Thursday 21 March 2013

The existing obligation to pay a sum of money is the sine qua non of a debt.


A "Debt" is a sum of money which is now payable or will become payable in future by reason of a present obligation. The existing obligation to pay a sum of money is the sine qua non of a debt.
"Damages" is money claimed by, or ordered to be paid to; a person as compensation for loss or injury. It merely remains a claim till adjudication by a court and becomes a "debt" when a court awards it.
(ii) In regard to a claim for damages (whether liquidated or unliquidated), there is no "existing obligation" to pay any amount. No pecuniary liability in regard to a claim for damages, arises till a court adjudicates upon the claim for damages and holds that the defendant has committed breach and has incurred a liability to compensate the plaintiff for the loss and then assesses the quantum of such liability. An alleged default or breach gives rise only to a right to sue for damages and not to claim any "debt". A claim for damages becomes a "debt due", not when the loss is quantified by the party complaining of breach, but when a competent court holds on enquiry, that the person against whom the claim for damages is made, has committed breach and incurred a pecuniary liability towards the party complaining of breach and assesses the quantum of loss and awards damages. Damages are payable on account of a fiat of the court and not on account of quantification by the person alleging breach.

Bombay High Court
E-City Media Private Limited vs Sadhrta Retail Limited on 20 November, 2009

1. By an agreement dated 22nd May, 2008 the Petitioner appointed the Respondent as an exclusive agent for designated branding sites situated within the premises of a shopping mall. Shorn of detail, the Petitioner permitted the Respondent to display advertisements at the mall, in a theatre and upon ticket jackets. During the term of the agreement there were disputes over whether all the facilities under the contract were made available by the Petitioner to the Respondent. On 29th August, 2008 the Petitioner, while recognizing deficiencies, offered to extend the duration of the contract as compensation. The Respondent by its email of 2nd September, 2008 agreed to accept the compensation recommended and proceeded to state that a formal amendment to the contract ought to be signed by the parties. The Petitioner by a communication of 26th September, 2008 recorded that a revised duration issued as agreed towards compensation, was being forwarded to the Respondent. The term of the contract between the parties was to commence on 22nd May, 2008 and was to conclude on 31st July, 2009. 3
The term was extended by a formal amendment to cover the months of August and September 2009. There was a further exchange of correspondence by which on 26th September, 2008 the Respondent acknowledged that there was a delay on its part in effecting payments. One of the directors of the Respondent also addressed an email of 1st November, 2008 furnishing an assurance that all payments would be cleared. This was followed by a communication dated 6th March, 2009 seeking a meeting to settle the pending issues. The Petitioner issued a statutory notice under Sections 433 and 434 of the Companies Act, 1956 on 19th December, 2008 and proceeded to terminate the agreement.

2. The claim which forms the basis of the petition for winding up has been particularized in Exhibits H and I to the Petition. The claim is for amounts due and payable between July 2008 until 31st December, 2008 (Exhibit H) and for the period between 1st January, 2009 until 31st July, 2009 (Exhibit I). Service tax dues have been claimed thereon. The total claim is in the amount of Rs.25.02 lacs on 4
which interest at the rate of 18% has been claimed.
3. The maintainability of the Petition has been questioned. The Respondent which has filed an affidavit in reply in these proceedings submits that a substantial part of the debt or dues alleged in the Petition is for loss or damages sustained on an alleged breach by the Respondent of the agreement dated 22nd May, 2008. It is urged that the determination of loss or damages will require evidential proof which lies beyond the summary nature of proceedings for winding up. It has been urged that no debt can be held to be due and payable unless the extent or loss of damages has been ascertained.

4. On the other hand, it has been submitted on behalf of the Petitioner that even if the provision of the contract is held to be in the nature of liquidated damages, in view of the judgment of the Supreme Court in Oil & Natural Gas Corporation Ltd. v. Saw Pipes Ltd.1, the Petitioner would be entitled to claim the sum named by the parties in 1 (2003) 5 SCC 705.
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the contract unless it is held to be unreasonable or by way of penalty. In the present case it was urged that there is no defence to the effect that the sum named is either unreasonable or by way of penalty. Learned counsel submitted that in terms of the contract the Respondent is liable to pay the minimum guaranteed royalty and the failure of the Respondent to do so would result in a debt due and payable.

