Tribunal Rules Settlement Deed Defaults Do Not Constitute Operational Debt Under IBC
In a significant ruling, the National Company Law Tribunal (NCLT), New Delhi, dismissed an insolvency petition filed by M/s Silver Collections Private Limited against M/s Paragon Knits Ltd. The tribunal held that defaults arising from a settlement deed do not constitute "Operational Debt" under the Insolvency and Bankruptcy Code, 2016 (IBC), and thus, cannot be grounds for initiating Corporate Insolvency Resolution Process (CIRP).
The petition, filed under Section 9 of the IBC, sought the initiation of CIRP against Paragon Knits Ltd. for a claimed default amount of Rs. 2,33,45,477. The operational creditor, Silver Collections, argued that the corporate debtor had defaulted on payments for the supply of yarn and further failed to comply with a settlement deed executed on January 8, 2025, where Paragon Knits had acknowledged its liability.
However, the tribunal, comprising Shri Mahendra Khandelwal and Ms. Anu Jagmohan Singh, determined that the default arising from the settlement deed does not fall under the definition of "Operational Debt" as per Section 5(21) of the IBC. The tribunal emphasized that once a settlement deed is executed, it creates fresh obligations, and any default under such an agreement should be pursued in an appropriate forum other than the insolvency framework.
In its detailed analysis, the tribunal referred to precedents including the NCLAT's decision in Trafigura India Pvt. Ltd. v. TDT Copper Ltd., affirming that defaults on settlement agreements are outside the scope of operational debt. This aligns with the NCLT's limited role, which is not to act as a recovery forum but to ascertain the existence of operational debt.
The ruling underscores the importance of distinguishing between original operational transactions and obligations arising from subsequent settlements. Operational creditors are advised to pursue claims related to settlement defaults in civil courts or arbitration, rather than through insolvency proceedings.
This decision highlights the judiciary's stance on maintaining the integrity of the IBC's framework, ensuring it is not misused for debt recovery beyond its intended scope.
Bottom line:-
A settlement deed entered into by the parties during the pendency of a Section 9 application under the Insolvency and Bankruptcy Code, 2016, creates fresh obligations, and any default arising out of such a settlement deed does not constitute "Operational Debt" as defined under Section 5(21) of the Code.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 Sections 5(21), 9
