2024 (7) TMI 387 - AT - Insolvency and Bankruptcy

Settlement agreement after loan breach doesn't constitute novation under Section 62, debt obligations remain valid despite property disposal terms

Ms. Mausumi Bhattacharjee Promoter of Arjun Industries Limited Versus Jumbo Chemicals And Allied Industries Private Limited, Mr. Vikram Bajaj Resolution Professional of Arjun Industries Ltd.

The NCLAT dismissed an appeal challenging initiation of CIRP under IBC. The Corporate Debtor argued that a settlement agreement dated 27.08.2019 ... Initiation of CIRP u/s of IBC - debt or default on the part of the Corporate Debtor - unilateral suo-moto cancellation of the settlement agreement - winding up of the Corporate Debtor u/s 433 (e) and 433 (f) and Section 434 r/w Section 439 of Companies Act, 1956 - HELD THAT:- It is noted that the requisites of a novation may include elements like an agreement of all the parties to a new contract, the extinguishment of the old obligations, and the validity in supersession of old contract by the new contract, however, in the present case no such specific clauses exist. We also note that the Settlement Agreement dated 27.08.2019 was only with regard to disposal of the mortgaged properties of the Corporate Debtor. It is understood that if the contract is altered in material particulars to change its essential character, the modified contract must be read as doing away with the original contract but if the modified contract has no independent contractual force, no new contract comes into play. There are no such wording in settlement agreement dated 27.08.2019. It is found that in case of Manohur Koyal vs. Thakur Das Naskar [1888 (1) TMI 2 - CALCUTTA HIGH COURT], the plaintiff sued the defendant to recover Rs. 1100 due on a bond and after the due date of the bond, the plaintiff agreed to accept from the defendant, in satisfaction of the bond, Rs. 400/- in cash and a fresh bond for Rs. 700/-. The defendant failed to pay the Rs. 400 and to give the fresh bond of Rs. 700/-. In a suit by the plaintiff to recover the amount of original bond, the defendant contended that the subsequent agreement was a novation. It was held that Section 62 did not apply, as the subsequent agreement was made after the breach of the original contract, and that the defendant having failed to perform satisfactorily which he had promised to give, remained liable on the original, contract. This case is similar to facts of the present appeal and is found to be applicable. It is found that the existing rupee term loan as well as foreign currency loan assigned by registered assignment deeds remain valid which are relevant documents to establish debt and default - the loans were sanctioned somewhere in 1996 i.e., almost 28 years back and the last assignment deed was signed in favour of the Respondent No. 1 on 16.04.2008 i.e., 16 years back and even after decades, the litigation has been continuing and no recovery could be affected by the original financial creditors or the present Respondent No. 1 in whose favour the assignment deed was signed almost 16 years back. This state of affair is found to be unusual and alarming. There are no merit in the appeal. The appeal deserved to be dismissed and stand dismissed. Issues Involved:1. Initiation of Corporate Insolvency Resolution Process (CIRP)2. Alleged Breach of Loan Agreements and Default3. Validity and Impact of the Settlement Agreement4. Legal Existence of the Respondent No. 15. Application of Section 62 of the Indian Contract Act, 18726. Continuous Acknowledgment of DebtDetailed Analysis:1. Initiation of Corporate Insolvency Resolution Process (CIRP):The appeal was filed under Section 61(1) of the Insolvency & Bankruptcy Code, 2016 against the order dated 22.02.2024, which initiated the CIRP of the Corporate Debtor. The Respondent No. 1, being the Financial Creditor, filed an application under Section 7 of the Code which was allowed by the Adjudicating Authority.2. Alleged Breach of Loan Agreements and Default:The Corporate Debtor availed loans from IDBI but failed to repay, leading to legal action and an OTS agreement, which also failed. The debt was assigned to Kotak Mahindra Bank and subsequently to the Respondent No. 1. The Appellant defaulted on the loans, and despite multiple litigations, the debt remained unpaid.3. Validity and Impact of the Settlement Agreement:The Settlement Agreement dated 27.08.2019 was intended to sell mortgaged properties and divide proceeds. The Appellant unilaterally canceled this agreement, which the Respondent No. 1 contested. The Tribunal held that the Settlement Agreement did not supersede the original loan agreements and was merely a mechanism to settle dues.4. Legal Existence of the Respondent No. 1:The Appellant argued that the Respondent No. 1 was not a legal entity when the Settlement Agreement was signed, as its name was struck off. However, the Tribunal's order dated 24.03.2021 restored the company's name as if it had never been struck off, validating all actions taken by the Respondent No. 1, including the Settlement Agreement.5. Application of Section 62 of the Indian Contract Act, 1872:The Appellant claimed that the Settlement Agreement constituted a novation of the original contract under Section 62, thereby nullifying the original debt. The Tribunal found no evidence of such novation in the Settlement Agreement, stating it was only for the disposal of mortgaged properties and did not substitute the original loan agreements.6. Continuous Acknowledgment of Debt:The Tribunal noted continuous acknowledgment of debt in the Corporate Debtor's balance sheets from 1998-99, which sustained the claim of the Financial Creditor. Previous judgments also supported the validity of the debt and default.Conclusion:The Tribunal dismissed the appeal, confirming that the original loan agreements and assignment deeds remained valid and enforceable. The argument that there was no debt or default was found unsustainable. The appeal was dismissed with no costs, and all interlocutory applications were closed.