Passing Of Decree Or Award Does Not Alter The Nature Of Operational Debt To Financial Debt: NCLT Mumbai

“Undisputedly, the claim on the basis of which arbitral proceedings were initiated by the Petitioner emanated from a work contract which originally was at best an operational debt and as per the law laid down in the afore cited cases, the nature of debt would not change with the passing of a decree or an award and, therefore, simply because an award was passed in respect of an operational claim, it will not by itself metamorphose into a financial debt.”

Background Facts

Hpcl-Mittal Pipelines Limited (“Applicant/Financial Creditor”) awarded a Work Contract to M/s Coastal Marine Construction and Engineering Ltd. (“Corporate Debtor”). Being dissatisfied with the work, the Financial Creditor terminated the Work Contract and initiated arbitration proceedings for the losses suffered.

On 14.01.2020, an award was passed by the Arbitral Tribunal whereby the Corporate Debtor was directed to pay Rs. 13,56,25,814/- to the Financial Creditor alongwith interest. The Corporate Debtor failed to pay the award amount.

The Financial Creditor filed a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor. The alleged debt amount was Rs. 14,99,51,429.95/- as on 31.07.2022.

The Financial Creditor relied on the Supreme Court judgment in Dena Bank v. C. Shivakumar Reddy, (2021) 10 SCC 330, wherein it was held that any arbitral award for payment of money, if not satisfied, would constitute a financial debt, thereby enabling the Financial Creditor to initiate proceedings under Section 7 of IBC. It was argued that the arbitral award is equivalent to a decree which can be enforced as per law and is therefore, a financial debt under Section 5(8) of IBC.

NCLT Verdict

The Bench opined that the Financial Creditor's claim pertained to a work contract between the parties and thus it was clearly in the nature of an operational debt. Therefore, the averment that the claim which has culminated into the award should be treated as a financial debt is incorrect.

The Bench placed reliance on NCLAT judgment in Sushil Ansal Vs. Ashok Tripathi and others, 2020 Ibclaw.in 43 NCLAT, wherein it was held that mere holding of a decree/award per se by an individual will not make it debt fall within the ambit of financial debt.

Further reliance was placed on Madras High Court verdict in Cholamandalam Investment and Finance Company Limited Vs. Navrang Roadlines Pvt. Ltd., 2022 ibclaw.in 331, wherein it was held that a decree/award of the court or tribunal is a measure of debt and mere holding of a decree per se by an individual will not make its debt fall within the ambit of financial debt. It was further held by the High Court that it is the underlying claim under a decree that will decide the nature of the debt whether it is financial or operational.

The Bench accordingly held that the nature of a debt would not change with the passing of a decree or an award. Merely because an arbitral award has been passed in respect of an Operational Debt would not automatically convert it into a Financial Debt.

“Undisputedly, the claim on the basis of which arbitral proceedings were initiated by the Petitioner emanated from a work contract which originally was at best an operational debt and as per the law laid down in the afore cited cases, the nature of debt would not change with the passing of a decree or an award and, therefore, simply because an award was passed in respect of an operational claim, it will not by itself metamorphose into a financial debt.”

The petition has been dismissed since the debt is not a financial debt for the purpose of Section 7 of IBC.

Case Title: Hpcl-Mittal Pipelines Limited v Coastal Marine Construction And Engineering Limited

Case No.: C.P. (IB) 323/MB/2023

Counsel For Financial Creditor: Adv. Kartik Nayar

Counsel For Corporate Debtor: Adv. Ridhi Nyati

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