Financial Creditor
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, New Delhi: The bench of Abni Rajan Kumar Sinha, Judicial Member and Hemant Kumar Sarangi, Technical Member has held, that default made in payment of instalment amount as per the terms of the settlement agreement does not fall under the definition of operational debt.

Facts of the case

Operational creditor, Ahluwali Contracts (India) Pvt. Ltd. entered into a Memorandum of Understanding (MoU)/ Settlement Agreement with corporate debtor, Logix Infratech Pvt. Ltd. on 30-09-2019 for the final settlement against the work done by the operational creditor according to the ‘Work Contracts’.

The operational debtor defaulted in making payments of instalments as determined under the settlement agreement. Operational creditor filed a company petition seeking to initiate the Corporate Insolvency Resolution Process (CIRP) against corporate debtor by invoking the provisions of Section 9 r/w Rule 6 of the Insolvency and Bankruptcy Code, 2016 (IBC) for a resolution of Operational Debt of Rs 7,72,00,000.

Issue Whether the breach of terms and conditions mentioned under the settlement agreement comes within the purview of ‘operational debt’?

Analysis and decision

Firstly, the Bench noted that operational debt means a claim in respect of provision of goods and services including employment. In the present petition, the claim of the operational creditor did not fall under the category of either goods or services provided by the operational debtor. Rather, the present application was being pressed by the operational creditor only in respect of default made due to the breach of terms and conditions mentioned under the settlement agreement.

At this juncture, the bench referred to the decision of NCLT, Allahabad in Delhi Control Devices Pvt. Ltd. v. Fedders Electric and Engineering Ltd. (Company Petition (IB) No. 343/ALD/ 2018 wherein the bench held that, “unpaid instalment as per the agreement cannot be treated as operational debt a per Section 5(21) of IBC. The failure or Breach of settlement agreement can’t be a ground to trigger CIRP against corporate debtor under the provision of IBC 2016 and remedy may lie elsewhere not necessarily before the Adjudicating Authority”. A similar view was followed in the case Nitin Gupta v. International Land Developers Pvt. Ltd. (IB No. 507/ND/2020).

Hence, the bench applied the same principle as laid down in the aforementioned cases and considered that the default of payment of settlement agreement does not come under the definition of operational debt.

Therefore, the bench dismissed the application.

[Ahluwali Contracts (India) Pvt. Ltd. v Logix Infratech Pvt. Ltd., 2022 SCC OnLine NCLT 169, decided on 03-06-2022]

Advocates before the Tribunal

For the Applicant: Adv. Dhruv Rohatgi

For the Respondent: Adv. Nitish K. Sharma

Case BriefsSupreme Court

Supreme Court: The 3-judge bench of L. Nageswara Rao, BR Gavai* and AS Bopanna, JJ has held that a liability in respect of a claim arising out of a Recovery Certificate would be a “financial debt” within the   meaning of clause (8) of Section 5 of the IBC. Consequently, the holder of the Recovery Certificate would be a financial creditor within the meaning of clause (7) of Section 5 of the IBC. As such, the holder of such certificate would be entitled to initiate CIRP, if initiated within a period of three years from the date of issuance of the Recovery Certificate.

The Court explained that the words “means a debt along with interest, if any, which is disbursed against the consideration for the time value of money” are followed by the words “and includes”. By employing the words “and includes”, the Legislature has only given instances, which could be included in the term “financial debt”.  However, the list is not exhaustive but inclusive.

“The legislative intent could not have been to exclude a liability in respect of a “claim” arising out of a Recovery Certificate from the definition of the term “financial debt”, when such a liability in respect of a “claim” simpliciter would be included in the definition of the term “financial debt”.”

Observing that the trigger point for initiation of CIRP is default of claim, the Court further explained that “default” is non-payment of debt by the debtor or the Corporate Debtor, which has become due and payable, as the case may be, a “debt” is a liability or obligation in respect of a claim which is due from any person, and a “claim” means a right to payment, whether such a right is reduced to judgment or not. It could thus be seen that unless there is a “claim”, which may or may not be reduced to any judgment, there would be no “debt” and consequently no “default” on non-payment of such a “debt”.

“When the “claim” itself means a right to payment, whether such a right is reduced to a judgment or not, we find that if the contention of the respondents, that merely on a “claim” being fructified in a decree, the same would be outside the ambit of clause (8) of Section 5 of the IBC, is accepted, then it would be inconsistent with the plain language used in the IBC.”

Hence, taking into consideration the object and purpose of the IBC, the legislature could never have intended to keep a debt, which is crystallized in the form of a decree, outside the ambit of clause (8) of Section 5 of the IBC.

[Kotak Mahindra Bank Ltd. v. A. Balakrishnan, 2022 SCC OnLine SC 706, decided on 30.05.2022]

*Judgment by: Justice BR Gavai

National Company Law Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, New Delhi: The Coram of P.N. Prasad, Judicial Member and Rahul Bhatnagar, Technical Member, declared insolvency proceedings against the builder Supertech Limited.

An application was filed to initiate the Corporate Insolvency Resolution Process against Supertech Limited under Section 7 of the Insolvency and Bankruptcy Code 2016 for the alleged default by the respondent in settling an amount of Rs 431,92,53,302.

