DEFAULT IN PAYMENT OF SETTLEMENT AGREEMENT – OPERATIONAL DEBT?

[DR.MARIAPPAN GOVINDARAJAN]

Operational debt

Section 5(21) of the Insolvency and Bankruptcy Code, 2016 (‘Code’ for short) defines the term ‘operational debt’ as a claim in respect of the provision of goods or services including employment or a debt in respect of the payment of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority.

Issue

The issue to be discussed in this article is as to whether the default in settlement agreement entered into between two business entities amount to operational debt and default of the same is eligible to initiate corporate insolvency resolution process (‘CIRP’ for short) with reference to decided case laws.

Case laws

In PERMALI WALLACE PRIVATE LIMITED VERSUS NARBADA FOREST INDUSTRIES PRIVATE LIMITED - 2022 (11) TMI 1551 - NATIONAL COMPANY LAW TRIBUNAL, INDORE held that the amount arising out of some settlement agreement cannot be termed as operational debt within the meaning of Section 5(21) of the Code.

In HARJI ENGINEERING WORKS PRIVATE LIMITED VERSUS M/S. ENERTURE TECHNOLOGIES PVT. LTD. - 2025 (5) TMI 44 - NATIONAL COMPANY LAW TRIBUNAL NEW DELHI, the applicant is an operational creditor to Enerture Technologies Private Limited.  The applicant is providing construction services in the execution of varied nature.  The applicant registered as ‘Small Enterprise’ under MSME Act, 2006.  The corporate debtor, Enerture Technologies Private Limited is an MNRE channel partner, engaging in the business of providing end-to-end solar solutions, engineering design, project execution, solar PV installation, charging station and other allied works. 

Both the corporate debtor and the operational creditor entered into a Memorandum of Understanding (‘MoU’ for short) on 23.01.2024 to bid secure and jointly perform a solar project for ‘setting up of 100 MW ISTS connected solar power on pan India basis with operation and maintenance for 3 years for CUF @ 29.66% and the annual generation of 260 million units including operation and management for 3 years after the warranty period of 12 months from the Commercial Operation Declaration.

Both of them entered their bid as a consortium.  The tender was awarded to them on 26.02.2024.  Several disputes arose between them in many of the way like that the allocation of work, profit sharing etc.  Legal notices were sent by them to each other’s.  Despite several instances of disputes both of them were ready to enter into a second MoU on 01.06.2024 in order to reduce and resolve their disputes.  According to their mutual agreement, the respondent i.e., corporate debtor is to pay Rs.5 crores with tax to the applicant within 4 months from 01.06.2024 i.e., date of signing the second agreement.  It was also agreed that the corporate debtor should handover two post dated cheques to the applicant each amounting to Rs.2.5 crores in favour of ‘Harji Energy Works Private Limited’, the sister concerned of the applicant.

As per the agreement, the corporate debtor issued two post dated cheques each of Rs.2.5 crores. The first cheque was deposited but the same was returned as dishonoured for the reason ‘insufficient fund’.  However, the corporate debtor requested the applicant to deposit the two cheques again.  In the hope that the two cheques would be honoured, the applicant deposited the two cheques.  The same were dishonoured with the remarks ‘insufficient funds’ on 19.11.2024. 

For the reason of dishonour of cheques, the applicant issued a legal notice to the corporate debtor on 23.11.2024 under Section 138 of the Negotiable Instruments Act, 1881 read with Section 141 of the said Act.  In the legal notice the applicant demanded the entire sum of outstanding along with interest @ 24% per annum.

Since no payment has been received despite issue of legal notice, the applicant preferred to send a demand notice under Section 8 of the Code instead of filing a criminal complaint.   The demand notice was issued on 23.11.2024 for a sum of Rs.4.30 crores along with interest Rs.54.99 lakhs for the default of 335 days.  Since no payment has been received, the applicant filed an application under Section 9 of the Code for the initiation of CIRP against the corporate debtor. 

The Adjudicating Authority considered the application and also analysed the provisions of Section 5(21) of the Code defining the term ‘debt’ and section 9 of the Code.   The Adjudicating Authority observed that the pre-requisite for initiating of CIRP against the corporate debtor, there should be an ‘operational debt’.  The applicant in his application that there was a default in payment of outstanding dues.  The Adjudicating Authority observed that the debt that has been termed as ‘default’ under Section 9 of the Code hereof, cannot be considered as ‘operational debt’ due to the basis of the said debt not falling under the aforementioned pre-requisite conditions as mentioned above.

The Adjudicating Authority was of the view that the instant application ought to be rejected on the basis of the aforementioned ground solely, as the said default cannot be expressly categorised as ‘operational debt’.  The Adjudicating Authority also observed that many a dispute arised between these two parties, which is due to the pre-existing disputes between the parties. 

The Adjudicating Authority relied on a decision of National Company Law Appellate Tribunal in M/S. SUMILON POLYESTER PVT. LTD. (FORMERLY M/S. SUMILON POLYESTER LTD.) VERSUS M/S. PARIKH PACKAGING PVT. LTD. - 2020 (12) TMI 952 - NATIONAL COMPANY LAW APPELLATE TRIBUNAL, NEW DELHI in which the NCLAT held that any established dispute between the parties can be a ground for rejection of an application under Section 9 of the Code.  The Code is beneficial legislation intended to put the Corporate Debtor on its feet and it is not a mere money recovery legislation for the Creditors.

Adjudicating Authority is of the considered view that due to the prior existence of the dispute between the parties concerning the quality of the products, the instant application cannot be admitted under Section 9 of the Code.  The Adjudicating Authority rejected the petition as it has been made amply clear that there exists a pre-existing dispute.