Breaching The Consent Terms: Revival Of Insolvency Proceedings Under IBC

The author is Kavish Arora, a fifth year student at Symbiosis Law School, Hyderabad.

Introduction

The Insolvency and Bankruptcy Code 2016 (“IBC”) is an umbrella legislation for laws pertaining to bankruptcy, liquidation, and insolvency resolution. Being at a nascent stage, IBC has witnessed multiple disputes pertaining to the interpretation of its insolvency resolution process. One such complexity is pertaining to the breach of settlement agreement reached between the parties in a corporate insolvency resolution process (“CIRP”).

A settlement agreement entails an agreement between parties, wherein a party in order to resolve a dispute agrees to pay a certain amount to the other party. The breach occurs on the failure of the party to fulfil the payment condition as per the terms of the settlement agreement. The issue arises pursuant to such a breach of the consent terms, and is in relation to the recourse available to the creditor to claim the debt due.

The article seeks to examine the jurisprudence pertaining restoration of CIRP when the consent terms are breached. It further sheds light on the requirement of seeking liberty from the Adjudicating Authority to revive such proceedings, and how this liberty has been sought recently. Moreover, the article attempts to establish that the nature of debt will have no consequential effect pursuant to the breach of consent terms.

Restoring the Insolvency Proceedings

When a settlement agreement is agreed upon by the parties, the CIRP initiated against the corporate debtor is withdrawn pursuant to Section 12A of the IBC. On breach, an issue arises whether the CIRP can be revived in cases wherein it was withdrawn in accordance with the settlement agreement. Revival of CIRP would imply the reinstatement of a previously withdrawn CIRP by a financial creditor, which typically occurs in response to a breach of the settlement agreement.

In ICICI Bank v. OPTO Circuits (India) Ltd. the NCLT rejected an application to restore CIRP and held that the financial creditors can however file a fresh application to initiate the CIRP. On appeal, the NCLAT set aside the order of the NCLT and allowed the financial creditors to restore CIRP proceedings. This decision was based on NCLAT’s ruling in Vivek Bansal v. Bruda Druck India Pvt. Ltd. wherein the NCLAT held that in the event of default and not adhering to the terms of the settlement agreement, the Operational Creditor shall be at the liberty to seek revival of the CIRP proceedings before the Adjudicating Authority.

Seeking the liberty of the Adjudicating Authority – A norm?

At this juncture, it becomes imperative to understand whether it is mandatory to seek the liberty of the court to revive the CIRP proceedings. In Krishna Garg v. Pioneer Fabricators Pvt. Ltd. the NCLAT noting that neither the settlement agreement was filed nor it was brought on record or incorporated in the order of Adjudicating Authority, declined to allow the revival of the CIRP proceedings. Further, in Himadri Foods Ltd. v. Credit Suisse Funds AG(“Himadri Foods”) the NCLAT upheld the order of the NCLT and allowed for the revival of CIRP proceedings owing to the fact that the Adjudicating Authority had recorded the consent terms agreed between the parties and made those terms the part of its order.

Further, the position of revival of CIRP proceedings has been fortified through the recent case of IDBI Trusteeship Services Ltd. v. Nirmal Lifestyle Limited (“IDBI Trusteeship”) wherein the NCLAT has held that when the consent term itself contains a clause for revival and the same has been placed on record, it is inconsequential that the liberty has not been obtained by the Adjudicating Authority. Similarly, in Pooja Finlease v. Auto Needs (India) Pvt. Ltd. the Corporate Debtor contended that there was no liberty granted in the order of the Adjudicating Authority. The NCLAT observed that where an application was allowed in terms of the consent terms which contained a clause for revival of CIRP proceedings, such a clause shall be treated as a part of the order, entitling the Financial Creditor to revive the CIRP proceedings in case of a default. It is pertinent to note herein that in Himadri Foods, the deed of settlement agreed upon between the parties included a revival clause. However, the same was not delved into by the NCLT and the NCLAT while rendering its order.

