NCLT Kochi Allows Second CIRP After Settlement Breach Where Settlement Preserved Creditor's Right

The National Company Law Tribunal (NCLT) at Kochi has recently admitted an insolvency petition against Soura Natural Energy Solutions India Private Limited, holding that an operational creditor is entitled to initiate fresh insolvency proceedings upon breach of a settlement where the settlement itself expressly preserves such a right.

A coram of Judicial Member Vinay Goel and Technical Member Ravichandran Ramasamy was considering a petition filed by Raychem RPG Private Limited seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against Soura Natural Energy Solutions over an alleged operational debt of ₹4.22 crore arising from the supply of solar panels, solar inverters and other goods.

An earlier insolvency petition filed by the Operational Creditor had been admitted by the Tribunal but was withdrawn in March 2022 after the parties entered into a settlement, under which the Corporate Debtor acknowledged its liability and agreed to repay ₹4.43 crore in monthly instalments.

Alleging breach of the settlement after partial payments, the Operational Creditor issued a fresh demand notice and, upon non payment, filed a fresh insolvency petition.

The Corporate Debtor opposed the petition, contending that no liberty had been granted to initiate fresh CIRP proceedings after withdrawal of the earlier petition, that the claim was barred by limitation, and that the proceedings were a recovery action in the guise of insolvency.

Rejecting the corporate debtor's contention on limitation, the tribunal observed:

“For the purpose of computation of limitation, the last payment made towards the outstanding debt constitutes a valid acknowledgement of liability. A part payment made towards the debt falls within the ambit of acknowledgement under the law.”

The Bench noted that the Corporate Debtor had continued making part payments after the settlement and had, by its reply dated October 3, 2023, sought four to five months' additional time to clear the outstanding dues. These acts, it held, amounted to acknowledgments of liability, thereby extending the period of limitation.

On the issue of maintainability, the Bench held that Clause 9 of the settlement deed preserved the Operational Creditor's right to initiate proceedings under the IBC upon breach of the settlement.

“ Clause 9 of the Settlement Deed unequivocally reserves the right of the Operational Creditor to initiate proceedings under the Insolvency and Bankruptcy Code, 2016 in the event of any breach of the terms of the settlement by the Corporate Debtor. The said Settlement Deed formed the very basis on which this Adjudicating Authority, vide order dated 11.03.2022, permitted withdrawal of the earlier Company Petition. Consequently, the terms of the Settlement Deed, including Clause 9, became an integral part of the order permitting withdrawal and govern the rights and obligations of the parties.” it held

Placing reliance on the NCLAT's decision in Pooja Finlease Ltd. v. Auto Needs (India) Pvt. Ltd, the Tribunal observed that where a petition is withdrawn on the basis of consent terms that expressly reserve the creditor's right to revive proceedings upon default, those terms become an integral part of the withdrawal order and remain enforceable.

Rejecting the Corporate Debtor's contention that the petition was merely a recovery proceeding, the Tribunal held that breach of the settlement entitled the Operational Creditor to invoke the remedies available under law.

“The Respondent having failed to honour the settlement terms, the revival of the Operational Creditor's rights, as expressly contemplated under the settlement agreement, to initiate insolvency proceedings cannot be defeated on technical objections by contending that the Code is being used merely as a recovery mechanism.” it added

Accordingly, the tribunal admitted the petition, declared a moratorium under Section 14 of the code, and appointed an Interim Resolution Professional to commence the CIRP.

For Applicant: Advocate Yohaan Limitwalla

For Respondent: Advocate Ebin Mathew