Can Insolvency Proceedings Be Revived Without a Specific Clause in a Settlement Agreement? NCLAT’s Landmark Ruling Explained

The Role of Settlement Agreements in the IBC Framework

The IBC was created to provide a structured, time-bound process for resolving corporate insolvency. It aims to revive a struggling company rather than liquidate it. A key provision, Section 12A allows for the withdrawal of an insolvency application with the approval of 90% of the Committee of Creditors (CoC). This is a common path when parties reach a settlement, allowing them to resolve disputes outside the formal, often lengthy, Corporate Insolvency Resolution Process (CIRP).

Settlement agreements are now a routine part of this process. They offer a faster, less expensive route to a resolution. To ensure compliance, many of these agreements include a “revival clause,” which explicitly states that if the debtor fails to meet their obligations, the creditor can simply revive the original insolvency proceedings.

However, a major problem arises when this clause is missing. Historically, debtors who defaulted on such agreements would argue that the settlement was a separate contract, and therefore, the creditor had no choice but to file a new civil suit for breach of contract. This would force the creditor into a new, time-consuming legal battle, completely undermining the purpose of the IBC.

NCLAT’s Rationale: Why Substance Trumps Form

The NCLAT’s recent ruling directly addresses this loophole. Instead of focusing on the absence of a specific clause, the tribunal looked at the bigger picture: the intent behind the settlement agreement and the conditional nature of the withdrawal.

Here’s a breakdown of the NCLAT’s reasoning:

● Conditional Nature of Withdrawal: The tribunal asserted that the withdrawal of an IBC application under Section 12A is not an unconditional act. It is inherently conditional on the successful implementation of the settlement agreement. The insolvency proceedings are essentially put on hold, ready to be reactivated if the agreed-upon terms are not met. The withdrawal is a suspension not a permanent termination.

● The Spirit of the IBC: The NCLAT emphasized that the IBC is a special law designed for swift and effective debt resolution. Interpreting it in a way that allows debtors to escape their obligations due to a missing clause would be a gross injustice and would weaken the entire framework. It would encourage bad-faith settlements, where a debtor could withdraw an application and then default, leaving the creditor in a worse position.

● Preventing Abuse of Law: The judgment serves as a powerful deterrent against the misuse of the legal process. By allowing proceedings to be revived, the NCLAT made it clear that the law cannot be circumvented through clever contract drafting. The court has an inherent power to ensure its processes are not abused and a settlement that leads to withdrawal is not a “get out of jail free” card.

Key Takeaways for Businesses and Creditors

This ruling has major implications for all stakeholders in the Indian business environment.

● For Creditors: This is a significant win. Creditors can now be more confident in entering into settlement agreements, knowing they can easily revive the insolvency proceedings if the debtor defaults. This greatly reduces their legal risk and the time and cost associated with pursuing a new civil suit.

● For Corporate Debtors: The ruling places a greater burden on debtors to honor their commitments. The absence of a revival clause is no longer a valid excuse for defaulting. This reinforces the need for transparency and good faith in all dealings.

● For the IBC Framework: The judgment strengthens the IBC as a whole. It proves that the tribunals are willing to take a flexible, purpose-driven approach to interpretation, ensuring the Code remains a robust and effective tool for corporate governance and debt resolution.

In conclusion, the NCLAT’s decision is a crucial step forward for India’s corporate insolvency regime. By confirming that insolvency proceedings can be revived even without an explicit revival clause, the tribunal has upheld the core principles of the IBC and closed a major loophole. This ruling ensures that the integrity of the settlement process is protected, holds corporate debtors more accountable and provides a much-needed layer of security for creditors.