The National Company Law Appellate Tribunal, Principal Bench, New Delhi (“NCLAT”) has in its judgement dated February 1, 2023 (“Judgement”), in the matter of Priyal Kantilal Patel v. IREP Credit Capital Private Limited and Another [Company Appeal (AT) (Insolvency) No. 1423 of 2022], held that the nature of financial debt would not change on account of breach of consent terms that have been agreed between the parties.

Facts

Rajesh Landmark Projects Private Limited (“Corporate Debtor”) had issued debentures to IREP Credit Capital Private Limited (“Financial Creditor”). On December 20, 2019, the Financial Creditor filed a petition under Section 7 (Initiation of corporate insolvency resolution process by financial creditor) of the Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking initiation of corporate insolvency resolution process (“CIRP”) against the Corporate Debtor (“Original Petition”).

During the pendency of the Original Petition, the Financial Creditor and the Corporate Debtor entered into consent terms recorded in a settlement agreement (“Consent Terms”) where under the Financial Creditor agreed to withdraw the Original Petition. Further, the Consent Terms placed an obligation on the Corporate Debtor to release the amounts agreed to thereunder and entitled the Financial Creditor to claim the entire outstanding amount as would be due on the date of the Corporate Debtor’s default of the Consent Terms. The Consent Terms also contemplated revival of the Original Petition in the event of default of the Consent Terms on part of the Corporate Debtor.

Subsequently, the cheques which were issued to the Financial Creditor were dishonored and thereby the Consent Terms were defaulted on part of the Corporate Debtor. The Financial Creditor, instead of reviving the Original Petition, filed a fresh company petition against the Corporate Debtor under Section 7 of the IBC (“Fresh Petition”).

In the Fresh Petition, the Financial Creditor based its claim on the initial financial debt that was claimed by it in the Original Petition along with giving details of the Consent Terms and the subsequent events which took place. The Fresh Petition was admitted by the National Company Law Tribunal, Mumbai (“Adjudicating Authority”) in its order dated October 10, 2022 and CIRP was initiated against the Corporate Debtor (“Impugned Order”).

Aggrieved by the Impugned Order, the present appeal has been filed before the NCLAT by the director of the Corporate Debtor namely, Priyal Kantilal Patel (“Appellant”).

Issue

Whether the nature and character of financial debt changes upon breach of Consent Terms.

Arguments

Contentions raised by the Appellant:

The Appellant submitted that the Fresh Petition filed by the Financial Creditor was not maintainable. A breach of the Consent Terms by the Corporate Debtor did not furnish any right on the Financial Creditor to file a Fresh Petition initiating CIRP against the Corporate Debtor, given that a breach of Consent Terms could not be treated as a financial debt.

The Appellant placed reliance on the judgment passed by the NCLAT in the case of Amrit Kumar Agarwal v. Tempo Appliances Private Limited [2020 SCC OnLine NCLAT 1202] (“Amrit Kumar Case”) wherein it was held that “mere obligation to pay under a Settlement Agreement would not amount to disbursal of amount for consideration against the time value of money and breach thereof would not entitle the Appellant in the instant case to trigger Corporate Insolvency Resolution Process against the Respondent. Viewed from this prospective, we find that bouncing of cheques issued in discharge of obligation under the Settlement Agreement would not fall within the purview of default in regard to financial debt.”

The Appellant also submitted that there was no consensus amongst the majority debenture holders for initiating CIRP against the Corporate Debtor under Section 7 of the IBC and that the Financial Creditor amounted to a mere 12% of the total debenture holders.

Lastly, the Appellant submitted that the Adjudicating Authority had committed an error by admitting the Fresh Petition filed by the Financial Creditor.

Contentions raised by the Financial Creditor:

The Financial Creditor contended that the debt which was claimed by it under the Fresh Petition remained a financial debt and that the nature of the debt would not change merely by virtue of the Consent Terms being entered into between the parties.