5. Clause (i) of the contract provides that the Respondent was to pay a sum of Rs.22,92,700/- as and by way of a non-refundable royalty, which is described as a minimum guarantee on a yearly basis. Clause 8 of the contract upon which the maintainability of the Petition would depend provides, insofar as is material, as follows : "8. Making payments of the Royalty/MG amounts as provided in Clause No.1 and Annexure 1 the payment to Fun Multiplex on due dates as per Clause No.1 and Annexure 1 hereto above and non-termination are the ESSENCE of this Agreement. Further it is specifically agreed that :
a. Sadhrta Retail Pvt. Ltd. and E City Media cannot terminate this Agreement other than in the event the following occurs:
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A. In case Sadhrta Retail Pvt. Ltd. fails to make payment or if the cheque is dishonoured for any reason whatsoever of the Royalty/MG amount for a period of any one month during the term of this Agreement then E City Media shall be at liberty to terminate this Agreement after giving 7 days notice and dispose of the rights herein granted to Sadhrta Retail Pvt. Ltd in any manner as E City Media may deem fit and proper and in such an event Sadhrta Retail Pvt. Ltd. shall make good the losses and damages which may be suffered by E City Media. On occurrence of such an event, Sadhrta Retail pvt. Ltd. shall be liable to pay to E City Media on demand the entire Royalty/ MG amount mentioned in this Agreement with interest at 18% per annum."

6. The Petitioner terminated the contract by its communication dated 19th December, 2008 in view of defaults allegedly committed by the Respondent in making payments due under the contract. Clause 8 of the agreement provides that in the event that the Respondent fails to make payment for a period of any one month during the term of the agreement, the Petitioner would be at liberty to terminate the agreement with notice of seven days. In that event, the Respondent is obligated to make good the losses and damages which may be suffered by the Petitioner. On the occurrence 7
of such an event, the Respondent is liable to pay to the Petitioner on demand the entire royalty / minimum guaranteed amount mentioned in the agreement with interest at the rate of 18% per annum. Clause 8 is a provision for liquidated damages arising out a default on the part of the Respondent in paying the royalty and minimum guaranteed amount.

7. A petition for winding up cannot be maintained upon a claim for damages. Damages become payable only when they are crystallized upon adjudication. Until and unless an adjudication takes place with a resultant decree for damages, there is no debt due and payable. Damages require adjudication. Until then, the liability of a party in alleged breach of a contract does not become crystallized.

8. This position has been reiterated in a judgment of a Division Bench of the Karnataka High Court in Greenhills Exports (P) Ltd. v. Coffee Board2. Mr. Justice R.V. Raveendran (as the 2 (2001) 106 Company Cases 391.
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Learned Judge then was) speaking for the Division Bench formulated the propositions of law which emerge from judgments of the Supreme Court and the High Court. The Court held as follows : "(i) A "Debt" is a sum of money which is now payable or will become payable in future by reason of a present obligation. The existing obligation to pay a sum of money is the sine qua non of a debt.
"Damages" is money claimed by, or ordered to be paid to; a person as compensation for loss or injury. It merely remains a claim till adjudication by a court and becomes a "debt" when a court awards it.
(ii) In regard to a claim for damages (whether liquidated or unliquidated), there is no "existing obligation" to pay any amount. No pecuniary liability in regard to a claim for damages, arises till a court adjudicates upon the claim for damages and holds that the defendant has committed breach and has incurred a liability to compensate the plaintiff for the loss and then assesses the quantum of such liability. An alleged default or breach gives rise only to a right to sue for damages and not to claim any "debt". A claim for damages becomes a "debt due", not when the loss is quantified by the party complaining of breach, but when a competent court holds on enquiry, that the person against whom the claim for damages is made, has committed breach and incurred a pecuniary liability towards the party complaining of breach and assesses the quantum of loss and awards damages. Damages are payable on account of a fiat of the court and not on account of quantification by the person alleging breach.
(iii) When the contract does not stipulate the quantum of 9
damages, the court will assess and award compensation in accordance with the principles laid down in section 73. Where the contract stipulates the quantum of damages or amounts to be recovered as damages, then the party complaining of breach can recover reasonable compensation, the stipulated amount being merely the outside limit.
......
(v) Even if the loss is ascertainable and the amount claimed as damages has been calculated and ascertained in the manner stipulated in the contract, by the party claiming damages, that will not convert a claim for damages into a claim for an ascertained sum due. Liability to pay damages arises only when a party is found to have committed breach. Ascertainment of the amount awardable as damages is only consequential."

