1. Introduction

The case of Tráfico India Private Limited v. TDT Copper Limited adjudicated by the National Company Law Appellate Tribunal (NCLAT) in September 2022 presents a significant interpretation of what constitutes an 'operational debt' under the Insolvency and Bankruptcy Code, 2016 (IBC). This appellate decision delves into whether debts arising from settlement agreements can be categorized as operational debts, thereby qualifying for the Corporate Insolvency Resolution Process (CIRP). The primary parties involved are Tráfico India Private Limited (the Appellant and Operational Creditor) and TDT Copper Limited (the Respondent and Corporate Debtor).

2. Summary of the Judgment

The Appellant, Tráfico India Pvt. Ltd., sought initiation of CIRP against the Respondent, TDT Copper Ltd., under Section 9 of the IBC, asserting that the Respondent had defaulted on payments under a Master Sale Agreement (MSA) and a subsequent Settlement Agreement. The Adjudicating Authority (NCLAT) dismissed the application, holding that the unpaid amounts under the Settlement Agreement did not qualify as 'operational debt' under Section 5(21) of the IBC. The Appellant appealed this decision, which was ultimately upheld by the NCLAT, affirming that settlement agreement-related debts fall outside the scope of operational debts eligible for insolvency proceedings under the IBC.

3. Analysis

3.1 Precedents Cited

The judgment references pivotal rulings from the Supreme Court of India that define and distinguish types of debts. Notably:

• Kesoram Industries & Cotton Mills Vs. Commissioner of Wealth Tax (1966): This case elucidated the distinction between 'debt owing' (future obligation) and 'debt due' (current obligation), laying the groundwork for understanding debt categorization.
• Innoventive Industries Ltd. vs. ICICI Bank (2018): This judgment reinforced that a debt is considered 'due' only when it is payable in the present and not contingent on future conditions or agreements.

These precedents guided the tribunal in interpreting the nature of the debt under the Settlement Agreement in question.

3.2 Legal Reasoning

The crux of the legal reasoning rests on the definition of 'default' and 'operational debt' under the IBC:

• Definition of Default: As per Section 3(21) of the IBC, default occurs when there is non-payment of debt that has become due and payable.
• Operational Debt: Section 5(21) defines operational debt as a debt owed in the ordinary course of business, including any claim related to a salary, leave, bonus, or any other amount payable to, or for services rendered by, an employee under any contract of employment.

The Tribunal examined whether the unpaid amounts under the Settlement Agreement met these criteria. It concluded that the Settlement Agreement aimed to restructure and reduce the outstanding debt rather than constituting a fresh operational debt. The agreement's conditional terms and the Respondent's partial compliance indicated that the debt did not become 'due' in the IBC sense, thereby not triggering Section 9.

3.3 Impact

This judgment has significant implications for the interpretation of operational debt under the IBC. It establishes that:

• Debts arising from Settlement Agreements, especially those involving restructuring or conditional repayment terms, may not qualify as operational debts under the IBC.
• Appellants cannot rely solely on settlement acknowledgments to initiate insolvency proceedings if such debts do not meet the 'due and payable' criterion as defined by the IBC.
• Entities engaged in settlement negotiations should be aware that not all acknowledged debts grant creditors the immediate right to initiate CIRP, potentially affecting strategies for debt recovery.

4. Complex Concepts Simplified

4.1 Operational Debt

Operational Debt refers to debts incurred in the normal course of business operations. Under the IBC, this includes debts for the supply of goods or services essential to business functions. However, not all liabilities qualify; the debt must be present, due, and not contingent on future events.

4.2 Corporate Insolvency Resolution Process (CIRP)

CIRP is a process initiated under the IBC to resolve insolvency issues of a corporate debtor. It involves a detailed process of debt assessment, negotiations, and restructuring to pay off creditors, aiming to either revive the company or orderly liquidate its assets.

4.3 Settlement Agreement

A Settlement Agreement is a legally binding contract wherein parties agree to resolve disputes or outstanding obligations. In this case, it restructured the repayment terms of the existing debt but did not establish a new liability qualifying as operational debt under the IBC.

5. Conclusion

The NCLAT's decision in Tráfico India Pvt. Ltd. v. TDT Copper Ltd provides clarity on the boundaries of 'operational debt' under the IBC. By excluding debts arising from settlement agreements that do not unequivocally meet the 'due and payable' criteria, the tribunal reinforces the need for precise definitions in insolvency cases. This judgment underscores the importance for creditors to ensure that any claim intended to trigger CIRP aligns strictly with the IBC's definitions and prerequisites. Consequently, parties engaging in settlement negotiations must meticulously assess the implications of such agreements on their insolvency rights and remedies.