NCLT Ahmedabad Rejects Insolvency Plea Against Sadbhav Engineering, Holds MoU Claims Cannot Trigger IBC

The Ahmedabad National Company Law Tribunal (NCLT) on 29 July held that claims arising solely from a Memorandum of Settlement (MoU) or settlement agreement do not constitute “operational debt” under Section 5(21) of the Insolvency and Bankruptcy Code, 2016 (IBC), as such claims do not arise from the supply of goods or services.

A Bench comprising Judicial Member Chitra Hankare and Technical Member Dr V.G. Venkata Chalapathy rejected the insolvency petition filed by N.S. Company against Corporate Debtor Sadbhav Engineering Limited, holding that the claim was based on the MoU entered between the parties and not on any operational debt. It held:

“Claims arising purely out of a settlement agreement, MoU, or breach of contract generally do not qualify as an "operational debt" under Section 5(21) of IBC 2016. What is before us subsequent to MSME award is the MOU and the repayment made in full by the respondent which has been admitted by the respondent.”

N.S. Company had supplied road and building construction materials to Sadbhav Engineering Limited between April 2017 and December 2019. Out of 4,907 invoices raised during this period, payments were made for most invoices, while 537 invoices remained unpaid, resulting in an outstanding principal amount of Rs. 1,69,75,033.

The creditor then approached the Haryana Micro and Small Enterprises Facilitation Council (HMSEFC) under the Micro, Small and Medium Enterprises Development Act, 2006. Through an award dated 18 November 2022, the Council directed the Corporate Debtor to pay the outstanding amount along with interest at 22.25% per annum. As no appeal was filed against the award, it attained finality.

Subsequently, the parties entered into a MoU on 31 March 2023, under which the Corporate Debtor agreed to clear the dues through instalments until February 2024. However, only one instalment of Rs. 10 lakh was paid in June 2023. The creditor thereafter terminated the MoU in September 2023 and issued a demand notice under Section 8 of the IBC in October 2023, followed by the present petition under Section 9 seeking initiation of Corporate Insolvency Resolution Process (CIRP).

The Corporate Debtor argued that the claim arose from the MoU and that failure to comply with settlement terms does not amount to “operational debt” under Section 5(21) of the IBC. It also contended that the proceedings before the HMSEFC constituted a pre-existing dispute, which barred admission of the petition.

It further argued that the purchase orders executed between the parties did not contain any provision for payment of interest and that the demand notice claiming interest was therefore not maintainable. The Corporate Debtor also challenged the petition on the ground that it was filed without proper authorisation from the partnership firm.

During the pendency of the proceedings, the Corporate Debtor paid the entire principal amount of Rs. 1,69,75,073 through instalments made in June 2023, October 2025 and December 2025, leaving only the claim relating to interest. 

N.S. Company argued that partners are agents of the firm under the Partnership Act, 1932, and no separate authorisation was required for filing the petition. It also contended that the HMSEFC award could not be treated as a pre-existing dispute since it had attained finality and that payment of part of the amount did not extinguish the default.

The Bench observed that the unpaid invoices had already been crystallised into the HMSEFC award and that execution of such an award is governed by the MSMED Act, which provides for recovery as arrears of land revenue. It noted that after the parties entered into the MoU, the creditor chose to proceed under the settlement terms instead of pursuing the statutory recovery mechanism.

It further observed that the HMSEFC proceedings and the subsequent MoU related to a dispute that had already been adjudicated and that issuing a fresh demand notice under the IBC would amount to reopening matters already settled. The Bench also noted that the Corporate Debtor had discharged the entire principal liability during the pendency of the petition and observed:

“The unpaid part of interest arises out of the order of the MSME cannot be a cause of due for filing a Sec 9 of IBC 2016 as thé applicant did not proceed as per order for execution and recovery is specified, while they went for a MOU. It appears that the respondent has to pay if there is default the principal or remaining outstanding balance of Rs.1,69,75,073 with interest at 10% p.a.”

Accordingly, the NCLT held that the recovery of dues arising from the MoU cannot be pursued under Section 9 of the IBC, as the claim does not qualify as operational debt, and rejected the insolvency petition.