NCLAT Insolvency Deposit Default Ruling: Company Cannot Use Own Breach to Block IBC

In a significant ruling strengthening creditor protection under insolvency law, the National Company Law Appellate Tribunal has held that a company cannot escape insolvency proceedings by relying on its own violation of statutory deposit rules.

In Appeal No. 436 of 2022, decided in 2026, the appellate tribunal overturned an order of the National Company Law Tribunal that had dismissed an insolvency application on technical grounds. The NCLAT ruled that a corporate debtor cannot “evade repayment of deposits” by pointing to its own breach of Section 73 of the Companies Act.

The Tribunal made it clear that statutory non-compliance by a company cannot be used as a shield to defeat creditor claims under the Insolvency and Bankruptcy Code. The NCLAT insolvency deposit default ruling reinforces the principle that defaulting companies must remain accountable, even when their own conduct violates regulatory norms.

Background: Deposits, Defaults, and Insolvency Proceedings

The case arose from a dispute involving unpaid deposits collected by a company from investors.

Under Section 73 of the Companies Act, companies accepting public deposits must comply with strict regulatory requirements, including:

• Issuing prescribed notices

• Maintaining reserve accounts

• Ensuring repayment timelines

• Following disclosure norms

Failure to comply with these conditions renders deposit acceptance unlawful.

In the present case, the company had accepted deposits but allegedly violated Section 73 requirements. When the company later defaulted on repayment, depositors initiated insolvency proceedings under the Insolvency and Bankruptcy Code.

The corporate debtor challenged the insolvency application, arguing that since the deposits were accepted in violation of Section 73, related notices and claims were legally barred.

This argument formed the basis of the initial dismissal by the NCLT.

NCLT’s Dismissal on Technical Grounds

The National Company Law Tribunal had accepted the company’s argument that:

• The deposits were raised in breach of statutory provisions.

• Notices under Section 73 were restricted.

• The violation affected the maintainability of insolvency proceedings.

On this basis, the NCLT dismissed the insolvency application, treating the statutory breach as a procedural obstacle.

This approach effectively allowed the company to avoid insolvency proceedings by citing its own non-compliance.

The order was challenged before the appellate tribunal, leading to the NCLAT insolvency deposit default ruling.

NCLAT’s Reversal: No Benefit from Own Wrong

The appellate tribunal rejected the reasoning adopted by the NCLT and reversed its order.

The NCLAT held that:

• A company cannot take advantage of its own illegal conduct.

• Statutory violations cannot be used to defeat creditor remedies.

• The purpose of insolvency law would be frustrated if such defences were allowed.

The Tribunal observed that permitting a corporate debtor to rely on its own breach would amount to rewarding unlawful behaviour.

It stated that a defaulting company “cannot evade repayment of deposits” by invoking technical restrictions arising from its own misconduct.

This reasoning lies at the heart of the NCLAT insolvency deposit default ruling.

Interpretation of Section 73 of the Companies Act

Section 73 regulates the acceptance and repayment of deposits by companies.

It prohibits companies from raising deposits unless they comply with specified conditions. It also places restrictions on issuing notices and collecting funds in certain circumstances.

The company argued that because it had violated Section 73, deposit-related claims were legally defective.

The NCLAT rejected this interpretation.

The Tribunal clarified that:

• Section 73 is intended to protect depositors.

• It cannot be interpreted to harm them.

• Breach of the provision attracts penalties but does not extinguish repayment obligations.

According to the Tribunal, the purpose of deposit regulations is to ensure compliance, not to provide immunity from insolvency proceedings.

This approach aligns with the objective of safeguarding investor interests.

Insolvency Code and the Concept of “Default”

Under the Insolvency and Bankruptcy Code, insolvency proceedings can be initiated when a “default” occurs.

Default refers to failure to pay a debt when it becomes due and payable.

In the present case:

• Deposits had matured.

• Repayment was due.

• The company failed to pay.

These elements satisfied the statutory definition of default.

The NCLAT held that once default is established, insolvency jurisdiction is triggered, regardless of whether the underlying transaction involved regulatory breaches.

The NCLAT insolvency deposit default ruling thus reinforces the primacy of default over technical objections.

Preventing Evasion Through Technical Defences

A key concern addressed by the Tribunal was the risk of companies misusing regulatory violations as escape routes.

If the company’s argument had been accepted, it would mean that:

• Companies could raise illegal deposits.

