Law Firm in India

Can NCLT be approached if there is an Arbitration Clause

In the year 2016 the Parliament passed the Insolvency and Bankruptcy Code 2016 in order to focus on a recovery mechanism for creditors advancing money to companies.

Reasons for enacting the IBC:

In the year 2016 the Parliament passed the Insolvency and Bankruptcy Code 2016 in order to focus on a recovery mechanism for creditors advancing money to companies. In the event a company becomes insolvent, the Insolvency Code thus enacted would take care of all those aspects, including helping the creditors recover their amounts advanced as loans. Therefore, we can say that it lays down the procedure for insolvency resolution.

The Insolvency and Bankruptcy Code was a big sigh of relief for MSMEs, which ensured a lot faster debt recovery or liquidation process. It simplified the winding up process for companies, which earlier had to adhere to a whole lot of statutes.  . This Code has effectively done away with overlapping provisions contained in various laws viz: Sick Industrial Companies (Special Provisions) Act, 1985, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 and the Companies Act, 2013.
IBC vs Arbitration:

However, with the enactment of the Insolvency and Bankruptcy Code a new debate arose about whether a party having an arbitration clause in their Agreement, could approach the NCLT for adjudication or filing of the IBC Claim. Now, with this deadlock surfacing, other serious questions of judicial over-lapping, forum-shopping and parallel proceedings have cropped up.

An IBC proceeding under the Code initiated by an operational creditor encompasses that upon the occurrence of a default, a notice shall be issued to the corporate debtor under section 8 of the Code. Further, a period of ten days is provided for the debtor to respond to the notice proving the existence of a dispute. However, it is pertinent to mention that the existence of an arbitral proceeding is sufficient to stall the entire proceeding under the Code. For this a reference can be made to Section 21 of the Arbitration and Conciliation Act, 1996 to understand the pre-existence of an arbitral dispute.  Therefore, a notice under Section 21 facilitates a consensus upon the appointment of an arbitrator and constitutes the existence of a dispute and hence action under the IBC cannot be instituted. Conversely, any arbitral award for any agreement will be null and void for the reason, that the mandatory requirement of supplying the notice under Section 21 was not complied with, as indicated in Alupro Building Systems Pvt Ltd v. Ozone Overseas Pvt. Ltd., 2017 SCC OnLine Del 7228, decided on 28.02.2017. Hence, if a notice under Section 21 of the Arbitration Act is given, it means that there is a pre-existing dispute.

It is important to understand that the Insolvency and Bankruptcy Code, 2016, provides that the   corporate insolvency resolution process (CIRP) can be instituted against a corporate debtor but also has a provision for a moratorium period, which precludes the institution, continuation and execution of decree or order of any court, including an arbitration panel against the corporate debtor. The reflection of this aspect can be found in the civil appeal in Alchemist Asset Reconstruction Company Limited Vs. M/s Hotel Gaudavan Private Limited & Ors, Civil Appeal number 16929 of 2017 decided by the Supreme Court of India, passed on October 23, 2017. In this case the Court found that an arbitration proceeding started after the imposition of the said moratorium and appeals under Section 37 of the Arbitration Act were entertained. Therefore, the Court held that the effect of the Moratorium vide Section 14 (1) (a) of the Insolvency and Bankruptcy Code, 2016, is that the arbitration that is filed after the aforesaid moratorium is void or bad in law.
Current position:

The preamble of the Arbitration reads that Arbitration is a right in personam and binds two parties agreeing to opt for such mechanisms to resolve their dispute.  Hence, while deciding applications under Section 11, any Judge who finds that there was an arbitration agreement between or amongst the parties, should refer the matter for the decision of the Arbitral Tribunal. The NCLAT in the case of Parmod Yadav & Anr. Vs. Divine Infracon Pvt. Ltd held that upon the commencement of arbitral proceedings under section 21 of the Arbitration and Conciliation Act, 1996, it is presumed that there is an existence of a dispute and therefore, the petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 was not maintainable.  On the other hand the Supreme Court in M/s. Ksheerabad Constructions Pvt. Ltd. (“KCPL”) vs M/s Vijay Nirman Company Pvt. Ltd held that the pendency of a petition under Section 34 of the Arbitration Act,  constituted a pre-existing dispute under the IBC. Hence, from a clear reading of the above judgments it can be said that, the IBC cannot be invoked to initiate the corporate insolvency resolution process (CIRP) in respect of an operational debt where an Arbitral Award has been passed against the operational debtor, even though the same has not yet been finally adjudicated upon due to a challenge under Section 34 of the Arbitration Act. In a landmark judgment of Mobilox Innovations Private Limited v. Kirusa Software Private Limited [(2018) 1 SCC 353] the Supreme Court held that the insolvency process for operational creditors, cannot be used to bypass the adjudicatory and enforcement process of a debt contained in other statutes and defined in the Agreement. Therefore, using the IBC as a substitute for debt enforcement, the procedure had been rejected. Hence, as per the ratio held in this judgment if an Agreement has a pre-existing Arbitration clause we cannot approach the NCLT for adjudication. On the contrary once the moratorium period under IBC starts it precludes the filing of any legal action including initiation of Arbitration. Consequently, it can be said that unless a Notice under section 21 of the Arbitration Act has been given, there is no bar on approaching the NCLT even if there an Arbitration clause within the Agreement.

How Can we Help You?

Write to us with your enquiries, questions or request a meeting with a lawyer to discuss your potential case. One of our experts would review the form and revert back shortly.

Thank you for getting in touch!

We appreciate you contacting us at India Law Offices. We will review the details that you have submitted and one of our experts will connect with you shortly.

Invalid Captcha