In the matter of Desh Bhushan Jain, Erstwhile Director of Angel Promoters Pvt. Ltd. Vs. Abhay Kumar, IRP of Angel Promoters Pvt. Ltd. and Ors, the National Company Law Appellate Tribunal, New Delhi (NCLAT) has dealt with the question of whether default in the payment of the terms of a settlement agreement which was arrived at to settle an application filed under section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), can be construed as financial debt.
The National Company Law Tribunal (Adjudicating Authority), allowed an application filed under section 7 of the IBC on account of default incurring due to non-payment of settlement amount vis a vis a settlement agreement, arrived between the Corporate Debtor and the financial creditor seeking the initiation of the CIRP. Challenging the same, an erstwhile director of Angel Promoters Pvt. Ltd. filed an appeal before the Appellate Tribunal. The legal tussle unfolded with the IRP contesting the grounds of the second petition, by arguing that a default on the settlement agreement should not warrant the initiation of a section 7 petition. The financial creditors, on the other hand, maintained that the company was still indebted to them for an adjusted sum of INR 4.10 crore.
The NCLAT, after meticulous consideration of the arguments, arrived at a pivotal decision and affirmed that the initiation of a second petition under section 7 of the IBC is indeed maintainable if the corporate debtor defaults on a settlement agreement reached during the pendency of an earlier Section 7 petition. The base line to arrive at the given conclusion remains two-fold:
- firstly, discounting the default arising due to non-payment of settlement amount would incentivise the unscrupulous corporate debtor to get the petition filed under section 7 withdrawn on the basis of the settlement without actually having the intention to follow through; and
- secondly, non-payment of the settlement amount would essentially keep the debt alive, on account of which a financial creditor had initially initiated the insolvency proceedings. Hence, the financial creditor remains to be uncredited with the amount outstanding towards it.
This judgment is a warning signal to the corporate debtor or its promotor attempting to sway away from the liability to repay the outstanding amounts being due and payable under the garb of “settlement”, without having any intention to fulfil the obligation. At the same time, this judgment is also a light of hope to the financial creditors who, in any case, have to take huge amounts of haircuts in seeking the repayment of the financial assistance given by them to the Corporate Debtor.