India – Parties Adopting Foreign Law In The Agreement Are Not Estopped From Taking Recourse Under The Insolvency And Bankruptcy Code, 2016.

The National Company Law Appellate Tribunal (“NCLAT”) in its recent judgment dated August 21, 2019 in Excel Metal Processor Limited vs Benteler Trading International GMBH and Anr.[Company Appeal (AT) (Insolvency) No. 782 of 2019] has held that a clause in an agreement adopting a foreign law will not act as an embargo in initiating insolvency proceedings under section 9 of the Insolvency and Bankruptcy Code, 2016 (“Code”).

The brief facts of the case are that Benteler Trading International GmbH (“Operational Creditor”) filed an application under section 9 of the Code against Excel Metal Processors Private Limited (“Corporate Debtor”) alleging that the Corporate Debtor had committed a default on March 27, 2016 in making the payment to an extent of USD 1,258,219.42 inclusive of interest @15% per annum before the National Company Law Tribunal, Mumbai Bench (“NCLT”). The NCLT, by its impugned order dated June 25, 2019 admitted the application. Subsequently, the said order was challenged by the Corporate Debtor before the NCLAT.

One of the arguments raised by the Corporate Debtor was in relation to the jurisdiction of the NCLT to entertain the insolvency application. The Corporate Debtor referred to the Settlement Agreement executed between the parties and submitted that as per the said Agreement (wherein the parties have mutually agreed that the Agreement shall be governed by the foreign law) and as the office of the Operational Creditor is located in Germany, any suit or case is maintainable only in the Courts at Germany. It is pertinent to mention that the Agreement, as relied upon by the Corporate Debtor, stipulated as under:

“3. SETTLEMENT OF DISPUTES BETWEEN THE PARTIES

1. By signing the agreement the parties hereby under mutual concessions (utergegenseitigemNachegeben) mutually settle all disputes on or related to the existing obligations and the contract.

2. GOVERNING LAW AND RESOLUTION OF DISPUTES

3.1 This agreement is governed by, and shall be construed in accordance with, the substantive laws of the Federal Republic of Germany.

2. Any dispute arising out of or in connection with this Agreement shall be finally decided in accordance with this Agreement with the Arbitration rules of “schiedsgerichtsordnung der Deutschen Institution fur Shiedsgerichtsbarkeit e.V.”

Basis the aforementioned, the Corporate Debtor argued that no case can be filed before Courts in India. In view thereof, the Corporate Debtor raised a question on the jurisdiction of the NCLT in entertaining the application under section 9 of the Code.

The aforementioned argument of the Corporate Debtor was rejected by the NCLAT. The NCLAT relied on its judgment passed in Binani Industries Limited vs Bank of Baroda and Anr., Company Appeal (AT) (Insolvency) No. 82 of 2018 decided on November 4, 2018 wherein it was held by the NCLAT that 'Corporate Insolvency Resolution Process'/ insolvency proceedings is not a 'suit' or a 'litigation' or a 'money claim' for any litigation; no one is selling or buying the 'Corporate Debtor' a 'Resolution Plan'; it is not an auction; it is not a recovery, which is an individual effort by the creditor to recover the dues through a process that had debtor and creditor on opposite sides; and it is not liquidation. The object of the Insolvency Code is merely to get have a resolution in place, so that the Company does not default on dues.

NCLAT further noted that as per section 60 of the Code, “the Adjudicating Authority, in relation to insolvency resolution and liquidation for corporate persons including corporate debtors and personals guarantors thereof shall be the National Company Law Tribunal having territorial jurisdiction over the place where the registered office of the corporate person is located.” Therefore, as the office of the Corporate Debtor was located in Mumbai, NCLT had the jurisdiction to entertain an application under section 9 of the Code and the Corporate Debtor cannot derive advantage of the terms of the Agreement reached between the parties.

After due consideration of the all the grounds raised by the Corporate Debtor, the NCLAT declined to interfere with the aforementioned order dated June 25, 2019 passed by the NCLT and accordingly, dismissed the appeal.