CIRP Cannot be Sustained if Debt is Settled Before Admission: NCLAT

CIRP Cannot be Sustained if Debt is Settled Before Admission: NCLAT

Introduction

The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, has ruled that an application under Section 9 of the Insolvency and Bankruptcy Code (IBC) cannot be sustained if the operational debt is settled before the date of admission, as no debt remains in default to trigger insolvency proceedings.

Factual Background

The operational creditor filed a Section 9 IBC application seeking CIRP of the corporate debtor. However, during the pendency of proceedings, the operational creditor and the corporate debtor entered into a settlement agreement dated June 28, 2025.

Procedural Background

The NCLT admitted the application on June 30, 2025, without being informed about the settlement agreement by the operational creditor. The corporate debtor appealed to the NCLAT, arguing that since the debt had been settled before the admission date, the CIRP must be set aside.

Issues

The primary issue was whether the CIRP can be sustained if the operational debt is settled before the date of admission and whether the jurisdiction to admit under Section 9 still exists in such a scenario.

Contentions of the Parties

Appellant’s Contentions:

• The debt had been settled before the admission date; hence the CIRP should be set aside.
• The operational creditor acknowledged that no default existed at the time of admission.

Respondent’s Contentions:

• The settlement was reached after the NCLT had reserved its order on May 6, 2025, and the settlement agreement was executed on June 28, 2025.
• The operational creditor confirmed all claims were settled and no debt remained unpaid.

Reasoning & Analysis

The bench of Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member) held that an application under Section 9 is not maintainable when the operational debt is settled before admission, as no debt remains in default. The bench emphasized that the settlement was executed before admission and the operational creditor did not disclose it to the NCLT, which resulted in the admission order. The Tribunal reiterated that the existence of default is the sine qua non for initiating CIRP under Section 9.

Implications

This decision clarifies that once a default is cured before admission, the jurisdiction of the Adjudicating Authority to admit the application ceases. It reinforces the principle that insolvency proceedings cannot be used as a recovery mechanism when no debt remains due.

Final Outcome

The NCLAT set aside the CIRP, holding that there was no existing debt for admission of the Section 9 application due to the settlement between the parties.

In this case, the appellant was represented by Mr. Abhijeet Sinha, Ld. Sr. Advocate with Mr. Rishi Kumar Awasthi, Mr. Ishaan Raj, Ms. Heena Kochar, Mr. Anuj Tiwari, Ms. Kaanchi Ahuja, and Mr. Vaibhav Vats, Advocates.