19 September, 2017
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.
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.
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:
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?
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?
Whether the Appellant is an 'Operational Creditor' within the meaning of Section 5(20) and Section 5(21) of the IB Code?
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.
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