NCLT Imposes Cost Of Rs 10 L On Tata Chemicals For Giving False Information In Insolvency Petition [Read Order]

The National Company Law Tribunal, Mumbai Bench, in a recent case of TATA Chemicals Limited v. Raj Process Equipments and Systems Private Limited has imposed a cost of Rs 10 lakh on Tata Chemicals for filing a petition giving false information with an ulterior motive to get petition admitted to initiate Corporate Insolvency Resolution Process (CIRP) against a Maharashtra-based company.

A Bench comprising of members V.P. Singh (Judicial) and Ravikumar Duraisamy (Technical) also reiterated that unliquidated damages do not become operational debt until the liability is adjudicated upon and damages assessed by an adjudicatory authority.

In this case, Tata Chemicals (operational creditor) had filed a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016, for initiation of CIRP against the corporate debtor, Raj Process Equipments and Systems Private Limited.

In its petition, it was stated that the Tata Chemicals had approached Raj Process for designing, building, transporting, erecting and commissioning a double-effect evaporator at its plant at Sirperumbudur, Tamil Nadu. Based on the discussions and Letter of Intent entered between the parties, a Purchase Order was raised.

Further, in its petition, the Tata Chemicals claimed that it had made an advance payment of Rs 4.40 lakh, which was 10 per cent of the total purchase amount.

It was submitted that the delivery date of the evaporator was up to 30.9.2016 but despite its repeat reminders, the corporate debtor failed to deliver the product forcing it to terminate the contract and seek refund of advance payment of Rs 4.40 lakh and also Rs 9,15,00,000 towards financial loss.

To counter the submission, Raj Process' counsel said the company was ready with the machinery and the delay was on account of frequent changes in specifications from the end of Tata Chemicals who did not get the machine inspected despite repeated requests.

They also submitted that the petitioner was not really interested in lifting the machinery but only interested in making a claim against the corporate debtor and with that intention, insisted on renewal of bank guarantee and then autocratically terminated the purchase order and demanded a baseless and hyper-inflated claim of Rs 9,15,00,000.

In view of the facts, the Tribunal observed that "till filing of the petition, alleged compensation amount of Rs 9,15,00,000 was not even quantified. Even though the Petitioner, in Part IV of the Petition has mentioned actual financial damages of Rs 9,15,00,000. Further, the petitioner has mentioned Rs 9,19,40,000 as principal amount, whereas amount given as advance to the corporate debtor was only Rs 4,40,000.”

The Tribunal said that “The above assertion in the petition clearly shows that the petition has been filed on wrong facts to start CIRP by giving false information. There is no such case of the Petitioner that it has advanced Rs 9,19,40,000 as principal amount to the Corporate Debtor. By advance of Rs 4,40,000, the Petitioner has filed this petition, showing the principal amount of Rs 9,19,40,000 and has further filed the Affidavit certifying the contents of the Petition.

"This clearly shows that Petitioner has filed this Petition for initiation of CIRP fraudulently or with malicious intent for any purpose other than for the resolution of insolvency, which comes under the purview of Section 65 of the IBC. Actual amount advanced was Rs 4,40,000, but the Petitioner has falsely claimed Rs 9,19,40,000/- as the principal amount, which is 209 times of the actual advance amount," the tribunal added.

Damages claimed are not ‘Operational Debt’ until adjudicated

In its petition, Tata Chemicals made a claim that as on 21.04.2017, the corporate debtor defaulted on advance payment of sum of Rs 4,40,000. In addition, it claimed Rs 9,15,00,000 as actual financial damages and Rs 70,84,311 and further Rs 34,066 as interests, setting the total amount of debt at Rs 9,90,58,377.

"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'," the Tribunal observed.

Further, the Tribunal referred to the case of E-City Media Private Limited v. Sadhrta Retail Limited wherein the Bombay High Court held that "Petition for winding up cannot be maintained upon a claim for damages. Damages become payable only when they are crystallised upon adjudication…Damages require adjudication. Until then, the liability of a party in alleged breach of a contract does not become crystallised.”

Tribunal also referred another case of the Supreme Court titled Union of India v. Raman Iron Foundry, wherein it was 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 eo instanti 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.”

The tribunal then went on to add that, “It is also important to point out that Petitioner had neither provided any goods nor any services to the Corporate Debtor. There is no amount given by the Petitioner to the Respondent in nature of debt. On the other hand, the Corporate Debtor is a vendor, and the applicant has not made payment to it. Hence the petitioner is not an Operational Creditor as defined under the IBC.”

Thus in view of the observations made above, the Tribunal noted that the “Petitioner's claims do not fall within the definition of Operational Debt. Petitioner has filed false affidavit to prove that the actual principal amount due is Rs 9,19,40,000 instead of Rs 4,40,000.”

Therefore, the Tribunal dismissed the petition directing the Tata Chemicals to pay a cost of Rs 10,00,000 within 30 days from the date of the order. The cost is to be paid in the account of the "Prime Minister National Relief Fund”.