Counsel for the Corporate Debtor had admitted the debt and default.

“In order to initiate CIRP under Section 7 the applicant is required to establish that there is a financial debt and that a default has been committed in respect of that financial debt.”

Tribunal on perusal of the documents found that the Corporate Debtor had indebted and defaulted the repayment of loan amount.

Therefore, Coram admitted the present petition and initiated CIRP on the Corporate Debtor with immediate effect.

Mr Hitesh Goel was appointed as Interim Resolution Professional.

Material on record clearly depicted that the respondent had availed the credit facilities and committed default in repayment of the outstanding loan amount.

Tribunal on being satisfied that the present application was held that the applicant financial creditor was entitled to claim its outstanding financial debt from the corporate debtor and that there had been default in payment of the financial debt.

Further, the Coram directed that in terms of Section 13(2) of the Code, public announcement shall be made by the Interim Resolution Professional immediately with regard to the admission of this application under Section 7 of the Insolvency and Bankruptcy Code, 2016.

Moratorium in terms of Section 14 of IBC was declared. Thus following prohibitions are imposed:

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

(b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;

(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitization and reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;

(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.

It was made clear that the provisions of the moratorium shall not apply to transactions which might be notified by the Centre or supply of essential goods or services to the Corporate Debtor are not to be terminated or suspended or interrupted during the moratorium period. As per IBC, the provisions of the moratorium shall not apply to the surety in a contract of guarantee.

Registrar of Companies shall update its website by updating the status of ‘Corporate Debtor’. [Union Bank of India v. Supertech Ltd., 2022 SCC OnLine NCLT 40, decided on 25-3-2022]

Advocates before the Tribunal:

Counsel for the Petitioner: Alok Kumar, Advocate

Counsel for the Respondent: Kanishk Khetan, Advocate

Cyril Amarchand MangaldasExperts Corner

Insolvency and Bankruptcy Code, 2016 (IBC) has been a hot topic since its inception. However, despite it being in force for almost 6 years now, and witnessing innumerable challenges and disputes, there are still some areas which lacks clarity. “Interest” qua debt is one such zone. There has been some discussion around this issue before courts, however, there are still certain nuances that are yet developing. In this blog, we attempt to consolidate the prevalent views on some of such issues. More precisely, the following:

  1. Why is there a distinction in treatment of “interest” qua “financial debt” and “operational debt” under IBC.
  2. Whether “interest” is chargeable on “operational debt”.
  3. Whether “interest” alone would qualify as “operational debt” to maintain insolvency application.
  4. Whether “interest” can be clubbed with principal debt to crossover the threshold limit of INR 1 crore.


Distinction in treatment of “interest” under “financial debt” versus “operational debt”

Prior to IBC, financial debt and operational debt were not considered differently for the purpose of initiating winding-up proceedings against a company for its inability to pay debt under the Companies Act.[1] However, with the introduction of IBC, the debts have been classified into two categories, namely, (i) financial debt; and (ii) operational debt. For both these debts, IBC provides for different procedures with corresponding rules and regulations.


Amongst many, one relevant distinction between the two debts is in relation to the component of “interest”. The term “financial debt” is defined to include “interest” (if any), while there is no mention of “interest” in the definition of “operational debt”. The definitions are reproduced below:

    1. […]

(8) “financial debt” means a debt along with interest, if any, which is disbursed against the consideration for the time value of money and includes […]

*          *          *

(21) “operational debt” means a claim in respect of the provision of goods or services including employment or a debt in respect of the [payment] of dues arising under any law for the time being in force and payable to the Central Government, any State Government or any local authority;


Although, the distinction in the treatment of “financial” and “operational” debt and creditor has been sufficiently deliberated and upheld by the Supreme Court in the celebrated case of Swiss Ribbons (P) Ltd. v. Union of India[2], the distinction viz. the component of “interest” is not explicitly dealt with yet.


Some guidance, however, in this regard may be drawn from the Supreme Court decision in Pioneer Urban Land and Infrastructure Ltd. v. Union of India[3] wherein while classifying home buyers as “financial creditors” and not as “operational creditors”, Supreme Court noted that:

  1. 42. One other important distinction is that in an operational debt, there is no consideration for the time value of money—the consideration of the debt is the goods or services that are either sold or availed of from the operational creditor.


Evidently, there is no concept of “time value of money” for a debt to qualify as an “operational debt”, unlike a “financial debt”. Thus, “interest” which may be considered as a factor evidencing “time value of money” against a debt is not a sine qua non for an “operational debt”,[4] justifying absence of the term “interest” from the definition of operational debt.


In other terms, “interest” is not necessary for an “operational debt”, as there the consideration is the value of the goods or services sold or availed by the corporate debtor from the operational creditor. Limited relevance it may drawis when payment of the said consideration is delayed beyond a due date, and the “interest” is levied. Such interest, however, is in the form of “penalty” and not a return on investment. Thus, it could be argued that the distinction in definition do hold some rationale.


