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More often than not, an insolvency application filed by an operational creditor under the Insolvency and Bankruptcy Code, 2016 (IBC) results into settlement between the triggering creditor and the corporate debtor. Typically, such settlements are recorded by way of consent terms, which are filed with the National Company Law Tribunal (NCLT).
But what happens when the corporate debtor fails to honour its debt under the consent terms?
In a first of its kind case, the consent terms so entered into between the DBM Geotechnics and Constructions Pvt Ltd (the operational creditor) and Dighi Port Ltd (the corporate debtor) at the stage of admission were breached by Dighi.
The initial application had been filed by DBM for recovery of a sum of approximately Rs. 22.5 crores (plus 24% p.a. interest) for construction work undertaken by DBM. The consent terms entered into thereafter, required Dighi to pay a (full and final) settlement amount of Rs. 30 crore in installments.
Based on the consent terms, both Dighi and DBM agreed to ‘settle all disputes, differences and claims between them arising out of the work executed’.
Dighi, however, ‘inadvertently’ paid only Rs. 2.6 crore and defaulted in paying the balance installments.
The consent terms permitted DBM to either revive its earlier application or file a fresh one, in the event Dighi defaulted in is payment. However, the same bench in a previous order had ruled that nothing in the IBC allows revival of an application previously withdrawn / disposed of in terms of consent terms.
Accordingly, a fresh application under Section 9 of the IBC was filed by DBM against Dighi.
Dighi defended its stance by, inter alia, questioning the very competency of DBM to enter into the consent terms. It said that the consent terms were null and void in view of the objections raised by a shareholder having 36% in DBM.
Further, the claim itself was challenged as being ‘bereft of elements of operational debt’, since it was based on the claims arrived at between the parties in the consent terms, and not the original claim made in the previous application, which was dismissed.
Further, Dighi referred to a pre-existing dispute with respect to the claim under Section 11 of the Arbitration and Conciliation Act, 1996, which was pending before the Bombay High Court. DBM had withdrawn this claim only after the notice was served in the new application.
Accordingly, the bench settled the dispute by answering two broad questions:
a) Whether the nature of claim gets change once parties enter into consent terms ?
On this point, the bench said that merely entering into consent terms does not change the nature of claim. The underlying claim continues to be in respect of the services that DBM had rendered to Dighi. The bench also said in its order that Dighi had the opportunity to raise several of its objections the first time the case came up for admission but didn’t do so.
b) Whether the withdrawal of arbitration proceedings, after being served a Section 8 demand notice, will amount to dispute under the IBC?
Observing the broad language used in the consent terms which settled all disputes, differences and claims when the parties arrived into consent terms, the bench said that whatever disputes were there in existence before execution of the consent terms, have to be treated as resolved by the consent terms subsequently arrived at. Withdrawing after issuing of notice is merely a technical argument and holds no substance, said the bench.
The application was thus admitted.
Senior Counsel Mustafa Doctor argued for DBM briefed by Sachin Mandlik‘s team at Khaitan & Co. Raghavan Sarathy of Thodur Law Associates argued on behalf of Dighi along with Akhil Sarathy and Devendra Avhad.
(Read the order)