Home  > Recent Judgements > Corporate Debt Challenges: The Arjun Industries Insolvency Experience

 August 09, 2024

BACKGROUND

In the case of  Ms. Mausumi Bhattacharjee v.Jumbo Chemicals and Allied Industries Pvt. Ltd. and Anr. Corporate Debtor obtained a loan of Rs. 3.67 Crores from Industrial Development Bank of India (IDBI) and an additional foreign currency loan of Rs. 1.83 Crores. Failing to service and repay these debts, the Corporate Debtor sought a One Time Settlement (OTS) with IDBI, agreeing to settle for Rs. 2.50 Crores. However, the Corporate Debtor could not meet the OTS amount, leading to its failure.

Subsequently, IDBI assigned its outstanding debts to Kotak Mahindra Bank Ltd. on 31.06.2006. Kotak Mahindra Bank Ltd. then assigned the debt to Respondent No. 1 on 16.04.2008 through a registered deed of assignment. On 12.10.2018, a meeting took place between the Appellant (Corporate Debtor) and Respondent No. 1, where they discussed the disinvestment of the Corporate Debtor’s mortgaged properties. This led to a settlement agreement on 27.08.2019, in which both parties agreed to sell the mortgaged properties and share the proceeds.

The settlement agreement acknowledged the original loan assignment from IDBI to Kotak Mahindra Bank Ltd. and further to Respondent No. 1. On 26.07.2021, the Appellant attempted to unilaterally cancel the settlement agreement via email. Respondent No. 1 responded on 04.08.2021, accusing the Appellant of trying to evade its repayment obligations through unilateral cancellation.

Respondent No. 1 filed an application under Section 7 of the Insolvency and Bankruptcy Code (IBC) before the Adjudicating Authority. The application was accepted, and the Corporate Debtor entered the Corporate Insolvency Resolution Process (CIRP) on 22.02.2024. The Appellant contended that there was a novation of the contract, implying that the original contract with Respondent No. 1 had ceased to exist.

DECISION OF APPELLATE TRIBUNAL

The Appellant argued that the settlement agreement dated 27.08.2019 was invalid because Respondent No. 1’s name was struck off at the time of signing. The NCLAT noted that Respondent No. 1 was struck off for not furnishing financial statements but was later restored by the NCLT, making all actions, including the settlement agreement, valid. The Appellant also claimed novation of contract, asserting that the settlement agreement replaced the old obligations. However, the NCLAT found no clauses indicating novation, as the agreement only addressed disposing of mortgaged properties without altering the essential character of the original contract. The Tribunal emphasized that whether a subsequent agreement supersedes the old one depends on specific case facts. Here, the old loan agreements and assignment deeds remained valid, and Section 62 of the Indian Contract Act, 1872, did not apply. Consequently, the appeal was dismissed, affirming the validity of the settlement agreement, and all interlocutory applications were closed with no costs awarded.

JUDGEMENT

The Promoter, Shareholder, and Suspended Board of Director of Arjun Industries Limited, filed an appeal under Section 61(1) of the Insolvency and Bankruptcy Code, 2016 against the order dated 22.02.2024 by the National Company Law Tribunal, New Delhi Bench. This order initiated the Corporate Insolvency Resolution Process (CIRP) for Arjun Industries Limited, following a Section 7 application by Jumbo Chemicals and Allied Industries Private Limited, the financial creditor. Despite several legal proceedings and a settlement agreement in 2019 to sell mortgaged properties and share the proceeds, the Appellant canceled this agreement in 2021, leading Jumbo Chemicals to file the Section 7 application. The Appellant argued the settlement agreement indicated novation, meaning the original debt was extinguished, and the claim was now invalid. Additionally, the Appellant contended that Jumbo Chemicals had no legal standing as it had been struck off from the Register of Companies in 2018, although it was restored in 2021.

The Tribunal dismissed these arguments, noting that the restoration of Jumbo Chemicals’ name retroactively validated the settlement agreement. It held that the settlement agreement did not constitute novation of the original loan agreements. The Tribunal further stated that the continuous acknowledgment of debt in Arjun Industries’ balance sheets upheld the existence of the debt and default. Additionally, the Tribunal referenced the historical case of Manohur Koyal vs. Thakur Das Naskar, illustrating that an unsatisfied subsequent agreement does not nullify the original contract. Thus, the debt and default conditions were met, justifying the CIRP initiation. Consequently, the appeal was dismissed, affirming the validity of the Section 7 application and the commencement of CIRP for Arjun Industries Limited.

ANALYSIS

This case highlights the intricate legal entanglements that can arise from loan defaults and subsequent settlements. The core issue revolves around whether the settlement agreement superseded the original loan agreements and assignments. The appellant argued for a novation, claiming the old agreements ceased to exist, while the respondent insisted on the validity of the original debt. The NCLAT, however, emphasized that the restoration of the respondent’s name retroactively validated all agreements. Furthermore, the tribunal found no clear novation elements within the settlement agreement, establishing that the original financial obligations remained intact. This ruling underscores the importance of clear contractual terms and continuous legal existence for enforceability. The long timeline of the case, spanning over two decades, underscores the protracted nature of financial disputes and the critical role of precise legal documentation and adherence to procedural norms in corporate debt resolutions.

For more information or queries, please email us at

[email protected]