I. DELHI HIGH COURT: INVOKING CIRP WOULD NOT MAKE THE DISPUTE NON-ARBITRABLE.
The High Court of Delhi ("High Court"), in its judgment dated December 15, 2022 in the matter of Brilltech Engineers Private Limited v. Shapoorji Pallonji and Company Private Limited [Arb. P. 790 / 2020], has held that invocation of proceedings under the relevant provisions of the Insolvency and Bankruptcy Code, 2016 ("IBC") seeking initiation of corporate insolvency resolution process ("CIRP") against an entity does not make the dispute non-arbitrable in nature.
Army Welfare Housing Organization ("AWHO") awarded the project for construction of Twin Tower residential accommodation at Greater Noida to Shapoorji Pallonji and Company Private Limited ("Respondent") on March, 2011. Further, on November 16, 2011, AWHO approved Brilltech Engineers Private Limited ("Petitioner") as a "specialist firm" for carrying out electrification works in the aforesaid project. Thereafter, on December 19, 2011, the Respondent awarded the work order for electrical works exclusively to the Petitioner.
It was agreed between the parties that the Petitioner shall issue the running account bills for the work done, which would be approved and confirmed by the Respondent on the basis of joint inspection conducted by AWHO and the architect. Thereafter, the Petitioner shall generate tax invoices after accepting the verification and certification, which the Respondent shall receive and accept by making an endorsement and would make the payment on back-to-back basis.
Several running bills were raised by the Petitioner and duly paid from time to time. However, the Petitioner submitted the running account bill no. 40 dated October 29, 2018 for the sum of INR 37,34,229/- (Rupees Thirty-Seven Lakhs Thirty-Four Thousand Two Hundred and Twenty-Nine Only) in respect of the work done by the Petitioner, which was duly approved by the Respondent. However, the Respondent made certain deductions due to which an amount of INR 20,87,437/- (Rupees Twenty Lakhs Eighty-Seven Thousand Four Hundred and Thirty-Seven Only) was still due and payable. Subsequently, the Petitioner raised another running account bill no. 41 dated March 1, 2019 for the sum of INR 41,44,500/- (Rupees Forty-One Lakhs Forty-Four Thousand and Five Hundred Only) which was approved by the Respondent. Furthermore, the Respondent was also liable to pay the security amount along with interest at the rate of 24 per cent per annum on the security amount of INR 30,15,468/- (Rupees Thirty Lakhs Fifteen Thousand Four Hundred and Sixty-Eight Only), which was supposed to be paid after the virtual completion of the project in May, 2018.
On successful completion, a completion certificate dated March 25, 2019 and a letter of appreciation dated March 12, 2019 were awarded by AWHO in favour of the Petitioner. A total outstanding amount of INR 59,76,574/- (Rupees Fifty-Nine Lakhs Seventy-Six Thousand Five Hundred and Seventy-Four Only) was payable from the Respondent to the Petitioner along with interest thereon at the rate of 24% per annum. In view of the above-mentioned, Petitioner served a demand notice dated April 19, 2019 ("Demand Notice") upon the Respondent and thereafter, the Respondent served a reply to the Demand Notice dated May 8, 2019.
Further, the Petitioner had also submitted an application before the Ministry of Micro, Small and Medium Enterprises but the proceedings became void ab initio due to expiry of the statutory limit prescribed thereunder.
Thereafter, the Petitioner filed a company petition under Section 9 (Application for initiation of corporate insolvency resolution process by operational creditor) of the IBC before the Hon'ble National Company Law Tribunal, Mumbai ("NCLT"). The NCLT opined that the claim of the Petitioner was genuine and asked the Respondent to settle the matter.
