2019 (8) TMI 874 - Tri - Insolvency and Bankruptcy

Admissibility of petition - initiation of Corporate Insolvency Resolution Process - Corporate debtor - scope of 'Operational Debt' - section 9 of Insolvency Bankruptcy Code, 2016 - HELD THAT - The debt in hand pertains to liquidated damages and is not an Operational Debt within the meaning of Section 5(21) of the Code. The Liquidated damages are the damages whose amount the parties designate during the formation of a contract for the injured party to collect as compensation upon a specific breach, such as in this case, non-performance. The liquidated damages can be crystallised only after adjudication from a court of law. Its reasonableness is also decided by a court of law. on the other hand, the insolvency proceedings are not the appropriate forum to decide the reasonability of the liquidated damages or to file claim for damages. Hence, the damages claimed in the present case cannot be adjudicated as the same is the subject matter of a civil suit. Liquidated damages are not an actionable claim, until and unless adjudicated. This is the first reason for not considering the liquidated damages as operational debt - Liquidated damages are provided in certain legal contracts as an estimate of otherwise intangible or hard-to-define losses to one of the parties. As against that, the meaning of Operational Debt is a claim in respect of goods supplied, or services rendered as defined in section 5(21) of the Code. Therefore, it can be concluded that the impugned claim of damages, neither ascertainable nor crystallised, hence out of the ambits of the Operational Debt. This petition stands outside the scope of the Code and Section 9 thereof - appeal dismissed on maintainability.

Issues Involved:
1. Whether the claim for liquidated damages constitutes an operational debt under Section 5(21) of the Insolvency and Bankruptcy Code, 2016.
2. Whether the National Company Law Tribunal (NCLT) can enforce an order for liquidated damages.
3. Whether the petition is barred by limitation.
4. Whether the demand notice sent by the advocate was authorized.

Issue-wise Detailed Analysis:

1. Whether the claim for liquidated damages constitutes an operational debt under Section 5(21) of the Insolvency and Bankruptcy Code, 2016:

The Tribunal examined whether the claim for liquidated damages falls under the definition of "operational debt" as per Section 5(21) of the Code. It was noted that operational debt is confined to claims related to goods, services, employment, or government dues. The Tribunal referred to several judgments, including the Supreme Court's decision in Union of India V. Raman Iron Foundry and the Bombay High Court's decision in E-City Media Pvt. Ltd. V. Sadhrta Retail Ltd., which established that liquidated damages are not considered a debt until adjudicated by a court. The Tribunal concluded that liquidated damages are not an operational debt as they do not arise from the supply of goods or services but are a form of compensation for breach of contract.

2. Whether the National Company Law Tribunal (NCLT) can enforce an order for liquidated damages:

The Tribunal discussed the applicability of the NCLAT judgment in Annapurna Infrastructure Pvt. Ltd. v. M/s Soril Infra Resources Ltd., which held that NCLT can be moved for the enforcement of an arbitral award. However, the Tribunal distinguished the present case by noting that the claim for liquidated damages is not covered by the definition of operational debt. The Tribunal emphasized that insolvency proceedings are not the appropriate forum to decide the reasonableness of liquidated damages or to adjudicate claims for damages, which should be pursued in a civil suit.

3. Whether the petition is barred by limitation:

The Tribunal did not explicitly address the issue of limitation in detail. However, it implied that the petition is not maintainable under the Insolvency and Bankruptcy Code due to the nature of the claim being for liquidated damages, which requires adjudication by a court.

4. Whether the demand notice sent by the advocate was authorized:

The Corporate Debtor contended that the advocate who sent the demand notice was not authorized by the Board of Directors of the Operational Creditor. The Tribunal did not provide a detailed analysis of this contention, as the primary focus was on the nature of the debt and the maintainability of the petition under the Insolvency and Bankruptcy Code.

Findings:

The Tribunal concluded that the claim for liquidated damages does not constitute an operational debt under Section 5(21) of the Insolvency and Bankruptcy Code. It emphasized that liquidated damages are not actionable claims until adjudicated by a court. The Tribunal also noted that the scope and jurisdiction of the NCLT are limited to the provisions of the Insolvency Code, and the claim for liquidated damages falls outside this scope. Consequently, the petition was dismissed on the grounds of maintainability, with the liberty granted to the Operational Creditor to pursue the claim in an appropriate forum.

Conclusion:

The petition was dismissed on the grounds that the claim for liquidated damages does not fall within the definition of operational debt under the Insolvency and Bankruptcy Code. The Tribunal directed the Operational Creditor to seek remedy in an appropriate forum as per applicable law. The file was ordered to be closed and consigned to records.

← Previous Next →