Ami Corporation vs Shivam Parivar Developers Private Limited

ORDER

Submissions made by Financial Creditor by way of Petition:

I. EXISTENCE OF FINANCIAL DEBT AND DEFAULT

Particulars Amount in Rupees

Base outstanding / Principal Amount as on 31.12.2017 (Confirmed in Letter of Understanding dated 31.12.2017 – Exhibit D)	6,65,00,000.00
Add : Interest @ 12% p.a. for the period 01.01.2018 to 31.12.2018 (Confirmed in Supplemental Letter of Understanding dated 16.07.2018 – Exhibit F to the Petition)	79,80,000.00
Total amount due as on 31.12.2018	7,44,80,000.00

The Financial Creditor claims further interest @ 12% p.a. to be calculated on the aforesaid outstanding due of Rs.7,44,80,000/- to be calculated from 01.01.2019 till date of actual payment and/or realization.

(a)

At the outset, reliance is placed on the provisions of Section 25(3) of the Indian Contract Act, 1872 which provides that a fresh promise to pay amounts to a fresh cause of action, even in respect of a time barred debt. Section 25 of the Contract Act is reproduced hereinbelow:

25. Agreement without consideration, void, unless it is in writing and registered or is a promise to compensate for

something done or is a promise to pay a debt barred by limitation law.

An agreement made without consideration is void, unless —

(1)

It is expressed in writing and registered under the law for the time being in force for the registration of [documents], and is made on account of natural love and affection between parties standing in a near relation to each other; or unless

(2)

It is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do; or unless

(3)

It is a promise, made in writing and signed by the person to be charged therewith or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits.

In any of these cases, such an agreement is a contract and is an enforceable contract on the breach committed by the Corporate Debtor and gives rise to fresh cause of action.

(b)

It is submitted that the basic requirement to fall under section 25(3) of the Contract Act, has to be:

(a)

It must refer to a debt which the creditor but for the period of limitation, might have enforced:

(b)

There must be a distinct promise to pay wholly or in part such debt;

(c)

The promise must be in writing signed by the person or by his duly appointed agent (in the present petition the Board Resolution at page 26 ratifies the entire promise and is enforceable in law).

(c)

In the instant matter, it is respectfully submitted that assuming without admitting that if the claim herein is time barred, only the remedy of the Financial Creditor is extinguished but the debt is not extinguished even after limitation period is over. In a situation where the debtor approaches the creditor and makes a fresh promise to pay the debt, there is no such law which bars the debtor from discharging its debt to the creditor. Cause of action accordingly arises from the date when such fresh promise is made.

(d)

In the present matter, the Corporate Debtor made a renewed/ fresh promise through their authorized signatories being the Directors and supported by the Board Resolution dated 13^th July, 2018 (annexed at page 26 to the Petition) and expressly agreed to pay the financial debt to the Financial Creditor which is evidenced from the documents referred to hereinabove.

Further Submissions by the Financial Creditor by way of Addl. Affidavit dated 15.09.2021

Submissions made by the Corporate Debtor:

h. In the event if the Corporate Debtor, Respondent/Personal Guarantor and the said other two Personal Guarantors or any of them default/fails in making any payment/instalment on their designated due dated or the allowed extended date/grace period of one week as afore-stated, than the Corporate Debtor, Respondent / Personal Guarantor and the said other two Personal Guarantors agree and undertake as under: -

a. The Corporate Debtor, Respondent / Personal Guarantor and the said other two Personal Guarantors will be liable to pay the full outstanding amount of the Financial Debt together with interest at the rate of 15% per annum (compounded annually) from the date of default till payment and/or realization;

b. Additionally, the Corporate Debtor, Respondent / Personal Guarantor and the said other two Personal Guarantor will be liable to pay a sum of Rs.1,00,00,000/- (Rupees One crore only) as pre-determined liquidated damages to the Financial Creditor immediately on the date of default;

c. It is further agreed that the liquidated damages, as recorded hereinabove, shall stand reduced to a sum of Rs.75,00,000/- (Rupees Seventy Five lakhs only), in the event, the Corporate Debtor, Respondent/Personal Guarantor and the said other two Personal Guarantor succe4ssfully make the payment of the amount of the Second Installment as per the respective due date but default in making payment of the amount of the Third Instalment, as recorded hereinabove to the Financial Creditor.

d. Time is the essence of payment of the Financial Debt. The penal interest of 15% p.a. (compounded annually) as afore-stated shall be charged on all outstanding amounts from the date of default to the date of realization of the said amounts.

