NCLT Mumbai Rules, Settlement Agreement Between Parties Merely Acknowledging & Structuring Repayment Doesn't Change Nature Of Debt
Pranav B Prem
The National Company Law Tribunal, Mumbai Bench, Court-III, comprising Justice Lakshmi Gurung (Judicial Member) and Hariharan Neelakanta Iyer (Technical Member), has held that a settlement agreement entered into between parties—merely to acknowledge outstanding dues and to prescribe a repayment schedule—does not automatically transform the nature of the underlying debt. The Tribunal emphasized that unless the settlement document itself creates a new liability independent of the original transaction, the character of the debt continues to depend on the original operational relationship between the parties.
The ruling came in a petition filed under Section 9 of the Insolvency and Bankruptcy Code, 2016, by M.K. Metals, an operational creditor, seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against M/s Kundan Industries Ltd., the corporate debtor, for default amounting to ₹11.76 crore, in addition to interest and further charges.
A key document in the dispute was a Settlement Agreement executed between the corporate debtor and the Shah Family Group, of which the operational creditor is a constituent. Under the agreement, the corporate debtor acknowledged total dues of ₹35.76 crore owed to the Shah Group. Within this amount, it admitted liability of ₹12.59 crore specifically towards M.K. Metals. Some instalments were paid initially, but payments soon stopped, resulting in default. When the operational creditor served a statutory demand notice, the debtor denied liability, leading to the present petition.
The operational creditor relied on ledger accounts reflecting outstanding dues, supported by entries in its books, to demonstrate continued default. In response, the corporate debtor argued that the present claim arose purely from default under a settlement agreement rather than from any supply of goods or services. It contended that under Section 5(21) of the IBC, only debts directly arising from operational transactions qualify as "operational debt," and unpaid settlement instalments do not fall in that category. The corporate debtor further argued that the petition was time-barred, noting that the underlying invoices were issued prior to March 2020, and was also hit by the Section 10A suspension period.
The Tribunal rejected the broad argument that a settlement agreement automatically changes the debt’s character. Relying on the NCLAT’s judgment in Ahluwalia Contracts India Ltd. v. Jasmine Buildmart Pvt. Ltd., Company Appeal (AT) (Insolvency) No. 1164 of 2023, it observed that when a settlement merely acknowledges a debt and restructures payment timelines, the underlying nature of the debt remains connected to its origin. The Tribunal clarified that such agreements do not transform an operational debt into a different species of liability unless they extinguish the original debt and create a new, independent obligation.
However, the NCLT ultimately dismissed the petition, holding that the operational creditor failed to demonstrate that the debt claimed under the settlement agreement met the statutory definition of operational debt. The Tribunal noted that the settlement agreement did not specify or refer to invoices for supply of goods or services, nor did it record any default traceable to operational transactions. Even assuming that an invoice mentioned in Schedule I of the settlement was considered, the Tribunal held that the value—₹57.94 lakh—did not meet the statutory ₹1 crore threshold for admission of a Section 9 application.
The Tribunal further highlighted that the settlement did not itself give rise to an operational debt and that liabilities acknowledged under such agreements cannot convert into operational dues merely by virtue of structuring repayment. Since the claimed amount did not satisfy statutory requirements, the petition was found non-maintainable. Accordingly, the NCLT dismissed the Section 9 application, reiterating that while settlement agreements can be valuable evidence of liability, they do not alter the legal nature of the underlying debt without clear contractual language extinguishing earlier obligations.
Appearance
For the Operational Creditor: Adv. Shyam Kapadia a/w Adv. Kashish Mainkar & Adv. Sonal Sengar i/b Wadia Ghandy & Co.
For the Corporate Debtor: Adv. Amir Arsiwala a/w Adv. Ashwini Gawde i/b ASR & A
Cause Title: M.K. Metals vs. Kundan Industries Ltd.
Case No: C.P.(IB)-738(MB)/C-III/2023
Coram: Justice Lakshmi Gurung (Member-Judicial), Hariharan Neelakanta Iyer (Member-Technical)
