[By Akshita Grover]
The author is a student of Jindal Global Law School.
INTRODUCTION
The Insolvency Bankruptcy Code 2016 was essentially a product of India’s efforts about building a competitive stance in the Ease of Doing Business Index of the World Bank Group. The Code consolidates several pieces of insolvency procedures from different legislations to uniformalise the process of Corporate Insolvency Resolution Processes (CIRP). This process is initiated by a Corporate Creditor via Company Petitions under the Code to ensure the revival of the Corporate Debtor. But sometimes this process is halted when the Creditor & the Debtor sign Consent Terms, wherein the Debtor promises to pay the Creditor and the Creditor thus takes down the process of CIRP by withdrawing the Company Petition. But what if after this legally valid agreement, the Debtor defaults on making the payment? Can this Company Petition then be revived by the Creditor as a recourse, especially because the Code is silent on this mechanism. Thus, the paper attempts to provide an answer to the legal jigsaw at hand.
CAUSE OF ACTION REMAINS POST THE EXECUTION OF THE COMPANY PETITION
The Gujarat HC in the case of Gujarat State Financial Services vs Amar Polyester Ltd held that the cause of action in the CP does not survive when Consent Terms by the debtor and creditor are voluntarily signed. The court reasoned that Insolvency Proceedings are initiated in the public interest and not to protect the selective interests of any single creditor.
While deliberating on this judgement delivered by the Gujrat HC, the Bombay HC in the case of M/S Corporate Couriers Ltd. vs M/S. Wall Street Finance Ltd felt otherwise and dismissed the applicability of this judgement by holding that the cause of action remains the same and holding that “both parties are aware that the proceedings are not closed and that the company petition would revive in the event there is a default in terms of the consent terms. In our opinion, the company cannot take advantage of its own wrong, more so as in this case where the creditor went out of its way even to reduce its claim….. in such a case, there is no change of cause of action. The cause of action is the cause based upon which the Company Petition was filed, and the company petition admitted. Only further proceedings were not taken in view of the consent terms.”
The Court in this case linked the cause of action to the company petition and not the insolvency proceedings. Thus when the company petition signed voluntarily has not been obeyed by the debtor, then the creditor still has the opportunity of knocking the doors of the court/tribunal to ensure the revival of the petition, giving the cause of action is still surviving.
Hence, the point of law taken by Bombay HC is that upon admission of the CP and upon the filing of the consent terms, any failure to comply with the consent terms will revoke the revival of the CP.
CONSENT TERMS ONCE LAID BEFORE THE COURT BECOME ENFORCEABLE
There are a string of judicial authorities that hold that the laying down of Consent Terms granting liberty to the Tribunal to revive the CP is an essential element strengthening the case for the Creditor to revive the Petition. These authorities strengthen the case of the creditor in ensuring that once the Debtor confirms to pay back, then there is no backing out especially when the judicial authorities are recording this confirmation in their court orders.
The NCLAT in the case of Krishna Garg & Anr v. Pioneer Fabricators Pvt Ltd explained the importance of filing the settlement terms before the Tribunal and bringing them on record to ensure that the agreement between the parties is an essential part of the order so that in case of a breach of the terms of the agreement, the Tribunal has the liberty to exercise its liberty. The case of SRLK Enterprises LLP v. Jalan Tran solutions India Ltd. provides more clarity on this proposition by giving the following reasoning that, there is a difference between cases where CIRP proceedings are withdrawn without much reference and acknowledgement of the Settlement Terms, versus cases where CIRP proceedings are withdrawn on the basis of the Corporate Debtor agreeing to the Settlement Agreement; wherein the later gives an explicit liberty to the adjudicating authority and thus necessitates revival.
In the case of IDBI Trausteeship Services Limited v. Nirmal Lifestyle Limited, the NCLAT held that the settlement between the parties was well within the Order of court and thus the Consent Terms will be a part of the Court Order and enforceable. In the case of Pooja Finlease v. Auto Needs (India) Pvt. Ltd. the company petition was withdrawn based on consent terms signed between the corporate debtor and the creditor, post which a default in payment was committed, and an application requesting for revival of the company petition was rejected. The Court again held that because this was not a case where “neither settlement terms were filed nor the same were brought on the record ” rather a case where “Consent Terms were filed and also were taken on record by the Adjudicating Authority” the appeal could be allowed revival of the Company Law petition.
NCLAT in Himadri Foods Ltd vs Credit Suisse Funds Ag held that “It appears that the Terms of Settlement providing a repayment schedule was incorporated in the order thereby making it an order or decree of the Court, and once this was the position, giving liberty to the Financial Creditor to come back can be interpreted on no hypothesis other than that the revival of CIRP would be sought for non-compliance with the Terms of Settlement”.
Therefore, once the consent terms are executed in the company petition, which is admitted by the NCLT, they become a part of the court order making it necessary for the parties to comply accordingly.
