NCLAT upholds second insolvency petition admission under Section 7 after debtor defaults on settlement agreement

The NCLAT dismissed an appeal challenging admission of a second petition under Section 7 of the Insolvency and Bankruptcy Code, 2016. The corporate debtor had initially settled with financial creditors after the first petition was admitted, leading to withdrawal of the original proceedings. However, the debtor defaulted on the settlement agreement, paying only Rs. 1,10,00,000 against arrears exceeding Rs. 3 crores. The tribunal held that allowing such tactics would incentivize unscrupulous debtors to manipulate the insolvency process through false settlements. The second petition was properly admitted as debt and default were established, preventing abuse of the settlement mechanism.

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Issues Involved:
1. Admissibility of the second petition under Section 7 of the Insolvency and Bankruptcy Code, 2016.
2. Treatment of unpaid instalments as debt and breach of settlement agreement.
3. Adjustment of the amount paid out of court during the pendency of the appeal.

Summary of Judgment:

1. Admissibility of the second petition under Section 7 of the Insolvency and Bankruptcy Code, 2016:
The appeal challenges the order dated 20.12.2023, passed by the Adjudicating Authority (NCLT, New Delhi, Bench IV), admitting an application filed u/s 7 of the Insolvency and Bankruptcy Code, 2016 by Financial Creditors against the Corporate Debtor for a resolution amount of Rs. 3,34,07,686/-. The Corporate Debtor had defaulted on a loan availed in 2015, leading to the filing of the first petition u/s 7, which was later withdrawn following a settlement agreement. However, due to subsequent defaults by the Corporate Debtor, the Financial Creditors filed a second petition u/s 7, which was admitted by the Adjudicating Authority.

2. Treatment of unpaid instalments as debt and breach of settlement agreement:
The Appellant argued that unpaid instalments as per the settlement agreement cannot be treated as debt and breach of the settlement agreement cannot be a ground to file an application u/s 7. The Appellant relied on the case of Raj Singh Gehlot Vs. Vistra (ITCL) India and Ors., where it was held that invoking Section 7 based on a settlement agreement is not permissible. However, the Tribunal found this argument unconvincing, noting that the first petition was based on the debt due and default committed by the Corporate Debtor, not on the settlement agreement. The Tribunal emphasized that allowing such arguments would encourage unscrupulous behavior by Corporate Debtors, undermining the purpose of the Code.

3. Adjustment of the amount paid out of court during the pendency of the appeal:
The Appellant contended that Rs. 87 Lac paid out of court should be adjusted against the principal amount due. The Tribunal rejected this argument, stating that there was no agreement indicating that the amount was paid towards the principal. The Financial Creditor is entitled to adjust the amount towards the interest component first, as per Section 60 of the Contract Act, 1872.

Conclusion:
The Tribunal dismissed the appeal, finding no merit in the arguments presented by the Appellant. The amount deposited by the Appellant in the court by way of FDR is ordered to be returned to the Appellant within one month from the date of the order.

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