Effect of acceptance of performance at time other than that agreed upon—

If, in case of a contract voidable on account of the promisor’s failure to perform his promise at the time agreed, the promise accepts performance of such promise at any time other than that agreed, the promisee cannot claim compensation for any loss occasioned by the non-performance of the promise at the time agreed, unless, at the time of such acceptance, he gives a notice to the promisor of his intention to do so.

61. Application of payment where neither party appropriates —

where neither party makes any appropriation, the payment shall be applied in discharge of the debts in order of time, whether they are or are not barred by the law in force for the time being as to the limitation of suits. If the debts are of equal standing, the payment shall be applied in discharge of each proportionally.

13)

I state that Corporate Debtor had been making regular monthly payments of a substantial value and as on the previous date of hearing, i.e. December 2, 2021, of the above captioned Company Petition, the Corporate Debtor had already paid a sum of INR 1,60,00,000/- towards the third and final instalment as per the second consent term and was, as on the date of the hearing, required to only pay an amount of INR 1,21,00,000/- towards the full and final settlement of the claim.

14)

I state that the Hon’ble Tribunal, vide hearing dated December 2, 2021 had called upon the Corporate Debtor to settle all outstanding dues and pay the sum as stated in the above company Petition by and before December 9, 2021, transferred a sum of INR 61,00,000/- to the Financial Creditor. Further, the Corporate Debtor, on 11.12.2021, transferred a sum of INR 48,50,000/- to the Financial Creditor and transferred the remaining amount of INR 11,50,000/- to the Financial Creditor on 14.12.2021.

15)

I state that vide the hearing of the above captioned Company Petition on 02.12.2021, the Hon’ble Tribunal had also imposed a cost of INR 25,000/- on the Corporate Debtor which was due and payable to the Financial Creditor. I state that the Corporate Debtor has transferred the sum of INR 25,000/- on 14.12.2021, to the Financial Creditor.

16)

I state that the Corporate Debtor has complied with all the directions passed by the Hon’ble Tribunal on 02.12.2021. the Corporate Debtor has paid the sum as was claimed by the Financial Creditor in the above captioned Company Petition and therefore, there is no outstanding dues pending which are payable by the Corporate Debtor to the Financial Creditor. Annexed and marked as Annexure – I is the total balance sheet in respect of the payments made by the Corporate Debtor to the Financial Creditor.

17)

Further, I state that all instalments stand duly paid and the Financial Creditor has not protested the payment receipt nor has the Financial Creditor given notice that it intends to enforce the default clause at the time of receipt of payment or otherwise howsoever. The Financial Creditor filed the Interim Application No.1915 of 2020 for revival of the above captioned Company Petition without reference to the Second Consent Terms and the subsequent facts that have followed.

18)

In view of the settlement of all claims of the Financial Creditor by the Corporate Debtor, it is prayed before this Hon’ble Tribunal that the above captioned Company Petition be withdrawn.

“22.

