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Defaults under “Settlement Agreement” are Operational debts under IBC

In various rulings of NCLT and NCLAT, while deciding Section 9 Petition under IBC, a view is taken that “Settlement Agreement” do not constitute “Operational debt” within the meaning of Section 5(21) of IBC. (The latest ruling appears to be of Trifigura India Pvt Ltd versus TDT Copper Ltd. NCLAT Order / Judgment dated 15.9.2022, passed in Company Appeal (AT) (Insolvency) No. 742 of 2020)

With greatest respect to the Learned Members at the Bench, all such rulings are ex-facie erroneous.

1.       Section 5(21) of IBC says Operational Debt "means a “Claim” and then sets out the class of debts that are considered as “Operational debts”. What is covered are (1) claims in respect of the provision of goods or services (2) claims in respect of Employment and (3)  A debt in respect of the payment of dues arising under any law payable to the Central Government, any State Government or any local authority.

2.       Now the Claim is defined u/s 3(6) of IBC.

“Claim” means

(a)     a right to payment, whether or not such right is reduced to judgment, fixed, disputed, undisputed, legal, equitable, secured or unsecured;

(b)     right to remedy for breach of contract under any law for the time being in force, if such breach gives rise to a right to payment, whether or not such right is reduced to judgment, fixed, matured, unmatured, disputed, undisputed, secured or unsecured;

3.       The breach of Settlement Agreement / or to say, remedy for breach of contract (read settlement Agreement), would inevitably gives rise to right to payment; and in default would trigger the cause of action, to prefer, among other avenues, Insolvency Resolution Application u/s 9 of IBC.

4.       It may be appreciated that Settlement Agreement by itself are not class of “debts”, but are only instrument / vehicle to settle claims or debt.

5.       The identity of debts / claims under the Settlement Agreement can be traced to original transaction in respect of provision of goods or services, or employment, or statutory dues, as the case may be.

6.       The NCLT / NCLAT Rulings on this aspect is “Sub-Silento / “Per Inqurium”, as the they have not considered the import and scope of “Claim" defined under section 3(6) of IBC and have in fact made a very literal interpretation of Section 5(21).

7.       Without prejudice, it may further be appreciated that, such an interpretation also frustrates the legislative intent, wherein the dishonest Corporate Debtors would deceptively overcome the rigors of IBC by entering into a Settlement Agreement, followed by planned default and then contending that the Settlement Agreement are not covered under “Operational Debt”.

8.       The Claims founded on a Settlement Agreement is in consonance with legislative mandate [5(21) r/w 3(6)] and very much constitutes “Operational Debt” within the meaning of Section 5(21) of IBC.

 

 

Sandeep Jalan

Adv.

https://www.litigationplatform.com/

 

 

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