Unpaid Installment Under Settlement Agreement Cannot Trigger Insolvency – Insolvency / Bankruptcy

Factual Matrix:

• The petition has been filed under Section 9 of the IBC by Ahluwalia Contracts (India) Ltd. (‘OC ‘) for initiating the Corporate Insolvency Resolution Process against Logix Infratech Pvt. Ltd. (‘CD‘).

• The OC is a construction company and the CD is engaged in the business of real estate development. The OC was engaged by the CD to develop a group housing project namely, ‘Blossom Greens’ situated at Sector 143, Noida (‘Project‘).

• Out of the total amount of work done by the OC for the CD under their contracts, an amount of Rs. 10.11 crores were verified and remained unpaid by the CD to the OC and an amount of Rs 4.02 crores were unverified and unresolved between the parties thereto. Thereafter, the parties arrived at a settlement for a lumpsum amount of Rs. 11 crores payable by the CD to the OC, where few flats / inventories were given to the OC worth Rs. 3.28 crores. A settlement agreement dated September 30, 2019 (“Agreement“) was executed accordingly between the parties.

• Vide letter dated October 14, 2019, the OC reminded the CD to make payment of the first installment by October 25, 2019. An email dated October 26, 2019 was sent to the CD by the OC apprising the CD of his failure to pay first installment of the settlement amount and requested the CD to make immediate payment. The OC issued another reminder letter dated November 5, 2019 to the CD to adhere to the settlement agreement. Thereafter, vide the email dated November 15, 2019, CD admitted to its failure to honor the Agreement and further blamed the non-payment of first installment on economic slowdown and the overall bad shape of the real estate market. Thereafter, the OC sent several reminders to the CD for payment of the unpaid installments under the Agreement.

• Thereafter, the OC under Section 8 of the IBC issued a Demand Notice dated February 15, 2020 upon the CD, demanding payment of the unpaid settlement amount of Rs. 7.72 crores. Subsequently, the OC filed an insolvency petition under the IBC before the NCLT for initiating the Corporate Insolvency Resolution Process of the CD.

Upon consideration, the NCLT pronounced its judgment on June 3, 2022, dismissing the IBC petition filed by the OC against the CD with the Ratio as stated above. The NCLT observed that “operational debt” means “a claim in respect of provision of goods or services …….” and a default in payment of the installment as per the settlement agreement was held to not come under the definition of operational debt.

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