The Insolvency and Bankruptcy Code, 2016 (“the Code”) is still at a nascent stage. They are varying and evolving interpretations of various concepts and terms under the Code. Since there is no exhaustive list of transactions which fall under the scope of the Code, there is a constant tussle between the contesting parties over whether a particular transaction would fall under the purview of the Code.
One such kind of transaction is a settlement agreement.
Recently, the New Delhi bench of the National Company Law Tribunal decided on this issue,1 wherein, the Operational Creditor was awarded a Letter of Intent and Work Order towards the construction of certain housing projects. After completion of the said projects, certain disputes arose regarding the quantum of payment. Thereafter, a Memorandum of Understanding / Settlement Agreement (“Settlement Agreement/MoU”) was executed wherein the Corporate Debtor agreed to pay to the Operational Creditor a sum of INR 11,00,00,000/- (Rupees Eleven Crores Only) towards full and final settlement of the claims of the Operational Creditor.
However, the Corporate Debtor failed to honor the terms of the aforesaid Settlement Agreement and in view thereof, a Demand Notice under Section 8 was served upon the Corporate Debtor for payment of INR 7,72,00,000/- (Rupees Seven Crore Seventy-two lakhs Only). Pursuant thereof, an application under Section 9 of the Code was filed by the Operational Creditor.
The Operational Creditor contended that the Respondent failed to pay the amount that was due and payable and admitted its liability under the Settlement Agreement/MoU. Therefore, Corporate Insolvency Resolution Process (“CIRP”) ought to be initiated against the Respondent. On the other hand, the Corporate Debtor submitted that there was a default in making payments in terms of the Settlement Agreement/MoU.
After hearing the contention of both the parties, the Bench held that the unpaid amounts do not arise out of provision of goods or services. The unpaid amounts arose out of the Settlement Agreement/MoU.
The Bench relied on the decisions of NCLT Allahabad in M/s. Delhi Control Devices (P) Limited v. Fedders Electric and Engineering Ltd.2 and NCLT New Delhi in Nitin Gupta v. International Land Developers Private Limited3 and held that the unpaid amounts under the Settlement Agreement cannot give rise to an application under Section 9 of the Code.
The Settlement Agreement/MoU was arrived at between the parties pursuant to the disputes that arose between the parties under the Work Order and Letter of Intent. It cannot be denied that amounts payable under the projects would come under the purview of the Code.
The Settlement Agreement /MoU could not have extinguished the right of the aggrieved party to seek recourse under the Code. It was established there was a due and payable debt owed to the Operational Creditor by the Corporate Debtor. Under such circumstances, could the Hon’ble NCLT have rejected the Application merely because a Settlement Agreement/MoU was entered into? Such a decision defeats the very purpose of the Code. The Hon’ble Bench rejected the Application merely on a technical ground which has resulted in the aggrieved party i.e. the Operational Creditor having suffered twice.
The decision of the NCLAT in Vivek Bansal v. Burda Druck India Private Limited & Anr4 is noteworthy in this context. In this matter, the Operational Creditor (Respondent) and Corporate Debtor (Appellant) had entered into a settlement agreement after initiation of CIRP under the Code. The NCLAT accordingly set aside the Order passed by the NCLT. However, the NCLAT laid down that the Operational Creditor shall be at liberty to seek revival of the CIRP in the event that the settlement agreement is breached by the Corporate Debtor.
It is settled law that all that the NCLT ought to see if there is a valid debt within the purview of the Code. A settlement agreement entered into pursuant to a transaction, which by itself would lead to proceedings under the Code cannot render the proceedings unenforceable. Such a settlement agreement merely sets down an understanding between the parties to the transaction.
On this note, there should be no bar against a party that wishes to initiate proceedings under Code for violation of a settlement agreement that was entered into pursuant to a transaction, which by itself would have entitled the aggrieved party to initiate proceedings under the Code.
Such decisions serve to put parties who have already had to accept lower amounts than what they were entitled to through a settlement agreement in a precarious position. On the other hand, a party which has breached its obligations both under a previous agreement and the settlement agreement can now escape proceedings under the Code. Such judgments might also discourage aggrieved parties from entering into settlement agreements and increase unnecessary litigation before the already overburdened civil courts of India.
This article has been written by Diksha Shetty (Senior Associate) and Vaibhav Sharma (Associate).
Disclaimer – This article is meant for informational purposes only. The contents of this article are not to be construed as legal advice. The views expressed in the article are those of the authors and do not necessarily reflect the views of the firm. The copyright to the article rests solely with the authors and the firm.