Whether breach of settlement agreement can trigger CIRP?

Introduction:

The Corporate Insolvency Resolution Process (CIRP) is a legal process that is triggered when a company is unable to pay its debts as and when they fall due. The process is governed by the Insolvency and Bankruptcy Code, 2016 (IBC) and is intended to provide a time-bound and efficient resolution for the resolution of corporate insolvency. One of the grounds on which CIRP can be triggered is a default in the repayment of debt. However, a question that arises is whether a breach of a settlement agreement can also trigger CIRP.

What is CIRP?

Corporate Insolvency Resolution Process (CIRP) is a process outlined in the Insolvency and Bankruptcy Code (IBC) of India, which aims to resolve the insolvency of corporate entities. It is a time-bound process, typically lasting for 180 days, during which the management of the company is taken over by an Insolvency Resolution Professional (IRP) appointed by the National Company Law Tribunal (NCLT). The IRP’s primary duty is to come up with a resolution plan for the company, which may include the sale of assets, a debt restructuring plan, or a merger or acquisition. The ultimate goal of the CIRP is to either revive the company as a going concern or to maximize the value of its assets for the benefit of its creditors. The process of CIRP is monitored by NCLT and the IRP is responsible for communicating with the stakeholders and creditors and submitting a resolution plan for the company. If no resolution plan is approved, the company will go for liquidation.

What is breach of settlement agreement?

A breach of settlement agreement occurs when one party fails to fulfil its obligations as outlined in a legally binding agreement. A settlement agreement is a legally binding agreement between two or more parties, which is intended to resolve a dispute or settle a claim. The agreement typically lays out the terms and conditions that the parties have agreed to and sets out the rights, obligations and responsibilities of each party.

A breach of settlement agreement can occur in many ways, including failure to make payments, failure to transfer property or assets, failure to provide goods or services, failure to meet performance standards or failure to comply with other terms and conditions outlined in the agreement.

When a breach of settlement agreement occurs, the non-breaching party may have the right to terminate the agreement, seek damages for any losses suffered as a result of the breach, or seek specific performance of the terms of the agreement. In addition, the non-breaching party may also seek an injunction from a court to prevent further breaches.

It is also important to note that there are two types of breaches that can occur, material and immaterial. Material breach is a significant breach of the agreement and gives the non-breaching party the right to terminate the agreement and seek damages. An immaterial breach is minor, and the non-breaching party is still obligated to continue performing under the agreement.

Sustainability of IBC proceedings against breach of a Settlement

The Insolvency and Bankruptcy Code (IBC) of India provides a framework for resolving the insolvency of corporate entities and individuals. The Corporate Insolvency Resolution Process (CIRP) is a key aspect of the IBC, which aims to resolve the financial distress of companies and maximize the value of their assets for the benefit of creditors. However, there have been instances where IBC proceedings have been initiated against a company for breach of a settlement agreement.

A settlement agreement is a legally binding agreement between two or more parties, which is intended to resolve a dispute or settle a claim. The agreement typically lays out the terms and conditions that the parties have agreed to and sets out the rights, obligations and responsibilities of each party. A breach of settlement agreement occurs when one party fails to fulfil its obligations as outlined in a legally binding agreement.

The IBC provides a framework for resolving the financial distress of companies, and its primary objective is to maximize the value of a company’s assets for the benefit of its creditors. However, the IBC does not specifically provide for the initiation of proceedings against a company for breach of a settlement agreement. The question that arises is whether the IBC can be invoked for the resolution of such disputes.

One of the sections of the IBC that can be invoked for the resolution of disputes arising from a breach of settlement agreement is Section 12A of the IBC. This section provides the powers to the Adjudicating Authority (NCLT) to revive the CIRP in case of breach of a settlement agreement. This means that the NCLT has the discretion to decide whether to revive the CIRP automatically or whether the creditor is required to file a fresh application.

Additionally, Section 9 of the IBC allows any operational creditor of a company to file an application with the NCLT for the initiation of CIRP. The application must be filed on the grounds that the company has not paid the operational creditor within the specified time period. In some cases, the operational creditor may file an application for the initiation of CIRP on the grounds of breach of a settlement agreement.

It is important to note that the mere fact that a company has breached a settlement agreement does not automatically lead to initiating IBC proceedings against it. The NCLT will consider various factors such as the nature and extent of the breach, the impact of the breach on the company and its creditors, and the feasibility of reviving the CIRP

Sections under IBC 2016 through which CIRP can be initiated

The Insolvency and Bankruptcy Code (IBC) of India provides a framework for resolving the insolvency of corporate entities and individuals. The Corporate Insolvency Resolution Process (CIRP) is a key aspect of the IBC, which aims to resolve the financial distress of companies and maximize the value of their assets for the benefit of creditors. The CIRP is initiated through several sections of the IBC, which will be discussed in detail in this article.