It is submitted that the claim in hand purports to be n respect of losses in form of ‘liquidated damages’. This is not a claim for providing goods or services. The meaning of damages is clear from the decision of the Bombay High Court in the case of Iron & Hardware (India) Co. V. Shamlal [MANU/MH/0115/1954: ILR 1954 BOM 739], Order dated 14.01.1954, wherein it was observed that “damages are compensation which a court of law gives to a party for the injury which he has sustained”. Therefore, the present claim is out of the ambit of the provisions of the code. 27. As held by the Hon’ble Supreme Court in the case of Union of India V. Raman Iron Foundry. [1974 AIR 1265], order dated 12.03.1974: The Indian Legislature has sought to cut across the web of rules and presumptions under the English common law, by enacting a uniform principle applicable to all stipulations naming amounts to be paid in case of breach, and stipulations by way of penalty, and according to this principle, even if there is a stipulation by way of liquidated damages, a party complaining of breach of contract can recover only reasonable compensation for the injury sustained by him, the stipulated amount being merely the outside limit. It, therefore, makes no difference in the present case that the claim of the appellant is for liquidated damages. It stands on the same footing as a claim for unliquidated damages. Now the law is well settled that a claim for unliquidated damages does not give rise to a debt until the liability is adjudicated and damages assessed by a decree or order of a Court or other adjudicatory authority. When there is a breach of contract, the party who commits the breach does not eoinstanti incur any pecuniary obligations, nor does the party complaining of the breach becomes entitled to a debt due from the other party. The only right which the party aggrieved by the breach of the contract has is the right to issue for damages. That is not in actionable claim and this position is made amply clear by the amendment in Sec.6(e) of the Transfer of Property Act, which provides that a mere right to sue for damages cannot be transferred.

28.

Further, in the case of E-City Media Pvt. Ltd. V. Sadhrta Retail Ltd. [CP 367/2009] the Hon’ble Bombay High Court held that: “If the clause in the present case is regarded as being a clause which stipulates the payment of a named sum by way of liquidated damages a debt will become crystallized only upon an adjudication of damages in a suit. Prior to an adjudication, it still constitutes a claim for damages. The decree of the court is what transforms the claim into a stated sum due and payable by way of damages. Whether the amount is reasonable or by way of penalty are evidential matters which cannot be decided in a petition for winding u. for, as the judgement in Saw Pipes holds, even if the sum stipulated by way of liquidated damages is clear, the jurisdiction of the Civil Court extends to determining whether it is unreasonable or by way of penalty. All these issues have to be decided in a suit. Whether or not evidential proof will be required to sustain such a claim is again a matter for the trial Court or, as the case may eb, an arbitral forum to decide. The Petition for winding up would manifestly not be maintainable. Until an adjudication results in duly constituted proceedings, it cannot be held that there is a debt due and payable”.

30.

A conclusion can be drawn from a plain reading of the above said judgements that the liquidated damages arises on breach of contract for which a suit can be filed wherein the damages are required to be ascertained because the said damages must not be allowed arbitrarily. Hence liquidated damages can be crystallized only after adjudication from a court of law. Its reasonableness is also decided by a court of law on the other hand, the insolvency proceedings are not the appropriate forum to decide the reasonability of the liquidated damages or to file claim for damages. Hence, the damages claimed in the present case cannot be adjudicated as the same is the subject6 matter of a civil suit. Liquidated damages are not an actionable claim, until and unless adjudicated. This is the first reason for not considering the liquidated damages as ‘operational debt’.

31.

Liquidated damages are provided in certain legal contracts as an estimate of otherwise intangible or hard-to-define losses to one of the parties. As against that, the meaning of ‘operational debt’ is a claim in respect of goods supplied, or services rendered as defined in section 5(21) of the Code. Therefore, it can be concluded that the impugned claim of damages, neither ascertainable nor crystallized, hence out of the ambits of the Operational Debt. This is the second reason for rejection.’

32.

In addition to the reasoning assigned in above paragraph, it is an admitted fact that the Petitioner had neither supplied any goods nor rendered any service to the other side, hence, there was no relationship of creditor on one hand and the debtor on the other hand as defined under Section 5(21) of the Code. The contract was for the performance of Power Purchase Agreement wherein the Corporate Debtor had to set up a project before the Scheduled Commercial operation date which was 06.06.2011. The Corporate Debtor failed to do the same and thus it was merely in the nature of impugned penalty for damages caused due to no-performance of contract. The scope of liquidated damages is distinct from Operational Debt, albeit, very thin. As far as this case is concerned, the admitted facts itself have drawn this distinction broadly. This is the third reason for not considering this claim as operational debt.

