Fresh Section 7 Petition Under IBC Code Not Barred By Settlement Agreement Entered During The Earlier Section 7 Petition

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In a recent decision , the National Company Law Appellate Tribunal ("NCLAT") has held that a second Section 7 Petition under Insolvency and Bankruptcy Code, 2016 ("IBC") is maintainable...
India Insolvency/Bankruptcy/Re-Structuring
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In a recent decision1, the National Company Law Appellate Tribunal ("NCLAT") has held that a second Section 7 Petition under Insolvency and Bankruptcy Code, 2016 ("IBC") is maintainable even if same is based on the settlement agreement entered during the pendency of earlier Section 7 Petition.

Brief Facts

Angel Promoters Private Limited ("Corporate Debtor") availed loan of Rs. 3,25,00,000/- on interest in 2015 from Financial Creditors ("Financial Creditors"). Since, the Corporate Debtor defaulted in repayment of the loan, Financial Creditors filed a Section 7 Petition2 ("First Petition"). However, during the pendency of the Section 7 Petition, one settlement agreement was entered between the parties. As per the agreement, Corporate Debtor had agreed to pay to the Financial Creditor, the principal amount along with the interest by way of Post-Dated Cheque.

Accordingly, the First Petition was withdrawn by the Financial Creditors by filing a joint application. However, the Corporate Debtor once again failed to make timely payments, either on account of dishonouring of post-dated cheques or requesting for extensions. Despite some payments, many cheques were unpaid or not replaced as per the settlement agreement. Consequently, a Second Section 7 Petition was filed by the Financial Creditors under Section 7 of IBC, which was duly admitted by the National Company Law Tribunal, New Delhi ("NCLT") and moratorium under Section 14 of the IBC was imposed.

Being aggrieved by the order, Desh Bhushan Jain, Erstwhile Director of Angel Promoters Private Limited ("Appellant") filed an appeal before the NCLAT.

Contention raised by the Appellant

Before the NCLAT, the learned counsel for the Appellant submitted that unpaid instalment as per the settlement agreement cannot be treated as debt and breach of settlement agreement cannot be made a ground to file a second Section 7 Petition. It was further argued that when the order was passed in the first Section 7 petition, no permission was sought of the Adjudicating Authority to revive the petition.

It was also submitted that the Appellant has paid Rs. 87 lakhs out of the court which cannot be appropriated by Respondent in the component of interest as the amount for which the Section 7 Petition was filed had already been crystallized.

Contention raised by the Respondents/ Financial Creditors

In response to the contentions raised by the Appellant, the learned counsel on behalf of Financial Creditor submitted that it is an apparent case of fraud having been played by the Corporate Debtor because there was no dispute that the loan was disbursed by the Financial Creditors to the Corporate Debtor which was to be returned along with interest. Subsequent to filing of the Section 7 Petition and the Financial Creditors/ Respondents were mischievously influenced by the Corporate Debtor to enter into a settlement agreement on the pretext that the principal amount with interest shall be paid.

It was also contended that there is no question of seeking permission to the Court because it was not a case of revival of the same petition rather a second petition has been filed.

Observation by NCLAT

It was observed that it is not in support of the argument that the Section 7 Petition cannot be filed on the basis of the settlement. It was observed that if the plea raised by the Appellant is accepted that the second petition on the ground of settlement agreement is not maintainable then it would give a premium to the unscrupulous Corporate Debtors to get the Section 7 withdrawn on the basis of the settlement which was not to be ultimately followed. Therefore, the plea taken by the Appellant was rejected. With the aforesaid observation, the appeal was dismissed.

The NCLAT also held that the judgment3 cited by the Appellant in support of its argument is not applicable to the present case as in the said judgment Section 7 Petition was filed on the basis of settlement agreement whereas in the present case, the first petition was not filed on the basis of settlement agreement rather it was filed on the basis of the debt due and default committed by the Corporate Debtor.


1. Desh Bhushan Jain, Erstwhile Director of Angel Promoters Pvt. Ltd. vs Abhay Kumar, IRP of Angel Promoters Pvt. Ltd. & Ors., Company Appeal (AT) (Ins) No.124 of 2024

2. Application for initiation of corporate insolvency resolution process by financial creditor

3. Raj Singh Gehlot Vs. Vistra (ITCL) India and Ors., Manu/NL/050/2022

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