Excessive Amount Mistakenly Paid Can’t Be Operational Debt, It’s Quasi Contract: NCLT Hyderabad

The Bench observed that under IBC, the NCLT cannot investigate the sufficiency of pleadings or proof in respect of a claim arising from Quasi Contracts as given under Section 72 of Indian Contract Act. An application filed for recovery under Quasi Contract and not for resolution of Corporate Debtor is not maintainable under IBC.

Background Facts

M/s TA Hydraulics Pvt. Ltd (“Corporate Debtor”) supplied goods to M/s. Sandvik Mining & Construction Tools AB (“Operational Creditor”) and raised invoices amounting to Rs. 4,30,110/-. When the Operational Creditor paid the Corporate Debtor, the payment was inadvertently made in US Dollars (USD) instead of Indian Rupees (INR). Thus, the Operational Creditor paid Rs.3,03,44,260/- to the Corporate Debtor in place of Rs. 4,30,110/-. The excess payment mistakenly made to the Corporate Debtor stood at Rs. 2,99,14,150/-.

The Corporate Debtor failed to refund the excess payment received to the Operational Creditor. Consequently, on 15.05.2020 the Operational Creditor issued a Demand Notice to the Corporate Debtor under Section 8 of Insolvency and Bankruptcy Code, 2016 (“IBC”). The Corporate Debtor responded to the Demand Notice and raised dispute with regard to the claim amount.

Thereafter, the Operational creditor filed a petition under Section 9 of IBC, seeking initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor.

Issue

Whether an excess sum paid mistakenly by the Operational Creditor to the Corporate Debtor is in the nature of an operational debt qua purchase orders issued and commercial invoices raised, especially when the Applicant traced operational debt under a quasi-contract?

Relevant Law

Section 72 of the Indian Contract Act, 1872

“Liability of person to whom money is paid, or thing delivered, by mistake or under coercion. —

A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it.

Illustrations

(a) A and B jointly owe 100 rupees to C, A alone pays the amount to C, and B, not knowing this fact, pays 100 rupees over again to C. C is bound to repay the amount to B. (a) A and B jointly owe 100 rupees to C, A alone pays the amount to C, and B, not knowing this fact, pays 100 rupees over again to C. C is bound to repay the amount to B.

(b) A railway company refuses to deliver up certain goods to the consignee except upon the payment of an illegal charge for carriage. The consignee pays the sum charged in order to obtain the goods. He is entitled to recover so much of the charge as was illegal and excessive. (b) A railway company refuses to deliver up certain goods to the consignee except upon the payment of an illegal charge for carriage. The consignee pays the sum charged in order to obtain the goods. He is entitled to recover so much of the charge as was illegal and excessive."

NCLT Verdict

Quasi Contracts and IBC

The Bench observed that under a quasi-contract the opposite party is required to pay or restore to the suitor, the amount/benefit that has been paid or parted with under a mistake or coercion, even when no such contract exists between the parties. In other words, a quasi-contract is an obligation created by an implied contract in order to prevent unjust enrichment rather than under an agreement between the parties.

Reliance was placed on the Andhra Pradesh High Court judgment in N.V. Ramaiah vs State Of Andhra Pradesh and Ors., 1988 (35) ALT 38 AP, wherein it was held that the party seeking benefit of Section 72 of Indian Contract Act would have to prove the injury/loss suffered and that equitable relief of restitution is required to offset such loss. The Court presumes that in ordinary course of business every manufacturer passes on the burden of what he has paid for the raw material, to the consumer of his product. Similarly, every dealer who resells such product to another, equally recovers the same from his purchaser.

The Bench observed that under IBC the NCLT cannot investigate the sufficiency of pleadings or proof in respect of a claim arising from Section 72 of Indian Contract Act. A mere plea that the Corporate Debtor failed to return the excess money it received unjustly, by itself is not sufficient to grant the equitable relief under Section 72 of the Indian Contract Act.

“Therefore, basing on such a bare mention alone it would be improper under law for us to hold that a debt due and payable by the respondent under a quasi-contract has been established by the applicant. Hence, we hold that existence of an operational debt as claimed by the applicant remains unestablished by the applicant.”

Whether claim falls under definition of Operational Debt

The Bench placed reliance on the Supreme Court judgment in Consolidated Construction Pvt. Ltd. Vs Hitro Energy Solutions Pvt Ltd., Civil Appeal No. 2839 of 2020, and observed that the sine qua non for categorizing a ‘debt’ as an ‘operational debt’ is that the ‘claim’ must have nexus and must be in respect of the provision of goods or services. Therefore, the Operational Creditor must establish the said nexus and also that the excess payment made to the Corporate Debtor was with regards to the goods supplied by the Corporate Debtor under the relevant purchase orders and commercial invoices. Otherwise, no operational debt would exist based on the excess payment.

“Thus, the excess payment mistakenly paid by the applicant being not in pursuance of the terms and conditions of the purchase orders referred above, applying the definition of ‘operational debt’ as defined in section 5(21) of the IB Code, and the ruling supra, the same cannot be considered as payment for supply of goods by the corporate debtor herein. This view of ours is further fortified by the fact that the applicant, unequivocally based its claim of operation debt not under the purchaser order or commercial invoices referred to above but entirely under a quasi or implied contract, which contract can only emerge impliedly, and when no such express contract between the parties existed.”

The Bench held that the excess amount paid to the Corporate Debtor is not in the nature of an operational debt. The initiation of CIRP in a Section 9 application on the basis of a default not relating to an operational debt is impermissible under IBC.

“Therefore, the present application having been based on a quasi-contract, can only serve the purpose of recovery and not resolution of insolvency of the respondent, we hold that the present application under section 9 of the IB Code is misconceived and not maintainable.”

The Bench held that the Section 9 application is not maintainable, since it is based on a quasi-contract and for the purpose of recovery and not resolution of the Corporate Debtor. The application has been rejected.

Case Title: M/s. Sandvik Mining & Construction Tools AB v M/s TA Hydraulics Pvt. Ltd.

Case No.: CP(IB) No. 278/09/HDB/2020

Counsel For Operational Creditor: Shri Shabbeer Ahmed, Advocate and Aneesh. V., Advocate.

Counsel For Corporate Debtor: Shri Sudershan Reddy, Senior Counsel assisted by Shri Hirendranath and Ms. Prakruti Golecha, Advocates.

Click Here To Read/Download Order