NCLT Dismisses Petition, Holds Settlement Agreement Doesn't Change Nature of Debt

NCLT Dismisses Petition, Holds Settlement Agreement Doesn't Change Nature of Debt

Introduction

The National Company Law Tribunal (NCLT), Mumbai Bench, Court-III, has held that a settlement agreement entered between the parties merely for the purpose of acknowledging the debt and structuring the repayment schedule doesn't necessarily change the nature of the debt when it is concreted with sufficient evidence.

Factual Background

M.K. Metals filed a petition under Section 9 of the Insolvency and Bankruptcy Code (IBC) seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against Kundan Industries Ltd. for non-payment of Rs. 11.76 Cr. plus interest. A settlement agreement was signed between the corporate debtor and the Shah Family Group, of which the operational creditor is a part, acknowledging a debt of Rs. 12.59 Cr. to the operational creditor.

Procedural Background

The corporate debtor defaulted on payments after making a few installments, and the operational creditor served a demand notice. The corporate debtor denied the amounts due and payable, leading to the filing of the petition.

Issues

1. Nature of Debt: Whether the settlement agreement changes the nature of the debt.

2. Operational Debt: Whether the unpaid installments can be treated as operational debt under Section 5(21) of the IBC.

Reasoning & Analysis

The bench of Justice Lakshmi Gurung (Member-Judicial) and Hariharan Neelakanta Iyer (Member-Technical) observed that the settlement agreement doesn't necessarily change the nature of the debt. Furthermore, relying on the decision of Ahluwalia Contracts India Ltd. vs. Jasmine Buildmart Private Limited, the tribunal held that the agreement for acknowledgment of debt and structuring the repayment schedule doesn't change the nature of the debt. However, it noted that the dues mentioned under the settlement agreement cannot be regarded as operational debt under Section 5(21) of the IBC.

Decision

The NCLT dismissed the petition, holding that the dues mentioned in the settlement agreement are not operational debt.

Implications

The decision clarifies the treatment of settlement agreements in relation to operational debt under the IBC.

Conclusion

The NCLT's judgment in this case provides clarity on the nature of debt and operational debt under the IBC. The decision is significant for operational creditors and corporate debtors.

In this case the appellant was represented by Mr. Shyam Kapadia along with Mr. Kashish Mainkar and Mr. Sonal Sengar, Advocates instructed by Wadia Ghandy & Co. Meanwhile the respondent was represented by Mr. Amir Arsiwala along with Mr. Ashwini Gawde, Advocates instructed by ASR & Associates.