NCLT REITERATES THAT UNPAID DUES UNDER SETTLEMENT AGREEMENT CANNOT BE RECOVERED UNDER INSOLVENCY AND BANKRUPTCY CODE

The National Company Law Tribunal (#NCLT) Principal Bench, New Delhi has in a matter of M/S Brand Realty Services Ltd vs M/S Sir John Bakeries India Pvt Ltd passed an Order dated 22-07-2020 and held that NCLT is not a recovery court and that an unpaid #instalment under a #settlement agreement cannot be considered as an #operationaldebt under the Insolvency and Bankruptcy Code 2016 (the Code).

In the present case, M/S Brand Realty Services Ltd (the Operational Creditor) and M/S Sir John Bakeries India Pvt Ltd (the Corporate Debtor) had agreed that the Operational Creditor would provide investment and consultancy services to the Corporate Debtor for setting up a retail outlet in Uttar Pradesh. In this regard, they executed an Agreement dated 28-11-2014 and the Operational Creditor raised invoices thereunder for the said consultancy services.

Thereafter, an Account Settlement Agreement dated 15-06-2018 (the Settlement Agreement) was executed, whereby, the Corporate Debtor had agreed to pay certain commission to the Operational Creditor for the said investment and consultancy services.

According to the said Settlement Agreement, the Corporate Debtor handed over cheques amounting to Rs. 33,94,000.00 to the Operational Creditor. But when the Operational Creditor presented the said cheques in the bank, the cheques were returned unpaid on 18-04-2019. Thereafter, the Corporate Debtor did not make payment of the said amount to the Operational Creditor.

Thus, the Operational Creditor sent a Legal Notice dated 30-04-2019 and later, a Demand Notice under Section 8 of the Code dated 30-04-2019 to the Corporate Debtor, thereby, demanding payment of unpaid operational debt. But as the Corporate Debtor failed to respond to the said Notices, the Operational Creditor filed an Application under Section 9 of the Code to initiate corporate insolvency resolution process (CIRP) against the Corporate Debtor before the NCLT New Delhi Principal Bench.

The NCLT Bench made the following observations in this case:

1- That as per the terms of the Settlement Agreement, the Corporate Debtor had already paid the settlement amount of Rs. 21,66,511.00 to the Operational Creditor. Therefore, they disputed the existence of any further liability or debt of Rs. 33,94,000.00 due and payable to the Operational Creditor.

2- That in order to trigger Section 9 of the Code, the Operational Creditor had to prove default or non-payment of operational debt by the Corporate Debtor. The term “operational debt” has been defined under Section 5 (21) of the Code as a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

3- But in the present case, the claim under Section 9 Application was not based on the Agreement dated 28-11-2014 by which invoices were raised by the Operational Creditor, but was based on the Settlement Agreement, whose terms were alleged to have been breached by the Corporate Debtor.

Based on the aforesaid grounds, the NCLT Bench reiterated that an unpaid instalment as per settlement agreement cannot be treated as “operational debt” under Section 5 (21) of the Code. Thus, the failure or breach of Settlement Agreement cannot be a ground to initiate CIRP process under the Code.

Further, the NCLT Bench reiterated that NCLT is not a recovery court and thus, the Application made for recovery of dues owing to breach of the Settlement Agreement was dismissed.

Harini Daliparthy

Senior Legal Associate

The Indian Lawyer