Breach of Settlement Instalments Cannot Trigger Insolvency Proceedings: NCLT Kolkata

The National Company Law Tribunal (NCLT) at Kolkata has recently held that it is not a forum to recover money arising from a default in instalments under a settlement agreement, and that such a breach cannot be treated as an operational debt to trigger CIRP under the Insolvency and Bankruptcy Code. 

A coram of Judicial Member Bidisha Banerjee and Technical Member Siddharth Mishra dismissed the petition filed by a contractor who had sought to initiate insolvency proceedings against Simplex Infrastructures Limited for an alleged default of nearly Rs 5.75 crores under a settlement agreement. 

“We would discern that this instant petition has been preferred to recover the rest of the amount due and payable in terms of the Settlement Agreement dated 07.10.2022. Thus, in light of the judgment rendered in Trafigura (Supra) and Maldar (Supra), we are of the view that this Adjudicating Authority is not a forum to recover money arising in default of instalment of a settlement agreement.", it said. 

The litigation began when the contractor- Lakhsmidhar Mohanty who had carried out earthwork and supplied construction equipment to Simplex, claimed that the company had failed to pay dues amounting to Rs 7.37 crore.

After repeated reminders, he issued a statutory demand notice in 2021 and filed a Section 9 petition for Rs 9.55 crore including interest. During those proceedings, Simplex proposed a settlement in October 2022 agreeing to pay Rs 5.75 crore in full and final settlement, and the earlier petition was withdrawn on that basis.

The contractor later alleged that Simplex defaulted on the settlement by failing to pay the balance instalments, claiming an outstanding amount of Rs 6.37 crore. He issued a fresh demand notice and filed the present Section 9 application seeking to revive the dispute.

Simplex, however, showed that it had paid the entire Rs 5.75 crore settlement amount by October 2024 and that the contractor had accepted all payments without protest.

The tribunal recorded that under the settlement the contractor had given up all claims arising from the original operational debt. Although the agreement allowed him to recover only the unpaid portion of the settlement amount in case of default, it did not permit revival of the original Rs 7.37 crore claim. Since the full settlement amount had been paid, no default survived.

Referring to the NCLAT's ruling in Trafigura India Pvt Ltd vs TDT Copper Ltd, the tribunal reiterated that breach of a settlement agreement does not constitute a default of operational debt because a settlement loses the character of operational debt under the IBC. The tribunal also cited Maldar Barrels Pvt Ltd v Pearson Drums and Barrels Pvt Ltd, which held that the NCLT is not the forum for enforcing settlement terms.

It further noted that the earlier petition had been withdrawn without liberty to revive or file a fresh one. Once withdrawn on that basis, it said, the same cause of action could not be brought back through a new insolvency application.

Click Here To Read/Download The Order