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2024 (11) TMI 838 - AT - IBCMaintainability of Application seeking reference to Arbitration - existence of debt and default or not - commencement of the Arbitration Proceeding by the Financial Creditor - HELD THAT - In the present case, the Reply to Section 7 was filed in December 2023, whereas Application under Section 8 has been moved on 07.03.2024. There are substance in the submission of the Appellant that right to move Section 8 Application was forfeited since Corporate Debtor did not choose to file the Application. Application under Section 7 was filed by the Financial Creditor in the Year 2023. The thrust of submission of the Appellant is that Financial Creditor itself has initiated Arbitration Proceeding by unilaterally appointed an Arbitrator on 26.07.2019, hence Section 7 Application ought not to have been proceeded and the Adjudicating Authority ought to have allowed the Application filed by the Corporate Debtor under Section 8 of the Arbitration Act. There is no dispute to the fact that Financial Creditor has unilaterally appointed a sole Arbitrator and sole Arbitrator, however, terminated the Arbitration Proceeding on 26.10.2021 holding that appointment of Arbitrator is contrary to the law laid down by the Hon ble Supreme Court in Perkins Eastman Architects DPC Anr. Vs. HSCC (India) Limited 2019 (11) TMI 1154 - SUPREME COURT reported in Arbitration Application 32/2019. From the law laid down by the Hon ble Supreme Court, it is clear that if an Application under Section 8 of the Arbitration and Conciliation Act, 1996, is filed, the Adjudicating Authority is duty bound to proceed first to decide the Application under Section 7 by recording a satisfaction with regard to their being default or not. The fact that whether Arbitration Proceedings are pending on the date when Section 7 Application is filed or it is sought to be initiated subsequent to filing of Section 7 Application is immaterial. The remedy under Section 7 is a special remedy, keeping the object and purpose of the IBC Code. When it is brought in the notice of the Adjudicating Authority that a Corporate Debtor needs a resolution it having committed default in payment of debt, the Court is obliged to consider the Section 7 Application to find out as to whether there is a debt and default. Allowing the Application under Section 8 filed by the Corporate Debtor amounts to asking the Adjudicating Authority to wait till Arbitration Proceedings are decided which is not in accord with the scheme of the IBC and shall defeat the entire purpose and object of the IBC. Adjudicating Authority in the Impugned Order has rightly rejected Application under Section 8 filed by the Corporate Debtor for referring to the dispute between the parties to the Arbitrator. The Application under Section 8 was filed much subsequent to the filing of the Reply by the Corporate Debtor. In the present case, debt and default is admitted by Corporate Debtor in its One Time Settlement offers issued twice in the Year 2019 and 2022 - no error has been committed by the Adjudicating Authority in rejecting the application filed by the Appellant. There is no merit in the Appeal. The Appeal is dismissed.
Issues Involved:
1. Whether the initiation of arbitration proceedings by the Financial Creditor precludes the filing of a Section 7 application under the Insolvency and Bankruptcy Code (IBC). 2. Whether the Corporate Debtor's application under Section 8 of the Arbitration and Conciliation Act, 1996, was maintainable after filing a reply to the Section 7 application. 3. Whether the acknowledgment of debt by the Corporate Debtor affects the proceedings under Section 7 of the IBC. Detailed Analysis: 1. Arbitration vs. Section 7 Application: The primary issue was whether the Financial Creditor's initiation of arbitration proceedings barred them from filing a Section 7 application under the IBC. The Financial Creditor had initially appointed an arbitrator, but the arbitration was terminated due to the appointment being contrary to the law. The Appellant argued that since arbitration was initiated, the Section 7 application should not proceed. However, the tribunal held that the initiation of arbitration does not preclude the filing of a Section 7 application. The tribunal emphasized that the remedy under Section 7 is a special remedy under the IBC, intended to address insolvency promptly. The tribunal referred to the Supreme Court's judgment in `Indus Biotech Pvt. Ltd.', clarifying that the adjudicating authority must first decide on the Section 7 application, regardless of pending arbitration proceedings. The tribunal concluded that allowing the Section 8 application would delay the insolvency resolution process, contrary to the objectives of the IBC. 2. Maintainability of Section 8 Application: The tribunal examined whether the Corporate Debtor's application under Section 8 of the Arbitration Act was maintainable after submitting a reply to the Section 7 application. According to Section 8, a party must apply for arbitration not later than the date of submitting their first statement on the substance of the dispute. The Corporate Debtor filed the Section 8 application after filing its reply, thereby forfeiting its right to seek arbitration. The tribunal cited the Delhi High Court's judgment in `Assam Petroleum Ltd. & