Profitable but Insolvent, in Brief
At a glance: The Supreme Court has made it clear that a lender can start insolvency proceedings against a company as soon as a loan payment or part-payment is missed. Arguments about the exact amount owed, or the fact that the business is making a profit, will not stop the case. And if your lender records the default with an Information Utility and you stay silent, that record will be treated as very strong proof against you.
Based on Deepak Raheja & Anr. v. Omkara Assets Reconstruction Pvt. Ltd. & Anr., 2026 INSC 1134 (decided on 15 October 2026)
Date: 03-11-2026
Who Should Read This
This update is for owners/management of MSMEs and start-ups and any other company that has taken any form of debt from a bank, NBFC or other lender. It is equally relevant if your loan has been, or may be, sold by your lender to an asset reconstruction company.
The Short Version
The Supreme Court has made it clear that a lender can start insolvency proceedings against a company as soon as a loan payment/part-payment is missed. Arguments about the exact amount owed, or the fact that the business is making a profit, will not stop the case. And if your lender records the default with an Information Utility and you stay silent, that record will be treated as very strong proof against you.
What Happened in the Case
Two companies running well-known hotels, the JW Marriott in Bangalore and the Crowne Plaza in Pune, had together borrowed Rs. 600 crores from Piramal Finance in 2017, and later took additional loans under the Government's Emergency Credit Line Guarantee Scheme (ECLGS). The lender thereafter sold the loans to Omkara Assets Reconstruction, an asset reconstruction company. The loan agreement allowed this without the borrowers' consent. Omkara recorded the defaults with NeSL, an Information Utility, recalled the loans and filed insolvency cases against both companies before the National Company Law Tribunal (NCLT).
The companies argued that they were profitable, that the money set aside from revenue and the reserve account should have covered any shortfall, and that the lender's figures were wrong. After a round of litigation that went up and down the tribunals, the NCLT admitted both companies into insolvency, the appellate tribunal (NCLAT) agreed, and the Supreme Court has now upheld those decisions.
What the Supreme Court Decided, in Plain Words
Missing even part of a payment is a "default". The law does not require the whole loan to be overdue. Non-payment of any part or instalment that has fallen due is enough to start insolvency proceedings.
Disputes over the exact amount do not stop the case. The Court separated two things: whether a default happened, and how much is owed. In its words, "The occurrence of default is a historical and static event which crystallises upon the date a debt became due and was not paid." The exact figure keeps changing with interest and charges, and is worked out later by the resolution professional during the insolvency process. At the admission stage, the tribunal only needs to be reasonably satisfied, on the documents, that a default above the minimum legal threshold has occurred.
An Information Utility record is very strong proof. An Information Utility is a regulated database where lenders record loan defaults. When a lender files a default, the Information Utility sends it to the borrower for confirmation. Further, if the borrower fails to respond, the Information Utility sends three reminders, each allowing seven days for a response. If the borrower confirms or simply does not respond, the default is marked "authenticated". The Court held that an authenticated record is, by itself, enough to prove default, and can be challenged only with clear, strong and convincing material, not a bare denial or a disagreement over accounting entries. A borrower who stayed silent cannot later turn around and deny the default.
Other documents can prove default too. Even without an Information Utility record, the tribunal can rely on loan agreements, account statements, balance confirmations, acknowledgements of debt, settlement offers and letters, taken together. In this case, the companies' own account statements, their own accountants' reports (which only disputed the interest rate), and their own letters seeking a settlement were used against them.
Being profitable is no defence. The companies pointed to positive operating profit (EBITDA). The Court explained that EBITDA is calculated before interest, so it says nothing about whether a business can actually pay its lenders. What matters is whether cash earnings cover loan repayments, measured by the Debt Service Coverage Ratio (DSCR). Here, the company's own audited accounts showed a DSCR of 0.12, meaning it earned only about Rs. 12 for every Rs. 100 of loan repayments due that year. As the Court put it, profitability is "an economically unreliable proxy for solvency."
The law steps in early, not at collapse. The Court stressed that the insolvency law is designed to intervene at the first default, so that a business can be rescued before it deteriorates to the point where it can only be shut down.
A loan transfer, once upheld, cannot be challenged again. The companies had already lost a challenge to the sale of their loans before the Karnataka High Court and the Supreme Court. They could not reopen that question in the insolvency case.
The Court also noted that a 2026 amendment to the insolvency law now says that tribunals "shall" admit a lender's case once a default is shown and the application is complete, and that an Information Utility default record filed by a financial institution is sufficient proof. The Court said this simply confirms what the law already meant.
What This Means for Your Business
- Never ignore a message from an Information Utility. If you receive a communication about a default recorded by your lender, act on it within the time given. If you disagree, dispute it with reasons and supporting documents at that stage. Silence will be treated as acceptance, and it becomes very hard to undo later.
- Watch your cash flow against repayments, not just your profit. A healthy profit and loss statement will not protect you if your cash earnings do not cover the instalments falling due. Keep track of how much of your repayment obligation your business can actually meet, and raise the alarm internally well before a payment is missed.
- A dispute over interest or charges will not shield you. If you believe your lender has applied the wrong interest rate or charges, raise it early and in writing. But do not assume that such a dispute will prevent an insolvency case. Since even a partial shortfall counts as default, paying what falls due, on time, matters.
- Be careful about what you put in writing. Letters explaining financial difficulties, requests for restructuring and one-time settlement proposals were used by the Court as evidence that the companies had defaulted. Negotiating with your lender is often the right step, but understand that such documents can later be read as an admission. It is sensible to take legal advice before sending them.
- Read your loan documents closely. This case shows three common surprises:
- your lender may be able to sell your loan to another entity, such as an asset reconstruction company, without your consent;
- an arrangement that automatically diverts a share of your revenue towards repayment may not fully satisfy your obligation to pay, if the agreement requires you to make up any shortfall from other sources; and
- a reserve account under one loan may not cover other loans.
- Act at the first sign of stress. The law is designed to step in at the first default. If you foresee difficulty in meeting repayments, engage with your lender and take advice early, rather than waiting until the default is recorded and a case is filed.
- If you lend money or extend credit as a business. For businesses that themselves extend financial credit, the ruling confirms that recording a default with an Information Utility, and getting it authenticated, is the most effective way to prove default before the NCLT.
A Word of Caution on AI-Generated Legal Research
At the end of its judgment, the Court noted that a compilation of case law filed on behalf of the companies was objected to as being full of AI-generated judgments that did not exist. The Court had proposed heavy costs, which it dropped only because one of the appellants had since passed away. If you use AI tools for legal research or drafting, always have the output verified by a qualified professional before relying on it.
How NoLegalPaisa Can Help
If your business has outstanding loans, has received a communication from an Information Utility, or is in discussions with a lender about restructuring or settlement, reach out to us. We can help you review your loan documents, understand your position and respond in time.
This article is for general information only and is not legal advice. Please seek advice specific to your situation.
This article is general information on Indian law, not legal advice for a particular case. Time limits and thresholds change, so have your documents reviewed by an advocate before you act.
Contact (Admin): support@nolegalpaisa.com • +91-9326024128
Date: 03-11-2026
Frequently Asked Questions
Supreme Court decisions referred to
- Deepak Raheja & Anr. v. Omkara Assets Reconstruction Pvt. Ltd. & Anr., 2026 INSC 1134 (decided 15 October 2026)