Legal Updates (Jan 26 – Jan 31, 2026)
A company’s inability to pay its dues because of financial distress is a civil issue, not a criminal offense. Hence, a director cannot be prosecuted for cheating unless there is clear proof of personal fraud or personal gain
The Delhi High Court in the case of Arun Kumar Bagla v. SCJ Plastics Ltd. [W.P. (CRL) 2165/2019] dated 7 January, 2026, has held that a company’s inability to pay its dues because of financial distress is a civil issue, not a criminal offense. A director cannot be prosecuted for cheating unless there is clear proof of personal fraud or personal gain. The Court, therefore, quashed cheating charges against a former managing director that later ran into financial trouble and was declared a sick industrial company by the Board for Industrial and Financial Reconstruction (BIFR).
The Court observed that the complainant is required to show specific acts of personal fraudulent intention or personal gain, distinct from the corporate entity’s business operations. Accordingly, once proceedings against the company itself are dropped, continuing the case against its director is not legally sustainable. The Court observed that the Director cannot be held criminally liable for the Company’s financial status or its corporate debts when the Company itself is no longer being prosecuted.
The Court further observed that an assurance of payment is a normal commercial representation. It is not, by itself, fraudulent. The Court noted that the complainant continued supplies to “maintain business relations.” This showed there was no dishonest inducement. It also noted that partial payments had been made. The Court held that dishonest intention at the start of the transaction was missing, and called the criminal complaint an afterthought, filed to pressure recovery.
Thus, in the absence of any specific allegation of personal deception or misappropriation, the Court observed a cheating case could not be made out. It held that continuing the trial would be an abuse of process. The High Court accordingly discharged Arun Kumar Bagla from the offense under Section 420 (Cheating) of the IPC.
Unsecured money brought into a company by its promoters to meet a bank’s lending condition does not qualify as a deposit under the Companies Act
The Mumbai Bench of the National Company Law Tribunal (NCLT) in the case of Ansumera Realty & Infra Pvt Ltd vs Vimla Thakarashi Dedhia [Company Application 370 of 2022] dated 21 January, 2026, has held that unsecured money brought into a company by its promoters to meet a bank’s lending condition does not qualify as a deposit under the Companies Act, and that repayment proceedings under the deposit provisions cannot be maintained. The Tribunal observed that once the transaction is covered by the statutory exclusion, the amount so received cannot be treated as a ‘deposit’ within the meaning of Section 2(31) of the Companies Act, 2013.
The NCLT observed that Section 73 of the Companies Act, 2013, which regulate acceptance and repayment of deposits, are not attracted, and the transaction in question is an exempted transaction under the Companies Act, 2013. It noted that promoter funds brought in pursuant to a stipulation imposed by a lending bank fall within the prescribed exclusion under the deposit rules and therefore cease to be deposits. In absence of amount being ‘deposit’, the invocation of Section 73(4) and 76(2) of the Companies Act, 2013 is wholly unsustainable.
Mere preparation of balance sheets and audited financial statements does not establish that a company was carrying on business or was in operation. Hence, the Registrar of Companies can strike off its name from the register of companies
The Mumbai Bench of National Company Law Tribunal (NCLT) in the case of Deepak Ashutosh Bharadwaj, Suhani Deepak Bharadwaj vs The Registrar of Companies [Company Appeal No. 54/MB/ 2025] dated 6 January, 2026, has held that mere preparation of the balance sheets and the Audited Financial Statements neither prove that the Company was carrying on business or was in operation unless there are some revenue/expenses of operation are reflected in such financial statements. The preparation of the Balance Sheets / Audited Financial Statements in the case of the Applicant company on the contrary is an indication of the fact that the Company had no intention of carrying on business activities.
The NCLT examined the financial statements placed on record for the past several financial years. It found that although balance sheets and audited accounts had been prepared, there was no revenue from business operation. The Tribunal held that compliance with procedural requirements, such as preparation of accounts, audits, or filing of income tax returns, cannot by itself show that a company was carrying on business or was in operation.
The NCLT considered the lease agreement relied upon by the appellants and noted that it was conditional in nature, and found that besides it, there were no documents to demonstrate that the company, being a construction company, has undertaken any such activity in the recent past. With this, the Tribunal held that the appellants had failed to establish that the company was carrying on business or was in operation at the time its name was struck off, or that restoration was otherwise justified.
