Treatment of Counter Claim in Financial Creditor’s claim in CIRP

 Treatment of Counter Claim in Financial Creditor’s claim in CIRP

Pendency of a counterclaim before the DRT does not, by itself, render the financial creditor’s claim a “disputed claim” so as to require the IRP/RP to notionally admit it for Rs. 1.00 in a CIRP under the IBC. For a financial creditor, the statutory test under Section 7 is the existence of a financial debt and default; an unadjudicated counterclaim does not extinguish the debt or suspend the creditor’s right to invoke insolvency.

Issues

1. Whether a pending counterclaim before the DRT changes the character of the bank’s claim in CIRP.

2. Whether the IRP/RP is bound to treat such claim as a disputed claim and admit it only nominally for Rs. 1.00.

3. What is the correct approach to claim verification under the IBC when a counterclaim is pending elsewhere.indiacode+1

Analysis

Section 5(8) of the IBC defines “financial debt,” and Section 7 enables initiation of CIRP on proof of debt and default. The Code does not make pendency of a dispute or counterclaim a precondition to maintainability of a financial creditor’s application; that concept is materially relevant in operational debt matters, not financial debt matters.

The CIRP framework requires the IRP/RP to receive, verify, and collate claims under the regulations, particularly Regulation 13 of the CIRP Regulations. That exercise is evidentiary and administrative: the IRP/RP must examine the loan documents, account statements, and default record, and then admit the claim to the extent it is verifiable. A pending DRT counterclaim may be noted, but it does not automatically reduce an otherwise established financial debt to a token amount.

The NCLAT in Mr. G. Sundaravadivelu v. Indian Overseas Bank held that pendency of proceedings before the DRT is not a bar to initiation of CIRP and that the NCLT need not await the DRT’s decision while deciding the Section 7 application. That authority supports the proposition that parallel DRT proceedings do not control the insolvency jurisdiction.

The Supreme Court reporting in B. Prashanth Hegde v. State Bank of India is even more directly relevant on the effect of counterclaims. It states that an unadjudicated counterclaim for damages does not extinguish an admitted financial debt or suspend the creditor’s statutory right to initiate insolvency proceedings. Therefore, unless the counterclaim has been adjudicated and has resulted in a legally effective set-off or extinguishment of debt, the claim cannot be reduced to Rs. 1.00 merely because the debtor has raised a counterclaim.verdictum

Conclusion

On the present issue, the legally sound position is that pendency of a counterclaim before the DRT does not make the bank’s financial claim a disputed claim requiring notional admission for Rs. 1.00. The IRP/RP should verify and admit the bank’s claim on the basis of the proved financial debt and default, while separately recording the pending counterclaim; only a binding adjudication affecting the debt may justify reduction of the admitted amount.

Suggested formulation

“Under Sections 5(8) and 7 of the IBC read with Regulation 13 of the CIRP Regulations, the IRP/RP is required to verify and collate the financial creditor’s claim on the basis of the proved debt and default. Pendency of an unadjudicated counterclaim before the DRT does not, by itself, convert such claim into a disputed claim or warrant notional admission for Rs. 1.00.”

Disclaimer: The sole purpose of this blog is to create awareness on the subject and must not be used as a guide for taking or recommending any action or decision, commercial or otherwise. One must do his own research and seek professional advice if he intends to take any action or decision in the matters covered in this blog.

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