IBC | Sec. 9 Petition Not Maintainable Against Claim For Compensation Penalty Under A Contract: NCLAT Delhi

The National Company Law Appellate Tribunal (“NCLAT”), New Delhi Bench, comprising of Justice Ashok Bhushan (Chairperson) and Shri Barun Mitra (Technical Member), while adjudicating an appeal filed in Chandrashekhar Exports Pvt. Ltd. v Babanraoji Shinde Sugar & Allied Industries Ltd., has upheld the dismissal of a petition under Section 9 of IBC which was filed based on claim of compensation penalty under a contract. The Bench held that whether a claim for compensation penalty has crystallized or not is to be adjudicated by a competent Court and not the Adjudicating Authority. Background Facts Chandrashekhar Exports Pvt. Ltd. (“Appellant”) and Babanraoji Shinde Sugar & Allied Industries Ltd. (“Respondent”) had entered into an Agreement. The Clause 10 of the Agreement stated that if the Respondent fails to perform, then it will be liable to repay the advance to the Appellant along with compensation penalty and losses incurred. When the Respondent could not perform the Agreement, it repaid the advance money to the Appellant. Since the compensation penalty remained unpaid, the Appellant filed a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Respondent. It was argued that mere refund of the advance money would not absolve the Respondent from making payment of compensation penalty. The NCLT dismissed the petition, while observing that a petition under Section 9 of IBC cannot be admitted on the basis of claim of compensation under a contract. An Operational Debt must be crystallized, undisputed and shouldn’t be something which requires adjudication by competent authority. The Appellant filed an appeal before the NCLAT against the order of dismissal. NCLAT Verdict The Bench observed that as per Clause 10 of the Agreement, the entitlement is for compensation and penalty if there is failure in performance on part of the Respondent. It was held that a competent Court would adjudicate on the issue of whether compensation penalty has crystallized or not. The NCLT has rightly rejected the Section 9 petition. “We are of the view that for crystallization of said compensation penalty adjudication is required by Competent Court and Adjudicating Authority has rightly not admitted Section 9 application. We are of the view that it is always open for the Appellant to take a remedy as available as per the contract in accordance with law.” The appeal has been dismissed. Case title: Chandrashekhar Exports Pvt. Ltd. v Babanraoji Shinde Sugar & Allied Industries Ltd. Case No.: Company Appeal (AT) (Insolvency) No.1032 of 2023 Counsel For Appellant: Mr. Kunal Tandon, Mr. Pulkit Agarwall and Mr. Ashutosh Kumar, Advocates. Counsel For Respondent: Mr. Prakhar Tandon, Advocate. Click Here To Read/Download Order

IBC | Sec. 9 Petition Not Maintainable Against Claim For Compensation Penalty Under A Contract: NCLAT Delhi

Pallavi Mishra

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