Thereafter, in terms of Clause 13 of the work order, the Petitioner filed a petition under Section 11 (Appointment of arbitrators) of the Arbitration and Conciliation Act, 1996 ("Act") seeking appointment of arbitrator to resolve the dispute between the Petitioner and the Respondent. The Petitioner also filed a petition under Section 9 (Interim measures, etc., by Court) of the Act seeking attachment of an amount of INR 2,58,03,143/- (Rupees Two Crores Fifty-Eight Lakhs Three Thousand One Hundred and Forty-Three Only) which was due to be paid by AWHO to enable the Respondent to release the aforesaid amount in favour of the Petitioner.
Whether a dispute which was previously raised by way of filing a company petition before NCLT under Section 9 of the IBC is arbitrable, considering that a petition filed under Section 9 of the IBC is maintainable only in case of no pre-existing dispute between the parties.
Contentions raised by the Respondent:
The Respondent contended that the very fact that the Petitioner had filed a company petition under Section 9 of the IBC proves that the nature of disputes in the present case is non-arbitrable. This is in view of the established law that a petition filed under Section 9 of the IBC is maintainable only when there is no pre-existing dispute between the parties. The Respondent submitted before the High Court that in the rejoinder filed before the NCLT, the Petitioner stated that there are no disputes between the parties, but the Respondent had delayed the payments to be made to the Petitioner.
Further, the Respondent contended that the mechanism for dispute resolution as provided in Clause 13 of the work order was not duly followed by the Petitioner. It provided for mutual discussion at first and referring the matter to regional head in case it is not resolved in the first step, and if it still remains unresolved, then to arbitration.
Further, the Respondent submitted that the mandatory notice under Section 21 (Commencement of arbitral proceedings) of the Act has not been served upon the Respondent by the Petitioner.
Further, the Respondent submitted that Petitioner has been indulging in forum shopping by approaching multiple courts/ tribunals for seeking the same remedy and claiming different amounts as due from the Respondent before different forums.
Observations of the High Court
On the issue as to whether the dispute is arbitrable, the High Court referred to the judgment pronounced by the Supreme Court in the matter of Mailbox Innovations Private Limited v. Kirusa Software Private Limited [(2018) 1 Supreme Court Cases 353], whereby the Supreme Court explained that in terms of Section 9(5)(ii)(d) of the IBC, the adjudicating authority must reject an application filed under Section 9 of the IBC, if a notice of dispute is received by the operational creditor or there is record of the dispute in the information utility as stated under Section 9(5)(ii)(d) of the IBC. The High Court observed that even though a proceeding may have been initiated by the Petitioner before the NCLT asserting that there is an admitted debt, but a mere assertion would not make it into an admitted liability especially when the Respondent has been denying the same at every forum. Hence, the High Court decided that the objection raised by the Respondent in respect of non-existence of arbitrable disputes is not tenable.
On the issue of forum shopping, the High Court observed that merely because the Petitioner has approached different forums for redressal of its claims, it does not amount to forum shopping. Each provision invoked by the Petitioner has its own individual scope. Merely because the Petitioner approached NCLT prior to seeking appointment of arbitrator by the High Court, it does not mean that the Petitioner has been indulging in forum shopping.
On the issue of invocation of notice under Section 21 of the Act, the High Court analyzed Clause 13 of the work order in detail and arrived at the conclusion that the Petitioner had served the Demand Notice whereby the Petitioner had asserted that an amount of INR 99,87,763/- (Rupees Ninety-Nine Lakhs Eighty-Seven Thousand Seven Hundred and Sixty-Three Only) is due. In view thereof, the Respondent had also issued a reply to the Demand Notice. Hence, the High Court observed that in the Demand Notice, the intention of invoking legal proceedings, including arbitration, was conveyed by the Petitioner. Notwithstanding and without prejudice to the aforesaid, the High Court also noted that in the order dated October 21, 2020 passed by the High Court in the petition filed by the Petitioner under Section 9 of the Act, the Respondent had agreed for referral of disputes to arbitration.
