IBC

Proceedings pending u/s.34 of Arbitration Act whether constitute ‘dispute’ u/s.5(6) of IBC?

Facts in brief:
M/s Vijay Nirman Company Private Limited, being an operational creditor, had initiated the Corporate Insolvency Resolution Process against corporate debtor viz. M/s Ksheeraabad Constructions Private Limited by way of an application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the Code”).

The National Company Law Tribunal (NCLT) vide its order dated 29 August 2017 admitted the application (holding that application u/s.34 of Arbitration and Conciliation Act 1996 (hereafter referred to as “Arbitration Act”) before Court is not ‘dispute’ u/s.5(6) of the Code.

In an appeal before National Company Law Appellate Tribunal (NCLAT), made by M/s Ksheeraabad Constructions Private Limited (Appellant) against the said order of NCLT, the NCLAT agreed with views of NCLT.

Aggrieved thereby, the matter came before the Hon’ble Supreme Court, on an important question of law as to whether the Code can be invoked in respect of an operational debt where an Arbitral Award has been passed against the operational debtor, which has not yet been finally adjudicated upon.

Rulings of Hon’ble Supreme Court:

A bench of Justice Rohinton Fali Nariman and Justice Indu Malhotra (in K Kishan vs. Vijay Nirman Company Pvt Ltd) in a Judgement dated 14.08.2018 observed that filing of Section 34 (Arbitration) petition against an arbitral award shows 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 and 37 of the Arbitration Act has taken place.

Hon’ble Supreme Court also dealt with different situation under which an appeal u/s.34 of Arbitration Act may be and its consequence under the Code as under:

(i) Where a Section 34 petition challenging an arbitral award may clearly and unequivocally be barred by limitation, in that it can be demonstrated to the court that the period of 90 days plus the discretionary period of 30 days has clearly expired, after which either no petition under Section 34 has been filed or a belated petition under Section 34 has been filed. It is only in such clear cases that the insolvency process under the Code may then be put into operation.

(ii) In cases where a Section 34 petition may have been instituted in the wrong court, as a result of which the petitioner may claim the application of Section 14 of the Limitation Act to get over the bar of limitation laid down in Section 34(3) of the Arbitration Act, the insolvency process under the Code cannot be put into operation without an adjudication on the applicability of Section 14 of the Limitation Act.

Further, the bench disagreed with the view of NCLAT that Section 238 of the Code overrides Arbitration Act. It said Section 238 of the Code would apply in case there is an inconsistency between the Code and the Arbitration Act. In the present case, no such inconsistency is observed. On the contrary, the Award passed under the Arbitration Act together with the steps taken for its challenge would only make it clear that the operational debt, in the present case, happens to be a disputed one.

Standard