However, this distinction has expansive implications under IBC and has given light to newer issues such as whether “interest” is even chargeable upon an “operational debt”, and if yes, whether such interest is an “operational debt” capable of giving rise to an action under IBC Section 9, or whether can it be clubbed with the principal component of the debt to cross-over the threshold limit of INR 1 crore for filing an insolvency application. Lets see the position of law as it exists today on these issues.

Whether “interest” is chargeable on “operational debt”

There has been a difference in reasoning of different NCLTs in regard to this issue. Some have held it appropriate for “interest” to be charged as default, while others consider it more appropriate if there is a mutual agreement between parties to charge interest.


In the case of the former, for e.g. NCLT Mumbai in D.F. Deutsche Forfait AG  v. Uttam Galva Steel Ltd.,[5] observed that there is also some time value of money for an “operational debt” as goods or services are supplied against money as consideration. It observed that it is not expected that delay in payments of consideration beyond time is left uncharged. It is a known fact that the money today will worth less from what it was worth yesterday, and hence, any delay beyond the credit period should entitle the creditor to claim “interest”. NCLT noted that:

“[…] On commercial side, the [operational] creditor claiming interest is quite normal and justifying, after all, business always runs keeping in mind the time value of money […]”


Against this, NCLT Chandigarh[6] and Kolkata[7] have aligned more in line with the latter approach and held that it ismust that there is a mutual understanding between the parties for interest to be chargeable and that it cannot be a unilateral act of the creditor. For instance, in Wanbury Ltd. v. Panacea Biotech Ltd.,[8] NCLT Chandigarh held that in absence of an agreement stipulating “interest”, interest is not chargeable. It was observed that IBC does not empower the adjudicating authority to impose interest on the parties, much less determine the rate of such interest.


Subsequently, even NCLT Mumbai revisited this question in Vitson Steel Corp (P) Ltd. v. Capacite Infraprojects Ltd.,[9] and united with the latter approach by holding that interest cannot be claimed as an “industry practice” on an operational debt. It held:


24. The object of the Code is not advanced by surprising the corporate debtor with a claim for interest firstly by claiming that it was as per industry practice and thereafter making a pitch that it was as per (MSME Act) Micro, Small and Medium Enterprises Development Act, 2006, when the operational creditor was confronted with a question posed by this Bench as to how the claim for interest was sustainable when neither the purchase order nor the invoices carried a provision therefor. […]

    1. For the reasons stated above, the present petition fails and therefore, the same is rejected.”

NCLAT too in Steel India v. Theme Developers (P) Ltd.,[10] upheld the latter approach and held that interest cannot be claimed if not agreed upon between the parties.

“[…] It is settled that the charging of interest, ought to be an actionable claim, enforceable under law, provided it was properly agreed upon between the parties.”

Thus, while there is still scope for a Supreme Court decision to settle the issue conclusively, the NCLAT decision does clarifies the position of law on this issue that “interest” is chargeable on an “operational debt” provided there is an agreement to that effect.

Whether “interest” would qualify as “operational debt” to file insolvency application under Section 9 of IBC.

While it is a good development that the interest on operational debt is being recognised and considered, there is also an unintended upshot of it as the creditors have started approaching NCLT seeking initiation of insolvency proceedings basis solely their claim towards interest even though the principal debt stands paid. This practice has, however, been deprecated regularly by both NCLT and NCLAT.


One of the earliest pronouncement on this issue was NCLAT decision in Krishna Enterprises v. Gammon India Ltd.[11] Here, the creditor filed a Section 9 Petition based merely upon “interest”. No principal amount was due. NCLAT Delhi although rightly dismissed the Section 9 petition but it was based on an incorrect reasoning that “interest” does not qualify as “debt” under IBC unless the interest is payable under the terms of the agreement. In other words, as per this decision, interest would qualify as “debt” if agreed between the parties.


  1. 5. […] the principle amount has already been paid and as per agreement no interest was payable, the applications under Section 9 on the basis of claims for entitlement of interest, were not maintainable. If for delayed payment appellant(s) claim any interest, it will be open to them to move before a court of competent jurisdiction, but initiation of Corporate Insolvency resolution process is not the answer.

Subsequently, however, NCLAT in S.S. Polymers v. Kanodia Technoplast Ltd.,[12] moved beyond the ruling in Gammon[13] and dismissed the Section 9 petition noting that it was being pursued only for realisation of interest amount in gross misuse of the IBC process as recovery mechanism. NCLAT held:

  1. Admittedly, before the admission of an application under Section 9 of the I&B Code, the “corporate debtor” paid the total debt. The application was pursued for realisation of the interest amount, which, according to us is against the principle of the I&B Code, as it should be treated to be an application pursued by the applicant with malicious intent (to realise only interest) for any purpose other than for the resolution of insolvency, or liquidation of the “corporate debtor” and which is barred in view of Section 65 of the I&B Code.


In a more recent decision, Amsons Communication (P) Ltd. v. ATS Estates (P) Ltd.[14], NCLAT Delhi reaffirmed this position and held that the provisions of IBC cannot be allowed as a recovery mechanism or to recover the claim of interest by operational creditor. It was held that Section 9 petition cannot be converted into proceedings for recovery of interest by operational creditor on delayed payment, as that is not the object of IBC.

