a broader trend. The Supreme Court's clarification that the IBC cannot be used as a substitute for execution of money decrees or as a tool for coercive recovery, delivered in April 2026, moves in the opposite direction on the facts, but rests on the same underlying idea. Each forum, civil court, Debt Recovery Tribunal, or NCLT, should be used for the purpose the legislature intended, and not repurposed to gain a tactical advantage over the other side. Read together, these rulings suggest an emerging judicial consensus that jurisdictional lines under the IBC are to be policed strictly, in both directions.

Where the concern about limiting legitimate remedies still has force

The harder question is what happens to a plaintiff whose claim genuinely does not arise from, or relate to, the debtor's insolvency, but happens to touch the same set of facts. The Supreme Court's own caution in Gujarat Urja Vikas Nigam, that the NCLT's residuary jurisdiction needs a specific textual hook and cannot be stretched to matters the Code never intended it to decide, remains good law, and the Delhi High Court expressly left open how a civil court should treat cases that fall closer to that boundary. A dispute between shareholders over an unrelated share transfer, or a fraud that predates the loan and has no real connection to the insolvency, might still deserve a civil court's attention even if a Section 7 petition happens to be pending in the background. The risk of a strict jurisdictional bar is that some defendants facing a genuine, independent civil claim now have an added argument, however weak, to seek dismissal at the threshold under Order VII Rule 11, forcing bona fide plaintiffs to spend time establishing that their claim actually falls outside the NCLT's remit.

There is also a practical concern about forum competence. The NCLT was designed for time-bound commercial adjudication, and Sections 65 and 75 give it explicit power to examine fraud and false information, backed by the evidentiary machinery in the NCLT Rules, 2016. Even so, complex fraud disputes involving forged documents and multiple corporate layers, of the kind at issue in Roseland Buildtech, can require extensive cross-examination and forensic scrutiny. Litigants used to civil court procedure may reasonably worry that the NCLT, still primarily focused on speed, is not always the ideal venue for that kind of fact-heavy inquiry, even though the law now clearly assigns it that job.

Conclusion

The Delhi High Court's ruling in Roseland Buildtech, read with the Supreme Court's guidance in Gujarat Urja Vikas Nigam and Embassy Property, closes a route that some corporate debtors had begun to use to slow down insolvency proceedings, namely filing a civil suit that repackages fraud and forgery arguments already committed to the NCLT under Sections 65 and 75. On balance, this strengthens the insolvency regime more than it weakens legitimate remedies. The Code was built around the idea of a single forum resolving everything connected to a company's distress, and allowing parallel civil litigation on the same questions would have quietly reintroduced the fragmentation the IBC was meant to end.

The safeguard that remains, and that future litigants should hold onto, is the requirement that the NCLT's jurisdiction rest on an actual textual hook in the Code, not merely on the fact that a CIRP happens to be pending. Civil courts retain jurisdiction and ought to exercise it wherever a claim genuinely does not arise from or relate to the corporate debtor's insolvency. Getting that line right, case by case, will decide whether the IBC's promise of speed comes at the cost of a fair hearing for claims that were never really about insolvency at all.

 *Authored by - Yash Bajpai, a 4th year B.Sc. LL.B (Cybersecurity Hons.) student at National Law Institute University, Bhopal. Views expressed are personal.