Decision of the High Court
The High Court held that there are arbitrable disputes between the Petitioner and Respondent, which are referable for arbitration, in view of Clause 13 of the work order and therefore directed for appointment of a sole arbitrator to adjudicate the disputes between the parties.
The High Court has rightly observed that even though during the course of proceeding before the National Company Law Tribunal seeking initiation of the corporate insolvency resolution process, the Respondent may have taken the defence of pre-existing dispute and the Petitioner may have denied the same; however, this does not make the dispute non-arbitrable in nature.
This clarity provided by the High Court is a welcome step, thereby setting the right precedent, so as to preclude a defaulter from twisting the legal provisions and taking convenient defence, with the mala fide intent to somehow wriggle out of the liability to repay the outstanding debt.
II. NCLAT: SECTION 96(1)(B) OF THE IBC DOES NOT STAY ANY FUTURE LIABILITY OR OBLIGATION.
The National Company Law Appellate Tribunal, Principal Bench, New Delhi ("NCLAT") has inits order dated November 29, 2022 ("Order"), in the matter of Ashok Mahindru and Another v. Vivek Parti [Company Appeal (AT) (Insolvency) No. 1324 of 2022],held that Section 96(1)(b) (Interim-moratorium) of the Insolvency and Bankruptcy Code, 2016 ("IBC") does not stay any future liability or obligation.
On September 5, 2019, Advance Home and Personal Care Limited ("Corporate Debtor") was admitted into Corporate Insolvency Resolution Process ("CIRP") by the National Company Law Tribunal, New Delhi ("NCLT") under Section 9 (Application for initiation of CIRP by Operational Creditor) of the IBC.
Thereafter, on December 4, 2019, the resolution professional filed an application under Section 19(2) (Failure of personnel to extend co-operation to Interim Resolution Professional) of the IBC against Mr. Ashok Mahindru and one another ("Appellants") who were the suspended directors of the Corporate Debtor. On July 23, 2020, the resolution professional filed an application under Section 66 (Fraudulent trading or wrongful trading) and Section 67 (Proceedings under Section 66) of the IBC.
The Appellants were also personal guarantors for another company, namely, Advance Surfactants India Limited ("ASIL"). By order dated December 6, 2021 and December 7, 2021, proceedings under Section 95 (Application by creditor to initiate insolvency resolution process) of the IBC were initiated against the Appellants as a personal guarantor for ASIL. Consequently, the interim moratorium under Section 96 of the IBC commenced in the said proceedings.
The Appellants filed an application in the CIRP proceedings under Section 9 against the Corporate Debtor seeking stay of proceedings under Section 19(2) of the IBC as well as under Section 66 and Section 67 of the IBC. However, the aforesaid application was dismissed by the NCLT by way of an order dated September 9, 2022 ("Impugned Order").
Aggrieved by the Impugned Order, the Appellants filed an appeal before the NCLAT ("Appeal").
Whether Section 96(1)(b) of the IBC contemplates a stay on any future liability or obligation.
Contentions raised by the Appellants:
The Appellant argued that all proceedings were bound to be stayed considering the fact that interim moratorium had commenced in the proceedings under Section 95 of the IBC qua ASIL, vide order dated December 6, 2021 and December 7, 2021.
The Appellants further submitted that in proceedings under Section 19(2) of the IBC as well as proceedings under Sections 66 and 67 of the IBC, there is a possibility that an order can be passed against the Appellants in terms of monetary considerations to be paid by the Appellants and therefore, in lieu of interim moratorium, these proceedings must be stayed.
The Appellants placed reliance on the case of State Bank of India v V. Ramakrishnan and Another [(2018) 17 SCC 394]wherein the Hon'ble Supreme Court had examined the provisions under Sections 96 and Section 101 which deals with moratorium in respect of personal guarantors contrasted with Section 14 which deals with moratorium in respect of a company undergoing CIRP under the provisions of IBC and held that Section 14 could not possibly apply to a personal guarantor.