33.

It is worth to note that the scope and jurisdiction of this Tribunal is limited and also confined to the provisions of Insolvency Code only while dealing a Petition filed under Section 9, therefore, the impugned Debt in question does not fall within those ambits. However, the claim under any other law, if permissible, can be pursued by the Petitioner as prescribed under any other law. Any observation, legal or factual, shall not prejudice the rights of the Petitioner, if to be exercised under any other law.”

“8.

Without prejudice, we may also state that the entire exercise of repayment of debt in this Petition is an exercise in recovery. Once the matters have been brought under the IBC 2016, and all earlier matters have abated, they have to be considered under the provisions of the Code. It is a settled position of law that the provisions of the Code cannot be invoked for recovery of outstanding amount but can be invoked to initiate CIRP for justified reasons as per the Code. The Hon’ble Supreme Court in the case of Mobilox Innovations Private Limited v. Kirusa Software Private Limited, has inter alia, held that I&B Code, 2016 is not intended to be substitute to a recovery forum.

Further, in another latest judgement rendered in Transmission Corporation of A.P. Ltd. v. Equipment Conductors and Cables Ltd., Hon’ble Supreme Court of India has inter alia held that existence of an undisputed debt is since quo non of initiating CIRP. In the instant case there was no debt within the meaning of the Code. Even if there may otherwise be amounts payable by the Respondent, and that too was disputed from the very beginning requiring the intervention of the BIFR with the Petitioner opposing various proposals, from time to time. There was therefore, no clear debt. Proceedings under the Code are summary proceedings where the debt, if any, has to be undisputed and clear. This is not the case here.”

“18.

It is further stated that when an obligation resembling those created by contract has been incurred and has not been discharged, any persons injured by the failure to discharge it, is entitled to receive the same compensation from the party in default, as if such person has contracted to discharge it, and had broken his contract. 19. In this case, the Petitioner has raised claim of Rs.5,00,000/- per day for loss of production, which is not only in nature of consequential damages, but also completely arbitrary and baseless, which cannot be relied upon in absence of adjudication. The alleged claim is not adjudicated by any competent authority in law, and hence, such a claim cannot be described as “Operational Debt”.

20.

In case of E-City Media Private Limited vs. Sadhrta Retail Limited in CP No.367 of 2009, the Hon’ble High Court of Judicature at Bombay has held that “The Petition for winding up cannot be maintained upon a claim for damages. Damages become payable only when they are crystallized upon adjudication. Until and unless an adjudication takes place with a resultant decree for damages, there is no debt due and payable. Damages require adjudication. Until then, the liability of a party in alleged breach of a contract does not become crystallized.”

21.

Further, in case of Union of India vs Raman Iron Foundry (9174 AIR 1265, 1974 SCR (3) 556), it has been held that “the claim for unliquidated damages does not give rise to a debt until the liability is adjudicated upon and damages assessed by an adjudicatory authority. When there is a breach of contract, the party who commits the breach does not eoinstanti incur any pecuniary obligation nor does the party complaining of the breach become entitled to a debt due from the other party. The only right which the party aggrieved by the breach has is the right to sue for damages, and this is not an actionable claim.”

“12.

The obligations undertaken by the Corporate Debtor under these present Consent Terms more particularly stated in these Consent Terms shall be treated as undertakings given by the Corporate Debtor to this Hon'ble Tribunal and the Applicant in addition to the remedies available to him under law, shall be duly entitled to initiate appropriate proceedings against the Corporate Debtor, in case of default, including execution of these Consent Terms and /or making Application to this Hon'ble Tribunal for revival of the captioned Petition, wherein the litigation cost and/or any other cost associated with the proceedings will be solely borne by the Corporate Debtor.”