The National Company Law Tribunal, New Delhi vide order dated 22.07.2020 held that ‘Default’ of instalments under a Settlement Agreement is not an “Operational Debt” under the Insolvency and Bankruptcy Code, 2016.

The order was pronounced in response to an application filed by M/S Brand Realty Services Ltd. (Appellant/Operational Creditor) against M/S Sir John Bakeries India Pvt. Ltd. (Respondent/Corporate Debtor) under Section 9 of the Insolvency and Bankruptcy Code, 2016 read with Rule 6 of the Insolvency and Bankruptcy Code, 2016, in order to initiate an insolvency resolution process in respect of the Respondent.

The Appellant/Operational Creditor was a consultant cum investor with the Respondent/Corporate Debtor whereby, the latter approached the Appellant for investment and consultancy services in respect of setting up a new retail outlet, after which both the parties entered into an agreement dated 15.06.2018.

It was alleged by the Appellant/Operational Creditor that the Respondent/Corporate Debtor had violated the terms of the Account Settlement Agreement dated 24.11.2014 and defaulted in the payments agreed under the said Agreement. As such, there was a default in payment of the Operational Debt. The said agreement was further ratified vide account settlement agreement dated 15.06.2018.

Besides denying having executed the Account Settlement Agreement dated 15.06.2018 and alleging that the relationship between the Respondent/Corporate Debtor and the Appellant/Operational Creditor had already seized in terms of another Settlement Letter dated 19.12.2017, it was, inter alia, argued by the Respondent that default of Instalment under the Settlement Agreement was not an Operational Debt under the definition of “Operational Debt” under sub-section (21) of the Section 5 of the Code.

Based on a joint reading of the definitions of “Debt” under section 3(11), “Default” under section 3(12) and “Operational Debt” under section 5 (21) of the Insolvency and Bankruptcy Code 2016, it was argued by the Respondent/Corporate Debtor that the definition of “debt” under the Code does not mean operational debt only and also includes financial debt as well as liability or obligation in respect of a claim which is due from any person and default means non-payment of debt. Furthermore, in order to trigger section 9 of the Insolvency and Bankruptcy Code 2016, an Operational Creditor is required to establish a default for non-payment of Operational Debt as defined under sub-section (21) of the Section 5 of the said Code.

Taking note of the merits of the present case, the Coram comprising of Justice Abni Ranjan Kumar Sinha and K.K. Vohra (Technical Member) agreed to the fact that the parties had entered into an agreement dated 15.06.2018 and although the present application was indeed regarding the breach of the terms and conditions of the said agreement, it was not against the agreement signed on 24.11.2014.

Referring to the judgement passed by the National Company Law Tribunal Allahabad, in the matter of Delhi Control Devices Limited vs. Fedders Electric and Engineering Limited, the Hon’ble Tribunal held as follows, “default of instalment of settlement agreement does not come within the definition of operational debt”.

The present application was therefore dismissed.

Order:Brand Realty Services Ltd. Vs. Sir John Barkery India Pvt. Ltd.-compressed