Settlement Breach Revives Insolvency Consequences, Not Debt Recovery: NCLT Ahmedabad Restores CIRP Against Aksa Paper Mills

Settlement Breach Revives Insolvency Consequences, Not Debt Recovery: NCLT Ahmedabad Restores CIRP Against Aksa Paper Mills

Introduction

The National Company Law Tribunal (Ahmedabad Bench) has held that revival of insolvency proceedings following breach of a court-recognised settlement does not amount to misuse of the insolvency framework as a recovery mechanism. A Bench comprising Judicial Member Shammi Khan and Technical Member Sanjeev Sharma restored insolvency proceedings against Aksa Paper Mills Pvt. Ltd. after finding that the corporate debtor failed to honour the terms of a settlement agreement entered with operational creditor S.N. Global Minerals LLP.

Factual Background

The dispute originated from operational dues claimed by S.N. Global Minerals LLP against Aksa Paper Mills Pvt. Ltd. The creditor initially initiated insolvency proceedings for non-payment of these dues under the Insolvency and Bankruptcy Code, 2016. During the pendency of the proceedings, the parties entered into a settlement agreement under which the corporate debtor agreed to pay ₹2,69,38,653 in instalments. Based on the settlement, the insolvency proceedings were set aside by the National Company Law Appellate Tribunal, while granting liberty to the creditor to revive the proceedings in the event of non-compliance with the settlement terms. According to the operational creditor, the company paid ₹2,30,00,000 but failed to pay the remaining ₹39,38,653, thereby breaching the settlement agreement.

Procedural Background

Following the alleged breach of the settlement, S.N. Global Minerals LLP approached the NCLT Ahmedabad seeking revival of the previously initiated insolvency proceedings. The corporate debtor opposed the application and argued that the dispute had effectively become a settlement dispute rather than an insolvency matter.

Issues

1. Whether insolvency proceedings could be revived after breach of a settlement agreement recognised by judicial order.

2. Whether revival of such proceedings would amount to using the insolvency framework as a debt recovery mechanism.

3. Whether acceptance of partial payments under the settlement barred the creditor from seeking revival of insolvency proceedings.

Contentions of the Parties

The operational creditor contended that the settlement agreement clearly provided that insolvency proceedings could be revived if the corporate debtor defaulted on the agreed payment schedule. It submitted that while substantial payments had been made, the company failed to discharge the balance amount, thereby breaching the settlement terms and triggering the right to seek revival of the insolvency process.

The corporate debtor argued that the matter had effectively transformed into a dispute regarding performance of the settlement agreement. According to the company, insolvency proceedings under the IBC cannot be used as a recovery mechanism for enforcing settlement obligations. It further contended that since the creditor had already accepted a substantial portion of the settlement amount, it could not revive insolvency proceedings for the remaining amount.

Reasoning and Analysis

The Tribunal examined the earlier order of the appellate tribunal which had permitted withdrawal of the insolvency proceedings in view of the settlement while expressly granting liberty to the creditor to revive the proceedings in case of breach. The Bench observed that the present application did not amount to initiation of fresh insolvency proceedings but was merely a revival of an already admitted petition in accordance with the liberty granted by the appellate tribunal.

The Tribunal further noted that the settlement agreement itself contemplated restoration of insolvency proceedings in the event of default. Consequently, the creditor’s acceptance of partial payments under the settlement did not prevent it from enforcing the remaining obligations. The Bench also addressed the argument that insolvency proceedings cannot be used as a recovery tool. It clarified that while the insolvency framework should not be reduced to a mechanism for recovery of debts, revival of proceedings after breach of a judicially recognised settlement merely restores the legal consequences that had already been adjudicated.

Decision

The NCLT Ahmedabad held that the corporate debtor had failed to comply with the settlement terms and that the operational creditor was entitled to revive the insolvency proceedings.

Accordingly, the Tribunal restored the insolvency petition against Aksa Paper Mills Pvt. Ltd. and directed the operational creditor to deposit ₹2 lakh towards the initial expenses of the insolvency resolution process.

In this case the appellant was represented by Advocate Ravi Pahwa, along with Advocate Gunjan Aggrawal. Meanwhile the respondent was represented by Advocate Atul Sharma.