NCLAT: Liquidated Damages Deducted During CIRP Under Valid Contracts Not Refundable Post-Resolution Plan
Pranav B Prem
The National Company Law Appellate Tribunal (NCLAT), Principal Bench, New Delhi, has held that liquidated damages deducted during the currency of a contract in the Corporate Insolvency Resolution Process (CIRP) cannot be directed to be refunded after approval of the Resolution Plan, especially when the contract was continued by the Resolution Professional on existing terms. The bench comprising Justice Ashok Bhushan (Chairperson), Mr. Arun Baroka and Mr. Barun Mitra (Technical Members), dismissed the appeal filed by Fabtech Projects and Engineers Pvt. Ltd., the Successful Resolution Applicant.
Background
Hindustan Petroleum Corporation Limited (HPCL) issued several purchase orders to Fabtech Projects and Engineers Ltd. (Corporate Debtor) between July 2018 and July 2019 for construction of 3 x 500 MT mounded storage vessels at its LPG plant in Purnea. CIRP was initiated against the Corporate Debtor on 24.09.2019 following a Section 7 petition by Bank of Maharashtra.
A Resolution Plan submitted jointly by Manjeet Cotton Pvt. Ltd. and Parason Machinery (India) Pvt. Ltd. was approved by the Committee of Creditors and subsequently by the NCLT on 16.11.2021. The plan allowed a 12-month extension to complete ongoing projects. During CIRP, HPCL deducted liquidated damages from the Corporate Debtor’s invoices citing delays in project execution.
Subsequently, the Resolution Applicant filed I.A. No. 712 of 2022 before the NCLT seeking refund of liquidated damages, but the NCLT rejected the application. Aggrieved, the Resolution Applicant approached the NCLAT.
Appellant's Contentions
The Appellant argued that after approval of the Resolution Plan, all prior claims stood extinguished and HPCL could not deduct or retain liquidated damages. It submitted that HPCL had not filed any claim under the CIRP and therefore, could not now retain amounts as liquidated damages. The Appellant also contended that the 12-month extension granted under the Resolution Plan covered project delays and therefore nullified any grounds for deduction.
It was further asserted that the Adjudicating Authority erred in distinguishing this case from the earlier decision in Indian Oil Corporation Ltd. v. Manjeet Cotton Pvt. Ltd. [Comp. App. (AT) (Ins.) No.716 of 2022], where the Tribunal had disallowed IOCL from pursuing extinguished claims.
Respondent's Submissions
HPCL contended that the deductions in question were not in the nature of pre-CIRP claims, but were made during the CIRP as per the contract terms. It submitted that the Resolution Professional had expressly continued the contract and agreed to its terms, including liquidated damages clauses. As the project continued and delays occurred, HPCL issued show-cause notices and deducted liquidated damages at the rate of 0.5% per week of delay, capped at 5% of the contract value.
It was pointed out that liquidated damages deducted post-approval of the Resolution Plan, amounting to ₹31,67,727.69, were already refunded by HPCL voluntarily. No other amounts were due from HPCL, and no claim existed at the time of plan approval.
Tribunal’s Observations
The NCLAT observed that the Resolution Professional, by choosing to continue with the contract after commencement of CIRP, bound the Corporate Debtor to the contract’s terms and conditions. Since the deductions were made during the currency of the contract in accordance with its terms, such deductions cannot be treated as claims requiring separate admission under the CIRP.
The Tribunal clarified that extinguishment of claims under an approved Resolution Plan does not retrospectively invalidate deductions made under valid contractual terms during the CIRP. Since these were not outstanding “claims” awaiting admission or adjudication at the time of resolution, they could not be subjected to refund.
It also distinguished the case from the IOCL-Manjeet Cotton matter cited by the Appellant. In that case, IOCL had filed a claim which was dealt with in the Resolution Plan, whereas in the present case, HPCL had no pending claim as deductions had already been made and settled.
Verdict
The NCLAT found no merit in the appeal and upheld the NCLT's decision rejecting the refund of liquidated damages. It concluded that the deductions were contractually valid, executed during CIRP, and not affected by the Resolution Plan. Accordingly, the appeal was dismissed.
Appearance
For Appellant: Mr. Chaitanya, Advocate
For Respondent: Mr. T. Sundar Ramanathan, Ms. Sukanya Vishwanathan, Mr. Krishan Singhal, Advocates
Cause Title: Fabtech Projects and Engineers Pvt. Ltd. (Formerly Fabtech Projects and Engineers Ltd.) V. Hindustan Petroleum Corporation Ltd.
Case No: Company Appeal (AT) (Insolvency) No. 373 of 2025
Coram: Justice Ashok Bhushan [Chairperson] , Mr. Arun Baroka [Member (Technical)], Mr. Barun Mitra [Member (Technical)]
[Read/Download order]
