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Introduction
In the intricate domain of commercial law, the IBC1 stands as a pivotal legislative framework designed to address the challenges of corporate default and insolvency. A critical facet of this framework is the empowerment of an operational creditor—an entity to whom a debt is owed for the provision of goods or services—to initiate the CIRP2 against a defaulting corporate debtor. For instance, a vendor that has supplied raw materials to a manufacturing company on credit terms, only to face persistent non-payment, finds in the IBC a formal and powerful recourse to recover its dues and ensure business continuity. But what happens when this very acknowledgment of debt, meant to provide clarity and a path to resolution, is used by a cunning corporate debtor as a shield to evade the rigorous proceedings of the CIRP?
In a landmark decision that provides a definitive answer to this question, the NCLT3, Mumbai Bench, Court-III, in the case of M.K. Metals v. M/s Kundan Industries Ltd.4, held that a settlement agreement entered into between the parties does not alter the fundamental nature of the debt. The Tribunal clarified that such an agreement, which merely serves to acknowledge the debt and structure a repayment schedule, does not extinguish the operational creditor’s right to initiate CIRP under Section 9 of the IBC, provided the underlying debt is substantiated with sufficient evidence. This article will delve into a detailed analysis of the nuances of such acknowledgments and their effect on the nature of debt, examining various seemingly distinctive judgments to provide a comprehensive understanding of the legal position.
In the corporate world, an operational creditor is a person or entity to whom an “operational debt” is owed, as defined in Section 5(20) of the IBC. This is a debt arising from the provision of goods or services, including employment, or dues payable to the government under any law. Think of it as a debt stemming from the regular, day-to-day operations of a business. A supplier of raw materials, a service provider, or an employee with unpaid wages are all considered operational creditors. The Supreme Court in Mobilox Innovations Private Limited v. Kirusa Software Private Limited5 succinctly clarified this, stating that an operational creditor is owed a claim “in respect of the provision of goods or services.” This is distinct from a financial creditor, whose debt is a financial transaction with the time value of money, like a loan from a bank.
The core of insolvency law revolves around the nature of the debt and whether a subsequent agreement, like a settlement, changes it. Does an operational debt remain operational even after it’s been packaged into a formal settlement agreement? This is a question that has been at the forefront of legal discourse, and the jurisprudence has evolved to provide clarity. A key turning point in this legal journey is the case of Ahluwalia Contracts (India) Ltd. vs. Logix Infratech Pvt. Ltd.6 In this case, the NCLAT7 set a crucial precedent. The tribunal held that a MoU8 entered into by the parties, which merely detailed the “mode and manner of payment,” did not transform the nature of the original debt. The NCLAT’s reasoning was clear: the debt originated from the provision of services, and the settlement was simply a mechanism to facilitate its repayment. Acknowledging the debt and providing a payment schedule does not magically convert it into something else. This principle was further solidified in Priya Kantilal Patel vs. IREP Credit Capital Pvt. Ltd. & Anr.9, where a similar stance was taken, reinforcing that the nature of the debt must be looked at from its genesis, not from a subsequent agreement that merely structures its repayment.
While the precedent set by Ahluwalia Contracts seems straightforward, the jurisprudence is not without its complexities. A seemingly contrasting viewpoint emerged from the case of Trafigura India Private Limited vs. TDT Copper Ltd.10 In this instance, the NCLAT observed that a “default of instalment of Settlement Agreement does not come within the definition of ‘operational debt’.” This suggests that a breach of a settlement agreement might not, in itself, give rise to an operational debt. This raises a critical question: when does a settlement agreement become so transformative that the original debt is no longer the primary consideration? However, the NCLAT, in the later Jasmine Buildmart Private Limited case, meticulously distinguished the Trafigura judgment. The court in Jasmine Buildmart emphasized that the key is to look at the “nature of operational debt claimed in Section 9 Application.” It highlighted that in their case, the settlement was “only mode of payment to the operational debt.” In contrast, the facts in the Trafigura case were evidently different, leading to a different conclusion.
Conclusion
the NCLT’s ruling in M.K. Metals solidifies the legal position that a settlement agreementdoes not automatically change the fundamental nature of an operational debt. This is a crucial clarification, as it prevents corporate debtors from using such agreements as a tool to evade insolvency proceedings under Section 9 of the IBC. The jurisprudence established through cases like Ahluwalia Contracts and Jasmine Buildmart demonstrates a consistent judicial approach: the courts will look beyond the form of the agreement to its substance, ensuring that the original debt, arising from the provision of goods or services, remains the core consideration. This judicial consistency provides much-needed predictability for operational creditors, assuring them that a structured repayment plan will not compromise their statutory rights under the IBC if a default occurs.
The distinction drawn from the Trafigura case is particularly instructive. It highlights that the outcome depends on the specific facts and the true purpose of the settlement. Was the agreement a mere acknowledgment of an existing operational debt with a new repayment schedule, or did it create an entirely new commercial relationship? The legal precedent suggests that if the agreement is simply a mechanism for paying off the original debt, the nature of the debt remains unchanged. This meticulous case-by-case analysis protects the spirit of the IBC, which is to provide a swift and effective remedy for creditors whose businesses are affected by non-payment.
Citations
Expositor(s): Adv. Anuja Pandit
