NCLAT Delhi Holds That A Breach Of The Settlement Agreement Does Not Change The Nature Of Financial Debt

Under the provisions of the Insolvency and Bankruptcy Code (IBC), 2016, in the event of a default by a Corporate Debtor, a process to resolve the corporate insolvency of such debtor can be initiated. This process is called the Corporate Insolvency Resolution Process (CIRP). It may be initiated by a financial creditor under Section 7[1], an operational creditor under Section 9[2], or a corporate debtor’s corporate applicant under Section 10[3]. Application for initiation of such process is to be filed before the National Company Law Tribunal (NCLT).

Recently, the National Company Law Appellate Tribunal (NCLAT) passed an Orderin the case of PriyalKantilal Patel v. IREP Credit Capital Pvt. Ltd. &Anr.[4] dated 1^st February 2023 to hold that the nature of the financial debt does not change as a result of a breach of consent terms.

Analyzing the Judgment

Background of Facts

The original dispute lay between Rajesh Landmark Projects Pvt. Ltd., the Corporate Debtor (CD), and IREP Credit Capital Pvt. Ltd., the Financial Creditor (FC). The CD had issued debentures to the FC. Thereafter, the FC filed a petition under Section 7 of IBC to initiate CIRP against the CD. Following this, both parties had agreed to certain consent terms and in furtherance of this, the FC had agreed to withdraw the petition. However, in the case of default, the FC had the liberty to revive the petition. After the CD defaulted, the FC filed a fresh petition under Section 7, which was admitted and CIRP was initiated. The CD challenged this Order while arguing that the breach of consent terms cannot constitute a financial debt.

The Decision of NCLAT

The Bench perused the Consent Terms, along with the Particulars of Financial Debt in the petition filed under Section 7. It observed that the Financial Debt claimed was the same as the one claimed originally in the earlier application. The petition is not for the default of consent terms and to enforce the same. Rather, it is claiming the original debt extended by the FC to the CD. The Bench further distinguished the present case from other authorities cited by the CD to observe that the present petition was not filed onlyon the basis of the default in payment per the settlement agreement. Therefore, just because consent terms were agreed upon during the previous proceedings, the nature and character of the financial debt do not change even in case of a breach of the settlement agreement.

Conclusion

The Tribunal dismissed the appeal and held that the nature of the financial debt claimed was the same as the one claimed originally and did not change in the event ofa breach of the settlement agreement. Furthermore, liberty was granted for the revival of the previous application, however, the filing of a fresh petition under Section 7 cannot be rejected on this ground.

[1] Section 7, Insolvency and Bankruptcy Code, 2016.

[2] Section 9, Insolvency and Bankruptcy Code, 2016.

[3] Section 10, Insolvency and Bankruptcy Code, 2016.

[4]PriyalKantilal Patel v. IREP Credit Capital Pvt. Ltd. &Anr., Company Appeal (AT) (Insolvency) No. 1423 of 2022 & I.A. No. 4457 of 2022.