Section 9 IBC Application Not Maintainable After Settlement: Key Takeaways from NCLT Delhi in Silver Collections Private Limited Vs Paragon Knits Ltd.

Introduction

The order in Silver Collections Private Limited Vs Paragon Knits Ltd. (NCLT Delhi) offers a significant clarification on how Section 9 of the Insolvency and Bankruptcy Code, 2016 (the Code) operates where parties have entered into a Settlement Deed after an operational dispute has arisen and a Section 9 petition is already pending.

The National Company Law Tribunal, Delhi Bench, examined:

  • Whether the original unpaid invoices for supply of yarn constituted an operational debt under Section 5(21); and
  • More critically, whether a default under a Settlement Deed executed during the pendency of the insolvency petition could still be treated as an “operational debt” so as to sustain a Section 9 application.

The Tribunal ultimately dismissed the Section 9 petition, holding that once a Settlement Deed is executed, the parties’ rights and obligations flow from that settlement, and any breach of its terms is not an “operational debt” within the meaning of Section 5(21). Such defaults must be pursued before an appropriate civil/criminal forum and not under the IBC.

Factual Matrix

Supply of Yarn and Origin of Operational Debt

  • The Operational Creditor, M/s Silver Collections Pvt. Ltd., supplied yarn to the Corporate Debtor, M/s Paragon Knits Limited, pursuant to email purchase orders raised between 05.05.2023 and 31.10.2023.
  • Supplies were made during the period 09.05.2023 to 17.11.2023.
  • The transactions were supported by:
    • Tax invoices
    • E-way bills
    • Goods receipts
      (all filed as annexures to the petition).

The total default alleged in the Section 9 application was Rs. 2,33,45,477/-, made up of:

  • Principal: Rs. 2,05,45,920/-
  • Interest (up to 28.06.2024): Rs. 27,99,557/-

The last “on account” payment by the Corporate Debtor was made on 09.02.2024, which the Operational Creditor treated as the date of default.

An additional invoice dated 28.06.2024 was raised only for interest on delayed payment. The Corporate Debtor responded with a Credit Note dated 30.06.2024, which the Operational Creditor argued amounted to an acknowledgment of liability for interest.

Dishonoured Cheques and Demand Notice

  • The Corporate Debtor issued seven cheques between 02.11.2023 and 30.04.2024 towards discharge of dues.
  • All seven cheques were dishonoured on presentation.
  • A demand notice dated 07.09.2024 under Section 8 was issued by the Operational Creditor in Form 3.
  • The Corporate Debtor replied on 23.09.2024, alleging a pre-existing dispute on:
    • Quality of yarn supplied, and
    • Interest component.
  • The Operational Creditor maintained that no documents were furnished by the Corporate Debtor to substantiate any pre-existing dispute.

The Section 9 petition was eventually filed on 28.10.2024.

Settlement Deed Executed During Pendency of Section 9 Petition

Terms of the Settlement Deed dated 08.01.2025

While the Section 9 petition was pending, the parties executed a Settlement Deed dated 08.01.2025. Under this Deed:

  • The Corporate Debtor clearly acknowledged the outstanding liability of Rs. 2,33,45,477/-.
  • As per Clause 1.1, the Corporate Debtor undertook to:
    • Pay the entire liability through monthly instalments of Rs. 10,00,000/-, and
    • Hand over 24 post-dated cheques to the Operational Creditor.
  • Under Clause 1.2, the Corporate Debtor agreed that, depending on the availability of funds, it would endeavour to pay more than Rs. 10,00,000/- per month.

Crucially, Clause 2 of the Settlement Deed provided:

“That on receipt of the above cheques and signing of this Settlement Deed, the first party shall withdraw the complaint/application for an Insolvency and Bankruptcy before the Hon’ble National Company Law Tribunal, Delhi vide C.P.(IB) 763/2024;”

Thus, the Operational Creditor contractually undertook to withdraw the pending Section 9 application once the Settlement Deed was signed and the cheques were handed over.

Subsequent Default Under the Settlement Deed

  • Pursuant to the Settlement Deed, the Corporate Debtor issued 24 cheques, but:
    • 14 cheques were dishonoured upon presentation.
  • Between 22.01.2025 and 28.06.2025, the Corporate Debtor managed to pay only Rs. 25,00,000/-.
  • The Operational Creditor initiated proceedings under Section 138 of the Negotiable Instruments Act for dishonour of cheques.
  • The Operational Creditor relied on Clause 4 of the Settlement Deed which, according to it, reserved the right to:
    • Revive or continue with the Section 9 petition if the cheques were dishonoured or if there was a breach of the Settlement Deed terms.

On these grounds, the Operational Creditor pressed for admission of the Section 9 application and commencement of CIRP.

Stand of the Operational Creditor

The Operational Creditor’s main contentions were: