Default in payment under settlement agreement does not come under definition of operational debt: NCLT

The New Delhi Bench of the National Company Law Tribunal (NCLT) on Monday held that default of payment under a settlement agreement between parties does not fall under the scope of 'operational debt' under the Insolvency and Bankruptcy Code (IBC), 2016 (Ahluwalia Contracts (India) Limited v. Logix Infratech Private Limited)..A Bench of justice Abni Ranjan Kumar Sinha and Hemant Kumar Sarangi cited the verdict of the Allahabad Bench of NCLT in M/S Delhi Control Devices v. M/S Fedders Electric and Engineering in which it was held that unpaid instalments under a settlement agreement cannot be treated as operational debt as per Section 5(21) of the IBC, and thus cannot be a ground to trigger the Corporate Insolvency Resolution Process (CIRP) against a corporate debtor.Finding that the said verdict could be applied to the present case, the Tribunal held that the default of payment of settlement agreement does not come under the definition of operational debt. .The case arose from a dispute between a developer (corporate debtor) and a construction company (operational creditor) in relation to a real estate project in Noida. As per the facts of the case, the corporate debtor defaulted on payments agreed on by both the parties by way of a settlement agreement. Based on the default in adhering to the terms of the agreement, the operational creditor filed an application under Section 9 of the Code for initiation of CIRP. The corporate debtor sought leniency from the Tribunal to provide further time to make the payments. In his defence, he stated that his inability to pay the operational creditor arose from the ban imposed by the National Green Tribunal (NGT) on construction activities in the National Capital Region (NCR) in view of the air pollution crisis, followed by the COVID-19 pandemic.He further submitted that since the construction had resumed in late February 2020 due to the availability of the skilled laborers, he would be able to complete the project and hence, repay the amount due. .Operational debt as per the definition under Section 5(21) of the Code is a claim in respect of provision of goods and services including employment. Referring to this definition, the Bench held that the claim of the applicant does not fall under the category of supply of good/services/employment rendered by the corporate debtor and therefore, does not qualify to be an operational debt for initiation of CIRP.Hence, the application stood dismissed.Advocate Dhruv Rohatgi appeared for the applicant and Advocate Nitish K Sharma appeared for the respondent..[Read the order]