Passing of Decree or Award does not Alter Nature of Operational Debt to Financial Debt: NCLT

The Mumbai Bench of the National Company Law Tribunal ( NCLT ) observed that the passing of decree or award does not alter nature of operational debt to financial debt.

The present petition has been filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 ( "IBC" ) by Hpcl-Mittal Pipelines Limited. ( “Financial Creditor” ) praying for initiation of Corporate Insolvency Resolution Process ( CIRP ) against M/s Coastal Marine Construction and Engineering Limited ( "Corporate Debtor" ) by invoking the provisions of Section 7 of the Insolvency and Bankruptcy Code ( “the Code" ) for resolution of an unresolved Financial Debt of Rs. 14,99,51,429.95/-.

During the subsistence of the Contract there were various gross defaults and breaches by the Corporate Debtor including but not limited to delayed commencement of works, etc. and the said defects and defaults were never cured by the Corporate Debtor. Owing to the aforesaid the Financial Creditor was compelled to terminate the Contract.

It was submitted that as on 31.07.2022, the Corporate Debtor has failed to pay the financial debt of Rs. 14,99,51,429.95. It is stated that the Corporate Debtor has been in default as even though the Award was rendered on 14.01.2020, the Corporate Debtor has failed to pay any part of the said financial debt till date and has continued to default on the same.

The corporate debtor submitted that the alleged claim under the Arbitral Award dated 14.01.2020 is not a 'Financial Debt'. Consequently, HPCL is not a Financial Creditor. If at all, it is merely an Operational Creditor. Merely by virtue of an alleged Award in its favour, its position does not elevate to that of a Financial Creditor. HPCL is neither a financial institution nor did it lend any money to COMACOE.

A Two-Member Bench comprising Anil Raj Chellan, Technical Member and Kuldip Kumar Kareer, Judicial Member observed that “Undisputedly, the claim on the basis of which arbitral proceedings were initiated by the Petitioner emanated from a work contract which originally was at best an operational debt and as per the law laid down in the afore cited cases, the nature of debt would not change with the passing of a decree or an award and, therefore, simply because an award was passed in respect of an operational claim, it will not by itself metamorphose into a financial debt.”

“As a result of above brief discussion, we are of the considered view that since the nature of the debt in question is not a financial debt, the application under Section 7 of the IB Code,2016 cannot be maintained and on this ground alone the same is liable to be dismissed. It is ordered accordingly. File be closed and consigned to records” the Bench noted.

To Read the full text of the Order CLICK HERE

Support our journalism by subscribing to Taxscan premium. Follow us on Telegram for quick updates