Accordingly, the NCLT upheld the Registrar of Companies’ action in striking off the name of Radiant Inn Pvt Ltd from the register of companies.
Lender’s failure to follow Reserve Bank of India Circulars on restructuring stressed MSME accounts does not, by itself, make an insolvency petition under the Insolvency and Bankruptcy Code non-maintainable
The National Company Law Tribunal (NCLT) at Guwahati in the case of Eduvanz Financing Pvt Ltd vs Abutani Mercantile Pvt Ltd [CP(IB)/9/GB/2025] dated December 04, 2025, has held that a lender’s failure to follow Reserve Bank of India circulars on restructuring stressed MSME accounts does not, by itself, make an insolvency petition under the Insolvency and Bankruptcy Code (IBC) non-maintainable.
The Tribunal observed that while the RBI circulars do mandate a structured framework for resolution of MSME distress, the non-compliance with such circulars cannot render a petition under Section 7 non-maintainable per se. Moreover, the IBC is a self-contained code, and where a financial debt and default are established, procedural non-compliance with RBI guidelines does not defeat the statutory remedy.
The Tribunal observed that according to the RBI’s guidelines, lenders should take a proactive approach when small businesses face financial trouble. Rather than moving straight to recovery, banks are expected to spot signs of stress early on and work directly with the borrower to find a solution. This typically involves developing a time-bound restructuring plan, such as adjusting repayment schedules or terms, to help the business stay afloat before the account is officially labelled as non-performing or legal action is taken.
The Tribunal also held that while RBI circulars provide a structured mechanism for resolution of MSME account, mere non-compliance with the procedures does not bar insolvency proceedings. It reiterated the Insolvency Code is a self-contained code and once the existence of a financial debt and default is established, the authority cannot conduct an inquiry into disputes and must admit the claim. The Tribunal accordingly admitted the petition.
Banks must operate within regulatory limits set by the RBI and cannot create barriers that penalize borrowers for exercising their right to repay or refinance loans
The Orissa High Court in the case of Maa Tarini Poultries Pvt Ltd. vs Indian Bank [WP (C) No. 23022 of 2025] dated November 29, 2025, has held that banks cannot impose charges that restrict a borrower’s freedom to switch lenders, ruling that such practices undermine fair banking standards and violate binding directions of the Reserve Bank of India. The Court said that banks must operate within regulatory limits set by the RBI and cannot create barriers that penalize borrowers for exercising their right to repay or refinance loans.
The Court observed that the bank cannot convert a borrower’s right to mobility into a chargeable commodity. The levy of such penalties operates as a deterrent to borrowers who intend to repay their loans ahead of schedule or shift to a competing lender. The consequences of this practice are the stifling of competition in the credit market, compelling borrowers to remain tied to a particular institution and thereby imposing an unwarranted restriction and freedom of trade and choice of consumer.
The Court rejected the bank’s contention that the RBI prohibition applied only to individual-retail borrowers for purposes other than business. It held that what matters is the effect of the charge and not the terminology used. Any similar charge which in substance operates as a foreclosure, prepayment or takeover fee on MSME credit, where regulatory prescription forbids such levy, is unlawful, arbitrary and must be quashed.
The Court held that contractual clauses inconsistent with RBI directions “stands ipso jure nullified and are rendered a legal nullity in the eyes of the law”. The court further noted that such charges deter borrowers from moving to competing lenders and “operate as a mechanism of control, curtailing consumer choice and impeding healthy competition among bank and financial institutions”. The court also found that the bank had no justification to withhold the original documents after full repayment.
The Court described the retention as based on a “tenuous, non-est, and statutorily prohibited demand” and said it was “manifestly arbitrary and antithetical to the rule of law”. Accordingly, the Court directed Indian Bank to immediately return all title deeds and allied documents without insisting on any charges and to file an affidavit of compliance within one month.