It was also argued that the NCLT had dismissed the application of the Appellants without giving any reason, except observing that it had been filed to halt all proceedings against the Corporate Debtor.
Contentions raised by the Respondent:
The respondent refuted the submissions of the Appellants and contended that Section 96 of the IBC contemplates stay of proceedings relating to the debt that is due. The said Section does not intend to stay the proceedings under Section 19(2), Section 66 and Section 67 of the IBC.
In this regard reliance was placed on the case Rakesh Kumar Jain, RP HBN Homes Colonizers Private Limited v. Jagdish Singh Nain, RP of HBN Foods Limited and Others [Company Appeal (AT) (Ins.) No. 425 of 2022] ("Rakesh Kumar Jain Case")wherein a question arose with regard to application of Section 14(1)(a) of the IBC to Section 66 and Section 67 of the IBC. NCLAT held that there is absolutely no inconsistency or repugnancy between Section 14 (1)(a) and Section 66 of IBC and the adjudicating authority passed the order only by exercising power that conferred on it by Section 66 of IBC. Hence, it was held that appeal may be filed during moratorium.
Observations of the NCLAT
The relevant extract of Section 96 of the IBC is reproduced herein below, which has been dealt with and interpreted by the NCLAT in the Order:
"96. Interim – moratorium. –
(1) When an application is filed under section 94 or section 95 –
(a) an interim-moratorium shall commence on the date of the
application in relation to all the debts and shall cease to have
effect on the date of admission of such application; and
(b) during the interim-moratorium period –
- any pending legal action or proceeding in respect of any debt shall be deemed to have been stayed; and
- the creditors of the debtor shall not initiate any legal action or proceedings in respect of any debt."
In this regard, the NCLAT observed that the expression used in Section 96(1)(b)(i) of the IBC is "any pending legal action or proceeding pending in respect of any debt shall be deemed to have been stayed". The term 'debt' has been defined under Section 3(11) of the IBC as "debt means aliability or obligation in respect of a claim which is due from any person and includes a financial debt and operational debt".
The NCLAT observed that a conjoint reading of Section 96(1)(b) of the IBC with the definition of 'debt' in Section 3(11) of the IBC, make it evidently clear that Section 96(1)(b) contemplates to stay the proceeding relating to debt, which means a liability or obligation in respect of a claim which is due from any person. Interim moratorium applies to proceedings which relate to a liability or obligation due, that is, due on the date when such interim moratorium has been declared.
Further, in NCLAT's view, the case relied on by the Appellants did not support their submissions in the instant case.
Decision of the NCLAT
The NCLAT opined that the respondent had rightly placed reliance on the decision in the Rakesh Kumar Jain Case and held that Section 96(1)(b) of the IBC cannot be read to mean that any future liability or obligation is contemplated to be stayed. Stay of proceedings under Section 19(2), Section 66 and Section 67 of the IBC are not contemplated under Section 96(1)(b) of the IBC.
The NCLAT held that the Impugned Order deserves no interference and accordingly, dismissed the Appeal.
The NCLAT has correctly observed that by virtue of imposition of interim moratorium under Section 96 of the IBC, other proceedings against the personal guarantors such as applications filed under Sections 19(2), 66 and 67 of the IBC cannot be stayed.
It is clear from the language used in Section 96(1)(b) of the IBC, that the effect of the interim moratorium is only in respect of the debt that is due and cannot be stretched to mean that interim moratorium contemplates to stay any future liability or obligation. Therefore, Section 96(1)(b) of the IBC in no way contemplates a stay on any future liability or obligation.
© 2020, Vaish Associates Advocates,
All rights reserved
Advocates, 1st & 11th Floors, Mohan Dev Building 13, Tolstoy Marg New Delhi-110001 (India).
The content of this article is intended to provide a general guide to the subject matter. Specialist professional advice should be sought about your specific circumstances. The views expressed in this article are solely of the authors of this article.