Mere Filing Of S. 7 Application Under IBC Does Not Bar Application For Appointment Of Arbitrator: Bombay High Court

The Bombay High Court has ruled that mere filing of an application under Section 7(1) of the Insolvency and Bankruptcy Code, 2016 (IBC) is not enough to invoke the bar of Section 238 of the Code. Thus, the same would not bar the court from entertaining an application under Section 11 (6) of the Arbitration and Conciliation Act, 1996 (A&C Act) for appointment of Arbitrator, the court said.

The bench of Justice Avinash G. Gharote held that there is no inconsistency between the provisions of the A&C Act and the IBC, since the provisions of Section 238 of the IBC would come into play only after an order has been passed by the Adjudicating Authority under Section 7(5) of the Code.

The court remarked that once the Section 7 application has been admitted by the Adjudicating Authority after recording its satisfaction as contemplated by Section 7(5) of the Code, the same would be the starting point for invoking the bar of Section 238. Therefore, before such an order has been passed by the Adjudicating Authority, an application under Section 11(6) of the A&C Act cannot be said to be non- maintainable, the court has ruled.

Sections 7 and 9 of the IBC deal with the initiation of corporate insolvency resolution process by a financial and operational creditor, respectively.

Section 238 of the IBC provides that the provisions of the Code shall have effect, notwithstanding anything inconsistent contained in any other law for the time being in force.

After certain disputes arose between the applicant, Sunflag Iron & Steel Co. Ltd, and the respondent, M/s. J. Poonamchand & Sons, under an agreement, Sunflag invoked the arbitration clause. Sunflag filed an application under Section 11(6) of the A&C Act before the Bombay High Court seeking appointment of Arbitrator.

The respondent, M/s. J. Poonamchand & Sons, opposed the application on the ground that it had approached the National Company Law Tribunal (NCLT) and had filed a petition under Section 9 of the IBC against Sunflag. Thus, it claimed that the provisions of Section 11(6) of the A&C Act, would become inapplicable and therefore, it would be impermissible to appoint an arbitrator. The respondent placed reliance on Section 238 of the IBC in support of its plea.

At the outset, the court remarked that unlike what is contemplated by Section 238 of the IBC, there is no provision in the A&C Act which gives an overriding effect to the provisions of the said Act. “However, it is equally trite that the A&C Act, is a special Statute, governing the field of Arbitration, and all other Statutes governing the filed earlier thereto, stood repealed in view of Section 85 of the A&C Act,” the court added.

Perusing Sections 7 to 9 of the IBC, the bench remarked that the mere filing of a Section 7 application by itself, does not mean that the Adjudicating Authority has taken cognisance of the matter. The court said that this is because Section 7(4) of the IBC, casts a duty upon the Adjudicating Authority- within 14 days of the receipt of such application- to ascertain the existence of a default from the records of an information utility or on the basis of other evidence furnished by the financial creditor.

The bench added: “The proviso to Section 7(4) of the IB Code further enjoins the Adjudicating Authority to record reasons for not ascertaining the factors, as contemplated by Section 7(4), within the time frame stipulated therein. Further Section 7(5) of the IB Code enjoins upon the Adjudicating Authority to record its satisfaction that the default has occurred and there is no disciplinary proceedings pending against the proposed resolution professional and upon such satisfaction permits admission of such application.”

The court thus concluded that the admission of an application after recording the satisfaction as contemplated by Section 7(5) of the IBC, would be the starting point where the bar under Section 238 of the IBC can be said to be capable of being invoked.

The bench, therefore, held that the mere filing of an application under Section 7(1) of the IBC cannot be said to be enough to invoke the bar of Section 238. This, the court said, is clearly apparent from the language of Section 7(4) read with Section 7(5) of the IBC.

The court reckoned, “…Section 7(5)(b) of the IB Code permits the Adjudicating Authority to reject the application where it is of the opinion that default has not occurred, thereby indicating that the mere filing of an application under Section 7(1) of the I B Code, would not act as a bar to any proceedings under other statutes, until and unless the satisfaction as contemplated by Section 7(4) r/w Section 7(5)(a) of the IB Code is recorded by the Adjudicating Authority and the application is admitted.”

The bench further ruled that there does not appear to be anything inconsistent between the provisions of the A&C Act and the IBC, since the provisions of Section 238 of the IBC would come into play only after an order has been passed by the Adjudicating Authority under Section 7(5) of the Code. Therefore, an application under Section 11(6) of the A&C Act, till such time, cannot be said to be not maintainable, the court said.

The court concluded, “..in case the Adjudicating Authority comes to a conclusion that there was a default then the position would squarely be governed by Section 238 of the IB Code, however, till such time it is so done, the entertaining of an application under Section 11 (6) of the A&C Act, would not stand prevented.”

The court thus allowed the application and appointed an Arbitrator to adjudicate the dispute between the parties.

Case Title: M/s Sunflag Iron & Steel Co. Ltd vs M/s. J. Poonamchand & Sons

Dated: 05.06.2023

Counsel for the Applicant: Mr. Ashutosh Dharmadhikari

Counsel for the Respondent: Mr. Rahul Bhangde

Click Here To Read/Download Judgment