Pranav B Prem

The National Company Law Appellate Tribunal (NCLAT), New Delhi Bench, comprising Justice Ashok Bhushan (Chairperson) and Barun Mitra (Technical Member), has held that once a corporate debtor and an operational creditor enter into a settlement and file an affidavit confirming such settlement, the Adjudicating Authority cannot admit an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC). The bench observed that when the liability stands settled through mutual agreement and duly acknowledged by both sides, continuing the insolvency proceedings would serve no purpose.

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Background

The appeal arose from an order passed by the National Company Law Tribunal (NCLT), Allahabad Bench, dated April 3, 2024, which had admitted a Section 9 application filed by Prime Tower – A Partnership Firm (Operational Creditor) against G.V. Meditech Pvt. Ltd. (Corporate Debtor). The corporate debtor, operating a hospital, had taken premises from the operational creditor on lease dated August 15, 2022, for nine years, at a monthly rent of ₹6,41,300. Following alleged defaults in rent payment, the operational creditor initiated proceedings under Section 23 of the Uttar Pradesh Tenancy Regulation Act (Second) Ordinance, 2021, which were dismissed by the Additional District Magistrate, Varanasi, on January 12, 2023, with liberty to file a fresh eviction suit. Subsequently, a demand notice dated March 13, 2023, was issued claiming ₹6.48 crore in rent arrears up to February 2023. When no response was received, the operational creditor filed a Section 9 IBC application, which the NCLT admitted.

Appellant’s Contentions

The suspended director of the corporate debtor, Dr. Indu Singh, challenged the NCLT’s order, arguing that there was a pre-existing dispute between the parties regarding rent, which should have barred admission under Section 9. It was contended that the letter dated August 13, 2022, written by the corporate debtor, clearly recorded disputes regarding the lease renewal, alleged coercion in executing a lease deed, and claims for adjustments of improvement costs. The appellant also pointed out that a civil suit for rent under Section 23 had already been filed and dismissed earlier, showing the existence of pending contractual disputes prior to the insolvency proceedings.

The appellant further argued that the amount claimed under Section 9 was inflated, including rent during the Section 10A period, when no insolvency applications could have been initiated. It was also submitted that both parties had subsequently reached an amicable settlement, and an affidavit confirming the settlement was jointly filed before the Appellate Tribunal.

Respondent’s Submissions

The operational creditor submitted that the civil suit was not dismissed on merits, and that the letter dated August 13, 2022, relied upon by the appellant, could not be treated as a valid pre-existing dispute. It was also argued that since rent dues remained unpaid for a considerable period, the NCLT had rightly admitted the Section 9 application.

NCLAT’s Observations

The Appellate Tribunal examined the record and noted that there were clear disputes regarding lease rentals prior to issuance of the demand notice. The letter dated August 13, 2022, specifically referred to disagreements over rent enhancement, COVID-period dues, and improvements made to the leased property, all of which constituted a pre-existing dispute. The bench further observed that the NCLT itself had acknowledged in paragraph 39 of its order that the claimed rent appeared inflated but had still proceeded to admit the application.

Significantly, the NCLAT noted that after admission of the Section 9 petition, the corporate debtor and operational creditor entered into a settlement, and both parties filed affidavits confirming the same, which included payment of ₹4.5 lakh to the Interim Resolution Professional (IRP) towards costs and fees. The bench held: “Once a settlement has been entered into between the parties and an affidavit confirming such settlement is filed, there remains no reason for continuing with insolvency proceedings under Section 9 of the Code.”  It further clarified that the NCLT ought not to have admitted the petition, especially when issues of dispute and settlement were evident from the record.

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Allowing the appeal, the NCLAT set aside the NCLT’s order admitting the Section 9 petition and closed the insolvency proceedings. The bench directed the appellant to pay ₹4.5 lakh to the IRP within two weeks and to discharge all dues to the operational creditor in accordance with the settlement terms. “Considering that the parties have settled their disputes and filed affidavits confirming such settlement, the Section 9 proceedings are closed. Payment to the IRP and operational creditor shall be made as per the settlement between the parties,” the Tribunal ordered. The appeal was accordingly disposed of.

Appearance

For Appellant: Mr. Arun Kathpalia, Sr. Advocate with Ms. Sanjana Saddy, Advocate.

For Respondents: Mr. Shivam Kumar, Ms. Upasana Singh, Mr. Udai Chandani, Mr. Aditya Survanshi, Advocates for R1. Mr. Abhishek Naik, Advocate for R-2.

Cause Title: Dr. Indu Singh Suspended Director of G.V. Meditech Pvt. Ltd. Versus Prime Tower – A Partnership Firm & Anr.

Case No: Company Appeal (AT) (Insolvency) No. 704 of 2024

Coram: Justice Ashok Bhushan (Chairperson), Barun Mitra (Technical Member)