India: Pendency Of Challenge To An Arbitral Award – A Bar To Insolvency Proceedings

The Supreme Court in its recent decision in K Kishan v M/s Vijay Nirman Company Private Limited, Civil Appeal No 21825 of 2017, has put to rest the question of whether an arbitral award that has been challenged under Section 34 of the Arbitration and Conciliation Act, 1996 (Act) by the award debtor can form the basis for an action under Section 9 of the Insolvency and Bankruptcy Code, 2016 (Code). The Supreme Court overturned the decision of the National Company Law Appellate Tribunal (NCLAT) and held that the pendency of an application under Section 34 of the Act constitutes a 'dispute' under Section 8 of the Code. Accordingly, the challenge to the arbitral award bars the initiation of the corporate insolvency resolution process (CIRP), under Section 9 of the Code.

Background

M/s Vijay Nirman Company Private Limited (Respondent) entered into a contract relating to the construction and widening of a highway with M/s Ksheerabad Constructions Private Limited (KCPL). Certain disputes arose between the parties which were referred to an arbitral tribunal in accordance with the agreement. The arbitral tribunal delivered its award dated 21 January 2017 (Award), wherein certain claims were allowed in favour of the Respondent (Allowed Claims) and KCPL's counterclaims were rejected. On the basis of the adjudication of the debt in the Award, the Respondent issued a notice to KCPL under Section 8 of the Code for payment of the Allowed Claims. KCPL responded within 10 days of receipt of the aforesaid notice, stating that the Allowed Claims are the subject-matter of an arbitration proceeding and the Respondent in fact owes larger amounts to KCPL. KCPL subsequently went on to file a petition under Section 34 of the Act to challenge the Award.

Thereafter, the Respondent initiated CIRP against KCPL by an application under Section 9 of the Code, which was admitted by the National Company Law Tribunal (NCLT) vide its order dated 29 August 2017, observing that the pendency of a Section 34 petition was irrelevant considering that there was no stay of the Award by the court. KCPL moved an appeal before NCLAT on the ground that the pendency of a petition under Section 34 of the Act would amount to the 'existence of a dispute' and consequently, the application for initiation of CIRP under the Code is not maintainable. The appeal was dismissed by NCLAT.

At this juncture, after the Appellant appealed against the decision of the NCLAT. The question for consideration before the Supreme Court was whether the Code can be invoked in respect of a claim for operational debt where an application under Section 34 of the Act has been filed against an arbitral award which has been passed in favour of the creditor, when such an application has not been finally adjudicated upon.

Arguments put Forth by the Parties

The Appellant made two major submissions: firstly, that the object of the Code is not to replace debt adjudication and enforcement under the Act or any other statutes and secondly, that the pendency of a Section 34 petition under the Act is reflective of a real dispute between the parties. The second contention was in light of the fact that if the cross-claims of the Appellant so rejected by the arbitral tribunal are subsequently held to be wrongly dismissed, then the Appellant would not owe any sum of money to the Respondent.

The Respondent's submissions relied on insolvency laws in foreign jurisdictions such as Singapore and Australia, which suggested that insolvency proceedings do not get stalled because an application to set aside the judgment, order or decision is pending in an appeal or otherwise. The Respondent also contended that Section 238 of the Code, is a non-obstante clause which will override provisions of the Act in any event.

Findings and Conclusions

  •  

The Supreme Court placed reliance on its landmark judgment in Mobilox Innovations Private Limited v. Kirusa Software Private Limited (2018) 1 SCC 353, and affirmed that the insolvency process, particularly in relation to operational creditors, cannot be used to bypass the adjudicatory and enforcement process of a debt contained in other statutes.

  •  

The Court held that in so far as operational debt is concerned, all that has to be determined by the Adjudicating Authority is whether the said debt can be said to be disputed. Accordingly, the Court decided that the filing of a Section 34 petition against an arbitral award proves that there is a "pre-existing ongoing dispute" which arose between the parties in the first stage of the arbitral proceedings, and may continue to exist even after the award, till the final adjudicatory process under Sections 34 and 37 of the Act has concluded.

  •  

The Court gave due weightage to the fact that the counter-claim of the Appellant was for amounts far exceeding the award given in favour of the Respondent, and the very fact that there was a possibility that KCPL may succeed on these cross-claims is sufficient to state that the operational debt cannot be said to be an undisputed debt.

  •  

The Supreme Court also held that since there were no inconsistencies between the provisions of the Code and the Act, the application of the non-obstante clause under Section 238 of the Act does not come into play.

  •  

The Court observed that the Code cannot be used in terrorem to extract small amounts from corporate debtors and jeopardize the fate of an otherwise solvent company worth several crores of rupees, even though the said amount may not be finally payable as adjudication proceedings in respect thereto are still pending.

Comment                                                                                                                                         

The judgment of the Supreme Court is a welcome and practicable settlement of the issue and ensures that operational creditors, whose debt claims are usually smaller in quantum, are not able to put the corporate debtor into the insolvency resolution process prematurely.

This decision overturns the position assumed by the NCLT and the NCLAT that proceedings pending under Section 34 of the Act do not imply the existence of a dispute and that an arbitral award that has been challenged does not constitute a record of the operational debt. [KCO1]The Court rightly held that whilst the final adjudication of a challenge to an award is pending under the Act, the provisions of the Code may not be legitimately attracted. This in effect is a harmonious construction by the Supreme Court of the two legislations, considering situations where a corporate debtor is put under the resolution process before final adjudication of a challenge to an award under the Act. If the arbitral award is subsequently set aside under Section 34 of the Act, the damage to the corporate debtor would be irreparable and the legal position under the two legislations thereby, irreconcilable.

The Supreme Court has also sent a clear message that the non-obstante clause of the Code has to be used with caution and only in cases where there exists a clear inconsistency between the provisions of the Code and some other Act.

This decision will go a long way in instilling faith of corporates in the market-driven and commercially viable approach of the Supreme Court. While the intent of the Supreme Court is to provide a workable solution for the interplay between the two statutes, it does not take into account the long procedural delays that may occur due to appeals being filed against the rejection of proceedings under Section 34 of the Act. In essence, an operational creditor may have to wait till there is a final verdict by the Supreme Court on the proceedings pending under Section 34 of the Act in order to be able to initiate proceedings under the Code.

Regardless, this decision of the Supreme Court will definitely reduce the steeply rising burden of premature insolvency applications on the NLCT and the NCLAT under the Code.


[KCO1] Contradictory. Consider rephrasing to "... do not imply the existence of a dispute and an arbitral award that has been challenged does not constitute a record of an operational debt"

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com

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
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Sign Up
Gain free access to lawyers expertise from more than 250 countries.
 
Email Address
Company Name
Password
Confirm Password
Position
Industry
Mondaq Newsalert
Select Topics
Select Regions
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