A creditor under the Indian laws may approach several forums and/or courts so as to recover their outstanding dues. Lately, the Arbitration Clause and Insolvency and Bankruptcy Code, 2016 (IBC) have gained traction in the debt recovery industry as one of the fastest and most effective methods of recovery from malicious, free-balling debtors. This article attempts to analyse whether the most preferred modes of debt recovery are in sync with its ultimate objective or create aberrations to the recovery process itself.
Once the dispute arises between the Debtor and any Creditor the parties can refer the dispute to the arbitration if the arbitration agreement exists between the parties. However, the question here arises is whether ongoing arbitration proceedings bars the filing of insolvency petition under the IBC or not?
The answer to the above question varies depending upon the Section under which the application is filed i.e. under Section 7 or 9 of IBC, 2016. Further, the maintainability of applications for initiating corporate insolvency resolution process chiefly depends on the applicant satisfying the Tribunal that it falls either within the definition of 'Financial Creditor' or 'Operational Creditor' under the IBC.
Section 7 of IBC
Customarily, Financial Creditors such as Banks, NBFC's or persons to whom a financial debt is owed, are entitled to file an application under Section 7 of the IBC for recover of outstanding dues.
An application filed under Section 7 of the IBC is NOT BARRED by the ongoing arbitration proceedings. However, once an application under Section 7 of the IBC is admitted, the other proceedings pending before any Courts or Tribunals including the Arbitral Tribunals are stayed after the commencement of moratorium period from the date of admission of the application by the NCLT.
The abovementioned law has been settled by the NCLT in Reliance Commercial Finance Limited vs. Ved Cellulose Limited, (IB)-156(PB)/2017 wherein the NCLT held that "Under Section 7 of the IBC there is no bar to initiate CIRP even if arbitration proceeding is pending, such a bar exists in respect of claim made by the Operational Creditor under Section 9 of the IBC."
Section 9 of IBC
On the other hand, Operational Creditors – whose liability from the entity comes from a transaction or operations – are entitled to file a Section 9 application under IBC for recovery of their outstanding dues. One of the conditions for admission of an application by an operational creditor to initiate insolvency proceedings against a Corporate Debtor by the Adjudicating Authority (here, National Company Law Tribunal) is the existence of a "Dispute."
Section 5(6) of the IBC states that a dispute includes a suit or arbitration proceedings relating to (a) the existence or the amount of debt; (b) the quality of goods or service; or (c) the breach of a representation or warranty. However, there lies no "Dispute" under the IBC if no notice of dispute is received by the Operational Creditor or there exists no record of dispute in the information utility. [Section 9(5)(i)(d)].
In K. Kishan vs. M/s Vijay Nirman Company Pvt. Ltd. [Civil Appeal Nos. 21824 & 21825-2017], the Hon'ble Supreme Court further expanded the scope of the word "Dispute" and held that the pendency of a petition under Section 34 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") constitutes a "Dispute" under the IBC. Therefore, the IBC cannot be invoked to initiate the corporate insolvency resolution process (CIRP) in respect of an operational debt where an Arbitral Award has been passed against the debtor, though it has not yet been finally adjudicated upon due to a challenge under Section 34 of the Arbitration Act.
The filing of a Section 34 petition against an Arbitral Award shows that a pre-existing dispute which culminates at the first stage of the proceedings in an Award, continues even after the Award, at least till the final adjudicatory process under Sections 34 & 37 has taken place.
The judgment of the Supreme Court is praiseworthy and provides clarity on what constitutes existence of dispute under the IBC. In crux, it has emphasized that a debt is not crystallized till the Arbitral Award containing such debt attains finality. This judgment has amplified the scope of previous judgments in Mobilox and Annapurna to include challenge to Arbitral Awards within the meaning of 'existence of dispute' under Section 9 the Code.
APEX COURT'S FINDINGS:
- application for initiation of corporate insolvency resolution process by the operational creditor is liable to be rejected in the presence of a 'pre-existing dispute' as to the debt;
- pendency of challenge to an arbitral award qualifies as 'pre-existing dispute' for the purposes of initiating corporate insolvency resolution process by the operational creditor;
- the Code should not be used inappropriately as a substitute for debt adjudication and enforcement procedures under other statutes.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.