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2020 (11) TMI 993 - AT - Insolvency and BankruptcyMaintainability of application - initiation of CIRP - default in payment of Settlement Agreement - financial debt or not - it is stated by appellant that Corporate Guarantor had undertaken to discharge the liability arising out of dishonoring of cheques issued by the Principal Borrower in favour of the Financial Creditor - HELD THAT - Mere obligation to pay does not bring the liability within the ambit of financial debt . The debt, along with interest, if any, should be disbursed against the consideration for the time value of money. Breach of terms of an agreement including a Settlement Agreement whereunder payment may be due would not fall within the ambit of Section 5(8) so as to constitute a Financial Debt - Admittedly, inter se the parties, there is no disbursement against the consideration for the time value of money. Principal borrower is not a party to Settlement Agreement. Viewed in the context of Settlement Agreement, there is no borrowing on the part of Respondent from the Appellant. Mere obligation to pay under a Settlement Agreement would not amount to disbursal of amount for consideration against the time value of money and breach thereof would not entitle the Appellant in the instant case to trigger Corporate Insolvency Resolution Process against the Respondent. It is found that bouncing of cheques issued in discharge of obligation under the Settlement Agreement would not fall within the purview of default in regard to financial debt. The Appellant may have other remedies available under law for effecting recovery of money due in terms of the Settlement Agreement but the triggering of Corporate Insolvency Resolution Process is not warranted. Insolvency proceedings stand at a different footing and cannot tantamount to recovery proceedings. Corporate Insolvency Resolution Process cannot be initiated for purposes of recovery of money - appeal dismissed.
Issues:
Dismissal of application under Section 7 of the Insolvency and Bankruptcy Code, 2016 on the ground of default in payment not constituting financial debt. Analysis: The Appellate Tribunal considered the case where the Appellant's application under Section 7 of the Insolvency and Bankruptcy Code, 2016 was dismissed by the Adjudicating Authority. The dismissal was based on the ground that the default in payment of a Settlement Agreement did not fall under the definition of financial debt. The Appellant contended that the Respondent, acting as a Corporate Guarantor, was liable to discharge the financial debt independent of the Settlement Agreement. The Tribunal examined the Memorandum of Understanding dated 22.09.2017, where the Appellant agreed to advance a loan to the Principal Borrower with the Respondent standing as guarantor. The Principal Borrower issued cheques towards the outstanding liability, which bounced upon presentation, leading to legal actions. An amicable Settlement Agreement was reached, but the cheques issued under it were also dishonored. The Tribunal scrutinized the Settlement Agreement and the Memorandum of Understanding to determine the nature of the obligation. It was observed that the Settlement Agreement superseded the previous understanding and the mere obligation to pay did not constitute a financial debt. The Tribunal highlighted that for a liability to be considered a financial debt, it must involve a disbursement against the consideration for the time value of money. In this case, there was no borrowing by the Respondent from the Appellant, and the bouncing of cheques under the Settlement Agreement did not signify default in financial debt. Therefore, the Tribunal concluded that triggering Corporate Insolvency Resolution Process was not justified based on the breach of the Settlement Agreement. The Tribunal emphasized that while the Appellant might have other legal avenues for recovering the outstanding amount, initiating insolvency proceedings was not the appropriate course for recovery. Insolvency proceedings serve a different purpose and cannot be equated to mere recovery proceedings. The dismissal of the appeal was based on the lack of legal grounds to support the initiation of Corporate Insolvency Resolution Process for the recovery of money due under the Settlement Agreement.
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