2022 (8) TMI 1160 - HC - Insolvency and Bankruptcy

Company under liquidation as per IBC - Validity of arbitration order while moratorium ordered by the NCLT was still in operation - petitioner s application was made mainly on the ground that the claim and counter claim had been filed during the period of moratorium under Section 14 of the I B Code - HELD THAT - The learned Tribunal came to the conclusion that the Section itself provides that first of all the claimant shall file a claim. Thereafter the respondent shall file his defence. After Section 23(2-A) being added with effect from 23.10.2015 the respondent in support of his case may also submit a counterclaim which has to be also adjudicated upon by the Tribunal. It held therefore that the language of Section 23 (2-A) of the Act made it clear that both claim and counterclaim should be decided together by the Arbitral Tribunal. It also observed that in a proceeding before the Arbitral Tribunal, if the respondent wants to file a counterclaim it can only file the same before the Arbitral Tribunal along with his defence of a claim. It held that the respondent had a right to move a counterclaim. It also held that the Arbitral Tribunal had a duty to adjudicate the same along with the claim. The learned Tribunal thereafter looked into the I B Code and the language of Section 14 which provides for a moratorium. It quoted the entire Section 14 and held that from the language of Section 14 (1) (a), it was clear that on the date of commencement of the CIRP, the NCLT could impose a moratorium prohibiting the institution of a suit or continuation of a pending suit or proceeding against the corporate debtor including execution of any judgement, decree or order in any court of law, Tribunal, Arbitral Panel or other Authority - Only after determination of objections under Section 34, the party may move a step forward to executing such Award and in case the objections are settled against the corporate debtor, then its enforceability against the corporate debtor certainly shall be covered by the moratorium of Section 14(1) (a). The Learned Tribunal thereafter observed that it is clear from a perusal of the observations made by the Delhi High Court that until and unless the effect of continuation of proceedings results in endangering, dissipating or adversely affecting the assets of the corporate debtor, it would not be prohibited under Section 14 (1) (a) of the I B Code 2016. A counterclaim would be in the nature of a suit against the plaintiff which was the corporate debtor. The Tribunal also observed that strictly speaking thus under Section 14 (1) (a) of the Code a counterclaim would be covered by the moratorium which prohibits the institution of suit or continuation of pending suits or proceedings against the corporate debtor, and counterclaim would be a proceeding against the corporate debtor, however, the counterclaim raised against the corporate debtor is integral to the recovery sought by the Corporate Debtor and is related to the same transaction. Section 14 has created a piquant situation i.e. the corporate debtor undergoing Insolvency proceedings can continue to pursue its claim but the counterclaim would be barred under Section 14 (1)(a). When such situations arise, the Court has to see whether the purpose and intent behind the imposition of the moratorium is being satisfied or defeated - When the counterclaim is adjudicated and the amount to be paid/recovered is determined, at that stage or in an execution proceeding, Section 14 could be triggered. Till such adjudication of claim and counterclaim is carried out by the appropriate forum i.e. the Arbitral Tribunal, Section 14 would not come into play. The important question that the Court needs to consider is the nature of the proceedings i.e. whether it is in favour or against the corporate debtor. Proceedings against an Award in favour of the corporate debtor would be like stalling the Corporate debtor s efforts to recover its money and hence would not fall within the embargo of Section 14 (1) a of the I B Code. If a counterclaim is allowed then section 14 (1) (a) of the Code would immediately come into play and the decree would not be Executable against the corporate debtor. In P Mohan Raj and others versus Shah Brothers Ispat Private Limited, 2021 (3) TMI 94 - SUPREME COURT , a three judges bench of the Supreme Court was considering whether criminal complaints filed by the respondent against the Company and the appellants under Section 138 read with Section 141 of the Negotiable Instruments Act could be allowed to continue during the moratorium period. The NCLAT had held that Section 138, being a criminal law provision, cannot be held to be a proceeding within the meaning of Section 14 of the IBC. The Supreme Court observed that Section 138 proceedings although a criminal proceeding is in essence initiated only to recover an amount of the bounced cheque against the assets of the Company, and would therefore be included in the term proceedings against the corporate debtor. It is evident from the careful consideration of the entire judgement rendered in P Mohan Raj that the observations made by the Supreme Court were in the context of the facts of the case where it had been argued before it by the respondents that criminal proceedings as well as quasi-criminal proceedings can go on against the corporate debtor or its directors as they do not strictly fall within the definition of proceeding under Section 14 (1) of the Act. The court held that a Section 138/141 proceedings under the Negotiable Instruments Act is against the corporate debtor is covered by Section 14 (1)(a) of the I B Code. It however clarified that in the case before it such proceedings under the Negotiable Instruments Act could continue against the company as well as the Appellants for the reason that the Insolvency Resolution Process did not involve a new management taking over and the moratorium period had come to an end. The Supreme Court has repeatedly emphasised in its judgements the importance of keeping handsoff approach where arbitration matters are concerned. This Court finds that the learned Tribunal has decided an application made to it by the petitioner and the orders squarely falls under the provisions of Section 16 of the Act of 1966. Therefore, it cannot be said to be an order patently lacking in jurisdiction and therefore perverse and liable to be interfered with by this Court under Article 227 of the Constitution. This petition is dismissed as not maintainable.

