NCLT Kolkata: Breach Of Settlement Agreement Not 'Operational Debt' Under Section 5(21) Of IBC

NCLT Kolkata: Breach Of Settlement Agreement Not 'Operational Debt' Under Section 5(21) Of IBC

The National Company Law Tribunal (NCLT) Kolkata bench, comprising D. Arvind (Technical Member) and Bidisha Banerjee (Judicial Member), ruled that a breach of a settlement agreement between an operational creditor and corporate debtor does not qualify as "Operational Debt" under Section 5(21) of the IBC.

The tribunal further determined that seeking implementation of the Settlement Agreement was not within the jurisdiction of the NCLT.

Section 5(21) of the IBC defines "Operational Debt" as a claim related to the provision of goods or services, including employment, or a debt arising from payment obligations to the Central Government, State Government, or local authorities under current laws.

M/s. Simplex Infrastructure Limited (“Corporate Debtor”) engaged M/s. Amrik Cranes and Infrastructure (“Operational Creditor”) for crane services, issuing a work order. Although the operational creditor rendered the services as requested, the corporate debtor failed to pay the full amount owed, resulting in an outstanding debt of ₹ 3,29,01,959.

Consequently, the operational creditor-initiated proceedings under Section 9 of the I&B Code against the corporate debtor for non-payment of the operational debt.

During the March 2022 proceedings, the corporate debtor proposed a settlement to the operational creditor. According to the settlement agreement, the corporate debtor agreed to pay ₹ 2,86,27,594 in six monthly instalments of ₹ 47,70,000. The National Company Law Tribunal (NCLT), Kolkata Bench, approved and recorded this settlement.

However, the operational creditor alleged that after the initial installment was paid, the corporate debtor defaulted on further payments, breaching the settlement agreement. Subsequently, the operational creditor filed a petition in the NCLT to initiate the corporate insolvency resolution process under Section 9 of the IBC.

The operational creditor argued that a demand notice under Section 8 of the I&B Code was issued to the corporate debtor, demanding payment of the outstanding ₹ 2,81,31,959 plus interest. Despite delivery via email and Speed Post, the corporate debtor neither responded nor made the payment.

In response, the corporate debtor contended that the default under the settlement agreement did not constitute operational debt. They claimed that ₹ 2,29,23,085 had already been paid under the Settlement Agreement, with only ₹ 57,04,509 remaining due, attributable to a GST mismatch.

The NCLT observed that according to a settlement agreement, the corporate debtor was obligated to pay ₹ 2,86,27,594 in six monthly installments starting on April 25, 2022. However, despite reminders from the operational creditor, only the first installment was paid, and subsequent payments were not made.

The tribunal noted that the alleged default stemmed from the non-payment of installments under the settlement agreement. It clarified that the breach of a settlement agreement does not meet the definition of "operational debt" under Section 5(21) of the I&B Code, citing the case Trafigura India Pvt. Ltd. v. TDT Copper Ltd.

Furthermore, the NCLT referred to the NCLAT's ruling in Maldar Barrels Pvt Ltd v. Pearson Drums and Barrels Pvt Ltd, which affirmed that the NCLT is not the appropriate forum for enforcing a settlement agreement. It emphasized that parties should seek other legal avenues available for enforcing such agreements.

Consequently, the NCLT concluded that the petition sought recovery of amounts due under the settlement agreement. Based on the precedents in Trafigura and Maldar, the tribunal determined that it lacked jurisdiction to adjudicate claims arising from a default on a settlement agreement. Since such breaches do not qualify as "operational debt" under the I&B Code, they do not trigger the Corporate Insolvency Resolution Process (CIRP) against the corporate debtor.

Therefore, the NCLT dismissed the petition accordingly.