Defaults Occurring Out Of Settlement Agreements Are Not “Operational Debts” U/S 5(21) Of IBC, Rules NCLT New Delhi
Pranav B Prem
In a significant ruling, the New Delhi Bench of the National Company Law Tribunal (NCLT), comprising Shri Manni Sankariah Shanmuga Sundaram (Judicial Member) and Dr. Sanjeev Ranjan (Technical Member), has clarified that amounts due under a settlement agreement or Memorandum of Understanding (MoU) do not qualify as “operational debt” under Section 5(21) of the Insolvency and Bankruptcy Code, 2016 (IBC). The Tribunal dismissed a Section 9 petition filed by M/s Harji Engineering Works Pvt. Ltd. (“Operational Creditor”) against M/s Enerture Technologies Pvt. Ltd. (“Corporate Debtor”), holding that the petition was not maintainable.
Factual Background
The Operational Creditor had originally entered into an MoU with the Corporate Debtor on 23.01.2024 for the execution of engineering services related to a 100 MW solar power project. As per this agreement, the Operational Creditor was to provide construction services across India and also oversee the operation and maintenance of the project for three years.
Disputes soon arose between the parties, primarily concerning the allocation of work and the ratio of profit-sharing. To resolve these issues, both parties entered into a Second MoU dated 01.06.2024, which served as a settlement agreement. Under this MoU, the Corporate Debtor agreed to pay a settlement amount of ₹5,00,00,000/- to the Operational Creditor within four months, in full and final settlement of the disputes.
To this effect, the Corporate Debtor initially issued two post-dated cheques towards part payment. However, these cheques were dishonoured upon presentation due to insufficient funds. Subsequently, the Corporate Debtor issued two more cheques dated 19.11.2024, which were also dishonoured. This sequence of dishonoured cheques prompted the Operational Creditor to initiate legal action.
A legal notice under Section 138 of the Negotiable Instruments Act was issued on 23.11.2024, followed by a demand notice under Section 8 of the IBC for payment of the outstanding amount. Upon non-receipt of any reply or payment from the Corporate Debtor, the Operational Creditor filed the present Section 9 application seeking initiation of the Corporate Insolvency Resolution Process (CIRP).
Legal Analysis by the Tribunal
The primary issue before the NCLT was whether the amount claimed under the MoU dated 01.06.2024 constituted an “operational debt” under Section 5(21) of the IBC.
Section 5(21) of the IBC defines operational debt as a claim in respect of:
Provision of goods or services (including employment), or
A debt arising under any statute and payable to the government or local authority.
The Tribunal held that the settlement amount agreed upon under the MoU did not fall within any of these categories. It was neither for the supply of goods nor services, nor was it a statutory due. Instead, it was a settlement of disputed claims, and hence could not be treated as an operational debt.
Reliance on Judicial Precedents
The NCLT referred to the decision in Permali Wallace Pvt. Ltd. v. Narbada Forest Industries Pvt. Ltd. [C.P(IB) No.: 668 of 2019], wherein the NCLT Indore held that an amount payable pursuant to a settlement agreement does not constitute operational debt. Further, the Tribunal noted that pre-existing disputes between the parties were evident, especially concerning the scope of work and profit-sharing. This was corroborated by the fact that a second MoU had to be executed to resolve the dispute.
The Tribunal cited the decision of the NCLAT in M/s. Sumilon Polyester Pvt. Ltd. v. M/s. Parikh Packaging Pvt. Ltd., which held that where a dispute is evident prior to issuance of a demand notice under Section 8, the Section 9 petition is liable to be rejected. The NCLAT had further emphasized in Umesh Saraf v. Tech India Engineers Pvt. Ltd. that exchanges of legal notices or complaints prior to the filing of the petition establish the existence of a dispute.
In the present case, the Tribunal found that multiple correspondences and legal notices indicated an ongoing dispute between the parties even before the demand notice was issued.
Verdict
The NCLT concluded that the debt claimed by the Operational Creditor did not qualify as an “operational debt” under the IBC, and that the application was further vitiated by a pre-existing dispute between the parties. Accordingly, the Section 9 petition was dismissed. The Tribunal emphasized that the IBC is not a substitute for recovery proceedings and cannot be used as a tool for enforcement of settlement agreements that fall outside the statutory definition of “operational debt”.
Appearance
For the Applicant: Mr. Sahil Garg, Ms. Samiksha Jain, Advs.
For the Respondent: -
Cause Title: Harji Engineering Works Pvt. Ltd. V. M/s Enerture Technlogies Pvt. Ltd.
Case No: CP (IB) No. 63 (ND)/ 2025
Coram: Sh. Manni Sankariah Shanmuga Sundaram [Hon’ble Member (Judicial)], Dr. Sanjeev Ranjan [Hon’ble Member (Technical)]
[Read/Download order]
