Revival Of Insolvency After Settlement Breach Not A Recovery Action: NCLT Ahmedabad

The National Company Law Tribunal (NCLT) at Ahmedabad, recently observed that when a settlement recognised by a judicial order is breached, the revival of insolvency proceedings does not amount to using the insolvency process as a recovery tool but merely restores the legal consequence that had already been adjudicated.

A bench of Judicial Member Shammi Khan and Technical Member Sanjeev Sharma made the observation while reviving insolvency proceedings against Aksa Paper Mills Pvt. Ltd.

It observed, “The Tribunal is also mindful that insolvency proceedings cannot be reduced to a recovery tool; however, where a settlement recognized by judicial order is breached, the revival of insolvency is not recovery but restoration of a legal consequence already adjudicated.”

The tribunal was considering a plea filed by S.N. Global Minerals LLP, an operational creditor, seeking revival of insolvency proceedings against the company after alleging breach of a settlement between the parties.

According to the creditor, it had initially initiated insolvency proceedings for non-payment of operational dues. During the pendency of the case, the parties entered into a settlement under which the company agreed to pay Rs 2,69,38,653 in instalments.

The tribunal admitted the insolvency petition. The National Company Law Appellate Tribunal later set aside that admission in view of the settlement while granting liberty to the creditor to revive the proceedings if the company failed to comply with the settlement terms.

The creditor told the tribunal that the company paid Rs 2,30,00,000 but failed to pay the remaining Rs 39,38,653, prompting the present request to restore the insolvency proceedings.

The company opposed the plea, arguing that the dispute had effectively become a settlement dispute and therefore could not be pursued through insolvency proceedings, which are not meant to function as a debt recovery mechanism. It also contended that the creditor could not revive insolvency proceedings after accepting substantial payments under the settlement.

Rejecting these objections, the tribunal said the liberty granted by the appellate tribunal allowed revival of the proceedings once the settlement terms were breached. It noted that the proceedings were not a fresh insolvency action but a revival of an already admitted petition following default under the settlement.

“The plea of unclean hands and requirement of restitution is devoid of merit particularly when the settlement itself contemplates restoration upon default. Acceptance of part payments under a settlement does not estop the creditor from enforcing the remaining obligations, especially when the settlement itself contemplates restoration upon default,” the tribunal said.

Holding that the company had failed to honor the settlement terms, the tribunal restored the insolvency petition and directed the operational creditor to deposit Rs 2 lakhs towards initial insolvency resolution expenses.