- The Insolvency and Bankruptcy Code, 2016 ("IBC") is a hallmark in the landscape of Indian insolvency laws, amalgamating principles from well-developed bankruptcy regimes globally. These principles focus on early detection and intervention during corporate distress and provide a time-bound process for the resolution of the corporate debtor's financial stress. Despite the IBC's advancements, commercial considerations often drive creditors to settle with the corporate debtor both before and after initiating formal IBC processes. As a result, many applications for the corporate insolvency resolution process ("CIRP") are withdrawn before reaching the Adjudicating Authority/ National Company Law Tribunal ("NCLT"). A pressing concern in recent years is the implications of a breach of these settlement terms on a creditor's right to re-initiate or revive the CIRP.
Case laws and Issues
- Central to the discussions on breached settlement agreements are two contentious questions:
(i) Does a settlement agreement modify the original outstanding debt's nature as claimed in the application initiating the CIRP?
(ii) Can creditors reinitiate or revive a CIRP if the corporate debtor breaches the settlement agreement's terms?
- The IBC segregates creditors based on their transactional relationships with the corporate debtor, categorizing them as either financial or operational creditors. Financial creditors are entities which disburse debt against the consideration of time value of money. Meanwhile, operational debt pertains to claims for goods or services provision, and an operational creditor is a party who is owed such a debt. This classification is pivotal as the eligibility to initiate a CIRP hinges upon a creditor who is either classified as an operational or financial creditor. Creditors that do not fall under either of these categories are not qualified to trigger a CIRP under the IBC. In this background, this article seeks to analyse pertinent case laws and dissect the varied stances adopted by the NCLTs and the National Company Law Appellate Tribunal ("NCLAT") on the right of a creditor to reinstate or revive a CIRP pursuant to breach of settlement terms by the corporate debtor.
- In Vinay Gupta v. Ashika Credit Capital Ltd. & Anr1 ("Vinay Gupta") it was contested that debts due pursuant to breach of a settlement agreement could not be termed as 'financial debt' since there was no disbursement of debt against the time value of money. In this case, the NCLAT concluded that a default in the settlement agreement is only a by-product of the original CIRP application that does not affect the nature of claim in the application filed by the applicant creditor. Similar contentions were raised by the corporate debtor in Priyal Kantilal Patel v. IREP Credit Capital Pvt. Ltd. & Anr.2, ("Priyal Kantilal") wherein it was argued that breach of consent terms would not entitle the financial creditor to initiate a new CIRP application since such breach would not constitute as 'financial debt' defined under Section 5(21) of the IBC. The NCLAT not only held that mere breach of consent terms does not wipe out the nature and character of the original debt which was claimed by the creditor but also expressly noted that any interpretation to the contrary would be tantamount to providing a premium to the corporate debtor who has breached consent terms. The NCLAT further held that absence of provisions in the consent terms entitling the financial creditor to revive the company petition could not be a valid reason for the NCLT to decline entertaining a fresh petition basis the original debt. These cases are followed by yet another ruling in IDBI Trusteeship Services Ltd. v. Nirmal Lifestyle Ltd.3 ("IDBI Trusteeship") wherein the NCLAT categorically held that non-grant of liberty to revive the company petition is inconsequential in the event the settlement agreement possesses clauses that allow for revival pursuant to the breach of settlement/consent terms.
- In complete contrast however, there have been various judgments of the NCLAT that have introduced an additional requirement by mandating express permission from the court to revive or reinitiate a CIRP in case of breach of settlement terms. In one instance, an application for recall of the order for withdrawal of CIRP application was rejected since the settlement was arrived outside the aegis of the Adjudicating Authority and no express liberty was sought by the operational creditor to revive the application filed under Section 9 of the IBC. Upon assailing the order, the NCLAT took a similar view and held that a simiplicitor withdrawal merely stating that the parties have settled the matter was different from bringing the settlement on record, making it a part of the order, and seeking liberty to revive the application in case of any default by the debtor. The NCLAT further held that the IBC was not akin to recovery proceedings where parties could repeatedly approach the court for recovery of partial amounts due to them. 4 In another case namely Permali Wallace Private Limited v. Narbada Forest Industries Private Limited5, ("Permali Wallace") despite the existence of express terms in the settlement agreement which allowed revival of the CIRP application in case of any breach, the NCLT rejected the application under Section 9 of the IBC filed pursuant to breach of the settlement terms by the corporate debtor. Upon appeal, the NCLAT held that there was no error with the order of the NCLT and concluded that the CIRP application was filed only for recovery of the balance amount of interest which was not the intent of the IBC and was therefore liable to be rejected.
- The judgments of the NCLAT in the cases of SRLK Enterprise and Permali Wallace pose two disconcerting issues. Firstly, these cases are prime examples of exercise of excessive judicial discretion which was a significant contributor to the failure of the erstwhile insolvency regime. The hyper-technical approach of the NCLAT in the cases jeopardises the rights of creditors and introduces an element of uncertainty. The imposition of procedural burdens and consideration of external factors despite existence of debt and default, not only undermines the efficacy of the IBC as a modern insolvency law but also has catastrophic consequences on national productivity and the growth of an economy. The principle of 'allocative efficiency' requires the resources in an economy to be put to their most efficient use to ultimately maximise social welfare. An efficient insolvency law can act as a catalyst to such a process by enabling speedy allocation of resources from failing businesses to the efficient businesses. This continuous process of reallocation of resources, plays a critical role in the productivity and growth of an economy.
- Secondly, denying creditors' their remedy under the IBC gives an impetus to defaulters who continue to remain in the management of the corporate debtor while simultaneously freeing themselves from the rigours and processes of the IBC. The NCLAT's conclusions in Permali Wallace in particular, also sets a dangerous precedent prone to misuse by defaulting corporate debtors who may attempt to orchestrate settlements solely with the mala fide intent to escape the ordeal of the statute. This is in clear contravention of the IBC which was enacted to ensure that "defaulters paradise is lost"6 and in its place, the economy's rightful position is regained.
- Conversely, the perspectives embraced by the NCLAT in the cases of Vinay Gupta, Priyal Kantilal and IDBI Trusteeship that breach of a settlement agreement neither alters the primary underlying transaction nor modifies the original nature of debt, appears to be in harmony with the core objectives of the IBC. This alignment ensures that the external factors are not taken into account when addressing undeniable cases of corporate indebtedness and default. The IBC is designed to provide a predictable and efficient framework for a corporate insolvency resolution. Breach of settlements should not undermine the fundamental principles of IBC or have the effect of altering the very nature of the original claimed debt which would be an interpretation against protection of creditors' interests. It is imperative that judicial determinations are guided by the very purpose of the statute particularly one of an economic nature, like the IBC. This alignment would safeguard creditors' rights and sidestep unnecessary procedural roadblocks. Any deviations from such alignments in judicial decisions could exert profound societal repercussions on a macroscopic scale.
1. CA(AT)(I) No. 92 of 2023, Order dated 27 January 2023.
2. CA(AT)(I) No. 1423 of 2023, Order dated 1 February 2023.
3. Company Appeal (AT) (Insolvency) No. 117 of 2023, Order dated 15 May 2023.
4. SRLK Enterprises LLP v. Jalan Transolutions India Ltd, Company Appeal (AT) (Ins) No. 294 Of 2021, Order dated 8 April 2021.
5. Company appeal (AT) (Insolvency) No. 36 of 2023, Order dated 17 January 2023.
6. Swiss Ribbons Private Limited v. Union of India (2019 4 SCC 7).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.