Settlement Agreement During Pendency Of Section 7 Petition Does Not Bar Filing Second Section 7 Petition: NCLAT Delhi

Settlement Agreement During Pendency Of Section 7 Petition Does Not Bar Filing Second Section 7 Petition: NCLAT Delhi

The National Company Law Appellate Tribunal (NCLAT), Delhi Bench, comprising Justice Rakesh Kumar Jain (Judicial Member), Shri Naresh Salecha, and Shri Indevar Pandey (Technical Members), while adjudicating an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC), in the case of Desh Bhushan Jain, Erstwhile Director of Angel Promoters Pvt. Ltd. v. Abhay Kumar, IRP of Angel Promoters Pvt. Ltd. & Ors., has ruled that a second petition under Section 7 is maintainable if the Corporate Debtor defaults on a settlement agreement reached during the pendency of the original Section 7 petition.

Desh Bhushan Jain, the Erstwhile Director of Angel Promoters Pvt. Ltd. ("Corporate Debtor"), availed a loan of Rs. 3,25,00,000/- with interest in 2015 from Angel Promoters Pvt. Ltd. & Ors. ("Financial Creditors"). The Financial Creditors filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) due to the Corporate Debtor's default in repaying the loan. While the petition was pending, the parties reached a settlement agreement on 26.07.2018, under which the Corporate Debtor agreed to pay Rs. 4,34,00,000/- to the Financial Creditors via post-dated cheques, including interest. Consequently, the Financial Creditors withdrew the first petition on 27.07.2018 by filing a joint application.

However, the Corporate Debtor failed to make timely payments, dishonoring post-dated cheques or requesting extensions. Despite making some payments, many cheques remained unpaid or were not replaced as per the settlement agreement, leading the Financial Creditors to file a second petition under Section 7 of the IBC.

The appellant argued that unpaid installments under the settlement agreement cannot be treated as debt and that breach of the settlement agreement cannot be grounds for a Section 7 application. They also contended that no permission was sought from the Adjudicating Authority to revive the petition when the first petition was withdrawn. Additionally, they argued that the payment of Rs. 87 lakhs made out of court should not be appropriated by the Respondent as part of the interest since the amount for the Section 7 petition had already been crystallized.

The respondents countered that they were misled by the Corporate Debtor into entering the settlement agreement on the promise that the principal amount with interest would be paid. They also contended that there was no need to seek court permission since this was not a revival of the same petition but rather the filing of a second petition.

The tribunal observed that it does not support the argument that an application under Section 7 cannot be filed based on a settlement. It noted that if the appellant's plea were accepted, it would provide an incentive for unscrupulous Corporate Debtors to have petitions filed under Section 7 withdrawn based on settlements that they do not ultimately follow. Therefore, the appellant's plea was rejected.

With this observation, the appeal was dismissed.