Penal Interest Aaid as Liquidated Damages for Breach of Contract can’t be Termed as a Financial Debt: NCLAT

Case Details: Budhpur Buildcon (P.) Ltd. v. Abhay Narayan Manudhane - [2023] 149 taxmann.com 312 (NCLAT- New Delhi)

Judiciary and Counsel Details

• • Rakesh Kumar, Judicial Member and Dr. Ashok Kumar Mishra, Technical Member
  • Zal Andhyarujini, Sr. Adv., Karan Bhide, Nitesh Ranawat, Aman Raj Gandhi, Ms. Disha Shetty, Ms. Apoorva Kaushik and Mustaqueen Bagsaria, Advs. for the Appellant.
  • Ms.Meghna Rao, Ms. Prerna Wagh, Shahdab Jan, Subir Kumar, Advs., Abhinav Vasisht, Sr. Adv., Ms. Priya Singh, Deepayan Mandal and Soumya Roop Sanyal, Advs. for the Respondent.

Facts of the Case

In the instant case, the corporate debtor undertook a development project on various parcels of land. The corporate debtor was in need of funds for the development of the said project. Consequently, the appellant and the corporate debtor entered into various development agreements.

Thereafter, the CIRP was initiated against the corporate debtor and Resolution Professional (RP) was appointed. The RP received claims of financial creditors including the appellant. However, the RP rejected the claim of the appellant. The Adjudicating Authority (NCLT) vide impugned order did not find any illegality or irregularity in the RP’s decision.

Then, an appeal was made to the National Company Law Appellate Tribunal (NCLAT) against the order passed by the NCLT.

The appellant argued that the total consideration amount payable to the corporate debtor was structured to finance the corporate debtor in order to enable the corporate debtor to construct and develop the rehabilitation component of the said project.

The appellant, further argued that the impugned order was passed without considering the relevant material, based on extraneous grounds, and was contrary to the law. Also, the impugned order was not backed by adequate reasons. The appellant also claimed that the said consideration amount was a financial debt.

NCLAT Held

The NCLAT observed that financial debt always carries an interest towards the time value of money, however, interest per se in any business contract cannot make a debt as a financial debt if it is in nature of liquidated damages or penal interest resulting from compensation for breach of contract, which is stipulated for a penalty.

The NCLAT, further observed that the element of interest, which was put as 2% interest per month after 60 days from the date of default to perform and the obligation was purely in the form of liquidated damages or compensation.

Therefore, the claim of the appellant to consider its case as financial debt could not be sustained and the order of the NCLT was to be upheld. Accordingly, the appeal was to be dismissed.

Case Review

• • Budhpur Buildcon (P.) Ltd. v. Abhay Narayan Manudhane [2023] 149 taxmann.com 311 (NCLT – Mum.) affirmed [See aneex].

List of Cases Referred to

• • Pioneer Urban Land and Infrastructure Ltd. v. Union of India [2019] 108 taxmann.com 147/155 SCL 622 (SC) (para 3),
  • Swiss Ribbons (P.) Ltd. v. Union of India [2019] 101 taxmann.com 389/152 SCL 365 (SC) (para 3),
  • Mohammad Raja Miya v. Naderajjama Miya AIR 1932 Cal 53 (para 5-I),
  • Arjan Bibi v. Asgar Ali Chowdhuri [MANU/WB/0155/1886] (para 5-J),
  • Anuj Jain, IRP for Jaypee Infratech Ltd. v. Axis Bank Ltd. [2020] 8 SCC 401 (para 5-K) and
  • Feteh Chand v. Balkishan Dass [1964] 1 SCR 515/AIR 1963 SC 1405 (para 5-L).