‘Shylockian’ Lending is ‘Squeezing of Blood’: NCLT Moves Beyond Debt & Default to Reject a Section 7 Application

‘Shylockian’ Lending is ‘Squeezing of Blood’: NCLT Moves Beyond Debt & Default to Reject a Section 7 Application 

Introduction 

Shylock was a fictional character in William Shakespeare’s play The Merchant of Venice. He was a moneylender who had lent 3,000 ducats to Antonio on a bond, which provided that, upon default, Shylock could take a pound of flesh from Antonio’s body. When Antonio failed to repay the loan, Shylock insisted upon literal enforcement of the bond. The term ‘Shylockian’ has consequently come to describe harsh and oppressive lending arrangements structured to extract returns grossly disproportionate to the amount advanced. 

The decision of the National Company Law Tribunal (‘NCLT’), Kochi Bench, in NCS Autocarsi examined precisely such a transaction. Although the application under s. 7 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’) satisfied the technical requirements of debt, default and the statutory threshold, the Tribunal independently examined the surrounding circumstances and rejected the application. 

By treating commercial substance as relevant at the admission stage, the NCLT departed from the ordinarily narrow enquiry contemplated under s. 7 of the IBC, thereby raising an important question: how far may the NCLT travel beyond the existence of financial debt and default, particularly after the Supreme Court’s repeated insistence that admission ordinarily follows once the statutory ingredients are met and the 2026 amendmentii expressly restricts rejection on any other ground? 

Brief Facts 

• SC Shah Corporation and 7 other entities and individuals were the Financial Creditors (‘FC’) who had jointly filed an application under s. 7 of the IBC for initiation of the corporate insolvency resolution process (‘CIRP’) against NCS Autocars, the Corporate Debtor (‘CD’). The FCs had advanced about Rs. 4 crores to the CD in two tranches dated 29.09.2023 and 11.12.2023. Separate demand promissory notes had been executed in their favour, mentioning interest rates ranging from 1.7% to 2.9625% per month and requiring repayment within about 5 months. 

• The entire face value recorded in the promissory notes had not been disbursed. Interest for the initial 5-month period had been deducted upfront and only the net amount had been transferred to the CD. The FCs had also obtained numerous post-dated cheques (‘PDCs’) corresponding to weekly repayments of the principal amount. The CD had made part payments of about Rs. 1.45 crores. After appropriating those payments, the FCs had claimed that Rs. 2.55 crores remained payable towards principal and Rs. 1.27 crores towards interest, totalling to about Rs. 3.82 crores. Legal notices had been issued by the FCs in May 2024 and December 2025. The CD had not entered appearance before the NCLT despite service and had hence been proceeded against ex parte vide order dated 22.04.2026. 

• In support of their application, the FCs had primarily relied upon the promissory notes, bank statements and ledger accounts. No comprehensive loan agreements or financial statements of the CD had initially been placed on record. The NCLT had therefore called for additional documents and information concerning the transactions. 

• The additional material brought forth revealed that a large no. of PDCs had been obtained, although only a few had been encashed. The material also disclosed earlier and recurring dealings between the parties, substantial deduction of interest before disbursement, discrepancies regarding whether the applied interest rates were monthly or annual, and similar insolvency applications filed by connected lenders against other corporate entities before different NCLT Benches. 

Held 

• The NCLT dismissed the s. 7 application while preserving the FCs’ right to pursue such civil, contractual or statutory remedies as were otherwise available to them. It also directed that this decision be forwarded to the Insolvency and Bankruptcy Board of India (IBBI) for research and analysis. 

• The NCLT first held that the joint application filed by the FCs was maintainable. S. 7 permitted FCs to apply jointly and, since their aggregate claim exceeded the minimum threshold under s. 4 of the IBC, each FC was not independently required to satisfy the threshold. The Tribunal observed that the FCs appeared to have satisfied the technical requirements concerning debt and default but held that these ingredients could not be examined through a straitjacket formula and that surrounding circumstances could assume significance where the cumulative material disclosed a substantially different picture. 

• Relying upon the Supreme Court’s decision in Anjani Technoplast Ltd.iii, the NCLT held that the insolvency process could not be used as a substitute for enforcement or recovery proceedings. It emphasized that commencement of CIRP resulted in consequences in rem and affected not merely the CD, but also its employees, shareholders, creditors and other stakeholders. Hence, an application could not be admitted mechanically merely because of documentary indications of debt and default. 

