NCLAT upholds rejection of refund claim for liquidated damages deducted during CIRP under Section 7

NCLAT dismissed appeal challenging rejection of Section 7 application seeking refund of liquidated damages deducted during CIRP. Corporate debtor's resolution applicant claimed damages should be refunded post-resolution plan approval, arguing claims were extinguished. NCLAT held liquidated damages already deducted from invoices per contract terms during CIRP cannot be refunded despite resolution plan approval. Extinguishment of claims under approved resolution plan does not affect damages previously deducted as per contractual obligations. Adjudicating Authority correctly rejected refund application.

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1. ISSUES PRESENTED and CONSIDERED

- Whether liquidated damages deducted by the Respondent from invoices during the Corporate Insolvency Resolution Process (CIRP) period can be claimed back by the Successful Resolution Applicant after approval of the Resolution Plan.

- Whether the approved Resolution Plan, which provided for a 12-month extension for completion of ongoing projects, prohibits the Respondent from deducting liquidated damages from the Corporate Debtor's invoices.

- Whether the extinguishment of claims under the Resolution Plan applies to liquidated damages deducted during the CIRP period but not claimed prior to CIRP.

- The applicability and distinction of precedents, particularly the judgment in Indian Oil Corporation Ltd. vs. Manjeet Cotton Pvt. Ltd., concerning extinguishment of claims and liquidated damages in the context of CIRP and Resolution Plans.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Whether liquidated damages deducted during CIRP can be reclaimed by the Successful Resolution Applicant post-approval of the Resolution Plan.

The legal framework governing this issue is primarily the Insolvency and Bankruptcy Code (IBC), which mandates that claims existing as on the date of approval of the Resolution Plan stand extinguished, and the Resolution Plan binds all stakeholders. The question arises whether liquidated damages deducted during the CIRP period, but not claimed prior to CIRP, fall within this extinguishment.

The Court noted that the liquidated damages in question were deducted pursuant to the terms and conditions of the Purchase Orders issued by the Respondent, which formed part of the running contract. The Resolution Professional had continued the contract during the CIRP on the same terms and conditions. The deduction of liquidated damages was in accordance with contractual provisions for delay penalties.

Key evidence included the absence of any claim for liquidated damages filed by the Respondent prior to or during the CIRP, and the fact that liquidated damages deducted after approval of the Resolution Plan had already been refunded to the Successful Resolution Applicant (amounting to Rs.31,67,727.69/-).

The Court applied the principle that the Resolution Plan extinguishes claims existing as of its approval date but does not affect contractual deductions made during the CIRP period in accordance with the contract terms. Since no claim was pending or filed, and liquidated damages were deducted as per contract, the Successful Resolution Applicant was not entitled to refund of such deductions.

The Court rejected the argument that the extension of 12 months granted by the Resolution Plan implied prohibition on deduction of liquidated damages. The extension was for completion of the project and did not negate the contractual right to liquidated damages for delay.

The competing argument that all claims stand extinguished post-Resolution Plan was addressed by distinguishing between claims admitted and dealt with in the Resolution Plan and deductions made during the contract period under contractual terms without any claim filed.

Conclusion: Liquidated damages deducted during the CIRP period as per contract terms cannot be reclaimed by the Successful Resolution Applicant after approval of the Resolution Plan.

Issue 2: Whether the approved Resolution Plan's provision for 12 months extension bars deduction of liquidated damages.

The Resolution Plan explicitly provided for a 12-month extension for completion of ongoing projects. The Appellant contended that this extension precluded any deduction of liquidated damages from invoices.

The Respondent argued that the extension was merely for completion of the project and did not affect the contractual provisions for liquidated damages for delay. The Court agreed with the Respondent, observing that granting extension of time does not imply waiver of liquidated damages for delays that occurred prior to or during the extension period.

The Court found that the extension period was to allow completion but did not absolve the Corporate Debtor or Successful Resolution Applicant from contractual liabilities such as liquidated damages for delays.

Conclusion: The 12-month extension under the Resolution Plan does not bar deduction of liquidated damages as per the contract terms.

Issue 3: Applicability and distinction of precedents, particularly the Indian Oil Corporation Ltd. judgment.

The Appellant relied heavily on the Tribunal's judgment in Indian Oil Corporation Ltd. vs. Manjeet Cotton Pvt. Ltd., where the Tribunal held that all claims, liquidated damages, advances, and interest up to the date of approval of the Resolution Plan stood extinguished and could not be agitated thereafter.

The Court analyzed the facts and distinguished the present case on critical grounds:

• In Indian Oil Corporation Ltd., the claim of liquidated damages was admitted by the Resolution Professional and explicitly dealt with in the Resolution Plan.
• In the present case, no claim for liquidated damages existed prior to or at the time of approval of the Resolution Plan, and none was filed by the Respondent.
• The liquidated damages deducted were pursuant to the contract terms during the CIRP period and not a pre-existing claim extinguished by the Resolution Plan.
• The Indian Oil case also involved an explicit prohibition on initiating proceedings for claims covered by the Resolution Plan, whereas here no such claim was pending or extinguished.

The Court further noted that the Adjudicating Authority had already refunded liquidated damages deducted after approval of the Resolution Plan, reinforcing that the Resolution Plan's extinguishment applies only to claims existing as of its approval date.

Conclusion: The precedent relied upon by the Appellant is distinguishable and does not support refund of liquidated damages deducted during the CIRP period under contractual terms.

3. SIGNIFICANT HOLDINGS

"The reliance on the approved Resolution Plan regarding extinguishment of the claim has no effect on the liquidated damages which were already deducted by Hindustan Petroleum Corporation Limited from the invoices as per the terms and conditions of the Purchase Order."

"Extension of 12 months is extension for completion of the work and liquidated damages deducted after 16.11.2021 has already been refunded."

"The Resolution Plan only extinguishes the claims that were subsisting on the day of Resolution Plan. No claim of Respondent was subsisting on the day of Resolution Plan, hence, there is no question of any extinguishment."

"The order passed in IA/303 is distinguishable on one more aspect. The IOCL, in that case, had issued a letter cautioning initiation of proceedings against 'the Resolution Applicant to recover its claim against which this Tribunal held that the 'said claim has been duly treated in the Resolution Plan and IOCL cannot initiate any proceedings in respect to such claims.'"

Core principles established include:

• Claims and liabilities existing as on the date of approval of the Resolution Plan stand extinguished, but deductions made under contractual terms during the CIRP period without any claim filed are not affected.
• Extension of time granted by a Resolution Plan for completion of projects does not negate contractual provisions for liquidated damages for delay.
• Successful Resolution Applicant cannot claim refund of liquidated damages deducted during CIRP period in accordance with contract terms where no claim was admitted or included in the Resolution Plan.
• Precedents concerning extinguishment of claims under the Resolution Plan apply only to claims admitted and dealt with in the Plan, and are distinguishable from contractual deductions made during CIRP.

Final determination: The Adjudicating Authority rightly rejected the application seeking refund of liquidated damages deducted during the CIRP period. The Appeal lacks merit and is dismissed.

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