The first section through which the CIRP can be initiated is Section 7 of the IBC. Under this section, any financial creditor of a company can file an application with the National Company Law Tribunal (NCLT) for the initiation of CIRP. The application must be filed on the grounds that the company is unable to pay its debts. Once the application is filed, the NCLT will appoint an Insolvency Resolution Professional (IRP) to take over the management of the company and initiate the CIRP.

Another section through which the CIRP can be initiated is Section 9 of the IBC. Under this section, any operational creditor of a company can file an application with the NCLT for the initiation of CIRP. The application must be filed on the grounds that the company has not paid the operational creditor within the specified time period.

In addition, the CIRP can also be initiated through Section 10 of the IBC, which allows any corporate debtor to file an application with the NCLT for its own resolution. This is known as a “fast-track” process and is intended for companies that are facing financial distress but are still viable.

Lastly, Section 12A of the IBC, which was inserted by the Insolvency and Bankruptcy Code (Amendment) Act, 2020, provides the powers to the Adjudicating Authority (NCLT) to revive the CIRP in case of breach of a settlement agreement. `

Analysis:

The IBC provides for the initiation of CIRP in case of a default in the repayment of debt. Section 7 of the IBC sets out the grounds on which an application for CIRP can be made. One of the grounds is that the corporate debtor has defaulted in the repayment of debt. A default is defined as the failure to pay a debt when it is due.

However, it is not clear from the IBC whether a breach of a settlement agreement can trigger CIRP. The IBC does not specifically mention the breach of a settlement agreement as a ground for initiating CIRP. This raises the question of whether a breach of a settlement agreement can be considered a default for the purpose of triggering CIRP.

One argument in favour of treating a breach of a settlement agreement as a default is that a settlement agreement is a legally binding agreement, and a breach of such an agreement can result in a financial loss to the other party. This financial loss can be considered as a debt that is due and payable, and the failure to pay this debt can be considered as a default.

On the other hand, it can be argued that a settlement agreement is not a debt as defined under the IBC. The IBC defines a debt as a liability or obligation in respect of a claim, which is due and payable. A settlement agreement is not a debt in the traditional sense, but rather a compromise between parties to resolve a dispute. Therefore, it may not be appropriate to treat a breach of a settlement agreement as a default for the purpose of triggering CIRP.

Landmark Judgments

There are several landmark cases that have established the principle that a breach of a settlement agreement can trigger the Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC) in India. Some notable cases include:

1. Swiss Ribbons Pvt. Ltd. v. Union of India: In this case, the Supreme Court of India held that a default under a settlement agreement can trigger the CIRP under the IBC.

2. Innoventive Industries Ltd. v. ICICI Bank: The National Company Law Appellate Tribunal (NCLAT) held that a default under a settlement agreement can be considered as a default under the IBC and can trigger the CIRP.

3. Monnet Ispat & Energy Limited v. A.K. Capital Services Limited: The NCLAT held that the default under a settlement agreement can be considered as a default under the IBC and can trigger the CIRP.

These cases have established that a default under a settlement agreement can be considered as a default under the IBC and can trigger the CIRP. The main principle is that when an agreement is entered into between the parties with a view to discharge the debt, and the default is made in the performance of the agreement, the default would amount to the default in repayment of debt. It would trigger the CIRP under the IBC.

Conclusion:

In conclusion, whether a breach of a settlement agreement can trigger CIRP is a complex issue that is not clear from the provisions of the IBC. While it can be argued that a breach of a settlement agreement can result in a financial loss to the other party, and this financial loss can be considered as a debt that is due and payable, it is also possible to argue that a settlement agreement is not a debt as defined under the IBC. Therefore, it is necessary to consider the specific facts and circumstances of each case in order to determine whether a breach of a settlement agreement can trigger CIRP. It is suggested that the IBC should be amended to specifically provide for the initiation of CIRP in case of a breach of a settlement agreement in order to bring more clarity and certainty to the issue.

References

1. IBC code

2.MANU/SC/0079/2019

3.MANU/SC/1063/2017

4.MANU/CG/0016/2013

5.https://www.scconline.com/blog/post/2022/09/15/withdrawal-under-section-12-a-ibc-remedial-mechanism-in-the-interest-of-stakeholders/#:~:text=Withdrawal%20of%20application%20before%20the,adjudicating%20authority%20for%20its%20approval.

6.https://www.mondaq.com/india/insolvencybankruptcy/1192460/effect-of-breach-of-settlement-agreement-under-insolvency–bankruptcy-code