'Default' Of Instalments Under Settlement Agreement Not "Operational Debt" Under IBC: NCLT [Read Order]

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26 July 2020 11:33 AM GMT
Default Of Instalments Under Settlement Agreement Not Operational Debt Under IBC: NCLT [Read Order]
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Whether 'Default' of instalments under a settlement Agreements is an "Operational Debt" under the Insolvency and Bankruptcy Code, 2016 ("the Code")? This question has been answered in negative by the National Company Law Tribunal, New Delhi in its Judgement dated 22.07.2020 passed in the matter of "Brand Realty Services Limited vs Sir John Bakeries India Private Limited, (IB) 1677/ND/2019".

The Applicant in the above-noted case had filed an application under section 9 of the Code against Sir John Bakeries Private Limited ("the Corporate Debtor") seeking initiation of Corporate Insolvency Resolution Process of the Corporate Debtor. It was alleged by the Applicant that the Corporate Debtor had violated the terms of the Account Settlement Agreement dated 15.06.2018 and defaulted in the payments agreed under the said Account Settlement Agreement. As such, there was a 'Default' in payment of the Operational Debt.

Besides denying having executed the Account Settlement Agreement dated 15.06.2019 and alleging that the relationship between the Corporate Debtor and the Applicant had already seized in terms of another Settlement Letter dated 19.12.2017, it was, inter alia, argued by the Respondent that default of Instalment under the Settlement Agreement was not an Operational Debt under the definition of "Operational Debt" under sub-section (21) of the Section 5 of the Code.

Based on a joint reading of the definitions of "Debt" under section 3(11), "Default" under section 3(12) and "Operational Debt" under section 5 (21) of the Code, it was argued by the respondent that the definition of debt as defined under the Code does not mean the operational debt only, rather it includes financial debt as well as liability or obligation in respect of a claim which is due from any person and default means non-payment of debt, but in order to trigger section 9 of the Code an Operational Creditor is required to establish a default for non-payment of Operational Debt as defined under sub-section (21) of the Section 5 of the Code. Reliance was placed on the Judgement passed by Hon'ble National Company Law Tribunal, Allahabad Bench in Company Petition (IB) No. 343/ALD/2018 in the matter of Delhi Control Devices Limited vs Fedders Electric and Engineering Limited"

While relying on the aforesaid decision of the NCLT, Allahabad Bench, the National Company Law Tribunal, New Delhi has held that "default of instalment of settlement agreement does not come within the definition of operational debt" and therefore, the application under section 9 of the Code was dismissed.

The respondent was represented by Mr. Nishant Awana, Founding Partner, NMA Law Chambers.

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