Moreover, in the present case, the Financial Creditor by filing the Fresh Petition, was not trying to enforce the Consent Terms entered into between the parties, but was rather claiming the original financial debt.

The Financial Creditor also submitted that while the Consent Terms stipulated that any default on part of the Corporate Debtor in abiding by the Consent Terms would entitle the Financial Creditor to revive the Original Petition, the mere filing of a Fresh Petition instead of reviving the Original Petition, could not be a ground to defeat the Fresh Petition.

The Financial Creditor therefore contended that the Fresh Petition had been rightly admitted by the Adjudicating Authority.

Observations of the NCLAT

The NCLAT observed that there was no dispute on the fact that the Original Petition was withdrawn basis the Consent Terms that were entered into between the parties.

The NCLAT took note of clause 9 of the Consent Terms wherein the Corporate Debtor had undertaken to fully comply with the payment schedule set out thereunder and to not commit any default in releasing the amounts agreed under the Consent Terms. The NCLAT also observed that in the event of Corporate Debtor’s default of the Consent Terms, the Financial Creditor was at liberty to claim the entire outstanding amount and revive the Original Petition.

Further, the NCLAT observed that the Amrit Kumar Case relied upon by the Appellant, was a case wherein an application under Section 7 of the IBC was filed on the ground of default in payment of a settlement agreement and therefore the NCLAT had opined that a default in payment of settlement agreement does not constitute a financial debt. However, in the eyes of the NCLAT, the facts of the instant case were distinguishable from that of the Amrit Kumar Case, considering that in the instant case, the Fresh Petition had been filed by the Financial Creditor not only for default of the Consent Terms on part of the Corporate Debtor, but also, for claiming the original financial debt which was extended by the Financial Creditor to the Corporate Debtor.

The NCLAT also observed that a mere breach of the Consent Terms on part of the Corporate Debtor would not extinguish the financial debt which was claimed by the Financial Creditor nor would the nature and character of the financial debt change due to breach of the Consent Terms. Besides, permitting such an interpretation would give a premium to the Corporate Debtor who has breached the Consent Terms.

Furthermore, although a reading of clause 9 of the Consent Terms made it evident that the Financial Creditor would be entitled to revive the Original Petition upon Corporate Debtor’s breach of the Consent Terms, the mere fact that instead of reviving the Original Petition, the Financial Creditor chose to file the Fresh Petition, could not be a reason to reject the Fresh Petition altogether.

With regard to the contention of the Appellant that there was no consensus amongst the debenture holders for initiating CIRP against the Corporate Debtor under Section 7 of the IBC and that the Financial Creditor amounted to a mere 12% of the total debenture holders, the NCLAT observed that the fact that the majority debenture holders had not initiated CIRP under Section 7 of the IBC against the Corporate Debtor, would not preclude the Financial Creditor from initiating the same on its own right.

Decision of the NCLAT

The NCLAT held that the Corporate Debtor’s breach of the Consent Terms, would not extinguish the financial debt which was claimed for by the Financial Creditor nor would the nature and character of the financial debt change due to breach of Consent Terms.

In view of the above, NCLAT did not find any reason to interfere with the Impugned Order passed by the Adjudicating Authority and therefore dismissed the appeal filed by the Appellant.

VA View:

The NCLAT has, through this Judgment, rightly opined that a mere breach in Consent Terms on part of the Corporate Debtor would not wipe out the original financial debt nor would the nature and character of the financial debt change.

Pertinently, in relation to filing of a Fresh Petition by the Financial Creditor instead of reviving the Original Petition as stipulated in the Consent Terms, the NCLAT reiterated that the same could not be a ground to reject the Fresh Petition filed under Section 7 of the IBC.

This Judgement emphasizes that although the parties have mutually agreed upon ‘revival’ of the proceedings, a financial creditor may, at its will, also proceed to file a fresh application for initiation of CIRP against a corporate debtor, thereby safeguarding the financial creditor’s interest. Therefore, consent terms cannot alter the nature or character of a financial debt whereby the statutory rights of a financial creditor are stripped away.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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