OTS Breach Revives Original Loan Liability; Creditor Can Recover Full Dues: NCLAT New Delhi

The New Delhi Bench of the National Company Law Appellate Tribunal (NCLAT) on 30 June held that breach of a One-Time Settlement (OTS) revives the corporate debtor's original liability under the loan agreement, entitling the financial creditor to proceed on the basis of the original debt.

Judicial Member Justice N. Seshasayee and Technical Member Arun Baroka dismissed the appeal filed by Gaurav Jaiswal, suspended director of JHV Sugar Ltd., challenging a National Company Law Tribunal (NCLT), Kolkata order admitting a Section 7 petition filed by Indian Renewable Energy Development Agency Ltd. (IREDA). The Bench observed:

“Therefore, we find that in view of the submissions of both sides, we find that due to withdrawal of the effective OTS, the CDs obligation under the loan agreement were revived and any purported payments made subsequently must be read to be adjusted against the outstanding amount thereunder and not under the effective OTS.”

Gaurav Jaiswal, suspended director of JHV Sugar Ltd., challenged the admission of insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016. The NCLT had admitted the petition filed by IREDA on the basis of default arising from a financing arrangement for expansion of the company's sugar mill and a 20 MW bagasse-based cogeneration project.

JHV Sugar Ltd. had availed financial assistance from IREDA in 2011. Although Rs 57.10 crore was sanctioned, only Rs 17.72 crore was disbursed. The appellant claimed that the shortfall disrupted operations and led to financial distress and outstanding liabilities.

The dispute subsequently moved through settlement arrangements between the parties. IREDA initially withdrew earlier insolvency proceedings after acceptance of OTS-1. The parties later entered OTS-2 in May 2021, under which JHV Sugar Ltd. agreed to repay Rs 20.42 crore along with interest by November 2022.

The corporate debtor paid substantial amounts, including the principal, but defaulted on interest dues of Rs 2.98 crore. Following the default, IREDA withdrew OTS-2 and revived the original loan liability before initiating fresh proceedings in April 2023.

The appellant challenged the NCLT order on the ground that it was passed ex parte. It contended that service of the company petition was effected only at a non-functional registered office and through a generic email ID, without service on active directors, thereby violating principles of natural justice.

Further, he submitted that insolvency proceedings could not be maintained when the principal stood discharged and only interest remained outstanding. He also contended that disputes relating to interest computation fell within the jurisdiction of the Debts Recovery Tribunal and not under the Insolvency and Bankruptcy Code. Additionally, he highlighted that the sugar mill supported the livelihood of around 25,000 families.

IREDA opposed the appeal and submitted that service was duly effected through the MCA-registered email ID, registered office address, and newspaper publication. It further contended that breach of the OTS automatically revived the original loan obligations and rendered the corporate debtor liable for the entire outstanding dues.

The NCLAT upheld the validity of service and held that notice sent to the MCA-registered email ID and registered office constitutes valid service under Rules 37 and 38 of the NCLT Rules, Section 20(2) of the Companies Act, 2013, and Order XXIX Rule 2 of the Code of Civil Procedure.

It observed that the corporate debtor was under an obligation to keep its registered office functional for receipt of statutory notices or to update its records with the MCA, and that failure to do so could not invalidate otherwise valid service. It further held that once summons is duly addressed to the registered office, service is deemed valid even if the premises are locked, the company has shifted, or postal articles are returned with endorsements such as “left” or “shifted”.

On merits, the Tribunal reiterated that the Insolvency and Bankruptcy Code is a self-contained framework and that a Section 7 petition is maintainable even on default of interest dues, provided the statutory threshold is met. It noted that the admitted interest default of Rs 2.98 crore exceeded the threshold requirement of Rs 1 crore.

Accordingly, the NCLAT held that breach of OTS results in revival of the original loan liability and permits the financial creditor to proceed for recovery of the entire outstanding dues. It found no infirmity in the NCLT's order, and dismissed the appeal.

For Appellants: Advocates Gaurav Sethi, Aman Sharma, Rahul Kapoor, Rahul Pawar and Kartik Nagpal,

For Respondents: Advocate Nibruti Samal for IRP. Advocates Nakul Sachdeva, Abhinandan Sharma, Shreyansh Rathi, S. Arora and Shrinkhla Tiwari, for IREDA