• The NCLT noted that, apart from the promissory notes, there had been no comprehensive written loan agreements explaining the commercial terms, manner of disbursement, appropriation of payments or previous dealings between the parties. Further, no board resolution or other material had been produced to establish the authority of the person who had executed the promissory notes on behalf of the CD. 

  
  
  

• It was observed that the FCs had obtained several PDCs but had presented only a few of them. They had neither pursued proceedings under s. 138 of the Negotiable Instruments Act, 1881 (‘NI Act’) nor satisfactorily explained why most of the PDCs had remained unpresented before banks. The Tribunal clarified that presentation of PDCs or recourse to s. 138 of the NI Act was not a condition precedent to a s. 7 application, it treated such conduct as a relevant circumstance indicating that IBC was being resorted to as a high-pressure recovery mechanism. 

• It was also found that the ledger accounts had revealed recurring receipts and payments rather than two isolated loan transactions. Payments had continued even after dishonour of some PDCs and hence, it was inferred that the parties had treated the transactions as continuing financial arrangements involving periodic advancement and repayment of money. The FCs had, however, not fully disclosed the prior dealings or explained the basis on which amounts had been deducted and adjusted. 

• The NCLT attached particular importance to the upfront deduction of interest. Against promissory notes of Rs. 4 crores, about Rs. 48 lakhs had been deducted before or at the time of disbursement. The CD had therefore received about Rs. 3.52 crores while being required to repay the principal of Rs. 4 crores through weekly instalments over approximately 5 months. Inconsistencies had also been noted in the promissory notes. The printed forms referred to interest ‘per annum’, whereas handwritten endorsements on most of the documents described the rates as ‘PM’ or ‘per month’. In one case, the promissory note continued to record an annual rate while the claim before the Tribunal appeared to have been calculated on a monthly basis. 

• To demonstrate the economic effect of the arrangement, the Tribunal prepared an illustrative calculation based on a net disbursement of Rs. 3.52 crores and 20 weekly repayments of Rs. 20 lakhs each. This yielded an effective annual rate of about 84.41%. The NCLT clarified that this calculation was not intended to determine the exact rate payable under each promissory note, but merely to illustrate how upfront deduction of interest, combined with simultaneous recovery of principal, could result in a burden substantially exceeding the nominal rate mentioned on the documents. 

• The Tribunal also noted that the FCs or connected entities had filed several applications under ss. 7 and 9 of the IBC against other corporate entities on substantially similar promissory-note transactions and the same insolvency professional had been proposed as interim Resolution Professional (IRP) in more than one proceeding. Though it was clarified that these circumstances did not independently establish illegality, their recurrence was considered relevant to the overall pattern in which the IBC was being invoked. 

• It was further observed that the FCs had not produced any banking license, money-lending license or statutory authorization for carrying on repeated lending activities. It was once again clarified that absence of such a licence did not, by itself, render a s. 7 application non-maintainable. It nevertheless regarded the apparent use of unregulated lending arrangements, followed by repeated insolvency petitions, as a relevant indication that the IBC was being channelled into a coercive recovery mechanism. 

• The NCLT found that no financial statements, records of liabilities, proceedings initiated by other creditors or other evidence had been produced to demonstrate that the CD was commercially insolvent or experiencing financial distress. Taking these circumstances cumulatively, the Tribunal described the arrangement as a ‘Shylockian system’ in which the stated interest appeared modest only on paper, while the effective burden amounted to ‘squeezing of blood’. It held that a system involving upfront deduction of interest, regular extraction of principal, exceptionally high effective returns and coercive recovery instruments could not be permitted to take advantage of the IBC framework. 

Our Analysis 

At the outset, a high-cost or unsecured loan does not cease to be a financial debt merely because its terms are commercially onerous. Nor does the IBC prescribe a maximum permissible rate of interest for determining whether a debt falls within s. 5(8) of the IBC. What the provision does require is a debt disbursed against consideration for the time value of money. However, where the face value mentioned in an instrument materially differs from the amount actually placed at the borrower’s disposal, and the applied interest is itself inconsistent, scrutiny of the actual disbursal and computation of the outstanding amount becomes relevant to determining the existence and quantum of the financial debt. 

The NCLT’s approach reflects a wider statutory principle found in the Usurious Loans Act, 1918 (‘UL Act’). The UL Act defines ‘interest’ to include every return over and above what was actually lent, irrespective of the description assigned to itiv, and includes within ‘loan’ any transaction which is, in substance, a loanv. S. 3 of the UL Act empowers a court, in a suit to which the Act applies, to reopen a transaction where the interest is excessive and the transaction is substantially unfair. The Explanation to s. 3(2) further recognizes that the interest charged may, by itself, constitute sufficient evidence that the transaction was substantially unfair. S. 4 of the UL Act grants similar powers to be exercised in relation to the proof of a loan in insolvency proceedings. 

