“Default” payments under the Settlement Agreement and not “Operational Debt” under the IBC: NCLT [Read Order]

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Is the “default” of payments under a settlement agreement an “operational debt” under the Insolvency and Bankruptcy Code of 2016 (“the Code”)? This question was answered in the negative by the National Company Law Tribunal of New Delhi in its judgment of 22.07.2020 rendered in the case “Brand Realty Services Limited vs Sir John Bakeries India Private Limited, …

Whether the “Default” of payments under a settlement agreement is an “operating debt” under the Insolvency and Bankruptcy Code, 2016 (“the code“)? This question was answered in the negative by the National Company Law Tribunal of New Delhi in its judgment of 22.07.2020 rendered in the case of “Brand Realty Services Limited v Sir John Bakeries India Private Limited, (IB) 1677 / ND / 2019”.

The plaintiff in the above-mentioned case had filed an application under section 9 of the Code against Sir John Bakeries Private Limited (“the debtor company“) requesting the initiation of the insolvency resolution process of the business of the debtor business. It was alleged by the plaintiff that the debtor business had violated the terms of the settlement of account agreement dated of 15.06.2018 and had not made the payments agreed under the said settlement of account agreement As such, there was a “Default” in the payment of the Operational Debt.

In addition to denying having executed the Settlement Agreement dated June 15, 2019 and alleging that the relationship between the debtor Company and the Applicant had already been entered under another Settlement Letter dated of 19.12.2017, it was, among others, argued by the Respondent that the default in payment under the Settlement Agreement was not an operating debt within the meaning of the definition of “operating debt” under subsection (21) of the Article 5 of the Code.

Based on a joint reading of the definitions of “debt” under subsection 3 (11), “default” under subsection 3 (12) and “operating debt” under subsection 5 (21 ) of the Code, the respondent argued that the definition of debt as defined in the Code does not mean only operating debt, but rather includes financial debt as well as liability or obligation under debt owed by any person and default means non-payment of the debt, but in order to trigger Article 9 of the Code, an operational creditor is required to establish a default for non-payment of the operational debt as defined in subsection (21) of section 5 of the Code. We relied on the judgment of the Honorable National Company Law Tribunal, the Allahabad Judiciary in Company Petition (IB) No. 343 / ALD / 2018 in Delhi Control Devices Limited v Fedders Electric and Engineering Limited “

While relying on the aforementioned decision of the NCLT, Allahabad Bench, the National Company Law Tribunal of New Delhi held that “the default of the settlement agreement does not fall within the definition of debt. operational ”and, therefore, the application under section 9 of the Code was rejected.

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

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