Case: Bahadur Ram Mallah (Ex-Director, Uniworth Textiles Limited) Versus Assets Reconstruction Company (India) Limited and Anr
Facts of the Case
ICICI Bank and IFCI Ltd. had sanctioned loan facilities to Uniworth Textiles Ltd. (“UTL”), a company part of the larger Uniworth Group. These loan accounts eventually turned non-performing, and both banks assigned their respective debts to the Asset Reconstruction Company (India) Ltd. (“ARC”) — ICICI’s on 31.03.2004 and IFCI’s on 12.01.2007.
On 19.09.2016, the Uniworth Group submitted a Global Settlement Arrangement (“GSA”) to ARC, proposing to settle dues across multiple group companies by paying a total sum of Rs. 75 crores. As per this offer, ARC received Rs. 51.10 crore from Uniworth Group towards the agreed settlement. However, the remaining sum of Rs. 21.40 crore remained unpaid. Subsequently, on 22.11.2018, ARC revoked the settlement citing default
ARC then filed a Section 7 IBC petition on 27.11.2018 before the Adjudicating Authority (NCLT) to initiate the Corporate Insolvency Resolution Process (CIRP) against UTL for a total claim of Rs. 205 crores.
On 17.03.2020, the NCLT dismissed the application, holding it to be time-barred. ARC appealed to NCLAT. On 10.07.2023, the NCLAT reversed that decision, holding that the Section 7 application was not time-barred and remanded the matter back to the NCLT for fresh consideration on merits.
On 14.12.2024, the NCLT admitted the application, initiating CIRP against the Corporate Debtor. The Corporate Debtor then filed this appeal before the NCLAT challenging this admission, primarily on the grounds that (i) the debt arose out of a settlement agreement (not a financial debt), (ii) the revocation of the GSA was unilateral, and (iii) there was no unambiguous acknowledgment of liability or default that could support a Section 7 admission.
Tribunal’s Decision
The NCLAT dismissed the appeal, upholding the admission of CIRP. It held that entering into a settlement agreement — and the subsequent breach thereof — does not extinguish the character of the underlying debt as a financial debt. The tribunal made it clear that the Section 7 application was not based on default under the GSA but on the original financial debt extended by ICICI and IFCI and later assigned to ARC.
It noted that ARC’s communication clearly mentioned outstanding dues of Rs. 21.40 crore against the Corporate Debtor, and the Corporate Debtor’s reply did not challenge this claim nor provide evidence of payment. Instead, it merely requested a Non-Dues Certificate (NDC) and acknowledged that other group entities had been issued NDCs after payment. This, the Tribunal observed, reflected an implied acceptance of the revocation of the GSA and the unpaid status of the dues.
The Tribunal further stated that for limitation purposes, entries in the balance sheet (as in the 2018–2019 records) can be considered acknowledgments of debt. It also emphasized that even if the revocation of the GSA was contested, such contestation alone cannot override or neutralize the financial creditor’s statutory right to invoke Section 7 under the IBC.
The NCLAT also referred to the case of Priyal Kantilal Vs IREP Credit Capital Pvt. Ltd., reaffirming that a breach of settlement/consent terms does not wipe out or transform the nature of financial debt. Therefore, ARC was fully entitled to initiate insolvency proceedings. The Tribunal concluded that the financial debt and default were established, and there was no valid ground to interfere with the Adjudicating Authority’s admission order.
Our Comments
Divergent view on Financial and Operational Creditors
This decision draws attention to a significant divergence in the way defaults under settlement agreements are treated under Section 7 (financial creditors) and Section 9 (operational creditors) of the IBC. While financial creditors are allowed to invoke Section 7 even after a settlement agreement has been breached — as long as the underlying financial debt survives — operational creditors are often denied the same relief under Section 9 when the default arises solely from a breach of settlement terms. Courts have repeatedly held that a settlement breach does not constitute an operational debt.
The underlying rationale may lie in the very definitions of “financial debt” and “operational debt” under the IBC. Financial debt is defined broadly in Section 5(8) to include any debt along with interest that is disbursed against the consideration for time value of money. This definition allows financial creditors to fall back on the original loan transaction — even if they entered into a compromise or restructuring, the original loan does not get extinguished unless fully satisfied. Thus, in cases like the present one, the NCLAT rightly treated the original lending transaction as the foundation of the Section 7 application, not the settlement agreement.
In contrast, operational debt under Section 5(21) is more transactional — it relates to goods, services, or dues like rent, employment, etc. When such a debt is due and a settlement agreement is executed for it, the original operational liability often merges into the settlement terms. If the debtor defaults on those terms, what survives is a contractual claim for breach, not an operational debt per se. That’s why courts frequently hold that operational creditors must pursue such claims through civil suits or arbitration, not through Section 9 proceedings.
The Hon’ble NCLT, Kolkata in the case of M/s. Amrik Cranes and Infrastructure v. Simplex Infrastructures Limited has held that “Thus, in light of the judgment rendered in Trafigura (Supra) and Maldar (Supra), we are of the view that this Adjudicating Authority is not a forum to recover money arises in default of instalment of a settlement agreement. Breach of the terms and conditions of payment in accordance with a settlement agreement does not constitute an “Operational Debt” as per the definition under Section 5 (21) of the I&B Code and accordingly that cannot be a ground to trigger CIRP against the Corporate Debtor. Thus, the outstanding due claimed herein has lost its substratum of being an “Operational Debt” under the I&B Code.”
Therefore, decision in the present case, reflects not an inconsistency but a structural difference in the Code. Financial creditors enjoy greater leeway under Section 7 because their claims inherently arise from long-term, structured loans backed by documentation and assignments — the IBC gives them wide latitude to act on original defaults even after failed restructuring efforts. Operational creditors, however, are expected to resolve disputes contractually if a settlement breaks down, unless the original operational debt itself remains unpaid.
Can financial creditor revert to the original facility agreement and claim amount under the same as against the settlement agreement?
In our opinion, a financial creditor is well within their rights to revert to the original facility agreement and claim the outstanding amount under it, even after a settlement agreement has been breached. This is because the original financial debt, as defined under Section 5(8) of the IBC, survives unless it is fully discharged or expressly novated. A failed settlement does not extinguish the underlying loan unless there is clear intent to substitute it entirely. Therefore, in insolvency proceedings under Section 7, the creditor can base their claim on the original transaction, which remains valid and enforceable in law.
For a deeper dive into IBC and its evolving jurisprudence, check out our guide here: https://rdlawchambers.com/comprehensive-guide-on-insolvency-and-bankruptcy-code-and-nclt-proceedings/