Exploring The Priority Of Consideration For Insolvency Applications U/S 7 Of IBC Over Arbitration Applications U/S 8 Of Arbitration Act

In a recent decision titled Century Aluminium Company Limited v. Religare Finvest Limited (2024), the NCLAT grappled with an important question whether, when an insolvency petition under section 7 of the IBC is filed and yet to be admitted, subsequent filing of an arbitration application under section 8 of the Arbitration Act would be maintainable or not. The tribunal observed that when the insolvency petition is filed and admitted or yet to be admitted, pendency or subsequent filing of the arbitration application is immaterial. The insolvency petition has to be decided first. The tribunal further observed that purpose of the IBC would be defeated if the insolvency petition is postponed just because a corresponding arbitration matter is pending. In this article, we unpack the development of law on this point with the help of statutory provisions and courts' interpretation. Introduction The IBC was brought in to streamline the insolvency mechanism in India. It provides a robust procedure for resolving the insolvencies of the corporate entities. When a corporate entity defaults in paying the debt, an insolvency petition under sections 7, 8 or 9 of the IBC can be filed. Once this petition is admitted, the moratorium under section 14 of the IBC comes into operation which halts all the proceedings against the corporate until the CIRP concludes. Although, this mechanism has been beneficial for the corporate debtor, it has created complications in the arbitration landscape The Supreme Court in the case of A. Ayyasamy v. A. Paramasivam (2016) has held that insolvency matters are non-arbitrable thereby further reinforcing the centralised nature of the IBC vis-à-vis decentralised nature of the arbitration. Commencement of CIRP As noted already noted above, insolvency petition can be filed either by a financial creditor, operational creditor or corporate debtor under sections 7, 8 or 10 of the IBC respectively. When the insolvency petition is filed by the financial creditor, the Adjudicating Authority has to be satisfied to the fact that the debt exists and the default has occurred. Once these requirements are fulfilled, the petition is admitted. The test for admitting or rejecting the petition was laid down by the Supreme Court in Innoventive Industries Limited vs. ICICI Bank and Another (2018) wherein the court, after referring to the provisions of the IBC held that “The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under subsection (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be.” From the above observation, it becomes crystal clear that only requirements of the debt and default need to be satisfied before a petition under section 7 of the IBC can be admitted. Once the petition is admitted, moratorium under section 14 comes into operation which stops all the proceedings initiated against the corporate debtor. Thereafter, entire procedure as outlined under the IBC is followed. Exploring the Primacy of Insolvency Petitions Over Arbitration Matters What if an insolvency petition is filed under section 7 and at the same time a petition under section 8 of the Arbitration Act is also moved seeking the matter to be referred to Arbitration. In such a scenario, the issue arises as to whether primacy is to be given to the insolvency petition or the arbitration petition. This question came for consideration before the Supreme Court in Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund (formerly Kotak India Venture Limited) & Ors (2021) wherein the court unpacked this issue in detail. The court in the above case firstly, discussed the nature of the insolvency matters and referred to its own judgment in Vidya Drolia and Others Vs. Durga Trading Corporation (2021) wherein it was held that: “Applying the above principles to determine non-arbitrability, it is apparent that insolvency or intra company disputes have to be addressed by a centralised forum, be the court or a special forum, which would be more efficient and has complete jurisdiction to efficaciously and fully dispose of the entire matter. They are also actions in rem.” From the above observations of the court, one major law point that culls out is that actions in rem cannot be resolved through arbitration and insolvency matters being actions in rem therefore, are also not-arbitrable. Now, the next issue which needs to be examined as to whether pre admission section 7 stage can be considered an action in rem for it to be outside the clutches of the arbitration. ...

Exploring The Priority Of Consideration For Insolvency Applications U/S 7 Of IBC Over Arbitration Applications U/S 8 Of Arbitration Act

Mohd Malik Chauhan

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