Insolvency and Bankruptcy Hotline: Claiming damages? Don’t go under IBC, says NCLT

Posted by By at 4 March, at 12 : 09 PM Print

March 04, 2019


  • NCLT Imposes penalty on the Petitioner for attempting to initiate CIRP based on incorrect facts and false information
  • Holds that a claim not adjudicated upon by a competent authority in law cannot be an “operational debt” under IBC.
  • Claim related to non-payment of advance money is not covered under IBC.


The National Company Law Tribunal, Mumbai (“NCLT”) in a recent case in TATA Chemicals Limited v/s. Raj Process Equipment’s and Systems Private Limited1 dismissed a petition of Tata Chemicals (“Petitioner”) filed under Section 9 of the Insolvency & Bankruptcy Code, 2016 (“IBC”) and imposed costs of INR 10 lakhs (USD 14,000 approximately) upon the Petitioner, for its attempts to initiate a Corporate Insolvency Resolution Process (“CIRP”) against the corporate debtor on ulterior motives.


The Petitioner had approached Raj Process Equipment’s & Systems Private Ltd. (“Corporate Debtor”) for the designing, building, transporting, erecting and commissioning of certain industrial equipment. A purchase order was raised by the Petitioner for the said equipment, for which the Petitioner made an advance payment of ₹4,40,000 (“Advance Amount”).

The Petitioner argued that despite repeated reminders, Corporate Debtor failed to deliver the equipment on the scheduled delivery date. The Respondent submitted that delays caused were inter alia, due to frequent changes in specifications and rectifications to the drawings suggested by the Petitioner,

The Petitioner proceeded to terminate the purchase order and demanded refund of the Advance Amount, claiming an additional amount of INR 9,15,00,000 /- towards financial loss (“Financial Damages”). Further, the Petitioner claimed interest of INR 70,84,311 /- and INR 34,066/- respectively.

The Petitioner filed the petition under Section 9 of the IBC, claimed that the actual principal amount due is INR 9,19,40,000 (“Principal Amount”).


The Claim of Financial Damages does not qualify as Operational debt

The NCLT observed that Section 73 of the Indian Contract Act provides that when a contract has been broken, the party who suffers such breach is entitled to receive, from the party, who has broken the contract, compensation for any loss or damage caused to him and which naturally arose in the usual course of things from such breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it. Further, when an obligation resembling those created by contract has been incurred and not discharged, the injured party is entitled to receive the same compensation from the party in default, as if such person had contracted to discharge it, and had broken his contract, it observed. Accordingly, the NCLT found that in the present case, the Petitioner has raised claims of INR 5,00,000 per day for loss of production, which is not only in nature of consequential damages, but also completely arbitrary and baseless, and which cannot be relied upon in absence of adjudication

Placing reliance in the cases of E-City Media Private Limited vs Sadhrta Retail Limited 2 and in Union of India vs Raman Iron Foundry3 , the NCLT observed that the claim regarding Financial Damages was without any adjudication and therefore not an ‘operational debt’ as defined under the IBC. It held that a claim for damages does not become operational debt until the liability is adjudicated upon and damages are assessed by a competent authority in law.

Petitioner is not an “operational creditor”

The NCLT observed that no goods or services were provided by the Corporate Debtor to the Petitioner and that, in fact, it is the Corporate Debtor who is the vendor to whom the Petitioner hasn’t made payments for goods. Since the Claim of the Petitioner was not based on any goods or services actually supplied, it would not fall under the definition of operational debt. The NCLT thus held that given the circumstances, the Petitioner would not fall under the definition of ‘Operational Creditor’ under the IBC.

Insolvency petition filed with malafide intentions

The court observed that the Principal Amount, as stated in the petition and affidavit, was not even quantified at the time of filing and was 209 times the actual amount advanced by the Petitioner to the Corporate Debtor. This, the NCLT observed, only showed that the petition was filed basis false information.

