IBC Not A Debt Recovery Mechanism, NCLAT Chennai Reiterates

The Appellate Tribunal held that the Code is not a ‘recovery mechanism’. Moreover, the definition of ‘Operational Debt’ cannot be widely interpreted to include any agreement between the parties that does not specifically pertain to the supply of goods or services as such an interpretation would undermine the purpose and scope of the Code.

Background Facts:

The cheques were issued by the Corporate Debtor post the Settlement Agreement however, the same were dishonored. The Operational Creditor provided "Business Development" services to the Corporate Debtor for which it was entitled 1% commission as per an initial Memorandum of Understanding (“MOU”). On completion, the Operational Creditor requested the payment, however, the Corporate Debtor induced the Operational Creditor to sign the Settlement Agreement, citing severe cash flow issues.

Through partial payments, the total due became Rs. 7.48 Crores for which a Demand Notice was issued. Upon receiving the Demand Notice, the Corporate Debtor proposed to give Rs.4.5 Crores only due to severe financial crises. To gain trust, the Corporate Debtor induced the Operational Creditor to sign a new MOU and transferred Rs. 50,00,000/- to the account, it also committed to pay Rs. 4 Lakhs by providing different cheques as specified in the MOU.

The Appellant argued that since the MOU was signed by both parties and binds the Corporate Debtor to the terms of the Settlement Agreement. The remaining amounts due and payable are considered "Operational Debt" under the Code, and therefore, NCLT Bangalore made an error in the dismissal of the Section 9 Application.

Contentions of the Corporate Debtor:

The Corporate Debtor denied entering into any agreement and argued that there was a pre-existing dispute prior to the issuance of demand notice as per the Statutory Notice under Section 138 read with Section 141 of the Negotiable Instruments Act, 1881. It denied any inducement to sign any agreement and argued that the principal was only Rs. 2.8 Crores with nearly Rs. 2.75 Crores already paid, leaving an amount of only Rs. 4.42 Lakhs, falling below the minimum threshold specified under the Code.

NCLAT Verdict:

The NCLAT Chennai dismissed the appeal and held that the Code is not a ‘recovery mechanism’. It pointed out that the definition of ‘Operational Debt’ cannot be widely interpreted to include any agreement between the parties that does not specifically pertain to the supply of goods or services as such an interpretation would undermine the purpose and scope of the Code.

The NCLAT emphasized that the petition in question, which pertained to claims arising from the disputed Settlement Agreement, did not meet the definition of 'Operational Debt’ since it is anti-dated, apart from being unstamped and unregistered. As per the Code, a Section 9 application 9 can only be filed for default in payment of Operational Debt as defined in Section 5 (21) of the Code.

Even if the Settlement Agreement is considered, the Tribunal observed that the claims stemming from the MOU had lost their character as 'Operational Debt' and had become a debt simpliciter. In conclusion, the Appellate Tribunal held that these claims are contractual in nature and should be pursued through appropriate civil proceedings.

Case Title: Mr. Maulik Kirtibhai Shah vs. United Telecom Limited.

Case No.: Company Appeal (AT) (CH) (Ins) No. 268/2023

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