2021 (3) TMI 207 - Tri - Insolvency and Bankruptcy

Maintainability of application - initiation of CIRP - Corporate Debtor failed to make repayment of its dues - amount due and payable to the operational creditor under a settlement agreement - existence of debt and dispute or not - HELD THAT - The claim of the applicant is based on settlement agreement and on the basis of that the petitioner claimed that since the respondent violated the terms and conditions of settlement and there is default in payment of the settlement amount, therefore, the petitioner filed the present application for initiation of CIRP for default in payment of operational debt. Whether the terms and condition of settlement agreement comes under the definition of operational debt? - HELD THAT - On reading of three definition together, operational debt, default and debt, it can be said that definition of debt as defined under the IBC 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 IBC an operational creditor is required to establish a default for non-payment of operational debt as defined in section 5(21) of the IBC, which means a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and if a person fails to establish that then they cannot initiate CIRP under section 9 of the IBC. Now it is the settled principle of law that the National Company Law Tribunal is not recovery court rather when a default of either financial debt or operational debt occurred in that case financial creditor or operational creditor may file an application for initiating corporate insolvency resolution process under section 7 or section 9 respectively. The settlement agreement on the basis of which the present application is filed by the applicant does not come under the definition of operational debt - As default of instalment of settlement agreement does not come within the definition of operational debt, hence, we are not inclined to admit the application rather we are of the view the present application is liable to be dismissed. Application dismissed.

Summary

Issues Involved:
1. Default in Payment under Settlement Agreement.
2. Definition of Operational Debt.
3. Pre-existing Disputes.
4. Applicability of Arbitration.
5. Jurisdiction of National Company Law Tribunal (NCLT).

Issue-wise Detailed Analysis:

1. Default in Payment under Settlement Agreement:
The operational creditor filed an application to initiate the corporate insolvency resolution process (CIRP) against the corporate debtor for defaulting on a sum of ?59,72,40,162 under a settlement agreement dated November 20, 2018. The corporate debtor had agreed to pay ?63,81,63,368 by April 30, 2019, which was later extended to May 15, 2019. Despite partial payments, a significant amount remained unpaid, leading to the issuance of a demand notice on September 24, 2019. The corporate debtor denied the default, citing various disputes and claiming that the demand notice was illegal.

2. Definition of Operational Debt:
The Tribunal examined whether the claim under the settlement agreement constituted an "operational debt" as defined under Section 5(21) of the Insolvency and Bankruptcy Code (IBC), which includes claims in respect of the provision of goods or services. The Tribunal concluded that the unpaid instalment under the settlement agreement does not qualify as an operational debt. It referenced previous rulings, including the National Company Law Tribunal, Allahabad Bench decision in *Delhi Control Devices P. Ltd. v. Fedders Electric and Engineering Ltd.*, which held that breach of a settlement agreement cannot trigger CIRP under the IBC.

3. Pre-existing Disputes:
The corporate debtor contended that several disputes existed between the parties, including issues related to GST, non-supply of materials, and account reconciliation. The operational creditor argued that these disputes were either resolved at the time of the settlement agreement or raised for the first time after the demand notice. The Tribunal noted that the existence of disputes could affect the initiation of CIRP, but in this case, the primary issue was whether the claim under the settlement agreement was an operational debt.

4. Applicability of Arbitration:
The corporate debtor sought to refer the matter to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996. The Tribunal held that its role under Sections 7, 9, and 10 of the IBC is limited to determining the existence of default and any disputes. It stated that referring the matter to arbitration was beyond the scope of Section 9 of the IBC. However, the corporate debtor was at liberty to pursue arbitration through the appropriate court.

5. Jurisdiction of National Company Law Tribunal (NCLT):
The Tribunal emphasized that it is not a recovery court and its jurisdiction under the IBC is limited to addressing defaults in financial or operational debts. It reiterated that the unpaid instalment under the settlement agreement did not constitute an operational debt, and thus, the application for initiating CIRP was not maintainable.

Conclusion:
The Tribunal dismissed the application, holding that the default under the settlement agreement did not fall within the definition of operational debt under the IBC. The corporate debtor's request to refer the matter to arbitration was also declined, but it was allowed to seek redress in the appropriate forum. The Tribunal's decision underscores the importance of distinguishing between operational debts and other types of claims when seeking to initiate CIRP under the IBC.