NCLT Mumbai: Operational Debt Under IBC Does Not Include Penalty Or Liquidated Damages

Background Facts:

Matoshri Laxmi Sugar Co-Generation Industries Ltd. (Corporate Debtor) had failed to supply the goods on time as per the agreed terms to Sucden India Pvt. Ltd. (Applicant), the Operational Creditor. A sum of Rs. 85.43 Lakhs became payable by the Corporate Debtor as a penalty for the delay in the supply of sugar.

On 30.06.2019, a debit note for a sum of Rs. 91.56 Lakhs (inclusive of GST) was raised by the Operational Creditor against the Corporate Debtor for the payment of penalty for late delivery of sugar against the Purchase Agreement dated 10.10.2018.

Further, on 01.11.2021, a Demand Notice was issued by the Operational Creditor under Section 8(1) of IBC against the Corporate Debtor for the payment of unpaid dues amounting to Rs. 1.15 crores (Rs. 85.43 Lakhs as principal debt and Rs. 30.02 Lakhs as interest) within ten days of receiving the notice.

On 20.01.2022, the Applicant filed a Corporate Insolvency Resolution Process ('CIRP') petition under Section 9 of IBC against the Corporate Debtor.

NCLT Verdict:

The NCLT Mumbai rejected the CIRP petition and held that the operational debt under IBC does not include penalty or liquidated damages.

The Tribunal referred to the definition of operational debt under Section 5(21) of the IBC and observed that the amount in default to constitute operational debt must represent “a claim in respect of the provision of goods or services”.

NCLT noted that the present claim against the Corporate Debtor based on Clause 2 of the Purchase Agreement stipulates that in case of delay in delivery, the Seller must provide a "Cash Discount" of Rs. 22 per metric ton per day, calculated on the entire remaining quantity from the payment date. Further, Clause 4 of the Agreement specifies that the "Cash Discount" will be deducted from the payment for the last 5,000 metric tons of the agreement. Therefore, the claim of the Applicant is not on account of the provision of goods but on account of penalty or damages for the delay in delivery of sugar by the Corporate Debtor.

The Tribunal pointed out that a claim for penalty does not qualify as an operational debt until the civil court adjudicates the liability and assesses and crystallizes the damages. Further, CIRP cannot be initiated upon a claim for liquidated damages, even if provided for, unless assessed and crystallized upon adjudication by the competent authority.

NCLT Mumbai noted that it is not the appropriate forum to decide on the questions of reasonableness and quantum of liquidated damages. Proceedings under Section 9 of IBC are not meant for ascertaining or crystallizing the quantum of damages.

Thus, the disputed amount of Rs. 85.43 Lakhs claimed by the Operational Creditor as a penalty for the delayed supply of sugar, as per the Purchase Agreement, cannot be considered an operational debt under Section 5(21) of the Act until it is determined and adjudicated by the competent court. Further, the claim doesn't relate to goods or services provided by the Operational Creditor to the Corporate Debtor but rather pertains to recovering penalties/liquidated damages due to supply delays. Therefore, labeling the same as an operational debt is incorrect.

The Tribunal also noted that simply obtaining a balance confirmation from the Corporate Debtor doesn't automatically classify the amount as an 'operational debt'. The Operational Creditor must independently prove, with credible evidence, that the claim pertains to the provision of goods or services, meeting the criteria of 'operational debt' as defined in Section 5(21) of IBC and that default exists.

Further, in the present CIRP petition, there is no specific mention of the date of default in Part IV. The Operational Creditor has not clarified when the penalty or damages for the delayed supply of sugar became due and payable which have not been paid by the Corporate Debtor. Therefore, the claimed amount of penalty or liquidated damages is deemed ineligible to be categorized as an 'operational debt' under Section 5(21) of the Code. The entirety of the Operational Creditor's claim is considered an unascertained and uncrystallized claim, which cannot be adjudicated by NCLT in its summary jurisdiction.

In conclusion, NCLT Mumbai rejected the CIRP application under Section 9 of IBC as the existense of undisputed operational debt due and payable by the Corporate Debtor has not been shown by the Operational Creditor.

Case Title: Sucden India Private Limited vs. Matoshri Laxmi Sugar Co-generation Industries Limited

Case No.: CP (IB) No.219/MB/2022

Counsel for Applicant: Adv. Amir Arsiwala

Counsel for Respondent: Adv. Ninad Deshpande

Click here to Read/Download Order