2023 (8) TMI 1699 - AT - IBC

Operational debt claims for contractual compensation must be crystallized and adjudicated before insolvency petitions are maintainable.

Contractual claims for compensation or penalty under Clause 10 are not treated as crystallized operational debt where entitlement and quantum remain ... Operational debt - application u/s 9 seeking initiation of corporate insolvency resolution process - failure of performance by the Corporate Debtor - entitlement to contractual penalty and compensation - crystallisation of debt - disputed claim requiring adjudication - HELD THAT:- Mere fact that principal amount of Rs. 3 Crores has been returned does not absolve the Corporate Debtor from making payment of compensation penalty. The Adjudicating Authority took the view that the claim of compensation cannot be said to be amount on basis of which application under Section 9 can be admitted. It has been held that the Operational Debt claimed by the petitioner must be crystallized, undisputed and not something which requires adjudication by competent authority. We are of the view that the Adjudicating Authority has not committed error in rejecting Section 9 application. As per Clause 10 of the agreement, the entitlement is for compensation and penalty if there is failure in performance on part of the Corporate Debtor. We are of the view that for crystallization of said compensation penalty adjudication is required by Competent Court and Adjudicating Authority has rightly not admitted Section 9 application. We are of the view that it is always open for the Appellant to take a remedy as available as per the contract in accordance with law. With these observations, the Appeal is dismissed. Issues: Whether the Adjudicating Authority erred in rejecting the Section 9 application seeking initiation of insolvency proceedings for claimed contractual compensation/penalty.Analysis: Clause 10 of the contract provides entitlement to compensation and penalty upon failure of performance. The claim for compensation/penalty is not a crystallized, undisputed monetary operational debt but requires adjudication to determine entitlement and quantum. A Section 9 application admits only crystallized operational debts that do not require substantive adjudication by a competent court or authority.Conclusion: The rejection of the Section 9 application is upheld; the claim for contractual compensation/penalty is not a properly crystallized operational debt for initiation of insolvency proceedings under Section 9 and requires adjudication by a competent forum. The decision is therefore against the Appellant and in favour of the Respondent.