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

The NCLAT dismissed an appeal challenging initiation of CIRP under IBC. The Corporate Debtor argued that a settlement agreement dated 27.08.2019 constituted novation, extinguishing original debt obligations. The NCLAT held that the settlement agreement lacked essential novation elements and only pertained to disposal of mortgaged properties. Citing Manohur Koyal vs. Thakur Das Naskar, the tribunal ruled that agreements made after breach of original contract do not constitute novation under Section 62. The existing rupee term loan and foreign currency loan assignments remained valid, establishing debt and default despite the settlement agreement's unilateral cancellation.

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Issues Involved:
1. Initiation of Corporate Insolvency Resolution Process (CIRP)
2. Alleged Breach of Loan Agreements and Default
3. Validity and Impact of the Settlement Agreement
4. Legal Existence of the Respondent No. 1
5. Application of Section 62 of the Indian Contract Act, 1872
6. Continuous Acknowledgment of Debt

Detailed 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.

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