Thus, it has been settled that “interest” in itself is not sufficient to maintain a Section 9 petition under IBC.

Whether “interest” can be clubbed with principal debt to cross-over the threshold limit of 1 crore

Post Notification dated 24-3-2020[15], the executive has revised the threshold for initiating insolvency proceedings under IBC to INR 1 crore from INR 1 lakh. Consequent thereto, courts[16] have held that if the insolvency application is filed after 24-3-2020, the increased threshold will apply. High Court of Kerala too, more recently, in Tharakan Web Innovations (P) Ltd. v. NCLT,[17] held that from the date of notification, IBC can apply only to matters relating to insolvency and liquidation of corporate debtors, where the minimum amount of default is INR 1 crore. Thus, no application can be filed after 24-3-2020 regarding an amount where the default is less than INR 1 crore.


This revision was intended to weed out applications filed for smaller defaults and to provide a breathing space to debtors during the COVID crisis. However, parties attempted to circumvent this by clubbing “interest” with “principal” debt to crossover the threshold limit.


Recently, in one such situation, NCLT Delhi in CBRE South Asia (P) Ltd. v. United Concepts and Solutions (P) Ltd.,[18] dismissed the Section 9 petition and held that interest amount cannot be clubbed with the principal amount to arrive at the minimum threshold of INR 1 crore. In this case, operational creditor had claimed a default of total amount of Rs. 1,39,84,400, out of which INR 88,50,886 was towards principal whereas the remaining INR 51,33,514 was towards interest. Since the principal outstanding was less than INR 1 crore, NCLT dismissed the petition as not maintainable. NCLT held:

“[…] it can be inferred that the ‘interest’ can be claimed as the financial debt, but neither there is any provision nor there is any scope to include the interest to constitute as the operational debt.”


While this reasoning is in line with the position of law as settled on related issues of “interest” viz. operational debt (as dealt above), it remains to be seen how different NCLTs and NCLATs look at this issue in the times to come. However, in order to prevent divergent views, it would be more apposite if these issues are settled through an authoritative judgment from NCLAT or Supreme Court and help avoid congestion before NCLT on account of filing of numerous otherwise non-maintainable Section  9 petitions.

†Partner, Cyril Amarchand Mangaldas.

†† Associate, Cyril Amarchand Mangaldas.

[1] See Delhi Cloth & General Mills Co. Ltd. v. Stepan Chemicals Ltd., 1984 SCC OnLine P&H 546 : (1986) 60 Comp Cas 1046; Krishna Chemicals v. Orient Paper and Industries Ltd., 2005 SCC OnLine Ori 159 : (2005) 128 Comp Cas 412.

[2] (2019) 4 SCC 17.

[3] (2019) 8 SCC 416.

[4] ‘Interest’ is not a sine qua non even for “financial debt” as held in Orator Marketing (P) Ltd. v. Samtex Desinz (P) Ltd., 2021 SCC OnLine SC 513.

[5] 2017 SCC OnLine NCLT 546. In this case, there were two bills of exchange and the debtor agreed to pay within 180 days. Since, the payments were not made, interest was sought to be levied by the creditor. This order was however later set-aside by NCLAT on different grounds.

[6] Wanbury Ltd. v. Panacea Biotech Ltd., 2017 SCC OnLine NCLT 475.

[7] Gulf Oil Lubricants India Ltd. v. Eastern Coalfields Ltd., 2019 SCC OnLine NCLT 7749. In this case, invoices carried a stipulation of interest on overdue payment and the debtor countersigned the same. This order was, however, later set aside by NCLAT in view of settlement between parties.

[8] 2017 SCC OnLine NCLT 475

[9] C.P. (IB) No. 1579/MB/C-IV/2019, order dated 28-4-2020.

[10] 2020 SCC Online NCLAT 200.

[11] 2018 SCC OnLine NCLAT 360.

[12] 2019 SCC OnLine NCLAT 1310.

[13] 2018 SCC OnLine NCLAT 360.

[14] 2021 SCC OnLine NCLAT 223.

[15] See MCA Notification dated 24-3-2020 increasing the threshold from INR 1 lakh to INR 1 crore.

[16] Jumbo Paper Products v. Hansraj Agrofresh (P) Ltd., Company Appeal(AT)(Ins) – 813 of 2021 (25-10-2021). Civil Appeal No. 7092 of 2021 is pending against the NCLAT Order. No Stay is ordered yet.

[17] 2020 SCC Online Ker 23744.

[18] CP (IB) No. 797/(ND)/2021.

Akaant MittalExperts Corner

In the previous two columns, we had covered the position of law on whether a claim for an operational debt or a financial debt could be based on a decree by a court or an arbitral award. The rulings in Dena Bank v. C. Shivakumar Reddy[1], and G. Shivramkrishna v. Isgec Covema Ltd.[2] provide us with the guidance with respect to decree and/or an arbitral award being based on a financial debt and an operational debt respectively.


Now we will proceed with the third and final column in this three-part series.


The issue whether a settlement agreement is sufficient to constitute a financial or an operational debt has a long line of inconsistent rulings.

