2025 (3) TMI 976 - AT - IBC

CIRP Application Under Section 9 Dismissed Due to Substantial Compliance with Settlement; Debt Acknowledged as Discharged

The Tribunal concluded that the initiation of Corporate Insolvency Resolution Process (CIRP) under Section 9 of the Insolvency and Bankruptcy Code, 2016, ... Maintainability of section 9 application initiating CIRP - parties had already entered into settlement much before issuance of demand notice which gave rise to the Section 9 application - section 9 application filed ignoring the payments of 20 instalments - HELD THAT:- It is already noticed that when earlier demand notice was issued on 05.03.2018, parties have entered into settlement dated 24.06.2019 revised on 03.07.2020 for final settlement of Rs.8, 30, 31, 244/- equivalent to $1, 110, 489 in 21 instalments last instalment to be paid by March, 2022. 20 instalments were paid and it was only due to some calculation issues last instalment was not paid, however, during the pendency of Section 9 proceeding said instalment was paid. Respondent fairly admitted that entire debt has been discharged. In facts of the present case, present is not a case for initiation of Section 9 proceeding against the Corporate Debtor who after receipt of the demand notice has entered into settlement and paid 20 instalments out of 21 instalments and non-payment of 21st instalment was due to calculation issues regarding amount of last instalment. Hence, present was not a case for initiation of any insolvency proceeding against the Corporate Debtor. Conclusion - Section 9 of the Insolvency and Bankruptcy Code is not to be used as a debt recovery mechanism when a settlement agreement is in place and substantially complied with. Section 9 application filed by the Respondent was inappropriate and unwarranted given the settlement and subsequent payment of the disputed instalment - appeal allowed. ISSUES PRESENTED and CONSIDEREDThe primary legal issue considered in this judgment was whether the initiation of the Corporate Insolvency Resolution Process (CIRP) under Section 9 of the Insolvency and Bankruptcy Code, 2016, was appropriate given the circumstances surrounding the settlement and payment between the Corporate Debtor and the Operational Creditor.ISSUE-WISE DETAILED ANALYSISRelevant Legal Framework and Precedents:Section 9 of the Insolvency and Bankruptcy Code, 2016, provides a mechanism for operational creditors to initiate insolvency proceedings against a corporate debtor upon the occurrence of a default. The purpose of this provision is to ensure that operational creditors have a remedy to recover unpaid debts. However, the provision is not intended to serve as a mere recovery mechanism when disputes or settlements are in place.Court's Interpretation and Reasoning:The Tribunal emphasized that the initiation of Section 9 proceedings should not be used as a means of debt recovery when a settlement agreement is in place and payments have been substantially made in accordance with that agreement. The Tribunal noted that the Corporate Debtor had entered into a settlement with the Operational Creditor and had made 20 out of 21 instalment payments, with the final instalment remaining unpaid due to calculation disputes. The Tribunal found that the initiation of Section 9 proceedings was inappropriate given these facts.Key Evidence and Findings:The Tribunal considered the following key facts: A settlement agreement was entered into on 24.06.2019 and revised on 03.07.2020, which outlined a payment schedule of 21 instalments.The Corporate Debtor had paid 20 instalments, totaling Rs.7,40,00,090/-, leaving only the final instalment unpaid due to a calculation dispute.The final instalment was paid during the pendency of the Section 9 application.The Respondent's counsel admitted that the entire debt had been discharged.Application of Law to Facts:The Tribunal applied the legal framework of Section 9, emphasizing that the provision is not to be used as a recovery tool when a settlement has been reached and largely fulfilled. The Tribunal highlighted that the Corporate Debtor had substantially complied with the settlement terms and that the dispute over the final instalment did not constitute a default warranting insolvency proceedings.Treatment of Competing Arguments:The Tribunal noted the absence of a reply from the Respondent to the appeal, despite multiple opportunities. The Tribunal also took into account the Respondent's counsel's admission that the debt had been discharged, which further supported the argument against the necessity of Section 9 proceedings.Conclusions:The Tribunal concluded that the initiation of Section 9 proceedings was unwarranted in this case, as the Corporate Debtor had complied with the settlement terms and the remaining dispute was resolved during the pendency of the application. The Tribunal found sufficient grounds to allow the appeal and set aside the order admitting the Section 9 application.SIGNIFICANT HOLDINGSPreserve Verbatim Quotes of Crucial Legal Reasoning:'In facts of the present case, present is not a case for initiation of Section 9 proceeding against the Corporate Debtor who after receipt of the demand notice has entered into settlement and paid 20 instalments out of 21 instalments and non-payment of 21st instalment was due to calculation issues regarding amount of last instalment.'Core Principles Established:The Tribunal reinforced the principle that Section 9 of the Insolvency and Bankruptcy Code is not to be used as a debt recovery mechanism when a settlement agreement is in place and substantially complied with. The Tribunal underscored the importance of considering the context and resolution of disputes before resorting to insolvency proceedings.Final Determinations on Each Issue:The Tribunal determined that the Section 9 application filed by the Respondent was inappropriate and unwarranted given the settlement and subsequent payment of the disputed instalment. The appeal was allowed, and the order admitting the Section 9 application was set aside.