Appellate Tribunal: Settlement Agreement default not financial debt.

The Appellate Tribunal dismissed the application under Section 7 of the Insolvency and Bankruptcy Code, 2016, as the default in payment under a Settlement Agreement did not constitute financial debt. The Tribunal found that the Settlement Agreement did not create a financial debt obligation, as it did not involve a borrowing by the Respondent from the Appellant. The bouncing of cheques under the Agreement did not signify default in financial debt, leading to the conclusion that initiating Corporate Insolvency Resolution Process was not justified. The Tribunal emphasized that insolvency proceedings are distinct from mere recovery actions, and the appeal was dismissed due to the lack of legal grounds for insolvency initiation based on the Settlement Agreement breach.

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Issues:
Dismissal of application under Section 7 of the Insolvency and Bankruptcy Code, 2016 on the ground of default in payment not constituting financial debt.

Analysis:
The Appellate Tribunal considered the case where the Appellant's application under Section 7 of the Insolvency and Bankruptcy Code, 2016 was dismissed by the Adjudicating Authority. The dismissal was based on the ground that the default in payment of a Settlement Agreement did not fall under the definition of financial debt. The Appellant contended that the Respondent, acting as a Corporate Guarantor, was liable to discharge the financial debt independent of the Settlement Agreement. The Tribunal examined the Memorandum of Understanding dated 22.09.2017, where the Appellant agreed to advance a loan to the Principal Borrower with the Respondent standing as guarantor. The Principal Borrower issued cheques towards the outstanding liability, which bounced upon presentation, leading to legal actions. An amicable Settlement Agreement was reached, but the cheques issued under it were also dishonored.

The Tribunal scrutinized the Settlement Agreement and the Memorandum of Understanding to determine the nature of the obligation. It was observed that the Settlement Agreement superseded the previous understanding and the mere obligation to pay did not constitute a financial debt. The Tribunal highlighted that for a liability to be considered a financial debt, it must involve a disbursement against the consideration for the time value of money. In this case, there was no borrowing by the Respondent from the Appellant, and the bouncing of cheques under the Settlement Agreement did not signify default in financial debt. Therefore, the Tribunal concluded that triggering Corporate Insolvency Resolution Process was not justified based on the breach of the Settlement Agreement.

The Tribunal emphasized that while the Appellant might have other legal avenues for recovering the outstanding amount, initiating insolvency proceedings was not the appropriate course for recovery. Insolvency proceedings serve a different purpose and cannot be equated to mere recovery proceedings. The dismissal of the appeal was based on the lack of legal grounds to support the initiation of Corporate Insolvency Resolution Process for the recovery of money due under the Settlement Agreement.

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