• Default on repayment.

• Then block insolvency proceedings by citing illegality.

The Tribunal noted that such an approach would undermine both company law and insolvency law.

By closing this loophole, the NCLAT ensured that statutory breaches do not become tools for evasion.

The ruling strengthens the enforcement framework by preventing misuse of technical defences.

Protecting Depositors in Insolvency Proceedings

Depositors are often among the most vulnerable creditors in corporate failures.

Unlike banks or institutional lenders, individual depositors usually lack:

• Negotiating power

• Access to timely information

• Legal resources

The NCLAT emphasised that insolvency law must remain accessible to such stakeholders.

It held that depositors’ claims remain enforceable under the IBC, even if the company violated deposit regulations.

The NCLAT insolvency deposit default ruling thus reinforces depositor protection within the insolvency framework.

Harmonising Company Law and Insolvency Law

The judgment reflects an effort to harmonise the Companies Act and the Insolvency and Bankruptcy Code.

The Tribunal clarified that:

• Company law regulates corporate conduct.

• Insolvency law deals with financial distress and default.

• Breach of one does not nullify remedies under the other.

Both statutes serve different but complementary purposes.

Allowing company law violations to block insolvency proceedings would distort this balance.

The ruling ensures that regulatory enforcement and insolvency resolution operate in coordination rather than conflict.

Reinforcing Accountability of Corporate Debtors

The decision sends a clear message on corporate accountability.

The NCLAT underlined that:

• Companies must bear consequences of their actions.

• Non-compliance cannot become a strategic defence.

• Financial responsibility cannot be avoided through technicalities.

By holding companies accountable for repayment despite regulatory lapses, the Tribunal reinforced ethical and legal standards in corporate governance.

The NCLAT insolvency deposit default ruling strengthens confidence in the enforcement of financial obligations.

Wider Context: Rising Insolvency Litigation

The judgment comes at a time when insolvency litigation in India continues to grow.

Cases involving:

• Defaulted deposits

• Unregulated fundraising

• Delayed repayments

• Investor disputes

are increasingly reaching insolvency forums.

Many such cases involve complex overlaps between regulatory law and insolvency law.

The present ruling provides guidance on how tribunals should handle such overlaps, prioritising substantive justice over procedural obstacles.

Impact on Future Insolvency Proceedings

The ruling is likely to influence how tribunals deal with similar defences in future cases.

It clarifies that:

• Illegality of deposit acceptance does not negate debt.

• Regulatory breaches do not erase default.

• Insolvency jurisdiction remains intact.

This guidance reduces uncertainty and promotes consistency in adjudication.

For depositors and creditors, it reinforces access to insolvency remedies.

For companies, it signals that statutory compliance failures will not shield them from financial accountability.

Ensuring Integrity of the Insolvency Framework

One of the objectives of the Insolvency and Bankruptcy Code is to create a predictable and reliable system for resolving financial distress.

Allowing debtors to rely on their own misconduct would weaken this system.

The NCLAT observed that insolvency law must not be reduced to a procedural battlefield where defaults are overshadowed by technical disputes.

By focusing on substance over form, the Tribunal protected the integrity of the insolvency regime.

The NCLAT insolvency deposit default ruling strengthens trust in institutional mechanisms for debt resolution.

A Clear Message Against Abuse of Legal Process

The judgment also addresses concerns about abuse of legal process.

The Tribunal noted that corporate debtors sometimes raise hyper-technical objections to delay or derail proceedings.

Such tactics burden tribunals and frustrate creditors.

By rejecting defences based on self-created violations, the NCLAT discouraged strategic litigation.

The ruling promotes efficient and fair resolution of insolvency cases.

Strengthening Depositor Rights and Debtor Responsibility

The NCLAT’s 2026 decision marks an important development in insolvency jurisprudence.

By holding that companies cannot rely on their own statutory breaches to defeat insolvency proceedings, the Tribunal has reinforced basic principles of fairness and accountability.

The NCLAT insolvency deposit default ruling confirms that:

• Defaults remain actionable despite regulatory violations.

• Depositor claims are legally protected.

• Corporate misconduct cannot be rewarded.

The judgment strengthens the position of small investors, upholds the objectives of the Insolvency and Bankruptcy Code, and ensures that insolvency law remains focused on resolving genuine financial distress.

By closing the door on technical evasion, the NCLAT has reaffirmed that legal remedies must serve justice, not facilitate avoidance.