Breach Of Settlement Gives Fresh Cause Of Action; NCLAT Allows Subham Capital To File Fresh CIRP Plea Against Vedic Realty

The National Company Law Appellate Tribunal (NCLAT) has recently held that Subham Capital Pvt. Ltd. was entitled to file a fresh Section 7 petition against Vedic Realty Pvt. Ltd. after breach of a settlement agreement, ruling that the subsequent default gave rise to a new cause of action and was not barred by res judicata.

A bench of Chairperson Justice Ashok Bhushan and Technical Member Barun Mitra observed:

“The breach of settlement clearly gave rise to a new cause of action in favour of the Appellant to file a Section 7 application and the Adjudicating Authority had misdirected itself by applying the principles of res judicata in the present case.”

The appeal was filed by Subham Capital Pvt. Ltd., a non-banking financial company, against Vedic Realty Pvt. Ltd., challenging the September 23, 2024 order of the Kolkata Bench of the National Company Law Tribunal which had dismissed its Section 7 application seeking initiation of the Corporate Insolvency Resolution Process.

Subham Capital had advanced loans totalling Rs 22.75 crore to the corporate debtor between 2011 and 2016 on the basis of an oral understanding.

The advances also carried interest which were reflected in the books of both parties, and were supported by demand promissory notes, confirmation letters, loan renewal acknowledgments and post-dated cheques. Interest payments were also subjected to tax deduction at source.

The last repayment was made on April 7, 2021, after which default occurred. A recall notice dated March 1, 2022 was issued, followed by a Section 7 petition later that year.

That petition was withdrawn after the parties entered into a settlement agreement on November 18, 2022. When the corporate debtor failed to comply with the settlement terms, Subham Capital filed a fresh Section 7 petition in 2023.

The NCLT dismissed the petition holding that the earlier petition had been withdrawn without liberty to file a fresh one, that the subsequent petition was barred by principles akin to res judicata, and that in the absence of a written loan agreement the financial debt was not established, leading to the present appeal.

The appellant submitted that withdrawal of the earlier Section 7 petition pursuant to the settlement was not a bar to filing a fresh petition since the breach of the settlement agreement gave rise to a fresh cause of action and the default continued even after execution of the settlement.

The respondent contended that the claim arose from breach of the settlement agreement and could not be enforced through insolvency proceedings, and that a second Section 7 petition on the same cause of action was not maintainable since the earlier petition had been withdrawn without liberty.

Referring to its earlier decisions, including Shraddha Enterprises vs Simplex Infrastructures Ltd., the appellate tribunal held that breach of settlement terms gives rise to a new cause of action and cannot be defeated on technical grounds.

The bench observed:

“Once there is breach of settlement terms by the Corporate Debtor, the legal right of the Appellant in seeking the legal remedy under relevant provisions of the IBC cannot be dismissed on the hyper-technical ground that the Adjudicating Authority had never given liberty to revive the Section 7 petition. Allowing any such interpretation would give undue benefit to the Corporate Debtor inspite of having breached the settlement terms.”

The tribunal further held that the NCLT erred in applying the principle of res judicata, noting that since the earlier petition had been withdrawn without adjudication on merits, the parties stood in the same position as if no petition had been filed, and the fresh petition was not barred in law.

Holding that debt and default were established and that the grounds for dismissal were erroneous, the appellate tribunal allowed the appeal and directed the adjudicating authority to pass an order admitting the Section 7 application in accordance with law