12 September 2018

INITIATING INSOLVENCY PROCEEDINGS DURING PENDENCY OF PROCEEDINGS UNDER SECTION 34 OF ARBITRATION AND CONCILIATION ACT

 Introduction

A bench of Hon’ble Justice R. F. Nariman and Hon’ble Justice Indu Malhotra of the Supreme Court of India recently, in the case of K Kishan (Appellant) vs. Vijay Nirman Company Pvt Ltd (Respondent), considered whether the Insolvency and Bankruptcy Code, 2016 (``the Code``) can be invoked in respect of an operational debt where the arbitral award passed against the operational debtor creating such debt, has been challenged under Section 34 of the Arbitration and Conciliation Act, 1996 (``the Act``).

Facts of the case

1. A contract was entered into between the parties for a construction project. During the course of the project, disputes and differences arose between the parties which were referred to an arbitral tribunal.
2. In the award, amongst other reliefs, a sum of Rs 1,71,98,302/- was granted in favour of the Respondent. There were certain cross claims of the Respondent which were rejected in the award.
3. Soon after the award was delivered, the Respondent issued a notice under Section 8 of the Code to the Appellant. The Appellant replied within 10 days stating that the invoice being referred to in the notice was the subject-matter of the arbitration proceedings and according to the Appellants, the Respondent was liable to pay larger amounts to them. Subsequently the Appellant challenged the award passed in the arbitration proceedings under Section 34 of the Act.
4. The Respondent thereafter also filed an application under Section 9 of the Code to the NCLT. The NCLT admitted the application stating that the Respondent was entitled to the sum as the award granted was in favour of the Respondent and also held that the fact that a Section 34 petition was pending was irrelevant for the reason that the claim was granted and no stay was received on the award.
5. On an appeal, the NCLAT held that the non-obstante clause contained in Section 238 of the Code would override the Act and the award of the arbitral tribunal mentioned in Part 5 of the Form V would be considered as a record of the operational debt. The NCLAT upheld the decision of the NCLT and dismissed the appeal.

The Supreme Court held:

1. The Supreme Court relied on the judgement of Mobilox Innovations Private Limited v. Kirusa Software Private Limited where it was held that the object of the Code was not to adjudicate and enforce a debt which could be possible by other Acts including the Act. Further the Hon’ble Court observed that if there is a real dispute between the parties which is likely to succeed on a point of law, the Code cannot be applied.
2. The Code is only applicable to cases where the claim is clear and undisputable. The filing of a Section 34 petition against an arbitral award, shows that the claim was not clear and is disputed. Therefore, the Code would not be applicable at least till the adjudication of the final award.
3. The Supreme Court also disagreed with the NCLAT’s view on the application of Section 238 of the Code stating that Section 238 would apply in cases where there is an inconsistency between the Code and the Act. The Hon’ble Court observed that in the present case there was no such inconsistency and on the contrary the award passed under the Act along with its challenge made it clear that the operational debt was disputed.
4. Allowing the appeal, the Hon’ble Court stated that it is most important that the operational debt be clear and not disputed. If the debt is disputed, within the parameters laid down in the Mobilox Innovations case, an insolvency application cannot be filed.

MHCO Comment: The judgment of the Supreme Court has made it clear that only an undisputed operational debt can be the subject matter of an application under the Code. A genuine challenge to an arbitral award which gives rise to the debt will preclude the operational creditor from pursuing an application under the Code. This decision further clarifies the ambit of dispute under the Code.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.