The Petitioner had also filed an affidavit certifying the contents of the petition. This, the NCLT found, clearly showed that the Petitioner had filed the petition for initiation of CIRP fraudulently and with a malicious intent for any purpose other than for the resolution of insolvency and therefore invoked Section 65 of the IBC.

In light of the above, and without going into the merits, the NCLT held that the Petition has been filed with ulterior motive to get insolvency petition admitted which comes under purview of Section 654 of the IBC, consequently dismissing the Petition and imposing costs of INR 10,00,000 on the Petitioner, to be paid to the “Prime Minister National Relief Fund”.


In this judgment, the NCLT has reaffirmed the main purpose of IBC which is the resolution of distressed companies and not to provide parties a weapon to arm twist an entity into succumbing to claims, which may not even have been adjudicated upon. This judgement clarifies that a claim for damages does not become operational debt until the liability is adjudicated upon and damages are assessed by a competent authority. Further, this decision should deter parties from filing petitions without adequately and accurately quantifying their claims.

When it comes to filing a petition under Section 9 of the IBC, parties should be careful to ensure that the claim for operational debt due made therein is undisputed, crystallized, payable and not something which requires further adjudication by a competent authority, or else penalties may be imposed upon them under Section 65 of the IBC.

– Siddharth Ratho & Sahil KanugaYou can direct your queries or comments to the authors

1 CP 21/I&BP/NCLT/MAH/2018

2 CP No.367 of 2009

3 (1974 AIR 1265, 1974 SCR (3) 556)

4 Section 65. (1) If, any person initiates the insolvency resolution process or liquidation proceedings fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, or liquidation, as the case may be, the Adjudicating Authority may impose upon such person a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees. (2) If, any person initiates voluntary liquidation proceedings with the intent to defraud any person, the Adjudicating Authority may impose upon such person a penalty which shall not be less than one lakh rupees but may extend to one crore rupees

Legal500 Asia-Pacific 2019: Tier 1 for Dispute Resolution, International Tax, Investment Funds, Labour & Employment, TMT and Corporate M&A

Chambers and Partners Asia Pacific 2019: Band 1 for Labour & Employment, Lifesciences, Tax and TMT

AsiaLaw 2019: Ranked ‘Outstanding’ for Technology, Labour & Employment, Private Equity, Regulatory and Tax

IFLR 1000 Asia Pacific 2019: Tier 1 for TMT and Private Equity

RSG-Financial Times: India’s Most Innovative Law Firm (2014, 2015 & 2017)

RSG-FT Awards (London) 2016: Asia Pacific’s Most Innovative Law Firm

Merger Market 2018: Fastest growing M&A practice

Benchmark Litigation Asia Pacific 2018: Tier 1 for Tax

IDEX: Tier 1 for Dispute Resolution

Asian Mena Counsel’s In-House Community Firms survey 2018- NDA voted as the only firm from India to excel in the Life Sciences sector

The Most Innovative Law Firm in Asia-Pacific


The contents of this hotline should not be construed as legal opinion. View detailed disclaimer.

This Hotline provides general information existing at the time of preparation. The Hotline is intended as a news update and Nishith Desai Associates neither assumes nor accepts any responsibility for any loss arising to any person acting or refraining from acting as a result of any material contained in this Hotline. It is recommended that professional advice be taken based on the specific facts and circumstances. This Hotline does not substitute the need to refer to the original pronouncements.

This is not a Spam mail. You have received this mail because you have either requested for it or someone must have suggested your name. Since India has no anti-spamming law, we refer to the US directive, which states that a mail cannot be considered Spam if it contains the sender’s contact information, which this mail does. In case this mail doesn’t concern you, please unsubscribe from mailing list.


Related Posts

Post Your Comment

You must be logged in to post a comment.

About Us

Nishith Desai Associates (NDA) is a research based international law firm with offices in Mumbai, Bangalore, Silicon Valley, Singapore, New Delhi, Munich and New York.

Mobile App


  • .
  • .
  • .