Settlement Agreement – As a Financial Debt

In Amrit Kumar Agrawal v. Tempo Appliances (P) Ltd.,[3] the financial creditor sought to base its claim of a financial debt against the corporate debtor/guarantor on a memorandum of understanding dated 22-9-2017 wherein the creditor had agreed to advance a loan of Rs 1,50,00,000 to one principal borrower along with with interest @18% per annum payable monthly. As per the MoU, the corporate debtor stood as a guarantor. However, when the cheques of the principal borrower had bounced, a settlement agreement was executed between the creditor and the corporate debtor. The corporate debtor, since was a guarantor had come forward to pay the outstanding amount of Rs 86 lakh with interest calculated at Rs 22 lakh and issued two cheques in consideration of such liability.


The creditor argued that their claim is based on the MoU and not the settlement agreement. The NCLAT (a) firstly held that as per the terms of the settlement agreement, the terms of the memorandum of understanding stood superseded. Then (b) it held that the obligation undertaken by the guarantor to pay Rs 86 lakh with interest calculated at Rs 22 lakh does not satisfy the ingredients of a financial debt, especially when no disbursement is made to the guarantor itself and the principal borrower was not a party to the settlement agreement.

It is submitted that the above ruling is an instance of a hyper-technical understanding of the provisions of the IB Code.


Previously in another ruling, when the debtor failed to comply with the terms of the master restructuring agreement, the appellant debtor pleaded that the terms of the debt stood altered and revised and therefore the element of default was missing. The aforesaid plea was rejected by the NCLAT and the order of admission was upheld.[4]


The position of law that a debt based on a consent decree will not be treated as a financial debt can also be found in context of real estate projects. In Arenja Enterprises (P) Ltd. v. Edward Keventer (Successors) (P) Ltd.,[5] the appellant and its associates entered into MoU about the land followed by two other supplementary MoUs. Later on, some dispute arose between the parties. The appellant, along with its associates filed a civil suit for specific performance along with other reliefs against the corporate debtor. Based on an amicable settled entered into between the parties, the civil suit was decreed where as per the settlement filed before the court, the corporate debtor had agreed to develop a group-housing complex on a plot of land measuring 22.95 acres. Out of this area, the applicant, along with another, was entitled to only 34,000 sq ft residential covered/built-up area along with proportionate super area. Given the terms of settlement if the sanction of plans is not obtained within a maximum period of 3 years from the date of signing of the settlement, in that event, further built-up area as well as liability of additional area would be imposed on the debtor.


Issue arose whether the terms of the consent decree tantamount to a financial debt. The NCLAT opined that in terms of Section 5(8)(f) of the IB Code, the appellant could claim a financial debt only when the amount raised from it as an “allottee” is used for a real estate project. Based on the facts and circumstances, the NCLAT firstly observed that no sum has been raised from an allottee under the real estate project. Then, it found that the financial creditor and its associates have not paid any money towards the allotment of built-up area and the entitlement of the appellant creditor is premised on the terms of settlement. In other words, in the light of the “consent decree and settlement terms”, the appellant had paid nothing in terms of money to the financial creditor and its associates. Resultantly, it was held that the appellant could neither be termed to be an “allottee” nor has any amount “being raised” from the appellant that could constitute to have the effect of a borrowing.


On the other hand, there is the ruling in Mahesh Kumar Panwar v. Neelam Singh[6], where the settlement agreement between the parties formed the basis of financial debt. One of the terms of the settlement agreement stipulated:

In terms of the clauses B and 8 of the earlier valid agreement dated 6-10-2008 entered between the same parties, the first party was to handover the vacant possession of space of about 2004 sq ft on 3rd floor in tower 1 in the proposed IT complex cum corporate hub to be constructed at Plot No. 02/02 situated at Sector – 154, in the name and style “the grid” of the unit duly completed in all respect by 30-6-2011.

It is ascertained and agreed by the first party that till date no construction work has started. Consequent upon the factual position both the parties have agreed for the amicable settlement.

*                                        *                                        *

Both the parties agreed and settled for a sum of Rs 1,34,00,988 (Rupees one crore thirty-four lakhs nine hundred eighty-eight only) which includes booking amount paid, compensation, commitment, services rendered, appreciation, etc.

 The first party has handed over post dated Cheque No. 617815 dated 1-2-2015 amounting to Rs 29,61,261 and Cheque No. 617818 amount to Rs. 1,04,39,727 both drawn at Corporation Bank, Noida total amounting to Rs 1,34,00,988 (Rupees one crore thirty-four lakhs nine hundred eighty-eight only) to the second party in discharge of his liability and post-dated cheques for interest of deferred payment applicable as per the agreement reckoning from 1-6-2014 as per details hereunder:

*                                        *                                       *

Noting the above-mentioned terms, the NCLAT had concluded that there was a disbursal of a sum of Rs 1,34,00,988 which was against the “consideration of time value of money” i.e. interest @12.5% per annum payable from 1-6-2014.


