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LexCognito

This issue of LexCognito, which in Latin means 'awareness about law', seeks to provide you an insight into significant legal and regulatory developments that have taken place very recently in India.


Date: 29 August 2018
Supreme Court on Insolvency Law: Insolvency process cannot be admitted during pendency of challenge to an arbitral award
The Hon’ble Supreme Court of India, vide its order dated 14 August 2018 in the matter of K Kishan Vs. Vijay Nirman Company Pvt. Ltd, has held that insolvency process cannot be initiated where an arbitral award passed against the corporate debtor is under challenge in an objection/petition pending adjudication.

Facts: In this case, an objection/petition under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) was filed challenging an Arbitral Award passed against the corporate debtor. While the same was pending, a petition under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“Code”) was filed for initiation of the corporate insolvency process against the corporate debtor based on the arbitral award.

The National Company Law Tribunal ("NCLT") had admitted the said petition under Section 9 of the Code while holding that pendency of the petition under Section 34 of the Arbitration Act for setting aside the arbitral award was irrelevant for the reason that the claim stood admitted, and there was no stay of the award. Thereafter, National Company Law  Appellate Tribunal ("NCLAT") also upheld the view taken by NCLT and dismissed the appeal while holding that the non- obstante clause contained in Section 238 of the Code would override the Arbitration Act. Hence, the matter reached to the apex court.

Held: The Apex Court allowed the appeal while holding that insolvency process, particularly in relation to operational creditors, cannot be used to bypass the adjudicatory and enforcement process of a debt contained in other statutes (Arbitration Act). Further, the Apex Court also held that filing of petition under Section 34 of the Arbitration Act against an arbitral award shows a pre-existing dispute which culminates at the very first stage of the proceedings in an award and continues even after the award, at least till the final adjudicatory process under Section 34 (application for setting aside arbitral award) and 37 (appeal against refusal to set aside arbitral award) of the Arbitration Act has taken place.  

The bench referred to the judgement passed in the matter of Mobilox Innovations Private Limited Vs. Kirusa Software Private Limited and gave its observation that operational creditors cannot use the 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. The Code cannot be used in terrorem to extract this sum of money of rupees 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 Apex Court disagreed with NCLAT’s view on Section 238 of the Code and further held that Section 238 of the Code would apply in case there is 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.

CRI Comment: The aforesaid judgment is in line with the object of the Code. The insolvency proceedings may be initiated only in cases where the debt owed is undisputed. Hence, the operational creditor cannot use the Code as substitute for debt enforcement procedure. Till the time an arbitral award attains finality after exhausting all the remedies provided under the Arbitration Act for challenging the same, insolvency proceedings cannot be initiated against the corporate debtor. On the other hand, it is imperative for the corporate debtor to pursue any disputed debt in a logical and timely manner so as to be able to substantiate before the court that the debt owed is indeed a disputed one. 
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Chambers of Rajan & Indraneel 
T: +91 11 41000224, 41030225| Fax:+91 11 29239074 
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Chambers of Rajan & Indraneel is a premier full service law firm headquartered at New Delhi, India. The Firm represents amalgamation of vast experiences and practices of two eminent lawyers. Indranil Ghosh is highly reputed as a disputes lawyer. He was a senior partner and head of litigation practice in one of the oldest Indian law firm Fox Mandal for several decades before setting up his own practice. Rajan D Gupta is a rank holder Chartered Accountant turned Corporate Lawyer. He is also a licensed Insolvency Resolution Professional. He has been associated with internationally renowned big law firms in past and has held senior level positions in firms like PwC, Fox Mandal, Khaitan & Co. and SRGR Law, etc. before starting the Firm.

We have a team of experienced Lawyers, Chartered Accountants, Company Secretaries and Insolvency Resolution Professionals with access to network of high quality experienced lawyers in all major commercial cities of India.

The Firm offers a wide range of expert legal services in the areas of corporate and commercial laws and specializes in representing major foreign and domestic corporations with diverse business interests in India. The Firm is professionally equipped to handle large sized and complex corporate transactions like Mergers & Acquisitions, Corporate Restructuring, Joint Ventures, Inbound & Outbound Investments, Private Equity and Venture Capital Investment Transactions, Real Estate Transactions, Infrastructure Projects, Project Finance, Power Projects, Non-Conventional Energy Projects, Highways & Road Projects and Corporate Taxation as well as GST, etc. The Firm also offers proven capabilities in litigation and dispute resolution practice areas, especially in handling international and domestic arbitrations as well as litigation in Supreme Court, various High Courts of India and various judicial and quasi-judicial tribunals/forums including at National Client Law Tribunal, Appellate Tribunals, Tax Tribunals, Competition Commission, Electricity Tribunal, Telecom Disputes Tribunal, Designated Authorities and other adjudicatory bodies.


We have set up a Japan Business Desk (JBD) in order to serve our Japanese clients in a better way. The endeavour of the JBD is to act as a bridge between our professionals and clients from Japan so as to ensure that there are no barriers as to linguistic and cultural differences. This will indeed facilitate Japanese corporates doing business in India. 
 
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This newsletter contains general information available in public domain at the time of its preparation. It is intended as a general news update and is not intended to be comprehensive nor to provide specific business, financial, investment, legal, tax or other professional advice or opinion or services. This newsletter is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any decision or action that may affect you or your business. Before making any decision or taking any action that may affect you or your business, you should consult a qualified professional adviser and refer to the source pronouncement/documents on which this business alert is based. It is also expressly clarified that this newsletter is neither a solicitation nor an invitation of any sort whatsoever or a source of advertising from our firm or any of its partners or lawyers or other professionals to create any adviser-client relationship. Whilst every effort has been made to ensure the accuracy of the information contained in this news alert, this cannot be guaranteed, and neither our firm nor any related person/entity shall have any liability to any person or entity that relies on the information contained in this publication. Any such reliance is solely at the user's risk.
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