S. 424(3) Companies Act | Private Settlement Cannot Be Enforced Through Execution Of Withdrawal Order: NCLT Ahmedabad

The National Company Law Tribunal (NCLT) at Ahemdabad has held that Section 424(3) of the Companies Act cannot be invoked to enforce an alleged breach of a private settlement, observing that an order merely recording withdrawal of an insolvency petition does not contain any executable direction.

A bench of Judicial Member Shammi Khan and Technical Member Sanjeev Sharma said, “The order dated 26.08.2019 is a withdrawal order devoid of executable direction. No decree or adjudicated command exists for enforcement under Section 424(3). Section 424(3) cannot be invoked to enforce an alleged breach of private settlement.”

Section 424(3) enables the tribunal to enforce its orders in the same manner as a decree of a civil court. The tribunal said this power is confined to enforcement of the operative part of an earlier order and cannot be used where the order does not contain any adjudicated direction capable of execution.

Explaining the scope of execution jurisdiction, the Bench observed, “Execution jurisdiction is strictly confined to the enforcement of the command contained in the operative portion of an order. It cannot enlarge, modify, supplement, or create substantive rights which were never adjudicated.”

It further held, “An executing forum cannot:

a. create a decree where none exists,

b. convert a private settlement into an executable command,

c. adjudicate fresh disputes under the guise of enforcement.”

The matter arose from an insolvency petition filed by Artha Energy Resources LLP against Tecso Projects Limited. During the proceedings, the parties entered into a settlement dated August 22, 2019, following which the tribunal, by order dated August 26, 2019, disposed of the petition as withdrawn.

Artha Energy later alleged that Tecso failed to comply with the settlement, under which the respondent had agreed to issue secured non-convertible debentures worth 1.5 crore rupees carrying interest at 15 percent per annum and redeemable within three years. Alleging default, the applicant sought recovery of about 3.6 crore rupees by filing an application seeking execution of the earlier order, including attachment of the respondent's assets.

Artha Energy argued that the withdrawal order should be enforced under Section 424(3) read with Rule 56 of the NCLT Rules, relying on the settlement terms and later correspondence to say that the respondent had acknowledged its liability.

Tecso resisted the plea, maintaining that the order dated August 26, 2019 merely recorded withdrawal of the insolvency petition and did not decide any liability or direct payment of money. According to the respondent, enforcing the settlement would require the tribunal to examine disputed contractual claims, something that cannot be done in execution proceedings.

The tribunal agreed with the objection. It noted that the earlier order neither admitted the insolvency petition nor incorporated the settlement terms into its operative directions, and for that reason the order could not be treated as executable under Section 424(3) of the Companies Act.