NCLAT: Insolvency proceedings not the same as recovery proceedings

NCLAT: Insolvency proceedings not the same as recovery proceedings

The Tribunal dismissed the application against Tempo Appliances Pvt. Ltd. on grounds that the default in the payment of the Settlement Agreement does fall under the definition of financial debt

The National Company Law Appellate Tribunal(NCLAT) has dismissed the Appeal filed against Tempo Appliances Pvt. Ltd.

Herein, the Appellant's application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (I&B Code) against Tempo Appliances Pvt. Ltd. (Corporate Debtor) came to be dismissed in terms of the impugned order by the Adjudicating Authority (National Company Law Tribunal/NCLT), New Delhi Bench-V on grounds that the default in the payment of the Settlement Agreement does not come under the definition of financial debt.

The Appellant, being aggrieved, had filed the instant appeal on grounds that the Respondent who was the Corporate Guarantor was liable in terms of the Memorandum of Understanding to discharge the liability with respect to the financial debt advanced to the principal borrower- Tempo Appliances India Ltd. and this was independent of the Settlement Agreement, where under the Corporate Guarantor had undertaken to discharge the liability arising out of the dishonouring of cheques issued by the Principal Borrower in favour of the Financial Creditor.

The main issue in this case was whether in terms of this agreement the obligation to pay the outstanding liability of Rs. 86 lakh together with interest on the part of the Respondent constituted a 'financial debt' within the purview of Section 5(8) of the 'I&B Code' and whether the Appellant could be treated as 'Financial Creditor' entitled to trigger the Corporate Insolvency Resolution Process as Financial Creditor against the Respondent.

The Appellate Tribunal has observed that mere obligation to pay does not bring the liability within the ambit of 'financial debt'. The debt, along with interest, if any, should be disbursed against the consideration for the time value of money.

Breach of terms of an agreement including a Settlement Agreement where under payment may be due would not fall within the ambit of Section 5(8) so as to constitute a 'Financial Debt'. Admittedly, inter se the parties, there was no disbursement against the consideration for the time value of money. The principal borrower was not a party to the Settlement Agreement. Viewed in the context of the Settlement Agreement, there was no borrowing on the part of the Respondent from the Appellant.

Mere obligation to pay under a Settlement Agreement would not amount to disbursal of the amount for consideration against the time value of money and breach thereof would not entitle the Appellant in the instant case to trigger the Corporate Insolvency Resolution Process against the Respondent. Viewed from this perspective, the Appellate Tribunal found that the bouncing of cheques issued in discharge of the obligation under the Settlement Agreement would not fall within the purview of default in regard to financial debt.

The Tribunal clearly stated that there was no legal infirmity in the order. The Appellant might have other remedies available under the law for effecting recovery of money due in terms of the Settlement Agreement but triggering of the Corporate Insolvency Resolution Process was not warranted.

The Tribunal also opined that Insolvency proceedings stand at a different footing and cannot tantamount to recovery proceedings. The Corporate Insolvency Resolution Process cannot be initiated for the purposes of recovery of money.