Operational debt under a settlement agreement requires a crystallised default before insolvency can proceed under Section 9.

A claim recorded in a settlement agreement may retain its character as operational debt where it remains linked to underlying supply transactions, but Section 9 insolvency requires proof that the debt has crystallised and become due and payable. Here, the staged payment structure and future-linked adjustments meant the alleged liability had not been shown as a defaulted operational debt on the relevant date. The Tribunal therefore upheld rejection of the insolvency petition and held that a mere outstanding exposure or contractual liability, without established default, is insufficient for admission under Section 9.

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Issues: (i) Whether amounts claimed under the settlement agreement, entered into in relation to supply of goods under the master sale agreement, constituted operational debt so as to sustain a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016; (ii) Whether the alleged liability had become due and payable so as to establish default and trigger insolvency proceedings.

Issue (i): Whether amounts claimed under the settlement agreement, entered into in relation to supply of goods under the master sale agreement, constituted operational debt so as to sustain a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016.

Analysis: The settlement agreement recorded the outstanding liabilities arising from the underlying supply transactions and also provided a revised payment mechanism for the outstanding amount. The decisive question was whether the claim, as presented in the insolvency petition, was still one for operational debt arising from the supply of goods or had become a separate claim under the settlement arrangement. The agreed terms showed that the liability remained connected with earlier supplies and was not divorced from the commercial underlying transaction merely because the parties later recorded their arrangements in a settlement document.

Conclusion: The claim was treated as arising from the underlying commercial arrangement, but the petition still failed on the facts of default and enforceability of the alleged due date.

Issue (ii): Whether the alleged liability had become due and payable so as to establish default and trigger insolvency proceedings.

Analysis: The settlement agreement fixed staged payment obligations, including reduction of exposure by specified dates and a further payment structure linked to future contractual developments. On the facts found, the Adjudicating Authority and the Appellate Tribunal concluded that the claim for insolvency could not rest on a mere balance of exposure or on an uncrystallised amount, and that the scope of Section 9 was confined to a genuine default in a debt that had become due and payable. The Tribunal also approved the view that a request for reference to arbitration could not enlarge the jurisdiction of the Adjudicating Authority in such proceedings.

Conclusion: The alleged debt was not established as a defaulted operational debt due and payable for the purpose of Section 9, and the insolvency petition was not maintainable.

Final Conclusion: The impugned dismissal of the Section 9 application was upheld, and no ground was found to interfere with the rejection of insolvency proceedings.

Ratio Decidendi: A claim founded on a settlement arrangement will support insolvency proceedings only if the applicant establishes a due and payable operational debt and a corresponding default; a mere contractual liability or outstanding exposure, without a crystallised default, does not justify admission under Section 9.

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