In the case of Ahluwali Contracts (India) Pvt. Ltd. v Logix Infratech Pvt. Ltd., the National Company Law Tribunal, New Delhi bench of Abni Rajan Kumar Sinha, Judicial Member, and Hemant Kumar Sarangi, Technical Member, held on 03.06.2022, that default in payment of instalment amount as per the terms of the settlement agreement does not fall under the definition of operational debt.
On September 30, 2019, operational creditor Ahluwali Contracts (India) Pvt. Ltd. and corporate debtor Logix Infratech Pvt. Ltd. signed a Memorandum of Understanding (MoU)/ Settlement Agreement for the final settlement of work performed by the operational creditor under the ‘Work Contracts.’
The operational debtor failed to make the required instalment payments as stipulated in the settlement agreement. Operational creditor filed a company petition to initiate the Corporate Insolvency Resolution Process (CIRP) against corporate debtor under Section 9 r/w Rule 6 of the Insolvency and Bankruptcy Code, 2016 (IBC) for the resolution of Rs 7,72,00,000.
Issue Whether the breach of the settlement agreement’s terms and conditions falls under the category of ‘operational debt’?
The Bench clarified that operational debt refers to a claim for goods and services, including employment. The operational creditor’s claim did not fall under the category of goods or services provided by the operational debtor in the current petition. Rather, the operational creditor brought this action only because of a default that occurred as a result of a breach of the settlement agreement’s terms and conditions.
The bench cited the NCLT’s Allahabad decision in Delhi Control Devices Pvt. Ltd. v. Fedders Electric and Engineering Ltd. (Company Petition (IB) No. 343/ALD/ 2018 in which the bench held that “unpaid instalments as per the agreement cannot be treated as operational debt a per Section 5(21) of IBC.” Failure or breach of a settlement agreement cannot be used to initiate CIRP proceedings against a corporate debtor under the provisions of the IBC 2016, and the remedy may be found elsewhere rather than before the Adjudicating Authority.” In the case of Nitin Gupta v. International Land Developers Pvt. Ltd. (IB No. 507/ND/2020), the court took a similar stance.
As a result, the bench dismissed the application on the same grounds as in the previous cases, concluding that failure to pay a settlement agreement does not fall under the definition of operational debt.
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