When can you initiate IBC action, if the Arbitration award is in your favour?

Hon’ble Supreme Court in K. Kishan vs. M/s. Vijay Nirman Company Pvt. Ltd. (in Civil Appeal No.21824 of 2018, decided on 14.08.2018) addressed – whether the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “the IBC”) 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.

M/s Vijay Nirman Company Pvt. Ltd. (the Respondent) entered into a sub-Contract Agreement with one M/s Ksheerabad Constructions Pvt. (‘KCPL’) on 01.02.2008.

Apart from this Agreement, a separate agreement of the same date was entered into between the said KPCL and one M/s SDM Projects Private Limited, Bangalore, as a result of which, a tripartite Memorandum of Understanding was entered into on 09.05.2008 between KCPL, M/s SDM Projects Pvt. Ltd. and the Respondent.

During the course of the project, disputes and differences arose between the parties and the same were referred to an Arbitral Tribunal, which delivered its Award on 21.01.2017. One of the claims that was allowed by the said Award was in favour of the respondent for a sum of Rs.1,71,98,302/-.

At this stage, a notice dated 06.02.2017 was sent by the Respondent to KCPL to pay an amount of Rs. 1,79,00,166/-. This notice was stated to be a notice under Section 8 of the IBC. Within 10 days, by a letter dated 16.02.2017, KCPL disputed the invoice that was referred to in the said notice, stating that the said amount was, in fact, the subject-matter of an arbitration proceeding.

After the notice and reply, on 20.04.2017, a Section 34 petition was filed by KCPL under the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Arbitration Act”) challenging the aforesaid Award. The same was filed within the period of limitation set down in Section 34(3) of the Arbitration Act.

It is only thereafter that a petition was filed under Section 9 of the IBC, on 14.07.2017 with the National Company Law Tribunal (NCLT).

According to the NCLT, the fact that a Section 34 petition was pending was irrelevant for the reason that the claim stood admitted, and there was no stay of the Award. For these reasons, therefore, the Section 9 petition was admitted.

An appeal filed to the National Company Law Appellate Tribunal (NCLAT) met with the same fate, as according to the NCLAT, the non-obstante clause contained in Section 238 of the IBC would override the Arbitration Act. Also, according to the NCLAT, since Form V of Part 5 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 requires particulars of an order of an arbitral panel adjudicating on the default, this would have to be treated as “a record of an operational debt”, as a result of which the petition would have to be admitted, as was correctly done by the NCLT.

The Apex Court relied upon its ruling in Mobilox Innovations Private Limited vs. Kirusa Software Private Limited, (2018) 1 SCC 353 – in particular para 13 thereof on the legislative history; para 27 on the notes on clauses annexed to the Bill; para 32 where it is noticed that the original Bill which ultimately became the IBC had the expression “bona fide dispute” contained in an inclusive definition. It is significant to note that by the time the IBC was enacted the expression “bona fide” was dropped and an observation therein that what is important is that the existence of the dispute and/or a suit or arbitration proceeding must be pre-existing i.e. it must exist before the receipt of the demand notice or invoice; para 38 and para 51 of the said ruling in Mobilox case.

Hon’ble Supreme Court observed that “the alarming result of an operational debt contained in an arbitral award for a small amount of say, two lakhs of rupees, cannot possibly jeopardize an otherwise solvent company worth several crores of rupees”. And that that the judgment in Mobilox Innovations (supra) has made it clear that the insolvency process, particularly in relation to operational creditors, cannot be used to bypass the adjudicatory and enforcement process of a debt contained in other statutes.

And held that 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 Apex Court has thrown important light by making its observation that-

(i) that there may be cases 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. And in such cases insolvency process under the IBC can commence.

(ii) There may also be other 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. In such cases also, it is obvious that the insolvency process under the IBC cannot be put into operation without an adjudication on the applicability of Section 14 of the Limitation Act.