Financial creditor that participated in the liquidation process and secured its dues through a one-time settlement cannot later avoid paying its share of liquidation costs for the time it had taken part in it
The National Company Law Tribunal (NCLT) at Bengaluru in the case of Ravindranath Narayana Rao vs Jammu & Kashmir Bank Ltd [I.A. No. 397 of 2025 in C.P. (IB) No. 286/BB/2019] dated January 07, 2026, has held that a financial creditor that participated in the liquidation process and secured its dues through a one-time settlement cannot later avoid paying its share of liquidation costs for the time it had taken part in it. The Court, therefore, directed Jammu & Kashmir Bank Ltd to bear its proportionate share of liquidation expenses in the liquidation of Alpine Wineries Pvt Ltd.
The Tribunal observed that whatever were the circumstances prevalent in CIRP & liquidation, the respondent having secured its interest through OTS because of the ongoing liquidation wherein it had thoroughly participated, cannot cut corners when its turn comes for paying off its share the costs of the process till such time it had participated in it.
The Tribunal further observed that the CIRP places the obligation to pay liquidation costs on financial creditors. It said that even if the ex-promoter/suspended director had agreed to bear the costs, this would not absolve the bank of its statutory liability, especially in the absence of any binding agreement enforceable by the liquidator. Accordingly, the Tribunal directed the liquidator to recalculate the bank’s share of liquidation costs only for the period during which it participated in the process and to share the revised amount with the bank.
Stamp duty on a sale certificate issued pursuant to a court-monitored auction, including auctions conducted by the Debt Recovery Tribunal, must be levied on the auction price and not on a higher market value independently assessed by stamp authorities
The Bombay High Court in the case of Shweta Aditya Malhotra v. The Collector of Stamps, Andheri Division [Writ Petition No. 12021 of 2025] dated 28 January, 2026, has held that stamp duty on a sale certificate issued pursuant to a court-monitored auction, including auctions conducted by the Debt Recovery Tribunal, must be levied on the auction price and not on a higher market value independently assessed by stamp authorities.
The Court observed that once a property is sold through a transparent, court-supervised auction process, stamp authorities cannot reassess its value by applying independent valuation rules. Such reassessment would amount to stamp authorities sitting in appeal over a judicially supervised sale.
The Court noted that the Recovery Officer had followed a structured and transparent process, which included publication of the sale proclamation, fixation of a reserve price, and sale through an online public auction. Such a process was meant to facilitate discovery of fair market value. Thus, the Court reiterated that in a court-monitored auction, the price discovered through a transparent bidding process represents the true value of the property and cannot be reopened by stamp authorities.
The Court further observed that as the property was sold in a public auction through online bidding and the bid of the petitioner, which matched the reserve price, was accepted, it would not be permissible for the Authorities under the Stamp Act, 1958, to contend that the market value of the property would be determined in accordance with the Rule 4(6) and not on the basis of the consideration so fetched in the public auction. Therefore, the Court directed that stamp duty on the sale certificate be adjudicated on the basis of the auction sale consideration.
The central government cannot initiate prosecution and cannot issue a Look Out Circular under the Companies Act on the basis of an interim report submitted by the Serious Fraud Investigation Office
The Calcutta High Court in the case of Sunil Kumar Agarwal vs Serious Fraud Investigation Office [WPA No. 12186 of 2025] dated 15 January, 2026, has held that the central government cannot initiate prosecution under the Companies Act on the basis of an interim report submitted by the Serious Fraud Investigation Office and must wait for the final investigation report after completion of the probe. The Court, therefore, quashed a Look Out Circular issued against him during the pendency of an SFIO investigation, noting that neither an interim report nor a final investigation report had been submitted to the central government.
The Court observed that the Companies Act contemplates two distinct kinds of reports. The first kind of report is under Section 212(11) of the Companies Act, 2013, which report is an “interim report” and can be issued at any point of time during the course of investigation by SFIO. The second kind of report is an “Investigation Report” which can be issued only after completion of the investigation by SFIO”. The Court said that only the “Investigation Report” can be considered by the Central Government under Section 212(14) for the purposes of commencement of prosecution.
The Court held that under Section 212(14), the central government is required to examine only the final investigation report and apply its mind before deciding whether prosecution should be initiated. It also clarified that proceedings before the NCLT under Section 212(14-A), including applications for disgorgement of assets or fixing personal liability, stand on a different footing and may be initiated on the basis of either an interim report or the final report. On the facts, the Court recorded that neither an interim report nor a final investigation report had been submitted to the government. Thus, the Court quashed the Look Out Circular, holding that it lacked statutory backing.
