‘We repeat that the object of the Code, at least insofar as operational creditors are concerned, is to put the insolvency process against a corporate debtor only in clear cases where a real dispute between the parties as to the debt owed does not exist.’
The Supreme Court has held that an insolvency process cannot be put into operation when there is a pending proceeding challenging against an arbitral award.
A bench of Justice Rohinton Fali Nariman and Justice Indu Malhotra (in K Kishan vs. Vijay Nirman Company Pvt Ltd) observed that filing of Section 34 (Arbitration) petition against an arbitral award shows 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.
In this case, the NCLT had admitted a Section 9 (IBC) petition observing that pendency of Section 34 petition was irrelevant for the reason that the claim stood admitted, and there was no stay of the award. The appellate tribunal upheld the NCLT view observing that the non-obstante clause contained in Section 238 of the Code would override the Arbitration Act. It was also held that 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.
Referring to Mobilox Innovations Private Limited vs. Kirusa Software Private Limited, the bench observed that operational creditors cannot use the Insolvency Code either prematurely or for extraneous considerations or as a substitute for debt enforcement procedures.
“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. Such a company would be well within its rights to state that it is challenging the Arbitral Award passed against it, and the mere factum of challenge would be sufficient to state that it disputes the Award. Such a case would clearly come within para 38 of Mobilox Innovations (supra), being a case of a pre-existing ongoing dispute between the parties. The Code cannot be used in terrorem to extract this sum of money of Rs. two lakhs even though it may not be finally payable as adjudication proceedings in respect thereto are still pending. We repeat that the object of the Code, at least insofar as operational creditors are concerned, is to put the insolvency process against a corporate debtor only in clear cases where a real dispute between the parties as to the debt owed does not exist,” the court said.
The bench then held as follows:
The bench also disagreed with the appellate tribunal view based on Section 238 of the Code. It said: “Section 238 of the Code would apply in case there is an inconsistency between the Code and the Arbitration Act in the present case. We see no such inconsistency. On the contrary, the Award passed under the Arbitration Act together with the steps taken for its challenge would only make it clear that the operational debt, in the present case, happens to be a disputed one.”
Allowing the appeal, the bench further said: “Even if it be clear that there be a record of an operational debt, it is important that the said debt be not disputed. If disputed within the parameters laid down in Mobilox Innovations (supra), an insolvency petition cannot be proceeded with further.”