Similarly, in Ludhiana Scrips (P) Ltd. v. K.C. Land & Finance Ltd.[7], the adjudicating authority had dismissed an application under Section 7 of the IB Code on the ground that the creditor did not bring on record the books of accounts with any entry showing any debit of interest in the account of the corporate debtor. The NCLAT, however, overruling the order referred to the settlement agreements[8] entered into between the parties to conclude that the interest element was very much present and the condition of time value of money stood satisfied. Consequently, the NCLAT held that the earlier compromise agreement dated 20-5-2017 and the subsequent agreement dated 15-6-2018 clarify the nature of the transaction and show that the appellant is a financial creditor to whom the respondent owes financial debt, and which is in default.

Clearly, the jurisprudence on this issue is diverging and conflicting.


Settlement Agreement – As an Operational Debt

With respect to an operational debt, the issue came up in Brand Realty Services Ltd. v. Sir John Bakeries India (P) Ltd.,[9] as to whether default of installments under a settlement agreement could be considered as an operational debt under the IB Code. In this case, the debtor had approached the creditor seeking investment and consultancy services and an agreement dated 28-11-2014 was entered into by the parties to that effect. Subsequently, a settlement agreement dated 15-6-2018 was entered into wherein the debtor undertook to clear the dues of the creditor.


Issue arose when the dues were not cleared. The NCLT in this case, firstly opined that the application under Section 9 was filed on account of breach of the terms of the settlement agreement dated 15-6-2018. The NCLT categorically rendered the findings that the claim of the creditor is not based on the invoices raised on account of the agreement dated 28-11-2014.


Consequently, the NCLT then referring to several precedents, including the ruling in Delhi Control Devices (P) Ltd. v. Fedders Electric and Engg. Ltd.[10], held that the debt due in terms of a settlement agreement cannot be considered as an operational debt in terms of Section 5(21) of IB Code and hence unpaid installments under the settlement agreement do not suffice to trigger resolution process against a corporate debtor.



From the three-part series discussion, it is crystal clear that: first, the decree-holder cannot be excluded from the definition of a financial or operational debt; second, an arbitral award may also be sufficient to constitute a financial or operational debt; third, the underlying debt must be based on a transaction that fulfills the criterion of a definitions laid down of financial debt and an operational debt. Lastly, the position with respect to a settlement agreement constituting a financial or an operational debt is still divergent and conflicting.

± Akaant Kumar Mittal is an advocate at the Constitutional Courts, and National Company Law Tribunal, Delhi and Chandigarh. He is the author of the commentary “Insolvency and Bankruptcy Code – Law and Practice.

[1] (2021) 10 SCC 330.

[2] 2020 SCC OnLine NCLAT 909.

[3] 2020 SCC OnLine NCLAT 1202.

[4] Esther Malini Victor v. Oriental Bank of Commerce, 2019 SCC OnLine NCLAT 1107.

[5] 2020 SCC OnLine NCLAT 1188.

[6] 2018 SCC OnLine NCLAT 596.

[7] 2019 SCC OnLine NCLAT 355.

[8] Ludhiana Scrips (P) Ltd. v. K.C. Land and Finance Ltd., 2019 SCC OnLine NCLAT 355, para 9 reproduces one of the agreements dated 15-6-2018 wherein one of the clauses of the agreement purported:

A company winding petition was filed before the Punjab and Haryana High Court by Part 1 against Part 2 which is pending adjudication.

There after it was agreed between the parties that Part 2 i.e. K.C. Land & Finance Ltd will pay Rs 4.40 crores as principal amount and Rs 1.60 crores as interest. An agreement was executed between the parties on 20-5-2017 and various post dated cheques were issued.

… Part 2 i.e. M/s K.C. Land and Finance Ltd. undertakes and assures that all these cheques will be honoured in the event of default Part 1 will be at liberty to enforce this agreement by way of initiating legal proceedings against Part 1 and the amount recoverable will be with interest @18% from the date of default till the realisation of the full amount. (emphasis added)

[9] 2020 SCC OnLine NCLT 6066.

[10] 2019 SCC OnLine NCLT 8030.

National Company Law Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal, NCLT Mumbai: Coram of Suchitra Kanuparthi, Judicial Member and Chandra Bhan Singh, Technical Member, observed that,

“…a Judicial authority ought not to pass Orders which would lead to further multiplicity of proceedings.”

The instant application was filed by the Operational Creditor who had earlier initiated the corporate insolvency resolution process against the Corporate Debtor−Rolta India Ltd. The applicant−Operation Creditor now sought withdrawal of his company petition admitted under Section 9 of the Insolvency and Bankruptcy Code, 2016.

The applicant worked as an employee of the Corporate Debtor from March 2013 to June 2019, when he was relieved from services without settlement of arrears of salary and other dues. Consequently, he filed a petition under Section 9 which was admitted by the National Company Law Tribunal, Mumbai (“NCLT”), in May 2021 and an Insolvency Resolution Professional was appointed for the Corporate Debtor.

Thereafter, further negotiations took place between the parties and they reached a settlement agreement. Consequently, the application requested the Insolvency Resolution Professional to file an application under Section 12-A (Withdrawal of application admitted under Section 7, 9 or 10). As the Insolvency Resolution Professional did not file the application immediately, the applicant preferred the Section 12-A application before the NCLT.

The withdrawal application was vehemently opposed by the Financial Creditors (a consortium of several Public Sector Banks) and some of the other ex-employees. Notably, over 75 other petitions under Sections 7 and 9 of  IBC were pending against the Corporate Debtor.

