Breach Of Settlement Agreement Does Not Preclude Financial Creditors From Filing Application U/S 7 Of IBC: NCLAT
The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Ashok Bhushan (Judicial Member), Mr. Arun Baroka (Technical Member) and Mr. Barun Mitra (Technical Member) has held that financial creditors are not precluded from filing an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (Code), merely because they have entered into a settlement...
The National Company Law Appellate Tribunal (NCLAT) New Delhi bench of Justice Ashok Bhushan (Judicial Member), Mr. Arun Baroka (Technical Member) and Mr. Barun Mitra (Technical Member) has held that financial creditors are not precluded from filing an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (Code), merely because they have entered into a settlement agreement with the corporate debtor that was subsequently breached. The nature of the debt remains unchanged, even if a settlement agreement has been executed between the parties.
Brief Facts:
ICICI Bank and IFCI Ltd. sanctioned certain loan facilities to the Corporate Debtor-Uniworth Textiles Ltd. (“UTL”).
The loan of ICICI and IFCI was assigned in favour of the Asset Reconstruction Company (India) Ltd. (“ARC” in short) on 31.03.2004 and 12.01.2007 respectively.
On 19.09.2016, the Uniworth Group of Companies made a Global offer of Settlement (“GSA”) to the ARC for an amount of Rs 75 Cr. Acting upon the terms of the GSA, Uniworth Group paid Rs 51.10 Cr. to the ARC. On 22.11.2018, ARC issued a letter for revocation of the terms of settlement on ground of default in the payment of debt by the Corporate Debtor.
On 27.11.2018, the ARC filed a petition under section 7 of the code against the Corporate Debtor for Rs 205 Cr. On 17.03.2020, the Adjudicating Authority dismissed the Section 7 application by holding it as time-barred. On 10.07.2023, the NCLAT set aside the order of the Adjudicating Authority. Holding the Section 7 petition filed by the ARC as not time barred, the NCLAT remanded the matter back to the Adjudicating Authority for decision on merit.
On 14.12.2024, the Adjudicating Authority after hearing the matter afresh admitted the Corporate Debtor into Corporate Insolvency Resolution Process (CIRP).
Contentions:
The Appellant submitted that the Financial Creditor-ARC revoked the GSA unilaterally. Though this revocation of GSA was contested by the Corporate Debtor in their letter dated 14.12.2018, the Adjudicating Authority erroneously misconceived this letter to be an acknowledgement of debt and default.
It was further contended that even though the amount due in terms of the GSA exceeded Rs 1 Cr., the Section 7 petition was not maintainable, since the claim of the ARC arose on account of default in payment of settlement amount which was not in the nature of financial debt as defined under the provisions of IBC.
It was also submitted that while for the purposes of considering the issue of limitation, an acknowledgement in the Balance sheet can be construed as an admission of the jural relationship between debtor and creditor but for purposes of considering admission of Section 7 application, the admission of liability requires to be unambiguous and unequivocal.
Per contra, Per contra, the Respondent submitted that the Adjudicating Authority committed no error in relying upon the corporate debtor's balance sheet of 2018-19 in which the loan was acknowledged which was due for repayment.
Lastly, it was submitted that merely contesting the unilateral revocation of the GSA and alleging a breach of settlement obligations are not sufficient to reject the application under section 7 of the code
Observations:
The Tribunal noted that from the material on record,it is clear that the ARC in a letter has in clear and unambiguous terms stated that No Dues Certificates (NDCs) have been issued for those companies whose settlement amount has been paid while the amounts payable by Uniworth Textiles Ltd of Rs. 21.40 crore as per terms of GSA had still not been paid.
It further added that in the said letter, it was also clearly stated that if payments were not made by 23.11.2018, ARC would proceed with legal action for recovery of the outstanding dues against the Corporate Debtor.
It further observed that a plain reading of the letter sent in reply to the above letter discloses that the Corporate Debtor merely acknowledged that the ARC had issued NDCs for Indoworth India Ltd. and Uniworth International Ltd. and requested an NDC for Uniworth Ltd., for which substantial payment had been made.
The Tribunal further said that however, there was no objection to the outstanding settlement amount claimed by the ARC for Uniworth Textiles or the resultant default. Given that the Corporate Debtor failed to make the required payments under the GSA, allowing them to argue against the ARC's revocation of the settlement is both illogical and absurd.
Based on the above, the Tribunal held that If the Corporate Debtor had genuinely contested the revocation, they would have referred to payments made towards the entire settlement amount or demanded their NDC. The letter contains no objections regarding the ARC's alleged non-compliance with the GSA or the unilateral revocation which clearly establishes that the revocation was impliedly accepted.
The Tribunal further observed that perusal of the Section 7 application makes it clear that it is not based on the default of the GSA but founded on the original financial debt which was extended by the ICICI and IFCI to the Corporate Debtor which had been subsequently assigned to the ARC.
The NCLAT in Priyal Kantilal Vs IREP Credit Capital Pvt. Ltd held that the mere fact that in earlier company petition, consent terms was arrived, which consent terms was breached by the corporate debtor, the financial debt which was claimed by the financial creditor would not be wiped out nor the nature and character of financial debt shall be changed on account of breach of the consent terms.
Based on the above, it held that the Respondent cannot be held to be precluded in any manner from being entitled to initiate a Section 7 application against the Corporate Debtor in the facts of the present case. The nature of debt which has been claimed under Section 7 application is a financial debt.
It further said that simply because an GSA was entered into between the parties which GSA suffered breach, the nature of debt shall not get changed. That does not in any way destroy the character of ARC as a creditor or the character of the money due to it from the Corporate Debtor as a debt.
The Tribunal held that the material on record establishes that the GSA stipulated a settlement amount of Rs. 75 Cr., of which the Corporate Debtor paid only Rs. 51.10 Cr., leaving Rs. 21.40 Cr. to be paid. The Corporate Debtor has not specifically denied this due amount or provided proof of its payment.
It further added that while it challenged the maintainability of the Section 7 petition, it has not denied debt and default. Furthermore, the DRT decree establishes the existence of debt and default, and despite an appeal, it has not been stayed by the DRAT.
Accordingly, the present appeal was dismissed.
Case Title: Bahadur Ram Mallah Versus Assets Reconstruction Company (India) Limited and Anr.
Case Number: Company Appeal (AT) (Insolvency) No. 66 of 2025
Judgment Date: 03/04/2025
For Appellant : Mr. Arvind Nayar Sr. Advocate with Mr. Narendra M Sharma, Mr. Ankur Sood, Ms. Shubhangi Tiwari, Mr. Shubham and Ms. Sahana Sathija Narayanan, Advocates.
For Respondent : Mr. Abhirup Dasgupta, Mr. Ishaan Duggal and Ms. Ruchi Goyal, Advocates for R1.
