Failure to pay settlement amt

• The Hon’ble National Company Law Tribunal (“NCLT”), Allahabad Bench, previously on 14.05.2019 in the matter of M/s Delhi Control Devices (P) Ltd Vs. M/s Fedders Electric and Engineering Ltd (Company Petition (IB) No.343/ALD/2018) held that the unpaid instalments as per a settlement agreement cannot be treated as an Operational debt as per Section 5(21) of the Insolvency and Bankruptcy Code,2016 (“IBC,2016”).
• Similarly, the Hon’ble NCLT, Delhi Bench on 22.07.2020 in M/s. Brand Realty Services Ltd Vs. M/s. Sir John Bakeries India Private Limited in (IB) 1677(ND)/2019 held that the Application filed by the Operational Creditor is liable to be dismissed with the view that default in payment of instalments of a settlement agreement shall not amount to the debt being classified as an Operational Debt and hence dismissed the Application.

However an Appeal has been preferred by the Operational Creditor before the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) in CA/958 of 2020, which is yet to be decided by the Hon’ble NCLAT.

• More recently, in another significant Order dated 18.01.2021, the Hon’ble NCLT Hyderabad Bench in M/s. Omega Elevators Vs. Prajay Properties Private Limited in CP (IB) No. 691/9/HBD/2019 held that default in payment of instalments according to the Agreement to Pay entered into between the parties cannot be categorised as an Operational Debt as the same doesn’t fall within the definition of an Operational Debt as per the IBC, 2016.
• In the above case, an Application was preferred by the Petitioner/Operational Creditor for initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor for default in payment of amounts for repair, maintain and service the lifts for which a settlement agreement was entered into between the parties, but subsequently the Corporate Debtor failed to pay such settlement amounts as agreed between the parties.
• The Hon’ble NCLT, Hyderabad Bench had also made reference to M/s Delhi Control Devices (P) Ltd Vs. M/s Fedders Electric and Engineering Ltd (CP(IB)343/ALD/2018)
  stating that the Order passed in that case was relevant and will be upheld in the instant case before the Tribunal

AMA View:

While taking into consideration the above, it has been seen that a common stance has been taken by the various NCLT Benches across the country with regards to default in payment of settlement amounts not amounting to an Operational Debt under the IBC, 2016. Thus, it can be stated that contravention or breach of the Settlement Agreement cannot be considered as a valid ground to commence CIRP as the same cannot be considered as an Operational Debt as per the IBC,2016. This is of course subject to the decision of the Hon’ble NCLAT on this issue and eventually the Hon’ble Supreme Court.

The intent seems to be clear that IBC should not be used as the money recovery tool and NCLT as a forum for recoveries of monies. The increase in threshold was also a step towards the same. Hence even in pending cases or in the forthcoming cases; settlements with staggered payments over a period of time may not be a preferred option for the creditor knowing well that IBC cannot be triggered for a default in the same.