Operational Debt as defined under Section 5(21) of the IBC, 2016 does not include Penalty or Liquidated Damages – Sucden India Pvt. Ltd. Vs. Matoshri Laxmi Sugar Co-Generation Industries Ltd. – NCLT Mumbai Bench
In this important ruling, Hon’ble NCLT Mumbai Bench held that:
(i) Operational debt under the Code does not include penalty or liquidated damages.
(ii) A claim for penalty does not become an operational debt until the liability is adjudicated upon by a civil court and the damages are assessed and crystallised.
(iii) Claim for liquidated damages for breach of contract cannot trigger insolvency process unless adjudicated by a competent court. Liquidated damages, even if stipulated, can only be crystallised on legal adjudication.
(iv) Adjudicating Authority is not the appropriate forum to decide on the questions of reasonableness and quantum of liquidated damages. Proceedings under Section 9 of the Code are not meant for ascertaining or crystallising the quantum of damages.
(v) Mere balance confirmation by the Corporate Debtor will not convert the amount of claim to an ‘operational debt’, because the Operational Creditor will have to independently discharge the onus of proving with credible materials that the claim is in respect of provision of goods or services so as to qualify as ‘operational debt’ within the meaning of Section 5(21) of the Code and that there has been a default in payment thereof.