The nature of debt pursuant to breach of the settlement agreement

The NCLT in Bajaj Rubber Company Pvt. Ltd. v. Saraswati Timber Pvt. Ltd. declined to revive the petition filed under Section 9 which was withdrawn due to a settlement agreement entered upon between the parties. The NCLT noted that breach of terms and conditions of a settlement agreement cannot come under the purview of Operational Debt under the IBC; therefore, it cannot be a ground to trigger CIRP. Similarly, in Delhi Control Devices Pvt. Ltd. v. Fedders Electric and Engineering Ltd. the NCLT held that failure or breach of settlement agreement cannot be a ground to trigger CIRP against the Corporate Debtor as it cannot be treated as Operational Debt under Section 5(21). Furthermore, in Finsbury Global FZE v. M/s Uttam Sucrotech International Pvt. Ltd. (“Finsbury Global”) the NCLT observed that after a settlement, the nature of debt changes. In this instance, the parties entered into a settlement agreement to resolve the outstanding Operational Debt. The NCLT observed that the amount outstanding pursuant to the settlement agreement is only a settlement amount which can be a ‘debt’ as defined under Section 3(11) but in no circumstances can be an Operational Debt as it has lost its substratum of being an Operational Debt.

On the other hand, in Priyal Kantilal Patel v. IREP Credit Capital Pvt. Ltd. (“Priyal Kantilal”) the Financial Creditor instead of reviving the erstwhile petition, filed a fresh application under Section 7. The Corporate Debtor contended that the Section 7 application filed by the Financial Creditor is not maintainable as breach of consent terms cannot be treated as a financial debt. The NCLAT observed that the financial debt claimed by the Financial Creditor would not be wiped out, nor would there be change in the nature and character of financial debt on account of breach of the consent terms agreed upon between the parties. The NCLAT noted that permitting a contrary interpretation would provide an undue advantage to the Corporate Debtor who breached the consent terms. On similar lines, the NCLAT in Alhuwalia Contracts (India) Ltd. v. M/s Logix Infratech Pvt. Ltd. while setting aside the order of the NCLT, allowed the Operational Creditor to commence CIRP against the Corporate Debtor by placing reliance on the settlement agreement.

If the former interpretation by the tribunals are accepted, then it would be antithetical to the very purpose of the Code. It would imply that the erstwhile CIRP proceedings cannot be reinstated nor could a fresh application be filed, thus placing the corporate debtor at an undeserved advantage. In Seethai Mills Ltd. v. N. Perumalswamy & Ors., the Madras HC observed that in a case where the original debt had merged in the decree and the person who was originally a creditor had become a decree-holder, the same does not in any way destroy his character as a creditor or the money due to him from the company as a debt. Therefore, breaching a settlement agreement does not change the character of the parties as creditor and debtor nor it extinguishes the financial liability of the debtor.

Conclusion

One may, by submitting an application in accordance with Section 60(5)(b) of the IBC, read with Rule 11 of the NCLT Rules 2016, exercise the inherent authority of the NCLT to seek revival of the withdrawn CIRP. The tribunals have made it clear through a catena of orders that for seeking revival, one must seek the liberty of the Adjudicating Authority. Nevertheless, in line with the decision in IDBI Trusteeship, such a liberty will be nugatory in cases wherein the settlement agreement itself warrants the revival of CIRP proceedings and the same is brought on record of the Adjudicating Authority.

However, the nature of debt pursuant to a settlement agreement appears to be a murky topic in light of the available jurisprudence. The recent orders in Finsbury Global and Priyal Kantilal are contrary to each other. If the interpretation in Finsbury Global is accepted, the corporate debtor shall gain an unwarranted benefit, leaving the creditor helpless. Therefore, on account of the breach, it is crucial to interpret the terms of the settlement agreement in a way so as to enable the remedy under the IBC efficacious.