NCLAT upholds revival of corporate insolvency proceedings after debtor breaches settlement agreement terms

NCLAT upheld NCLT's order allowing Financial Creditor's petition to revive original corporate insolvency proceedings against Corporate Debtor. Corporate Debtor challenged the revival order, arguing settlement agreement existed. NCLAT found Corporate Debtor admitted non-compliance with settlement terms and failed to discharge payment obligations. Court held that breach of settlement terms entitled Financial Creditor to seek revival of original petition, as denial would prejudice creditor's rights while giving undue benefit to defaulting debtor. Appeal dismissed.

---

---

The core legal questions considered by the Tribunal in this appeal arising under Section 61(1) of the Insolvency and Bankruptcy Code, 2016 ("IBC") include:

1. Whether the Adjudicating Authority had the jurisdiction and authority to revive the original Section 7 Company Petition ("First CP") after it was dismissed as withdrawn pursuant to a Settlement Agreement between the parties.

2. Whether the withdrawal of the First CP was unconditional or conditional, particularly in light of the Settlement Agreement executed between the parties, and whether such withdrawal precluded revival of the petition.

3. Whether the Settlement Agreement, which was not initially placed formally on record, was sufficiently brought to the notice of the Adjudicating Authority and whether its terms allowed for revival of the petition on breach.

4. Whether the breach of the Settlement Agreement by the Corporate Debtor justified the Financial Creditor's filing of a revival application and the subsequent restoration of the First CP.

5. Whether the Financial Creditor's right to initiate CIRP proceedings under Section 7 was extinguished or affected by the Settlement Agreement and the withdrawal of the First CP.

6. Whether the Adjudicating Authority's order allowing revival of the First CP was erroneous or justified in law and on facts.

Issue-wise Detailed Analysis:

Issue 1 & 2: Authority and Jurisdiction to Revive the First CP & Nature of Withdrawal

The legal framework under the IBC permits a Financial Creditor to file a Section 7 petition for initiation of CIRP against a Corporate Debtor upon occurrence of default. The Adjudicating Authority has powers to allow withdrawal of such petitions, often subject to conditions or settlements. The distinction between unconditional withdrawal and conditional withdrawal (where revival rights are reserved) is well recognized in precedents.

Precedents relied upon by the Appellant, including judgments of this Tribunal in IDBI Trusteeship Services Ltd. and SRLK Enterprises LLP, emphasize that revival of a petition withdrawn simpliciter and unconditionally is not ordinarily permissible unless the settlement terms expressly provide for such revival. The Appellant contended that the First CP was withdrawn unconditionally pursuant to an out-of-court settlement, and no liberty for revival was granted in the Withdrawal Order dated 08.04.2024.

However, the Tribunal noted that the Withdrawal Order explicitly recorded that the matter was settled amicably out of court but also dispensed with the formal requirement of placing the Settlement Agreement on record. This implies the Adjudicating Authority was aware of the settlement. The order did not expressly bar revival, but the absence of formal settlement terms on record was not deemed fatal.

The Tribunal distinguished the present facts from those in Pooja Finlease Ltd. and Krishna Garg, where the presence or absence of settlement terms on record influenced the decision to revive or not revive the petition.

Issue 3 & 4: Settlement Agreement's Terms, Knowledge of Adjudicating Authority, and Breach

The Settlement Agreement dated 03.02.2024 contained key clauses (notably Clause 6) stipulating that the parties agreed to forbear from initiating or continuing legal proceedings subject to full compliance with obligations under Clause 3. The Financial Creditor asserted that the Corporate Debtor had only partially complied, having paid Rs. 23.75 crore out of the total due, leaving Rs. 34.27 crore outstanding (principal and interest).

The Financial Creditor also produced correspondence dated 26.07.2024 detailing breaches and demanding remedy. The Corporate Debtor did not contest non-compliance but admitted readiness to fulfill remaining obligations, thereby implying breach.