9. On behalf of the Petitioner, however, reliance was sought to be placed on the judgment of the Supreme Court in Saw Pipes (supra). The judgment of the Supreme Court in Saw Pipes (supra) holds that where the terms of a contract make an unambiguous stipulation for the payment of liquidated damages in the event of breach, a party guilty of a breach is required to pay compensation named in the contract unless it is held that the estimate of damages is unreasonable or by way of penalty. Paragraph 68 of the judgment which lays down the propositions of law contains the following 10
observations :
"68. From the aforesaid discussions, it can be held that: (1)Terms of the contract are required to be taken into consideration before arriving at the conclusion whether the party claiming damages is entitled to the same.
(2)If the terms are clear and unambiguous stipulating the liquidated damages in case of the breach of the contract unless it is held that such estimate of damages / compensation is unreasonable or is by way of penalty, party who has committed the breach is required to pay such compensation and that is what is provided in Section 73 of the Contract Act.
(3)Section 74 is to be read along with Section 73 and, therefore, in every case of breach of contract, the person aggrieved by the breach is not required to prove actual loss or damage suffered by him before he can claim a decree. The court is competent to award reasonable compensation in case of breach even if no actual damage is proved to have been suffered in consequence of the breach of a contract.
(4)In some contracts, it would be impossible for the court to assess the compensation arising from breach and if the compensation contemplated is not by way of penalty or unreasonable, the Court can award the same if it is genuine pre-estimate by the parties as the measure of reasonable compensation."

10. The judgment in Saw Pipes (supra) holds that if parties, 11
when they make a contract, know that a particular loss is likely to result from a breach, it is open to them to agree upon the payment of a named sum as compensation in the event of breach. In such a case it may not be necessary to lead evidence to prove damages unless the Court arrives at the conclusion that no loss is likely to occur by the breach. Where the Court comes to the conclusion that a term contemplating damages is by way of penalty, it would be open to the Court to grant reasonable compensation not exceeding the amount named in the contract on proof of damages. These observations of the Supreme Court will indicate that where a claim arises on account of damages for breach, the claim by its very nature requires adjudication by the Court. In Saw Pipes, as the facts of the case show, the proceedings before the Supreme Court arose upon an arbitral award which was challenged before the High Court under Section 34 of the Arbitration and Conciliation Act, 1996. There was in that case an adjudication on the question of damages.
11. If the clause in the present case is regarded as being a 12
clause which stipulates the payment of a named sum by way of liquidated damages a debt will become crystallized only upon an adjudication of damages in a suit. Prior to an adjudication, it still constitutes a claim for damages. The decree of the Court is what transforms the claim into a stated sum due and payable by way of damages. Whether the amount is reasonable or by way of a penalty are evidential matters which cannot be decided in a petition for winding up. For, as the judgment in Saw Pipes holds, even if the sum stipulated by way of liquidated damages is clear, the jurisdiction of the Civil Court extends to determining whether it is unreasonable or by way of penalty. All these issues have to be decided in a suit. Whether or not evidential proof will be required to sustain such a claim is again a matter for the trial Court or, as the case may be, an arbitral forum to decide. The Petition for winding up would manifestly not be maintainable. Until an adjudication results in duly constituted proceedings, it cannot be held that there is a debt due and payable.
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12. For all these reasons, the Company Petition would have to be dismissed on the ground that it is not maintainable, leaving it open to the Petitioner to have recourse to its remedies in accordance with law. The Petition shall accordingly stand dismissed. *****

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