Analysis, Law and Decision

Instant application had been filed under Section 12-A of the IBC read with Rule 11 of the NCLT Rules, 2016 by an employee of the Corporate Debtor company in the capacity of Operational Creditor seeking withdrawal of the company petition in terms of Regulation 30-A of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016.

Applicant mentioned that he had approached the Insolvency Resolution Professional for filing the Application in Form FA under Regulation 30-A(1)(a) to seek withdrawal of the admitted company petition. However, he stated that the Insolvency Resolution Professional did not cooperate and, therefore, the applicant was compelled to file the present application on their own motion under Rule 11 of the NCLT Rules seeking withdrawal of the admitted company petition.

The Insolvency Resolution Professional mentioned that she had received claims/intimation of claims of about Rs 5523.81 crores from financial creditors, operational creditors and workmen employees of Rolta India Limited.

Further, the Bench noted that even under Workmen and Employees’ claim there were 567 employees whose claims had been collated by the Insolvency Resolution Professional. However, the settlement entered into by the Corporate Debtor was only with 32 employees. It was also noted that even the settlement which was proposed by the promoter on behalf of the Corporate Debtor company kept aside majority of the workmen employees’ claim which had been brought out by the Insolvency Resolution Professional. Moreover, the proposed settlement with the employees under the Joint Settlement Agreement will be done only after they withdraw the petition. The Bench observed:

“…Corporate Debtor is willing to pay the major part of the dues to the employees only subsequent to withdrawal of petition through the settlement jointly and/or severally with the employees. The Bench feels that this provides an escape route to both the promoter as well as to the Corporate Debtor Company to conveniently wriggle out of the partial mini settlement at any point of time.”

Major Issue 

The Tribunal noted the major issue:

Whether it would be proper for the Bench to allow withdrawal of corporate insolvency resolution process (“CIRP”) under Section 12-A or to exercise, its discretion to reject the present application under Section 12-A?

The Bench was fully aware that after passing the “Admission Order” dated 13-05-2021 and after the commencement of CIRP, the proceeding are in rem and therefore, any decision regarding the continuation or otherwise of CIRP has to be decided in the interest of all stakeholders and not just a handful of employees. It was reiterated:

“…under Section 53 of IBC the debts of the workmen rank equally with the financial debt owed to the secure/ unsecured creditors.”

In view of the above, it was stated that it cannot be ignored that Tribunal has to take into account the interest of all stakeholders. Before taking the discussion further, the Bench relied upon some of the prominent judgments in respect of the scope and ambit of Section 12-A of IBC. Supreme Court in the decision of Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17, clearly directed that interest of all stakeholders have to be considered while accepting or disallowing an application for withdrawal.

Supreme Court recently in the matter of Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund, 2021 SCC OnLine SC 268 has clearly observed that when a petition under Section 7 of IBC is admitted/triggered it becomes a proceeding in rem and even the creditor who has triggered the process would also lose control of the proceedings as corporate insolvency resolution process is required to be considered through the mechanism provided under IBC.

Further, the Tribunal noted that in the present matter, there were several Financial Creditors and total financial claim collated by the Insolvency Resolution Professional in the matter of Rolta India Ltd. was upward of Rs 5000 crore. Thus, this itself would be an enough ground to disallow the present application for withdrawal under Section 12-A. The Tribunal said:

“…even in the event of the original creditor [and] the Corporate Debtor settling their disputes prior to the constitution of the CoC, the Tribunal has sufficient jurisdiction to reject an application under Section 12-A of the IBC if the facts and circumstances of the case warrants such rejection.”

Tribunal in view of the above, expressed that, even if withdrawal was permitted, it is a fact that all the dues of all the employees of the Corporate Debtor company were not being settled. About more than 100 employees had lodged their claims against the Corporate Debtor. However, only some employees’ claims were being settled by the ex-management/promoter of the company. Therefore, the purported settlement lacked bona fide.

Moreover, the interest of the employees would be taken care of during the CIRP of the Corporate Debtor and they being operational creditors will be entitled to their rights as provided for under the IBC. Concluding, the Bench said that it had no doubt in its mind that considering that CIRP proceedings are in rem, the substantial claims of Financial Creditors cannot be disregarded or ignored in view of the purported settlement of certain employees of the Corporate Debtor.

In view of the above, the Bench dismissed the application filed under Section 12-A of the IBC and the CIRP against the Corporate Debtor company would continue. [Dinesh Gupta v. Rolta India Ltd., MA No. 1196 of 2021, decided on 6-08-2021]

Advocates before the Tribunal:

For the Promoter: Mr. Prateek Seksaria, Advocate.

For the IRP: Ms. Ranjana Roy Gawai, Mr. Pervinder, Mr. Vineet Kumar, Advocates a/w Ms. Vandana Garg, IRP.

For the Financial Creditor: Mr. Rohit Gupta, Mr. Nausher Kohli, Advocates.

