Claim Arising Out Of Arbitral Award Against Which Section 34 Proceedings Are Pending, NCLT Kolkata Upholds RP's Decision To Admit Claim Contingently

The National Company Law Tribunal (“NCLT”), Kolkata Bench, comprising of Shri Rohit Kapoor (Judicial Member) and Shri Balraj Joshi (Technical Member), has upheld the Resolution Professional's decision to admit claim arising out of an arbitral Award as contingent claim, since proceedings under Section 34 of Arbitration and Conciliation Act, 1996 are pending before the High Court against the Award. Background Facts Proton Steels Limited (“Applicant”) entered into a contract with McNally Bharat Engineering Company Limited (“Corporate Debtor”) for supply of steel casting. The Corporate Debtor failed to pay the dues and the Applicant filed an application before Micro, Small Enterprise Facilitation Council (MSMEFC). Thereafter, the matter was referred to arbitration and an arbitral Award dated 30.11.2011 was passed in favour of Applicant for a sum of Rs. 8,48,711.45/-. The Award was modified on 13.09.2013 by enhancing the interest payable on principal sum to three times the bank rate in view of MSMED Act, 2006 and Reserve Bank of India notification. On 18.07.2019, the Corporate Debtor filed an application under Section 34 of Arbitration and Conciliation Act, 1996 (“Arbitration Act”) before the High Court to set aside the Arbitral Award. On 29.04.2022, the NCLT admitted the Corporate Debtor into Corporate Insolvency Resolution Process (“CIRP”). The Applicant submitted its claim for an amount of Rs. 11.2 Crores inclusive of interest in view of the Arbitral Award. However, the Resolution Professional admitted the claim only to the extent of Rs. 6,62,404.54/-. The Resolution Professional stated that the said amount was reflected in books and accounts of Corporate Debtor and the interest component has been admitted as a contingent claim at notional value of Rs.1/-, since proceedings under Section 34 of Arbitration Act is pending before the High Court. The Applicant filed an application before the NCLT seeking admission of its entire claim of Rs. 11.2 Crores inclusive of interest. It was further prayed that the Applicant be treated as a Financial Creditor of the Corporate Debtor and be made part of Committee of Creditors. The Applicant argued that once the Resolution Professional has admitted the principal claim of Rs. 6,62,404.54/- which is a subject matter of an arbitral award under MSME Act, then by operation of law the Applicant becomes entitled for claiming interest at a rate which is three times of the normal interest rate, as also awarded in the arbitral award. NCLT VERDICT The Bench opined that the Arbitral Award is yet to attain finality as proceedings under Section 34 of Arbitration Act are pending before the High Court. Further, the admittance of principal amount as contingent liability is merely for the accounting purpose following the principle of Complete Disclosure. Thus, making a reversible accounting entry of principal claim as a liability does not mean the acceptance of the claim. “Be that as it may, the factual situation as of today is that there is a challenge to the arbitral award under section 34 pending before Hon'ble High Court. Therefore, it is evident that the award is yet to attain finality. In so far as the admittance of the principal amount under the arbitral award by RP is concerned, it is clear that the amount claimed has been categorised as a contingent liability, pending the final decision in the matter of challenge. The acceptance of the principal as a contingent liability is therefore merely for the accounting purpose following the principle of Complete disclosure. By the very definition of the contingent liability, if the condition precedent for confirming the entry as an expense is fulfilled, a reverse entry is made to treat the liability as an expense, otherwise the same is reversed. Thus, making a mere accounting entry, which is not irreversible, of the principal claim as a liability does not mean the acceptance of the claim. Since the matter is receiving consideration of the Hon'ble High court, it would be premature to make a confirmed entry towards the claim or reverse it, as the case may be.” The Bench held that it would be premature to make a confirmed entry towards the claim or reverse it while the Award is under challenge before the High Court. The Resolution Professional's decision to admit claim contingently has been upheld. The application has been dismissed. Case Title: Bank of India v McNally Bharat Engineering Company Limited Case No.: CP (IB) No. 891/KB/2020 Counsel for Applicant: Mr. Aniruddha Bhattacharya and Mr. Arnab Roy. Counsel for Respondent: Ms. Shweta Dubey and Mr. Atul Sureka. Click Here To Read/Download Order

Claim Arising Out Of Arbitral Award Against Which Section 34 Proceedings Are Pending, NCLT Kolkata Upholds RP's Decision To Admit Claim Contingently

Pallavi Mishra

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