The UL Act cannot be said to have been directly applied by the NCLT in the present case, especially without examining its territorial operation and its relationship with proceedings under the IBC. It nevertheless reflects a longstanding legislative policy that the real economic return and the amount actually advanced may take precedence over the terminology adopted in the instrument. 

The primary difficulty, however, arises from the precedential and statutory interpretation of s. 7 IBC. In January 2026, the Supreme Court reiterated in Elegna Co-Op. Housingvi that the enquiry under s. 7 was confined to the existence of financial debt and occurrence of default. Once those ingredients were established, admission was mandatory unless the application was incomplete. Considerations such as the viability of the CD, the conduct of the creditor or perceived prejudice to other stakeholders were ordinarily irrelevant at the admission stage. The Supreme Court also reiterated that the limited exception recognized in Vidarbha Industriesvii could not be converted into a general discretion to refuse CIRP despite establishing debt and default. 

At the same time, Anjani Technoplast (supra), decided on 23.04.2026, recognized that a s. 7 proceeding could be rejected as an abuse where a decree-holder bypassed execution, the quantum claimed remained seriously disputed and CIRP was sought against a perfectly solvent and functioning company. That ruling was expressly tied to its particular facts and to the anti-abise principle underlying s. 65 of the IBC. This decision hence, cannot be read as displacing the general rule reiterated in Elegna Co-Op. Housing (supra). 

The statutory position was further crystallized by Explanation I to s. 7(5), inserted by the IBC Amendment Act of 2026viii, which states that where the requirements under s. 7(5)(a) have been complied with, ‘no other ground’ shall be considered to reject the application. This amendment came into force on 26.05.2026ix. The present petition was filed on 14.02.2026 and registered on 01.04.2026 and the order dismissing it was delivered on 06.07.2026. 

The NCLT did not examine whether the amended provision governed a pending application before it or how its commercial-substance enquiry could be reconciled with the newly inserted Explanation. This omission is material because even if the applicability of the amendment is doubted, the line of authorities requiring admission once the statutory requirements are met cannot be discounted. 

In such a case, a more legally sustainable approach may have been to connect each suspicious circumstance to a statutory requirement. The discrepancy between the face value recorded in the instruments and the amount actually disbursed could have been examined while determining the existence and quantum of financial debt. The conflicting annual and monthly interest rates could have affected whether the amount claimed had actually become due. The absence of authority to execute the promissory notes could have been connected to the binding character of those instruments. Similarly, non-disclosure of prior dealings and unexplained ledger adjustments could have been tied to inadequate proof of the alleged default. Most importantly, if the surrounding circumstances demonstrated that the application had been moved maliciously for coercive recovery, the Tribunal could have expressly tested the case against s. 65 of the IBC. 

The NCLT’s independent scrutiny of the commercial substance and economic reality of the transactions cannot be side-lined. In fact, it can also be argued that this case was not an ordinary lending dispute and the material before the Tribunal warranted closer examination. However, this decision may be more vulnerable in appeal because its conclusions were framed primarily as an exercise of discretion after acknowledging that the essential ingredients of debt and default were met. Given the larger issue the Tribunal sought to deal with, its reasoning would have rested on firmer footing had the individual circumstances been categorized within the bounds of statutory requirements and interpretation. 

i SC Shah Corporation & Ors. v. NCS Autocars (P) Ltd., CP(IBC)/07/KOB/2026, NCLT-Kochi Bench, Order dated 06.07.2026
ii IBC (Amendment) Act, 2026, cl. 4 (substituting s. 7(5) and inserting Explanations I & II)
iii Anjani Technoplast Ltd. v. Shubh Gautam, 2026 SCC OnLine SC 668
iv S. 2(1), Usurious Loans Act, 1918
v S. 2(2), Usurious Loans Act, 1918
vi Elegna Co-Op. Housing and Commercial Society Ltd. & Anr. v. Edelweiss Asset Reconstruction Co. Ltd. & Anr., 2026 SCC OnLine SC 82
vii Vidarbha Industries Power Ltd. v. Axis Bank Ltd., 2022 SCC OnLine SC 841
viii See note ii
ix MCA Notification No. S.O. 2625(E) dated 22.05.2026