Breach of Settlement Not Operational Debt: CIRP Held Non-Maintainable: NCLT Kolkata
- REEDLAW
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REEDLAW Legal News Network reports: In a pivotal ruling, the Kolkata Bench clarified that a breach arising exclusively from a post-dispute settlement could not be treated as an operational debt for the purpose of initiating a corporate insolvency process. It held that once the underlying liability had been extinguished pursuant to a settlement, a subsequent failure to comply with its terms could not revive the extinguished claim for the purpose of triggering proceedings under the IBC.
The National Company Law Tribunal, Kolkata Bench, comprising Smt. Bidisha Banerjee (Judicial Member) and Cmde. Siddharth Mishra (Technical Member), adjudicating an application under Section 9 of the Insolvency and Bankruptcy Code, 2016, concluded that a default under a settlement agreement could not be characterised as an operational debt within the meaning of Section 5(21). The Bench observed that since the parties had already novated and settled the original operational claim, the extinguished debt could not serve as a foundation for initiating CIRP.
The National Company Law Tribunal (NCLT), Kolkata, considered the application filed by the Operational Creditor seeking initiation of the Corporate Insolvency Resolution Process against the Corporate Debtor for non-payment of dues arising from earthwork construction and equipment supply services. The Operational Creditor asserted that the Corporate Debtor had previously admitted its liability and subsequently entered into a settlement agreement dated 07.10.2022, pursuant to which an earlier Section 9 petition had been withdrawn. The Corporate Debtor, however, allegedly defaulted in complying with the instalment schedule under the settlement, remitting only part of the agreed amount. As the outstanding dues remained unpaid, a fresh petition under Section 9 was instituted.
During the proceedings, the Operational Creditor argued that the petition was based on the original operational debt, which had been admitted by the Corporate Debtor, and that the settlement agreement expressly permitted restoration or pursuit of outstanding dues in the event of default. It was submitted that the Corporate Debtor had defaulted shortly after withdrawal of the earlier petition and that only partial payments were made over a prolonged period. Reliance was placed on judicial precedents holding that breach of a settlement does not efface the character of the original debt. It was further submitted that the conduct of the Corporate Debtor reflected a repeated pattern of entering into settlements, making part payments, and thereafter committing default.
The Corporate Debtor contested maintainability and argued that the settlement agreement constituted a full and final resolution of all claims arising from the original operational debt. It was submitted that the Operational Creditor had expressly waived all past and future claims save and except those arising from the settlement amount, thereby extinguishing the original debt. The Corporate Debtor contended that the entire settlement amount of ₹5.75 crores had been paid—though belatedly—and had been accepted without protest. It was argued that the IBC could not be invoked to enforce or recover dues arising under a settlement agreement, particularly when the earlier petition had been withdrawn without liberty to revive or initiate a fresh proceeding. The Corporate Debtor further disputed the Operational Creditor’s claim for interest, asserting the absence of any contractual basis under the original transaction.
Upon consideration, the Tribunal found that the settlement agreement expressly recorded that its terms constituted full and final satisfaction of all claims arising from the original operational debt, thereby extinguishing such debt. Although Clause 6 of the settlement agreement permitted the Operational Creditor to pursue the unpaid portion of the settlement amount with interest in the event of default, the Tribunal observed that all instalments under the settlement had been paid, and only the interest component remained in dispute. Relying on judicial precedents, the Tribunal held that default under a settlement agreement did not constitute an operational debt under Section 5(21) of the Code, and that the IBC was not a mechanism for enforcing contractual settlements or recovering interest. The Tribunal also noted that the earlier petition had been withdrawn without any liberty to revive, thereby rendering the present petition barred.
In view of the fact that the settlement amount had been discharged in full and the remaining claim pertained solely to interest, the Tribunal held that initiation of CIRP would amount to misuse of the insolvency framework for recovery purposes. Consequently, the petition under Section 9 was dismissed, with the Operational Creditor being left to avail appropriate remedies for enforcement of the settlement terms before the competent forum.
Mr. A.K Srivastava and Mr. Akash Sharma, Advocates, represented the Petitioner.
Mr. Joy Saha, Sr. Advocate, Mr. Shaunak Mitra, Mr. Snehasish Sen and Ms. Mihika Roy, Advocates, appeared for the Respondent.
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