Breach Of Settlement Agreement Not 'Operational Debt' Under Section 5(21) Of IBC: NCLT Kolkata

Section 5(21) of the IBC defines "operational debt" as a claim in respect of the provision of goods or services, including employment, or a debt in respect of payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

Brief Facts:

M/s. Simplex Infrastructure Limited (“Corporate Debtor”) approached M/s. Amrik Cranes and Infrastructure (“Operational Creditor”) for crane services and issued a work order. Although the Operational Creditor provided the requested services, the Corporate Debtor failed to pay the full amount due which resulted in an outstanding debt of Rs. 3,29,01,959. Consequently, the Operational Creditor initiated proceedings under Section 9 of the I&B Code against the Corporate Debtor, who was unable to settle its operational debt.

During the proceedings in March 2022, the Corporate Debtor proposed a settlement to the Operational Creditor. According to a Settlement Agreement, the Corporate Debtor agreed to pay Rs. 2,86,27,594/- in six monthly instalments of Rs. 47,70,000/-. The National Company Law Tribunal (NCLT), Kolkata Bench, recorded the settlement. However, the Petitioner claimed that after the first instalment was paid, the Corporate Debtor failed to make further payments, thus breaching the Settlement Agreement. The Operational Creditor filed a petition in the NCLT to initiate the Corporate Insolvency Resolution Process under Section 9 of IBC.

The Operational Creditor argued that a demand notice was issued to the Corporate Debtor under Section 8 of the I&B Code, requesting the payment of the outstanding Rs. 2,81,31,959 plus interest. Despite delivery via email and Speed Post, the Corporate Debtor neither responded nor made the payment. Conversely, the Respondent contended that the default under the settlement agreement did not qualify as operational debt. The Corporate Debtor claimed that Rs. 2,29,23,085 had already been paid under the settlement agreement, with only Rs. 57,04,509 remaining due to a GST mismatch.

Observations by the High Court:

The NCLT noted that as per a settlement agreement. The corporate Debtor was to pay Rs. 2,86,27,594 in six monthly installments starting from April 25, 2022. However, only the first instalment was paid, and the subsequent payments were not made despite reminders from the Operational Creditor.

The NCLT noted that the claimed default was based on the non-payment of instalments under the settlement agreement. It held that the breach of a settlement agreement does not constitute "Operational Debt" under Section 5(21) of the I&B Code (referred to Trafigura India Pvt. Ltd. v. TDT Copper Ltd).

Additionally, the NCLT referred to the NCLAT's decision in Maldar Barrels Pvt Ltd v. Pearson Drums and Barrels Pvt Ltd, which affirmed that the NCLT is not the appropriate forum to seek enforcement of a settlement agreement. It held that parties should resort to other legal remedies available for enforcing such agreements.

The NCLT held that the petition aimed to recover amounts due under the settlement agreement. Referring to the judgments in Trafigura and Maldar, the NCLT held that it was not the proper forum for recovering money arising from a settlement agreement default. Since the breach of the settlement agreement does not constitute an "Operational Debt" under the I&B Code, it cannot trigger CIRP against the Corporate Debtor.

Therefore, the NCLT dismissed the petition.

Case Title: M/s. Amrik Cranes and Infrastructure vs Simplex Infrastructures Limited

Case Number: Company Petition (IB) No. 202 (KB) OF 2022

Advocate for the Petitioner: Mr. Aniruddha Bhattacharya and Mr. Arnab Roy.

Advocate for the Respondent: Mr. Snehashis Sen and Mr. Danyal Ahmed.

Date of Judgment: May 24, 2024

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