IBC Cannot Be Used as a Recovery Tool for Settlement Interest — NCLAT Delhi Affirms NCLT Rejection
Overview of the Case
The National Company Law Appellate Tribunal (NCLAT), Delhi Bench, recently upheld the decision of the National Company Law Tribunal (NCLT), Indore Bench, dismissing an appeal filed by an operational creditor whose Section 9 application under the Insolvency and Bankruptcy Code, 2016 (IBC) had been rejected. The case raises a critical question that frequently arises in insolvency proceedings: can the IBC machinery be deployed to recover amounts owed under a private settlement agreement, particularly when the original operational debt has already been fully discharged?
The answer, as firmly established by both the NCLT and the NCLAT, is an emphatic no.
Case Background: Permali Wallace Pvt. Ltd. Vs Narbada Forest Industries Pvt. Ltd. (NCLAT Delhi)
Chronology of Events
The genesis of this dispute traces back to 2017, when Permali Wallace Pvt. Ltd. (the appellant/operational creditor) had initially filed an application under Section 9 of the IBC, 2016 against Narbada Forest Industries Pvt. Ltd. (the corporate debtor). However, before the matter could proceed to adjudication, the parties arrived at a mutual settlement agreement. On the basis of this settlement, the appellant withdrew the original Section 9 application.
Under the terms of the settlement agreement dated 07.11.2017, the corporate debtor agreed to discharge:
- The entire principal operational debt of ₹1,74,16,527
- An interest component of ₹48 lakh
The corporate debtor duly paid the complete principal amount of ₹1,74,16,527. Towards interest, however, only ₹16 lakh was remitted, leaving a balance of ₹32 lakh out of the agreed ₹48 lakh unpaid.
The Fresh Section 9 Application
Citing this shortfall as a default, the appellant filed a fresh application under Section 9 of the IBC, 2016 before the NCLT, Indore Bench. Notably, at the time of filing this second application, the operational creditor had escalated the interest claim substantially — now demanding ₹1,28,00,000 (calculated as ₹1,44,82,040 minus ₹16,00,000 already received), a figure that far exceeded the ₹32 lakh balance contemplated under the original settlement agreement. This revised interest claim was disputed by the corporate debtor.
NCLT's Reasoning: Settlement Dues Are Not Operational Debt
The Adjudicating Authority rejected the Section 9 application, recording its observations in paragraphs 8, 9, and 10 of its order. These findings formed the cornerstone of the NCLAT's subsequent ruling and merit careful examination.
Key Observations of the NCLT
"8. At the outset, we note that this application is filed by the Operational Creditor for execution of terms of settlement agreement dated 07.11.2017. In our considered opinion, the amount arising out of some settlement agreement cannot be termed as operational debt within the meaning of Section 5(21) of the IBC, 2016."