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LIQUIDATED DAMAGES CANNOT TRIGGER INSOLVENCY PROCEEDINGS

JudgmentGujarat Urja Vikas Nigam Limited vs Nitash Co-generation Private Limited

Forum: National Company Law Tribunal, Mumbai Bench (“NCLT”).

Act/Law: The Insolvency and Bankruptcy Code, 2016 (“Code”).

Ratio: Claim for “Liquidated Damages” cannot trigger insolvency proceedings, unless adjudicated upon by a court of law. Proceedings under the Code are not for ascertaining or crystallizing the quantum of damages.

Factual Matrix:

  • Gujarat Urja Vikas Nigam Limited (“Gujrat Urja/Petitioner”) and Nitash Co-generation Private Limited (“Nitash/Corporate Debtor”) entered into a power purchase agreement (“Agreement”) in terms of which Nitash was to arrange for inter connection facilities and supply electricity/power to Gujrat Urja. The Scheduled Commercial Operation Date (“SCOD”) was agreed to be upon conclusion of 48 months from the date of execution of the Agreement i.e. 06.06.2011.
  • Nitash, however, failed to meet the SCOD and Gujrat Urja claimed from Nitash liquidated damages, as stipulated under Clause 4.3 of their Agreement.
  • Gujrat Urja filed a petition under the Electricity Act, 2003 before the Gujrat Electricity Regulatory Commission for claiming Rs.6,59,19,000/- towards liquidated damages with interest @15% per annum. The Commission adjudicated in favour of Gujrat Urja. However, despite directions, no payment was made by Nitash.
  • Thereafter, a petition was filed by Gujarat Urja for execution of the order of the Commission in which Gujarat Urja was, by order dated 20.09.2016 (“Order”), directed to “take appropriate course of action as per the provisions of applicable law for recovery of the liquidated damages as decided in the Commission’s order dated 06.11.2012 in Petition No. 1202 of 2012” .
  • Gujrat Urja, thereafter proceeded to file a Petition under Section 9 of the Code on the basis of the execution order, after serving the demand notice issued under Section 8 of the Code.
  • Nitash in reply to the notice under Section 8 of the Code, acknowledged the liability to pay and sought further two years’ time to make the payment. By way of written submissions, Nitash defended the claim of Gujrat Urja on various counts, more specifically stating that Gujrat Urja is not an operational creditor in terms of the Code.
Issue for Consideration:

(i)      Whether Gujrat Urja is an operational creditor in terms of the definitions under the Code?
(ii)     Whether there was any provision of goods and services by Gujrat Urja to Nitash?

While deciding the above question, NCLT relying upon the observation in the Order which directed Gujarat Urja to “take appropriate course of action as per the provisions of applicable law for recovery of the liquidated damages as decided in the Commission’s order dated 06.11.2012 in Petition No. 1202 of 2012” observed the following:

  1. The debt in question is neither crystallised nor adjudicated upon;
  2. The liquidated damages even if stipulated, can only be crystallised, once adjudicated upon by a court of law;
  3. The reasonability and the quantum of damages in a claim and is subject to adjudication;
  4. The damages as claimed for in the present case, is the subject matter of a civil suit; and
  5. NCLT is not the appropriate forum to decide on the very reasonability and quantum of liquidated damages.
NCLT then went on to analyse the definition of liquidated damages and operational debt. NCLT noted that Gujrat Urja neither supplied any goods nor rendered any services to Nitash. Therefore, NCLT held that the damages as sought by Gujrat Urja in the present case do not qualify as an operational debt.

Conclusion:

Insolvency proceedings under the Code are expeditious and deterrent and we have witnessed a trend that a number of creditors “try their luck” by first initiating insolvency proceedings in relation to their contractual claims. In many such cases, the risk averse companies, i.e. the Corporate Debtors settle the matter, thereby resulting in speedy recovery of the claims of the creditors.

The judgment is a welcome step to discourage such creditors from filing insolvency proceedings where claims have not yet attained finality. In terms of the judgment, a claim for liquidated damages attains finality upon a decree by a court of law and not prior thereto.

If you have questions or would like additional information on the material covered herein, please contact:

Ms. Swet Shikha, Associate
(sshikha@lexcounsel.in)

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