Breach of Settlement Agreement and Revival of Insolvency Application

Posted On - 20 June, 2023 • By - Souvik Ganguly


In 2018, section 12A[i] was introduced in the Insolvency and Bankruptcy Code, 2016 (Code), to provide statutory recognition to settlement between the parties after the application to initiate the corporate insolvency resolution process (CIRP) has been admitted and allow withdrawal of the insolvency application. As of 31 March 2023,[ii], about 848 CIRPs have been withdrawn under the Code, out of which 650 CIRPs have been withdrawn pursuant to settlement between the corporate debtor and the creditors.

Instances have often been observed where in an attempt to evade the rigours of CIRP, the corporate debtor reaches a settlement with the creditor. In anticipation of expedited recovery, the creditor withdraws the insolvency application on the terms and conditions as may be agreed in a settlement agreement. This leads to discontinuation of the CIRP before the National Company Law Tribunal (NCLT). However, the corporate debtor subsequently reneges on the settlement terms, prompting the creditor to seek the revival of the insolvency application. This raises a critical question before the NCLT: whether an insolvency application can be revived without grant of liberty by the NCLT. Various benches of the NCLT have taken divergent views on the issue.

Recently, in IDBI Trusteeship Services Limited v. Nirmal Lifestyle Limited (IDBI Trusteeship Case), the National Company Law Appellate Tribunal (NCLAT) has held that when an insolvency application is withdrawn by placing the consent / settlement terms on record, which provide for the revival of the application upon any event of default, then the application is liable to be revived. It is not necessary for the NCLT to grant liberty for such revival in its order for withdrawal.


IDBI Trusteeship Services Ltd. (IDBI) filed an application (Insolvency Application) to initiate CIRP of Nirmal Lifestyle Ltd. (Corporate Debtor), which was admitted by the NCLT. Thereafter, IDBI and the Corporate Debtor entered into consent terms (Consent Terms). The interim resolution professional filed an application under section 12A of the Code (Withdrawal Application), for the withdrawal of the Insolvency Application on the basis of the Consent Terms. The NCLT allowed the Withdrawal Application, where the Consent Terms were brought on record.

Later, the Corporate Debtor defaulted in making payment as per the Consent Terms. One of the clauses of the Consent Terms provided an undertaking on behalf of the Corporate Debtor about revival of the Insolvency Application in case of default in making payment as per the Consent Terms (Revival Clause). Accordingly, IDBI filed an application before the NCLT for revival of the Insolvency Application. The NCLT rejected this application on the ground that once an insolvency petition has been withdrawn after settlement, there is no specific provision in the Code allowing the revival of an insolvency application. The NCLT’s order was challenged before the NCLAT.

NCLAT’s Ruling

NCLAT relied on precedents where the NCLAT has clearly distinguished between: (i) withdrawal simplicitor, wherein the settlement takes place outside the NCLT, and the insolvency application is withdrawn by merely stating such settlement before the NCLT; and (ii) where the terms of the settlement are taken on record before the NCLT and is made a part of the order of the NCLT. NCLAT held that withdrawal simplicitor does not warrant revival of the insolvency application unless accompanied by liberty to revive, or the settlement terms are taken on record.

The NCLAT observed that the Consent Terms and Revival Clause were presented to the NCLT along with the Withdrawal Application. It held that if the Consent Terms explicitly include a provision for revival, the NCLT cannot deny the revival of the petition. The NCLAT also emphasised that in such instances, the NCLT’s permission for revival becomes irrelevant. As a result, the NCLT’s decision was overturned, and the Insolvency Application was reinstated.

Our thoughts

It would be relevant to refer to Himadri Foods Ltd. v. Credit Suisse Funds AG judgment where the NCLAT had held that where the terms of the settlement were incorporated in the NCLT’s order, the revival of the insolvency proceedings will not be dependent on liberty being granted by the NCLT. The IDBI Trusteeship Case takes the view a step further by rendering the requirement to grant such liberty as ‘inconsequential’ if the consent terms clearly warrant the revival of the insolvency application on default, and such consent terms are taken on record before the NCLT.

In view of the IDBI Trusteeship Case, it is advisable to ensure that a clause providing the revival of the insolvency proceedings as a consequence of default of the settlement terms, is incorporated while drafting the settlement agreement. Further, such settlement terms must be placed before the NCLT along with the withdrawal application.

While the clarity provided by the IDBI Trusteeship Case is appreciated, it is necessary for the members of the committee of creditors (CoC) to consider the practical aspects of such revival. In essence, the CIRP is merely restored to a post-admission stage, obviating the pre-admission enquiry by the NCLT, and various processes under the Code have to be undertaken de-novo. For instance, where the insolvency application is withdrawn after the constitution of the CoC, a fresh public announcement with respect to the revival of CIRP may have to be made for inviting new claims. The CoC will have to be reconstituted subject to fresh claims by new creditors or revised claims by current creditors. Any expression of interest, if invited, will become redundant due to a change in the claims of the creditors, and fresh expressions of interest should be invited. Therefore, while incorporating a revival clause in settlement terms can be beneficial, it is crucial to carefully assess the practical implications and potential challenges that may arise on account of the revival process.

Authors: Souvik Ganguly, Altamash Qureshi and Paridhi Rastogi

The information contained in this document is not legal advice or legal opinion. The contents recorded in the said document are for informational purposes only and should not be used for commercial purposes. Acuity Law LLP disclaims all liability to any person for any loss or damage caused by errors or omissions, whether arising from negligence, accident, or any other cause.

[i] Section 12A provides the NCLT the power to allow the withdrawal of application admitted under the provisions of the Code, on an application by the applicant, which must be filed with the approval of 90% of the committee of creditors, where the committee of creditors has been constituted.

[ii] The quarterly newsletter of the Insolvency and Bankruptcy Board of India, January -March, 2023