Breach of Settlement Agreement Does Not Bar Financial Creditors from Filing Application u/s 7 of IBC: NCLAT [Read Order]

The bench of the National Company Law Appellate Tribunal (NCLAT) in New Delhi has ruled that financial creditors who have signed a settlement agreement with the corporate debtor that was later broken are not barred from applying Section 7 of the Insolvency and Bankruptcy Code, 2016 (Code). Even if the parties have signed a settlement agreement, the substance of the obligation has not altered.

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Certain credit facilities were approved by ICICI Bank and IFCI Ltd. for Uniworth Textiles Ltd. ("UTL"), the corporate debtor. On 31.03.2004 and 12.01.2007, respectively, the ICICI and IFCI loans were transferred to the Asset Reconstruction Company (India) Ltd. ("ARC"). The ARC received a Global Offer of Settlement ("GSA") from the Uniworth Group of Companies for Rs 75 Cr. Uniworth Group paid the ARC Rs 51.10 Cr. in accordance with the GSA's stipulations. Subsequently, ARC sent a letter to revoke the terms of the settlement due to the corporate debtor's failure to pay.

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The ARC filed a Rs 205 Cr petition against the Corporate Debtor under section 7 of the code. The Section 7 application was rejected by the adjudicating authority on March 17, 2020, on the grounds that it was past due. The Adjudicating Authority's order was overturned by the NCLAT. The NCLAT remitted the case to the Adjudicating Authority for a merit-based determination, ruling that the ARC's Section 7 petition was not time-barred. Following a new hearing on the case, the adjudicating authority admitted the corporate debtor to the Corporate Insolvency Resolution Process (CIRP).

The appellant, Bahadur Ram Mallah, argued that the GSA was unilaterally terminated by the Financial Creditor-ARC. The Adjudicating Authority mistakenly believed that the Corporate Debtor's letter dated December 14, 2018, which opposed this revocation of GSA, constituted an acknowledgement of debt and default.

Furthermore, it was argued that even though the amount owed under the GSA exceeded Rs 1 Cr, the Section 7 petition could not be maintained because the ARC's claim was based on a settlement amount default, which was not considered a financial debt as defined by the IBC.

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Additionally, it was argued that although an acknowledgement in the balance sheet may be interpreted as an admission of the legal relationship between a debtor and a creditor for the purposes of evaluating the issue of limitation, the admission of liability must be clear and unambiguous for the purposes of evaluating the admission of a Section 7 application.

In contrast, the Respondent argued that the Adjudicating Authority was correct to rely on the corporate debtor's 2018–19 balance statement, which acknowledged the loan that was due for repayment. Finally, it was argued that section 7 of the code does not allow for the rejection of an application based solely on a dispute over the unilateral withdrawal of the GSA and a claim of a breach of settlement responsibilities.

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The tribunal comprising Justice Ashok Bhushan (Judicial Member), Mr. Arun Baroka (Technical Member) and Mr. Barun Mitra (Technical Member) found 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.

Further viewed that since 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.

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.

While dismissing the appeal, 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.

To Read the full text of the Order CLICK HERE

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