Breach of Settlement Terms No Ground To Recall Order Disposing Of Insolvency Proceedings: NCLAT

The National Company Law Appellate Tribunal (NCLAT) at Chennai has recently ruled that non-compliance with compromise terms cannot justify recall of a final order disposing of insolvency proceedings and must be addressed through execution proceedings.

A bench of Judicial Member Justice Sharad Kumar Sharma and Technical Member Indevar Pandey held that once a case is finally disposed of on the basis of a settlement, the tribunal cannot be asked to recall its order merely because one party has failed to honour the agreed terms.

“If it is a final order, which contains the terms of payment of the defaulted amount, if the terms of the compromise is not adhered to, by either of the parties to the proceedings or the settlement, which is basis of the final order, the recourse would be to seek an execution of the compromise order and not to file a recall for no fault of the Tribunal, which not apparent on the face of the order itself,” the bench observed.

The appeal was filed by Shri Rokadoba Maharaj Ginning & Pressing Pvt. Ltd., which had initiated insolvency proceedings against Sri Venkatesa Mills Ltd. The insolvency petition was first closed in 2018 after the parties settled their dispute for Rs 25 lakh.

When the settlement was not complied with, the petition was restored in 2019. The parties then entered into a second settlement later that year, following which the petition was dismissed as withdrawn. The dismissal order granted liberty to approach this Tribunal on the same cause of action afresh if the claim is not adhered to.

After the corporate debtor allegedly breached the settlement again, the appellant approached the National Company Law Tribunal, Chennai seeking recall of the dismissal order.

The NCLT rejected the application, holding that recall proceedings are not maintainable for enforcement of settlement terms. This order was challenged before the NCLAT.

Before the appellate tribunal, the appellant argued that the liberty clause in the second settlement expressly permitted restoration of the insolvency petition in the event of default.

It was contended that non-compliance justified revival of the proceedings and that recall was necessary to enforce the settlement obligations without resorting to execution proceedings.

Rejecting the argument, the NCLAT held that the insolvency petition had been dismissed as withdrawn at the request of the creditor-company itself. The bench observed that the liberty granted by the tribunal only allowed it to raise its claim afresh and did not permit revival of the earlier petition upon non-compliance.

The bench further held that the application seeking recall was rightly rejected by the NCLT, as the dismissal order did not grant any liberty to revive the proceedings in the event of breach of the compromise.

The appellate tribunal also cautioned against repeated attempts to seek recall on the ground of non-compliance with successive settlements. It observed that recurring recall applications would amount to an abuse of the tribunal's inherent powers.

The tribunal clarified that Rule 11 of the NCLT Rules cannot be invoked to revive a petition that has been finally dismissed as withdrawn.It further held that recall proceedings cannot substitute regular execution mechanisms provided under law.

“The powers under Rule 11 of the NCLT Rules cannot be permitted to be abused to an extent, to be adopted as a platform to avoid a recourse to the regular procedural law contemplated under Section 424 of the Companies Act, which has now been made applicable to the proceedings under the I&B Code, for filing of an execution,” the tribunal said.

With these observations, the NCLAT dismissed the appeal, holding that enforcement of settlement terms must follow execution proceedings and not recall of a concluded order.