REVIVAL CLAUSES IN CONSENT TERMS MANDATE THE RECOVERY OF COMPANY PETITION
NCLAT in Pooja Finlease v. Auto Needs (India) Pvt. Ltd. held that in a case where; a. the Consent Terms are filed and taken on record by the NCLT, b. the consent Terms have a Revival Clause and c. this application filed is allowed by the Adjudicating Authority, then the Financial Creditor would be fully entitled to seek revival of the Section 7 Petition in event of default of consent terms. The Tribunal further held that in such a scenario, “rejection of revival is to deny the Financial Creditor rightful remedy”.
This reasoning was upheld in the case of IDBI Trausteeship Services Limited v. Nirmal Lifestyle Limited, wherein it was held that it would be an error to reject the Company Petition when it specifically contained a revival clause. At the same time, the NLCAT dismissed the appeal for revival when the consent terms were absent in SRLK Enterprises LLP v. Jalan Tran Solutions India Ltd. by strongly holding that, “NCLT has rightly observed that no liberty to revive was there and so declined to interfere. The appellant would be at liberty to pursue other remedies in law”.
The presence of a revival clause giving liberty to the Tribunal reinforces the right of the Corporate Creditor to enforce their remedy to recover the debt by reviving the Company Petition.
NATURE OF DEBT REMAINS THE SAME EVEN POST THE CONSENT TERMS
In the case of Amrit Kumar Agrawal vs Tempo Appliances Pvt. Ltd, NCLAT held that a default in payment of a settlement agreement does not come under the definition of financial debt. Further, NCLT Delhi in Finsbury Global FZE v. M/s Uttam Sucrotech International Pvt. Ltd, held that the moment the parties entered into the settlement agreement, the nature of the debt changed from being operational debt under Section 5(21), and the debt outstanding by virtue of the Settlement Agreement loses the substratum of operational debt under the Code and merely stands to be a debt. Similarly, NCLT Allahabad, in the case of Delhi Control Devices Ltd. v. Fedders Electric and Engineering Ltd. held that unpaid installments in a settlement agreement cannot be treated as operational debt.
But the NCLAT moved away from this reasoning in Priyal Kantilal Patel v. IREP Credit Capital Pvt. Ltd. and differentiated the case by emphasizing the value of the company petition arising out of the Financial Debt. The Tribunal held, “Present is not a case where a Section 7 Application has been filed only on the ground of default in the settlement agreement rather a Section 7 application has been filed on the basis of original financial debt that was extended by the Financial Creditor to the Corporate Debtor. The mere fact that in an earlier company petition, consent terms were agreed upon, which consent terms were breached by the corporate debtor, the financial debt which was claimed by the financial creditor would not be wiped out nor the nature and character of the financial debt be changed on account of the breach of the consent terms. Permitting such interpretation shall be giving premium to the corporate debtor who breaches the consent terms”.
Thus, even after the execution of consent terms, the nature and character of the debt remain the same. Further, allowing the corporate debtor would provide a mechanism to avoid the consequences of a breach of the Consent Terms. This would ultimately lead the creditors remediless under the Code, who had agreed only on the condition of settling the debt to withdrew the CIRP proceedings.
REVIVAL OF PETITIONS BASED ON AGREEMENT IS VALID AND LEGAL
The court in the case of Vivek Bansal v. Burda Druck India Pvt. Ltd. recorded the settlement agreement between the parties and permitted the withdrawal of the application under Section 9 of the Code. The law established was that “in the event of default by the corporate debtor whereby it does not adhere to the terms of the settlement agreement as regards the payment of the outstanding instalments, the operational creditor shall be at liberty to seek revival of the CIRP proceedings before NCLT.”
The Tribunal also upheld the above case in ICICI Prudential Venture Capital v. Anand Divine Developers Private and granted the financial creditors the liberty to revive the CIRP while establishing the following law, “the Adjudicating Authority in the impugned order regarding the observation or liberty to file a fresh company petition by the Appellant Bank is erroneous, without application of mind and without following the Principles of Natural Justice, and without adhering to the decision of this Tribunal being the Appellate Authority, is hereby quashed and set aside.”
Thus, one can easily conclude that the relief sought by creditors in a situation of company petitions would be a valid, legal and fair. In the past, the tribunal has held that revival based on personal agreements signed between debtors and creditors after which the insolvency proceedings initiated have been terminated can be legally revived upon a default by the other party.
CONCLUSION
Thus, when Default occurs after Consent Terms are signed between the Corporate Creditor & the Corporate Debtor to withdraw the Company Petition, a revival can very well be allowed by the Tribunal given the aforementioned conditions are fulfilled. To sum up, these conditions are: that the company petition is laid before the court or the tribunal and that this petition involves a revival clause permitting the revival in case of default.