Section 9 IBC Cannot Be Used to Recover Settlement Interest: NCLAT Delhi

Background of the dispute

Permali Wallace Pvt. Ltd. had filed an application under Section 9 of the IBC in 2017 against Narbada Forest Industries Pvt. Ltd. The proceedings concerned an operational debt and claimed interest.

The parties subsequently entered into a settlement dated 7 November 2017. On the basis of that settlement, the earlier Section 9 proceeding was withdrawn.

Under the settlement, the corporate debtor paid the complete principal operational debt of ₹1,74,16,527. It also paid ₹16 lakh towards the agreed interest component.

Fresh Section 9 application for unpaid interest

After the principal amount had been paid, a dispute continued regarding the balance interest. The operational creditor therefore filed another application under Section 9.

The settlement referred to interest of ₹48 lakh, of which ₹16 lakh had been paid. This would leave ₹32 lakh under that calculation. However, the operational creditor later asserted a claim of ₹1,28,00,000 towards further interest after reducing the amount already received.

The corporate debtor disputed the interest calculation. The controversy was therefore no longer about non-payment of the original principal operational debt, but about the extent of interest allegedly payable under the settlement.

Why NCLT Indore rejected the application

The NCLT Indore Bench found that the new application was effectively seeking execution of the settlement agreement dated 7 November 2017.

It observed that an amount arising from a settlement agreement could not, on the facts before it, be treated as an operational debt within the meaning of Section 5(21) of the IBC.

The NCLT also noted that the entire principal operational debt and part of the agreed interest had already been paid. What remained was a disputed claim concerning calculation of interest, which could not be resolved through summary insolvency proceedings.

The Section 9 application was consequently rejected by order dated 3 November 2022.

Arguments before the NCLAT

Permali Wallace challenged the rejection before the NCLAT Principal Bench. It argued that the settlement terms permitted revival of proceedings if the corporate debtor committed a breach.

The appellant also referred to dishonoured post-dated cheques and maintained that the subsequent Section 9 application was filed for the unpaid balance interest.

The central issue before the Appellate Tribunal was whether the insolvency process could be invoked when the principal operational debt had been discharged and the surviving controversy related to disputed interest under the settlement.

IBC is not a debt-recovery proceeding

The NCLAT relied on the Supreme Court's decision in Swiss Ribbons Pvt. Ltd. v. Union of India, which explains that the IBC is designed for insolvency resolution and is not a recovery mechanism.

The Appellate Tribunal found that the application before it was intended only to recover the balance interest amount. It was not filed to resolve any genuine insolvency of the corporate debtor.

Accordingly, the NCLAT held that the Adjudicating Authority had committed no error in rejecting the Section 9 application. The appeal was dismissed for lack of merit.

Effect of a settlement on the original operational debt

A settlement does not produce the same result in every insolvency dispute. The consequences depend on the original transaction, the terms of settlement, the manner in which earlier proceedings were withdrawn and the nature of the subsequent default.

In this case, the complete principal operational debt had admittedly been paid. The surviving demand was for disputed interest calculated under or after the settlement.

The NCLAT therefore treated the later application as an attempt to recover money rather than an effort to commence a legitimate insolvency resolution process.

Why a revival clause was not sufficient

The appellant relied on terms allowing revival in case of breach. However, a contractual clause cannot by itself convert a disputed recovery claim into a maintainable insolvency application.

Even when parties reserve rights under a settlement, the creditor must still satisfy the statutory conditions of Sections 8 and 9, including the existence of an operational debt, default and absence of a genuine pre-existing dispute.

The NCLAT focused on the substance of the proceeding. Since the principal debt had been paid and only disputed interest remained, the application did not serve the resolution purpose of the Code.

Disputed interest requires the appropriate remedy

The ruling does not declare that interest can never form part of an operational debt. Interest may be considered where it arises from agreed contractual terms and remains connected with an unpaid operational debt.

The important distinction in this case was that the principal operational debt had been fully discharged and the claimed interest itself was disputed under the settlement arrangement.

A creditor may pursue a legally available civil, contractual, arbitration or other recovery remedy for such an amount, depending on the documents and limitation. Section 9 cannot be used merely as pressure for payment.

Practical guidance for operational creditors

• Record the principal amount, interest terms, due dates and settlement payments precisely.
• Ensure that contractual interest is supported by invoices, purchase orders, agreements or other accepted terms.
• Before issuing a Section 8 demand notice, identify whether the surviving claim remains an operational debt or has become a disputed settlement claim.
• Do not present insolvency proceedings as a method for executing a settlement agreement.
• Review whether the principal operational debt has already been paid in full.
• Assess any correspondence showing a dispute about the rate or calculation of interest.
• Use the appropriate recovery forum when the objective is collection of a disputed amount rather than insolvency resolution.
• Preserve settlement terms, payment records, cheque-return documents and withdrawal orders.

Practical guidance for corporate debtors

• Maintain proof of every principal and interest payment made under a settlement.
• Respond promptly to incorrect interest calculations and explain the basis of the dispute.
• Do not rely only on the existence of a settlement; place the complete payment history before the Tribunal.
• Demonstrate where the insolvency application is being used for recovery rather than resolution.
• Raise genuine disputes before receipt of the Section 8 demand notice wherever the dispute already exists.

Key takeaways

• The appeal number was Company Appeal (AT) (Insolvency) No. 36 of 2023.
• The NCLAT Principal Bench delivered the order on 17 January 2023.
• The original principal operational debt of ₹1,74,16,527 had been paid in full.
• The corporate debtor had also paid ₹16 lakh towards interest.
• The surviving claim concerned disputed balance interest under the settlement.
• A Section 9 application cannot be maintained merely to execute settlement terms or recover disputed interest.
• A contractual revival clause does not remove the statutory requirements of the IBC.
• The NCLAT dismissed the appeal and upheld the NCLT Indore order dated 3 November 2022.

Conclusion

Permali Wallace Pvt. Ltd. v. Narbada Forest Industries Pvt. Ltd. reinforces the boundary between insolvency resolution and ordinary money recovery. Once the principal operational debt was paid, the disputed claim for settlement interest could not be pursued through Section 9 merely because the settlement had allegedly been breached.

Creditors should select remedies according to the true nature of the surviving claim. The IBC may address genuine insolvency arising from an operational default, but it should not be used as an enforcement shortcut for disputed settlement amounts.