India: Indian Bankruptcy Law: Appeals And Challenges To Arbital Award Cannot Stall Bankruptcy Proceedings

Last Updated: 15 September 2017
Article by Alishan Naqvee, Rupal Bhatia and Sudipto Mitra

Judgment: M/s Annapurna Infrastructure Private Limited and Another ("Appellants") vs. M/s. SORIL Infra Resources Limited ("Respondent").

Forum: The National Company Law Appellate Tribunal ("NCLAT").

Act/Law: The Insolvency and Bankruptcy Code, 2016 ("IB Code") and the Arbitration and Conciliation Act ("A&C Act").

Ratio: Pendency of an arbitration proceeding amounts to 'existence of a dispute' under the provisions of the IB Code. However, a challenge to the arbitral award (under Section 34) or appeal in relation to an arbitration (under Section 37) of the A&C Act does not amount to 'existence of a dispute' under Section 8 of the IB Code.

Relevance: The phrase "existence of dispute" assumes significance as it is largely the only legal defence that a corporate debtor can take to avoid insolvency/liquidation proceedings initiated by an operational creditor. The survival of the corporate debtor therefore to a large extent depends on whether there exists a dispute concerning the claims of the operational creditor.

Before arriving at the above conclusion, the NCLAT interpreted the provisions of the IB Code, and also briefly discussed the law relating to finality of an arbitral award as per the provisions of the A&C Act.

A. FACTUAL MATRIX

The appeal before the NCLAT arose from an order dated March 24, 2017 of the NCLT wherein the NCLT had rejected the application of the Appellants, claiming to be the Operational Creditors, seeking initiation of corporate insolvency resolution process against the Respondent under Section 9 of the IB Code. The NCLT rejected the application of the Appellants on the ground that there was a dispute pending adjudication between the parties in view of the pendency of proceedings under Section 37 of the A&C Act.

The facts considered by the NCLT while rejecting the application of the Appellants under Section 9 are briefly listed as under:

  • The dispute between the parties arose out of a lease deed dated November 23, 2005 which was subject to an arbitration agreement for resolution of disputes. The parties accordingly invoked arbitration clause to resolve their disputes;
  • A sole arbitrator was appointed who passed an award on September 9, 2016 in favour of the Appellants;
  • The Respondent challenged the award under Section 34 of the A&C Act before the Delhi High Court. The Section 34 application was dismissed on December 19, 2016 by the Delhi High Court thereby affirming the award dated September 9, 2016;
  • The Respondent filed an appeal under Section 37 of the A&C Act before the Delhi High Court against the order dated December 19, 2016 passed under Section 34 application;
  • The Appellants filed an execution petition for recovery of the amount awarded in their favour under the Award dated September 9, 2016;
  • The Appellants also issued a demand notice dated January 13, 2017 under Section 8 of the IB Code demanding payment of the "operational debt"/awarded amount from the Respondent;
  • In response to the demand notice dated January 13, 2017, the Respondent stated that there was an existence of dispute between the parties with respect to the operational debt as the petition under Section 37 and execution petition under the A&C Act were pending.

B. ISSUES FRAMED BY NCLAT

In the light of the above background, the questions that arose for determination by the NCLAT were framed by the NCLAT as under:

  1. Whether there was an 'existence of dispute' between the parties, the award passed by Arbitral Tribunal having affirmed by the Court under Section 34 of the Arbitration Act?
  2. Whether pendency of a proceeding for execution of an award or a judgment and decree bar an operational creditor to prefer any petition under the IB Code?
  3. Whether the Appellant is an 'Operational Creditor' within the meaning of Section 5(20) and Section 5(21) of the IB Code?

C. OBSERVATIONS OF NCLAT

The NCLAT discussed and analysed Section 5(6) and Section 8(2)(a) of IB Code to assess the meaning of "dispute" and "existence of dispute" under the IB Code and concluded that "pendency of an arbitration proceeding" is referred to as "existence of dispute" under Section 8(2)(a) and not pendency of an application under Section 34 or Section 37 of the A&C Act.

The NCLAT further assessed Form 5 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 which is to be filled by an applicant applying under Section 9 of the IB Code. The NCLAT observed that under the said Form 5, order passed by an arbitral panel is cited as one of the documents to record the evidence of default. Thus, making it apparent that arbitral award has been shown as "debt" under the IB Code for the purpose of default on non-payment. The NCLAT also referred to its earlier judgment of Kirusa Software Private Ltd. vs. Mobilox Innovations Private Limited wherein it had settled the controversy relating to the interpretation of the phrases "dispute" and "existence of a dispute" under the IB Code.

Further, the NCLAT also referred to Section 36 of the A&C Act and concluded that the arbitral award reaches finality after expiry of enforceable time under Section 34 and/or if application under Section 34 is filed and rejected.

Weaving the above provisions together, the NCLAT concluded that insolvency resolution process is not a money suit for recovery nor a suit for execution for any decree or award as distinct from Section 36 of the A&C Act, which relates to execution of an award. The NCLAT held that Corporate Insolvency Resolution Process can be initiated for default of debt, as awarded under the A&C Act.

While rejecting the order of the NCLT, the NCLAT observed that NCLT proceeded on an incorrect presumption that a dispute is pending in view of pendency of a case under Section 37 of the A&C Act and thus its finding that it is an executable matter is against the essence of the IB Code. The NCLAT thus decided the Issue Nos. 1 and 2 in negative in favour of the Appellants and against the Respondent.

With respect to the Issue No. 3, the NCLAT held that since NCLT dismissed the application of the Appellants on the ground of "existence of dispute" between the parties, it did not adjudicate upon the issue as to whether the first Appellant was an 'operational creditor' or not? In view of the NCLAT, the said question first needs to be decided by the NCLT.

The NCLAT while setting aside the order dated March 24, 2017 of NCLT, has referred the matter back to NCLT to decide on the Issue No. 3 and if the application of the Appellants under Section 9 of IB Code is complete and in compliance of the provisions of IB Code.

LexCounsel provides this e-update on a complimentary basis solely for informational purposes. It is not intended to constitute, and should not be taken as, legal advice, or a communication intended to solicit or establish any attorney-client relationship between LexCounsel and the reader(s). LexCounsel shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained in this e-newsletter. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Alishan Naqvee
Rupal Bhatia
Sudipto Mitra
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions