Citation: Civil Appeal No. 21824 of 2017
Coram: R.F Nariman, Indu Malhotra
Date: August 14, 2018
Overview: This case primarily revolves around the relationship between the Arbitration Act and the Insolvency and Bankruptcy Code and which one would prevail in situations where an Award has been challenged under Section 34 of the Arbitration Act and there have been proceedings initiated by operational creditors under Section 9 of the IBC.
M/s Vijay Nirman Company Pvt. Ltd (“Respondent”) and M/s Ksheerabad Constructions Pvt. Ltd. (“KCPL”) entered into an agreement for the construction and widening of the existing two-lane highway. Subsequently, disputes between the parties and to arbitration proceedings for which an award was given on 21 January 2017. In the award, Rs 1,71,98,302 was granted in favour of the Respondent based on interim payment certificates.
KCPL challenged the Award under Section 34 of the Act. The Respondent filed an application under Section 9 of the Code which stated that the amount granted in favour of the Respondent was an ‘operational debt’ and non-payment of the said debt was a ground for initiation of the corporate insolvency resolution process under the Code.
While the National Company Law Tribunal (“NCLT”) admitted the Section 9 Application, it held that the pendency of a Section 34 application was irrelevant since there was no stay of the award. Further it held that the claim amount stood admitted during the arbitral proceedings. The National Company Law Appellate Tribunal affirmed this ruling of the NCLT by reasoning that order of the Arbitral Tribunal adjudicating on the default, would be treated as “a record of an operational debt”.
- Whether there needs to be a real and bona fide dispute between the parties and what the consequences of Section 34 are.
TheNCLT had stated that the fact that a Section 34 petition was pending was irrelevant for the reason whereby the claim was admitted and that there was no stay on the award. It was based on this reasoning, that the NCLT allowed the application under Section 9 of the Insolvency and Bankruptcy Code (IBC) to be admitted and this rationale was upheld in the Appellate Tribunal where it stated that the non-obstante clause contained in Section 238 of the IBC would override the Arbitration Act.
The Court held that the IBC cannot be used in terrorem to extract the sum of Rs. two lakhs even though it may not be finally payable as adjudication proceedings for it are still pending. Moreover, the Court reiterated that the object of the Code, at least with respect to operational creditors, is to put the insolvency process against a corporate debtor only in clear cases where a real dispute between the parties as to the debt owed does not exist.
It was therefore by this judgement that the Court upheld its decision in the case of Mobiloxby which it stated that the insolvency process could not be used as a way to circumvent the adjudicatory and enforcement process of any other statute, especially in the case of operational creditors. Moreover, petitions filed under Section 34 against the arbitral award in any case show the existence of a pre-existing dispute which continues even after the Award has been adjudicated upon and the dispute only comes to an end when the final adjudicatory processes under Section 34 and 37 have taken place.
This judgement settles the issue which arises whereby operational creditors, who normally have smaller debt claims, are able to put the corporate debtor in insolvency proceedings prematurely. The Court here held that while the final adjudication of a challenge to an award is pending under the Act, the provisions of the Code could not be legitimately attracted, which was a harmonious construction by the Supreme Court of the two legislations. Lastly, based on its decision the Court also held that the non-obstante clause which has been incorporated in the IBC must be used with caution and cannot be used to override adjudicatory and enforcement proceedings of other statutes.
Mobilox Innovations Private Limited vs. Kirusa Software Private Limited, (2018) 1 SCC 353