The Tribunal found that the Settlement Agreement was placed before the Adjudicating Authority in the Restoration IA and that the Adjudicating Authority was aware of the settlement at the time of withdrawal. The Adjudicating Authority's waiver of formal filing of the Settlement Agreement did not negate its knowledge of the terms.

Thus, the Tribunal held that the Settlement Agreement was not an "out of court" settlement unknown to the Court but was brought to the Court's notice, and the Corporate Debtor's admitted breach justified the Financial Creditor's invocation of revival rights.

Issue 5: Effect of Settlement Agreement and Withdrawal on Financial Creditor's Right to Initiate CIRP

The Respondent contended, supported by precedent in Bahadur Ram Mallah vs Assets Reconstruction Company (India) Ltd., that a breach of a Settlement Agreement does not extinguish the original debt or the creditor's rights. The nature of the debt remains unchanged, and the creditor retains the right to initiate CIRP proceedings upon default.

The Tribunal agreed, emphasizing that the Financial Creditor's rights are not surrendered by withdrawal of the petition if the settlement is breached. The right to revive or file a fresh petition continues as long as debt and default subsist.

Issue 6: Legality and Appropriateness of the Adjudicating Authority's Order

The Tribunal observed that the Adjudicating Authority, in allowing revival of the First CP, provided the Corporate Debtor liberty to raise objections and file replies, thus ensuring procedural fairness. The Tribunal found no error in the Adjudicating Authority's exercise of discretion to restore the petition on the grounds of admitted breach of the Settlement Agreement.

The Tribunal rejected the Appellant's argument that the Adjudicating Authority lacked authority to revive a petition dismissed as withdrawn without liberty for revival. The Tribunal held that the absence of explicit liberty in the Withdrawal Order did not preclude revival where the settlement was conditional and breached.

Competing Arguments and Their Treatment

The Appellant's arguments focused on the unconditional nature of withdrawal, absence of revival clause in the Settlement Agreement, and non-disclosure of the Settlement Agreement with the Restoration IA. The Tribunal found these arguments unpersuasive given the admitted breach, knowledge of the Settlement Agreement by the Adjudicating Authority, and the procedural fairness afforded.

The Respondent's arguments emphasizing the conditional nature of withdrawal, breach of settlement obligations, and continuing right to initiate CIRP were accepted. The Tribunal relied heavily on the admitted facts and correspondence evidencing breach.

Conclusions

The Tribunal concluded that the Settlement Agreement was conditional and known to the Adjudicating Authority, that the Corporate Debtor breached its obligations, and that the Financial Creditor retained the right to revive the First CP. The Adjudicating Authority's order restoring the petition was held to be lawful and justified.

Significant Holdings

"Clause 6 clearly provided that the parties had agreed to forbear either initiating or continuing a legal action contingent upon compliance to the terms laid down under Clause 3 of the Settlement Agreement."

"When there is incidence of breach of settlement terms by the Corporate Debtor, the legal right of the Respondent in seeking their legal remedy by revival of original petition cannot be denied as any such denial, on the one hand, would amount to causing serious prejudice to the rights and interest of the Respondent and on the other hand, would amount to giving unjust leeway and undue benefit to the Corporate Debtor inspite of having breached the settlement terms."

"The right of Financial Creditor to initiate Section 7 proceedings against the Corporate Debtor does not evaporate or stand extinguished merely because they had entered into a Settlement Agreement with the Corporate Debtor."

"The Adjudicating Authority while allowing the Restoration IA has given opportunity to the Appellant-Corporate Debtor to file their reply in the context of the Restoration IA including raising of objections. To meet the ends of justice, the Adjudicating Authority has therefore been very fair and reasonable in giving liberty to the Appellant to contest the revival of the First CP thereby protecting the interest of the Corporate Debtor."

"The appeal is devoid of merit. The appeal is dismissed. The impugned order does not warrant any interference."

---