Settlement Agreement Between Parties Merely Acknowledging & Structuring Repayment Doesn't Change Nature Of Debt: NCLT Mumbai
The National Company Law Tribunal, Mumbai Bench, Court-III, comprising Justice Lakshmi Gurung (Member-Judicial) and Hariharan Neelakanta Iyer (Member-Technical), has held that a settlement agreement entered between the parties merely for the purpose of acknowledging the debt and structuring the repayment schedule doesn't necessarily change the nature of the debt when it is concreted...
The National Company Law Tribunal, Mumbai Bench, Court-III, comprising Justice Lakshmi Gurung (Member-Judicial) and Hariharan Neelakanta Iyer (Member-Technical), has held that a settlement agreement entered between the parties merely for the purpose of acknowledging the debt and structuring the repayment schedule doesn't necessarily change the nature of the debt when it is concreted with sufficient evidence.
The petition under section 9 of the IBC was filed by M.K. Metals (operational creditor) seeking initiation of the CIRP against M/s Kundan Industries Ltd. (corporate debtor) for non-payment of Rs.11.76 Cr. plus interest and additional interest.
A settlement agreement was signed between the corporate debtor and the Shah Family Group, of which the operational creditor is a part. In the agreement the corporate debtor agreed to pay the dues of the Shah Family Group amounting to Rs. 35.76 Cr. In the same settlement, the corporate debtor has acknowledged that it owes a sum of Rs. 12.59 Cr. to the operational creditor. In pursuance of the agreement, a few installments were made; however, after a few months, the corporate debtor defaulted in the payment. In reply to the demand notice served, it denied the amounts due and payable. Therefore, the present petition was filed.
The operational creditor submitted the ledger account of the corporate debtor in its books to highlight the default on the part of the corporate debtor.
The corporate debtor contended that the application is not maintainable, as the default arises out of a settlement agreement. Highlighting the definition of 'operational debt' given u/s 5(21), it argued that the only debt arising out of goods and services comes under it, and the unpaid installments cannot be treated as operational debt.
It also submitted that no calculation has been given as to how and on what invoice basis the final amount was derived. Highlighting that the invoices were prior to March 2020, it contended that the petition is time-barred and is also hit by Section 10A.
Observations of the Adjudicating Authority
Relying on the ruling of Ahluwalia Contracts India Ltd. vs. Jasmine Buildmart Private Limited [Company Appeal (AT) (Ins) No. 1164/2023], the NCLT observed that if the parties enter into an agreement for acknowledgment of debt and structuring the repayment schedule, it does not necessarily change the nature of the debt.
The tribunal further observed that the settlement agreement neither explicitly mentions the existence of an invoice relating to the goods and services nor talks about any default of payment. It noted that even if the invoice mentioned in Schedule I is considered, then also the threshold limit of Rs. 1 Cr will not be met, as the amount is only Rs. 57.94 lakhs.
The bench lastly observed that the dues mentioned under the settlement agreement cannot be regarded as the operational debt u/s 5(21) of the IBC and dismissed the petition.
Case Name: M.K. Metals vs. Kundan Industries Ltd.
Case No.: C.P.(IB)-738(MB)/C-III/2023
Bench: Justice Lakshmi Gurung (Member-Judicial) and Hariharan Neelakanta Iyer (Member-Technical)
Order Date: 26.08.2025