Default Under a Settlement Agreement Does Not Fall Under the Definition of Operational Debt - New Delhi NCLT

CASE: Ahluwalia Contracts (India) Limited v. Logix Infratech Private Limited

BENCH: The New Delhi bench of Justice Abni Ranjan Kumar Sinha and Hemant Kumar Sarangi 

The National Company Law Tribunal (NCLT) of New Delhi ruled that default of payment under a settlement agreement does not fall under the definition of 'operational debt' under the Insolvency and Bankruptcy Code (IBC), 2016.

The Bench referred to the verdict of the Allahabad Bench of NCLT in M/S Delhi Control Devices v. M/S Fedders Electric and Engineering, wherein it was held that default in payment of installments under a settlement agreement cannot be treated as operational debt and thus cannot be a ground for initiating Corporate Insolvency Resolution Process (CIRP).

In this instant case, a dispute arose between a construction company (the operational creditor) and a developer (corporate debtor) in relation to a real estate project. The corporate debtor defaulted on payments agreed between the parties by way of a settlement agreement. Due to failure to non-compliance with the terms of the agreement, the operational creditor filed an application under Section 9 of the IBC for initiation of CIRP.

The corporate debtor sought time to make the payments. He stated that his failure to pay the amount arose from the ban imposed by the National Green Tribunal (NGT) on construction activities in the National Capital Region (NCR) due to the air pollution crisis, followed by the pandemic.

He further asserted that since the construction had resumed in late February 2020 due to the availability of skilled laborers, he would be able to complete the construction and repay the amount due. 

HELD

The claim of the applicant does not fall under the category of the corporate debtor and therefore, does not qualify to be an operational debt for initiation of CIRP. Hence, the application stood dismissed.