NATIONAL COMPANY LAW TRIBUNAL REITERATES "ITS NOT A RECOVERY COURT"

The National Company Law Tribunal (NCLT), New Delhi on July 22, 2020 held in the case of Brand Realty Services vs. Sir John Bakeries India Pvt. Ltd.[1] that NCLT is not a ‘recovery court’ and any unpaid instalment in light of a settlement agreement will not qualify as operational debt under the Insolvency and Bankruptcy Code, 2016.

The Applicant or the Operational Creditor, M/s Brand Reality Services Ltd. filed an application against Respondent/Corporate Debtor, M/s. Sir John Bakeries India Pvt. Ltd/ as per section 9 of the Insolvency & Bankruptcy Code, 2016 (“the Code”) read in conjunction with Rule 6 of the Code to initiate corporate insolvency resolution process in respect of Corporate Debtor.

The Corporate Debtor approached the Operational Creditor, which is a consultant cum investor company asking for investment and consultancy services pertaining to setting up a brand-new retail outlet. Subsequently, the Operational Creditor invested some amount and also supplied the consultancy services including efforts for overall planning etc. in setting up a new retail outlet of the Corporate Debtor.

To solidify the commitment, the two parties entered into an Agreement dated November 28, 2014 which was further ratified vide an Account Settlement Agreement dated June 15, 2018. As per this, the Corporate Debtor agreed to pay the outstanding dues of over Rs. 33 lakhs (USD 45,335) through post-dated cheques. However, before presenting the said cheques, the Corporate Debtor requested the Operational Creditor to hold the cheques and agreed to transfer by RTGS instead. It is alleged that the Corporate Debtor did not take steps to transfer the amount via RTGS nor replace the cheques till date. Things further aggravated when cheques which were drawn on the basis of the Account Settlement Agreement returned unpaid to the Operational Creditor on April 18, 2019 due to reason of “Stop Payment” and the Corporate Debtor did not take any steps to make the said payment.

Thereafter, a legal notice was issued on April 20, 2019 asking the Corporate Debtor to comply with the terms of the earlier Agreement which was ignored. Along with this a demand notice was also sent to the Corporate Debtor who responded by saying that since the required documents were absent, it denied any liability. Further, the Corporate Debtor had never admitted any debt being due or payable to the Operational Creditor.

The Operational Creditor prayed that the insolvency proceedings may be initiated against the Corporate Debtor in light of failure on part of the Corporate Debtor to make the payment of the operational debt.

The Tribunal

It first delved into the definition of debt which 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 Code, an Operational Creditor is required to establish a default for non-payment of operational debt as defined in Section 5(21) of 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 corporate insolvency resolution process under Section 9 of the IBC.

The Tribunal found that 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. It referred to a decision of NCLT Allahabad Bench[2] in which the Tribunal held that “unpaid instalment as per the settlement agreement cannot be treated as operational debt as per Section 5 (21) of IBC. The failure or Breach of settlement agreement can’t be a ground to trigger CIRP against Corporate Debtor under the provision of the Code and remedy may lie elsewhere not necessarily before the Adjudicating Authority”.

Thus, it finally held that default of instalment of settlement agreement does not come within the definition of operational debt, hence, they are not inclined to admit the application and the same is liable to be dismissed.

Conclusion

It is a settled principle of law that National Company Law Tribunal is not a recovery court rather when a default of either financial debt or operational debt occurs, financial creditor or operational creditor may file an application for initiating corporate insolvency resolution process under section 7 or section 9 respectively. Likewise, in this case, once the definition of ‘debt’ was clarified, it was concluded that payment of instalment of a settlement agreement cannot be termed as ‘operational debt’ as per the provisions of the Insolvency and Bankruptcy Code, 2016. This reiteration by the Tribunal comes as an important reminder to approach the NCLT for what is within its jurisdiction.

[1] IB 1677(ND)/2019. Access here. [2] M/s Delhi Control Devices (P) Ltd. vs. M/s Fedders Electric and Engineering Ltd., Company Petition (IB) No. 343/ALD/2018.