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Insolvency proceedings cannot be used to defeat a claim existing prior to the initiation of insolvency proceedings

In A.P. No.550 of 2008, Sirpur Paper Mills Ltd. Vs. I.K. Merchants Pvt. Ltd. (Formerly Known as I.K. Merchants), the question before the Calcutta High Court was whether the present application
under Section 34 of the Act should be kept in abeyance by reason of the provision of the IBC being invoked by operational creditors against the petitioner.

The petitioner contended before the Court that the application under Section 34 of the Arbitration Act for setting aside of the award cannot be proceeded with since Corporate Insolvency proceedings under the IBC has already been initiated against him as the ‘Corporate Debtor’.

It was further submitted by the petitioner that since the management of the petitioner/corporate debtor has already been taken over by JK Paper Limited (the resolution applicant before the NCLT) and the respondents have also not made any efforts to place their claim before the Resolution Professional (“RP”), the said application under Section 34 of the Arbitration Act cannot be proceeded with against the petitioner.

Thus, it was the contention of the petitioner before the Court that the respondent must first file its claim before the NCLT before it can contest the proceedings for setting aside of the award.

Disagreeing with the contention of the petitioner and relying on the law laid down by the Supreme Court in the case of K. Kishan Vs. Vijay Nirman Company Pvt. Ltd. (2018) 17 SCC 622 and Mobilox, the Calcutta High Court eventually decided that it is evident that the view of the Supreme Court was that the IBC cannot be used in terrorem to extract a sum of money when that sum is a subject-matter of a pending adjudication.

While the Court noted that the case of K. Kishan was different from the instant case in certain factual aspects, the intention underlying the Supreme Court’s judgment was found relevant i.e. that the corporate insolvency proceedings cannot be used in cases where there is a pre-existing and an ongoing dispute between the parties.

In view of the same, the High Court proceeded to hold that corporate insolvency resolution proceedings cannot be used to defeat a claim or a dispute which existed prior to the initiation of the insolvency proceeding. Both K. Kishan and Mobliox make it clear an earlier dispute or notice of a suit or an arbitration must be given precedence to the insolvency proceedings.

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