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Insolvency Process Can’t Be Admitted During Pendency Of Proceedings Challenging Arbitral Award

In K Kishan vs. Vijay Nirman Company Pvt Ltd., the appeals before the Supreme Court raised an important question as to whether the Insolvency and Bankruptcy Code, 2016 ('The Code') can be invoked in respect of an operational debt where an Arbitral Award has been passed against the operational debtor, which has not yet been finally adjudicated upon.

The background of the matter was that a contract was entered into between the parties for a project during the course of which disputes and differences arose between the parties and the same were referred to an Arbitral Tribunal, which delivered its Award on 21.01.2017.

At this stage, a notice  under Section 8 of the Code dated 06.02.2017 was sent by the Respondent to KCPL to pay an amount of Rs. 1,79,00,166/-. Within 10 days, by a letter dated 16.02.2017, KCPL disputed the invoice that was referred to in the said notice, stating that the said amount was, in fact, the subject-matter of an arbitration proceeding, and as per KCPL’s accounts, the Respondent was liable to pay larger  amounts to them and subsequently on 20.04.2017, a Section 34 petition was filed by KCPL under the Arbitration Act challenging the aforesaid Award. It is only thereafter that a petition was filed under Section 9 of the Code, on 14.07.2017.

The respondent company objected to the application since dispute has been raised in time and before the filling of the application and a application. The NCLT admitted the application stating that  arbitration award states the Respondent (corporate debtor) having admitted that the claimant is entitled to the said sum of Rs.1,71,98,302/-,  then that a Section 34 petition was pending was irrelevant for the reason that the claim stood admitted, and there was no stay of the Award. For these reasons, therefore, the Section 9 petition was admitted.

On appeal, the NCLAT held that the non-obstante clause contained in Section 238 of the Code would
override the Arbitration Act. Also, according to the Appellate Tribunal, since Form V of Part 5 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 requires particulars of an order of an arbitral panel adjudicating on the default, this would have to be treated as “a record of an operational debt”, as a result of which the petition would have to be admitted, as was correctly done by the NCLT. The appeal was, accordingly, dismissed.

We repeat that the object of the Code, at least insofar as operational creditors are concerned, is to put the insolvency process against a corporate debtor only in clear cases where a real dispute between the parties as to the debt owed does not exist.

The Supreme Court referring to Mobilox Innovations Private Limited vs. Kirusa Software Private Limited, held that a reading of Section 9(5)(ii)(d) would show that an application under Section 8 must be rejected if notice of a dispute has been received by the operational creditor which applies to the present case. Though undisputedly, an amount of Rs.1.71 Crores was  admitted by the respondent in the arbitral proceedings to be a debt due, it to say that cross-claims of sums much above this amount has been turned down by the Arbitral Tribunal, which are pending in a Section 34 petition challenging the said Award. The very fact that there is a possibility that the respondent may succeed on these cross-claims is sufficient to state that the operational debt, in the present case, cannot be said to be an undisputed debt. It is important to note that unlike counter claim Nos. 1 and 2, which were rejected by the Arbitral Tribunal for lack of evidence, counter claim No.3 which amounts to Rs.19,88,20,475/- was rejected on the basis of a price adjustment clause on merits. Therefore, it is difficult to say at this stage of the proceedings, that no dispute would exist between the parties.

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