Revocation of Failed Settlement Does Not Extinguish Original Financial Debt – Section 7 Application Maintainable Based on Assigned Loan Agreements
- REEDLAW
- 5 days ago
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NCLAT held that the revocation of a failed settlement agreement does not extinguish the original financial debt, and accordingly, a Section 7 application under the IBC is maintainable on the basis of the original loan agreements assigned to the financial creditor.
On 03-04-2025, the National Company Law Appellate Tribunal (NCLAT), Principal Bench, comprising Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka, while reviewing an appeal, held that the revocation of a failed Global Settlement Agreement (GSA) does not extinguish the original financial debt. It further held that a financial creditor is entitled to initiate proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016, on the basis of the original loan agreements, particularly where the corporate debtor has acknowledged the debt and default through its conduct and communications.
The National Company Law Appellate Tribunal (NCLAT), in the instant appeal under Section 61 of the Insolvency and Bankruptcy Code, 2016, upheld the order dated 14.11.2024 passed by the Adjudicating Authority (NCLT, Kolkata Bench-I), which admitted the Section 7 application filed by Asset Reconstruction Company (India) Ltd. (ARC) against Uniworth Textiles Ltd. (Corporate Debtor), thereby initiating the Corporate Insolvency Resolution Process (CIRP). The appeal, filed by the Suspended Director of the Corporate Debtor, challenged the maintainability of the application primarily on the ground that the debt stood extinguished under a Global Settlement Agreement (GSA) and that the original debt was not enforceable post-revocation of the said settlement.
The Tribunal carefully considered the background of the financial arrangements, where loans originally sanctioned by ICICI Bank and IFCI Ltd. were assigned to ARC, and the Corporate Debtor had been declared an NPA in 2007. Although a GSA was proposed in 2016 and part payment of Rs. 51.10 Cr. was made by the Uniworth Group, the settlement was revoked by ARC in November 2018 due to non-fulfilment of payment obligations. The Corporate Debtor neither disputed the revocation at the relevant time nor raised any formal objection to ARC’s right to fall back on the original debt. Furthermore, the NCLAT relied on the binding precedent in Priyal Kantilal v. IREP Credit Capital Pvt. Ltd., affirming that in the event of failure of a settlement, a financial creditor is entitled to initiate CIRP under Section 7 on the basis of the original financial debt.
The Appellant’s argument that the debt ceased upon execution of the GSA and that the remaining obligation was not a financial debt under Section 5(8) of the IBC was rejected. The Tribunal found that ARC’s Section 7 petition was founded not on the GSA’s breach, but on the original debt assigned from ICICI and IFCI. The Tribunal observed that the Corporate Debtor had acknowledged the liability through its balance sheets and official communications, and had even sought No Objection Certificates (NOCs) after the GSA’s revocation, which indicated its acceptance of the default. Moreover, a decree passed by the Debt Recovery Tribunal (DRT) in 2018 confirmed the existence of the debt and the Corporate Debtor’s liability to repay.
Accordingly, the NCLAT held that the Adjudicating Authority had rightly admitted the application on merits after the matter was remanded by the Supreme Court and that the requirements under Section 7 of the IBC were clearly met, including the existence of financial debt, occurrence of default, and satisfaction of the threshold under Section 4 of the Code. The appeal was dismissed, reaffirming that the failure of a settlement does not extinguish the underlying financial debt and does not bar a creditor from initiating CIRP based on the original loan agreements.
Mr. Arvind Nayar Sr. Advocate with Mr. Narendra M Sharma, Mr. Ankur Sood, Ms. Shubhangi Tiwari, Mr. Shubham and Ms. Sahana Sathija Narayanan, Advocates, represented the Appellant.
Mr. Abhirup Dasgupta, Mr. Ishaan Duggal and Ms. Ruchi Goyal, Advocates, appeared for Respondent No. 1.
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