Summary

Issues Involved:
1. Quashing of the order dated 19.09.2021 passed by the sole Arbitrator.
2. Maintainability of the writ petition under Article 227 of the Constitution.
3. Jurisdiction of the Arbitral Tribunal to adjudicate the counterclaim during the moratorium under Section 14 of the Insolvency and Bankruptcy Code (I&B Code).

Detailed Analysis:

1. Quashing of the Order Dated 19.09.2021:
The petitioner, a Private Limited company under liquidation, sought to quash the order dated 19.09.2021 by the sole Arbitrator, which allowed the adjudication of both the claim and counterclaim together, despite the moratorium under Section 14 of the I&B Code. The petitioner argued that the counterclaim should not be adjudicated during the moratorium period, as it would violate the provisions of Section 14.

2. Maintainability of the Writ Petition Under Article 227:
The respondent raised a preliminary objection regarding the maintainability of the writ petition under Article 227 of the Constitution. The respondent argued that the High Court should not interfere with the arbitration proceedings under Article 227 unless there is a patent lack of inherent jurisdiction. The Supreme Court's judgments in SBP and Co. vs. Patel Engineering Ltd., Deep Industries Ltd. vs. Oil and Natural Gas Corp Ltd., and Bhaven Construction vs. Executive Engineer Sardar Sarovar Narmada Nigam Ltd. were cited to support this argument. The High Court ultimately agreed, emphasizing that judicial interference in arbitration should be minimal and only in exceptional circumstances.

3. Jurisdiction of the Arbitral Tribunal During Moratorium:
The petitioner contended that the counterclaim filed by the respondent during the moratorium period was non-est in law and should be rejected. The petitioner argued that the moratorium under Section 14 of the I&B Code prohibits the institution and continuation of proceedings against the corporate debtor. The respondent, however, argued that the counterclaim was integral to the recovery sought by the corporate debtor and should be adjudicated together with the claim.

The Learned Tribunal, while rejecting the petitioner's application, observed that Section 23(2-A) of the Arbitration and Conciliation Act, 1996 mandates that both the claim and counterclaim should be adjudicated together. The Tribunal also noted that the moratorium under Section 14(1)(a) of the I&B Code prohibits proceedings that would result in endangering, dissipating, or adversely affecting the assets of the corporate debtor. However, it concluded that adjudicating the counterclaim would not violate the moratorium, as it would not immediately affect the corporate debtor's assets.

The Tribunal's decision was supported by the Delhi High Court's judgments in Power Grid Corporation of India Ltd. vs. Jyoti Structures Ltd. and SSMP Industries Ltd. vs. Perkan Food Processors (Pvt.) Ltd., which held that the moratorium does not bar the continuation of proceedings that do not result in recovery actions against the corporate debtor's assets. The Tribunal concluded that the counterclaim could be adjudicated without violating the moratorium, and any recovery action would be subject to the moratorium provisions.

Conclusion:
The High Court dismissed the petition as not maintainable, emphasizing the limited supervisory role under Article 227 and the need to minimize judicial interference in arbitration proceedings. The Tribunal's order was not found to be patently lacking in jurisdiction or perverse, and the adjudication of the counterclaim was allowed to proceed alongside the claim, subject to the moratorium provisions under the I&B Code.