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Breach of a settlement agreement does not render a Section 9 Application for insolvency proceedings

The National Company Law Appellate Tribunal (NCLAT), Principal Bench comprising Justice Ashok Bhushan, Chairperson and Barun Mitra, Technical Member was hearing an appeal and held that the breach of a settlement agreement, when it relates to the mode of payment for an underlying operational debt, does not render a Section 9 Application for insolvency proceedings as not maintainable.

In the present NCLAT judgment, an Operational Creditor filed an appeal against the order of the Adjudicating Authority (National Company Law Tribunal) dated 12.01.2023. The Adjudicating Authority had dismissed the Section 9 Application filed by the Appellant, stating that it was not maintainable.

The case involved a Work Order/Agreement between the Operational Creditor and the Corporate Debtor, 'Jasmine Buildmart Private Limited.' RA Bills were raised by the Operational Creditor between 04.11.2011 to February 2016. When payment was not made despite reminders, a demand notice under Section 8 was issued. A Section 9 Application seeking the initiation of the Corporate Insolvency Resolution Process (CIRP) was filed. During this process, a Settlement Agreement was reached between the parties, where the Corporate Debtor admitted liability to pay Rs. 19.81 Crores. However, the Corporate Debtor failed to comply with the Settlement Agreement, leading to the filing of a fresh Section 9 Application. The Adjudicating Authority dismissed the Section 9 Application, stating that the breach of the Settlement Agreement did not qualify as an operational debt.

In the appeal, the Operational Creditor argued that the debt arose from RA Bills due to the work awarded by the Corporate Debtor. They relied on a previous judgment in a similar case, Ahluwalia Contracts (India) Limited v. Logix Infratech Private Limited, REED 2020 NCLAT Del 09567, where it was established that the Memorandum of Understanding entered between the parties was related to the mode and manner of payment, and the failure to make payment did not absolve the Corporate Debtor from its debt and default.

The Respondent, on the other hand, supported the Adjudicating Authority's decision, claiming that the Settlement Agreement breach did not constitute an operational debt.

After considering the arguments, the NCLAT held that the Adjudicating Authority had erred in dismissing the Section 9 Application. It emphasized that the debt arose from the RA Bills for work done by the Operational Creditor, and the Settlement Agreement was only a mode of payment. The NCLAT also distinguished the case from Amrit Kumar Agrawal v. Tempo Appliances Private Limited, REED 2020 NCLAT Del 11557, stating that it was not applicable in this context. Additionally, the NCLAT cited a judgment, "Trafigura India Private Limited v. TDT Copper Limited, REED 2020 NCLAT Del 09566" which supported the Operational Creditor's position.

The NCLAT concluded that the filing of a claim in the CIRP of 'Venta Realtech Pvt. Ltd.' did not affect the maintainability of the Section 9 Application. Therefore, the appeal was allowed, and the Adjudicating Authority's order was set aside. The Section 9 Application filed by the Operational Creditor was to be revived and proceeded according to the law.

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