For the Operational Creditor: Mr. Nausher Kohli and Mr. Rohit Gupta, Advocates

National Company Law Tribunal
Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Tribunal (NCLT): Coram of H.V. Subba Rao (Judicial Member) and Chandra Bhan Singh (Technical Member) held that ‘Working Capital’ provided by an investor cannot be considered as ‘Financial Debt’.

Instant company petition was filed seeking to initiate Corporate Insolvency Resolution Process against the Corporate Debtor alleging that the Corporate Debtor committed default in making payment to the Financial Creditor.

Petition was filed by invoking the provisions of Section 7 of Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016.

Since the Corporate Debtor failed to make payment of a sum of Rs 7,02,682, a petition was filed before the Adjudicating Authority.

Financial Creditor submitted that a Restaurant Operation and Services Agreement (ROSA) was signed between the parties on, as per which the investor would finance furnish and equip restaurants whereas the respondent operating partner was to provide day to day Operations and Management Services for the running of the business.

Analysis, Law and Decision

Bench noted that the total claim of the petitioner was based on Article 2 Section 4 of the Agreement regarding working capital.

Article 2, Section 4: Capital Expenditure

“…The Capital Expenditure to be incurred by the Investor with respect to each of the Restaurants is capped at Rs. 35,00,000/-, excluding goods and service tax. Provided however, the Operating Partner shall use reasonable endeavours to minimize the actual Capital Expenditure for each Restaurant. In the event the Capital Expenditure exceeds the aforesaid amount, the Investor may, at its discretion, approve and incur the same…”

 Financial Creditor submitted that it provided a loan of Rs 7.02 lakhs.

Bench noted that all the three premises from where the restaurants were operating was rented in the name of the Financial Creditor under Leave and License Agreement and the Corporate Debtor was not a party.

Further, the total claim mentioned was a claim to Rent Commission and Maintenance, none of which amounted to a Financial Debt.

Adding to the above, Tribunal noted that there was no disbursement to the respondent and all the payments were related to the third party.

Hence, no money was received by the Corporate Debtor in its account. The Petitioner failed to produce any bank statement showing that the said amount had gone into the respondent’s account.

Therefore, about Rs. 7.02 lakhs did not come into the account of the Corporate Debtor but were paid by the Financial Creditor.

Bench even opined that Article 2 Section 4 never mentions that it is a working capital loan, it only says that in the event of Operating Partners requires the Working Capital for the initial period till a Restaurant has achieved break even, the Investor shall provide the same in a manner as may be mutually agreed between the parties.

Hence, the Tribunal stated that,

“…it was not a loan and till the achievement of the ‘break even’ the investor was to provide the Working Capital.”

 Further, it was also noted that the petitioner was trying to make out a case not as an Investor in the restaurant project but as a creditor which was contrary to the documents executed between the parties.

Corporate Debtor clearly brought out that the said restaurants never ‘broke even’ and therefore, there was no obligation on the part of the respondent to pay an amount which had been provided by way of working Capital.

Therefore, while concluding the matter, Bench held that the amount which was being claimed as Financial Debt was not a Debt at all and at best was a payment due after the restaurant business ‘breaks even’.

Hence, the amount claimed of Rs 7,02,682/- does not qualify as a Financial Debt under Section 5(8) of the Code and is not default under Section 3(12) of the Code. [Plutusone Hospitality (P) Ltd. v. Busabong & Co. (P) Ltd., CP No. 4395/IBC/MB/2019, decided on 26-7-2021]

Advocates before the Tribunal:

For the Applicant: Mr Shyam Kapadia, Advocate

For the Respondent: Mr Nausher Kohli, Advocate

Case BriefsTribunals/Commissions/Regulatory Bodies

National Company Law Appellate Tribunal (NCLAT): A two-member bench comprising of Justice S.J. Mukhopadhaya, Chairperson and Justice Bansi Lal Bhat, Member (Judicial), dismissed an appeal filed against the judgment of National Company Law Tribunal, New Delhi whereby Respondents 1 and 2 were held to be Financial Creditors.

Factual matrix of the case is that the said respondents were the erstwhile Directors of the Corporate Debtor company. They extended loan to the Corporate Debtor from time to time at an interest of 18% per annum. The question that arose for consideration in this appeal was whether the respondents came within the meaning of Financial Creditors as defined in Section 5(7) and (8) of the Insolvency and Bankruptcy Code, 2016. It is pertinent to note that Section 5(7) defines a Financial Creditor as any person to whom a financial debt is owed and includes a person to whom such debt has been legally assigned or transferred to.

The Appellate Tribunal perused various provisions of the Code and observed that the expression debt defined under Section 3(11) means a liability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt. Non-payment of such debt which has become due and payable and is not repaid by the Corporate Debtor falls within the mischief default defined under Section 3(12) of the Code. Further, in the present case, the manner and circumstances in which the amount of loan was borrowed by the Corporate Debtor from time to time with stipulated interest, left no room for doubt that the outstanding unsecured debt had all the trappings of a Financial Debt. Hence, the said respondents (erstwhile Directors) were safely held to be Financial Creditors. All the contentions raised by the appellant were repelled holding them sans merit. The appeal was, thus, dismissed. [Rajesh Gupta v. Dinesh Chand Jain,2018 SCC OnLine NCLAT 412, Order dated 09-08-2018]