NCLT Chennai: Non-Compliance With Compromise Terms Cannot Justify Recall Of A Final Order

Summary:

The National Company Law Tribunal (NCLAT) at Chennai dismissed an appeal, where the central issue addressed whether the Appellant, after reaching two separate settlement compromises could use Rule 11 of the NCLT Rules to file repeated applications for the recall and revival of the original company petition due to non-compliance with the settlement terms. The Tribunal dismissed the appeal affirming that the compromise order acts as a final decree and a failure to comply requires Appellant to seek execution, rather than repeatedly misusing recall process.

Facts:

• The Appellant happens to be the Operational Creditor, on an application preferred by it, which has been drawn under Section 9 of IBC. When these Company Petitions was taken up, the parties have entered into a settlement and a compromise order was passed on 25.09.2018.
• In terms of the compromise the Corporate Debtor was supposed to remit the balance amounts as per the terms of compromise, which was subject matter of the proceedings under Section 9 of IBC code. It was settled that the Corporate Debtor would pay in all amount Rs 25,00,000 out of which 15,00,000 would be paid upfront, and the remaining in 10 equal instalments. Accordingly, the company petition was closed.
• The conditions; aid put in the 25.09.2018 compromise order were not complied with. The appellant invoked Rule 11 of the NCLT Rules seeking restoration of the Company Petition based on non-compliance of compromise order.
• The Company petition was taken up on its merit once again. For the second time a compromise was entered into, and the petition was disposed by an order dated 10.12.2019. The joint memo of compromise included a clause stating that if the Corporate Debtor failed to honour the commitments, the Petitioner should have the opportunity to revive the CP before the Tribunal.
• The commitment was not complied with, and the appellant preferred a second restoration application praying for the recall of 10.12.2019

Issues:

1. Whether an exception could be carved out to file an application for recall in a decided petition, to enforce an order, in a manner to avoid filing of execution proceedings as against the order passed by the Tribunal in favour of the recall applicant.

Judgement:

• The tribunal held that an order passed on basis of a compromise which finally determines the rights and monetary liabilities between the parties, takes the shape of a decree or a final adjudication. If there is non-compliance with such a final order or decree, the proper legal recourse is to seek an execution of the compromise order. The procedure is contemplated under Section 42(3) of Companies Act.
• The NCLAT held that the powers under Rule 11 of the NCLT Rules cannot be invoked to seek a recall merely to enforce an order or avoid execution proceedings. Recall is fundamentally intended for orders that were inadvertently passed due to error of the court or counsel.
• The tribunal emphasized that even though the joint compromise memo mentioned revival, the operative order of 10.12.2019 definitively dismissed the petition as withdrawn and only gave the liberty to approach tribunal afresh.
• The filing of recurring recall applications due to non-compliance of consecutive compromises and final orders was deemed an abuse of Rule 11 of the NCLT Rules, especially since the Company Petition had been finally dismissed as withdrawn.

Analysis:

The conflict analyzed by the Tribunal was whether a party could use Rule 11 of the NCLT Rules, to enforce a compromise order. Once a company petition is closed or dismissed on final settlement, any subsequent non-compliance must be reminded by seeking the execution of the compromise order. This is mandated by Section 424(3) of the Companies Act. The tribunal found the Operational Creditor action of filing a recurring application due to non-compliance of consecutive compromises constituted an abuse of Rule 11.