Settled Debt Cannot Be Revived As Operational Debt On Breach Of Settlement: NCLT Kochi In Nest Realtors CIRP

The National Company Law Tribunal (NCLT) at Kochi has dismissed an insolvency petition filed by Kunnel Engineers and Contractors Private Limited against Nest Realtors India Private Limited. It held that once construction dues were extinguished under a settlement agreement, a later breach could not revive the original debt for insolvency proceedings.

A bench of Judicial Member Vinay Goel observed:

“The settlement agreement specifically and unequivocally records that the earlier operational liability stands fully extinguished, substituted, or discharged even such type of recitals appears time and again in the agreement dated 21.01.2016. This was the turning point wherein the parties adopted a new arrangement to settle their disputes.”

The bench further held:

“The subsequent breach by the Corporate Debtor would ordinarily give rise to remedies flowing from the settlement agreement itself, vis-à-vis specific performance, damages, recovery, or other civil remedies, rather than revival of the original operational debt.”

Kunnel had approached the Tribunal seeking insolvency proceedings against Nest Realtors over a claimed debt of ₹8.84 crore. The claim arose from construction works executed in the company's Orchid Park project in Kottayam, Kerala.

According to Kunnel, the parties first executed a settlement sheet in December 2015. This was followed by an agreement dated January 21, 2016, under which Nest Realtors acknowledged dues of ₹5.61 crore.

Part of the liability was adjusted through the allotment of two villas. The balance was to be discharged through allotment of twelve apartments in the Orchid Park project.

Kunnel contended that undivided shares relating to six apartments were registered in its favour. However, Nest Realtors allegedly failed to complete construction and hand over possession within the agreed timeline.

It claimed that the failure of the settlement arrangement left a principal amount of ₹3.16 crore outstanding. Together with contractual interest, the claim aggregated to ₹8.84 crore.

Kunnel also relied on a 2022 meeting record in which Nest Realtors allegedly assured completion of the apartments by September 2023. It argued that this extended the limitation period.

After issuing demand notices and receiving no payment, Kunnel moved the Tribunal.

Nest Realtors opposed the petition. It argued that the original construction dues had been fully settled and replaced by a later arrangement involving allotment of apartments.

According to Nest Realtors, the dispute concerned contractual obligations relating to immovable property. It said this was not a debt recoverable through insolvency proceedings.

The Tribunal also relied on Kunnel's own financial statements. Observing that the accounting treatment supported Nest Realtors' case that the original arrangement had been replaced, the bench ruled,

“Once the parties expressly agreed that the previous liability stood substituted and discharged altogether, the original operational debt lost its character and enforceability. Thereafter, the claim essentially became one arising out of breach of settlement obligations relating to the transfer of immovable properties, which may not fall within the ambit of operational debt as defined under the Code.”

The bench also noted material inconsistencies between multiple demand notices issued by Kunnel. These included changes in the characterization of the claim, amount sought, date of default, and basis of limitation.

Accordingly, the petition was dismissed.

For Petitioner: Advocate Akhil Suresh

For Respondent: Advocate Shankar P Panicker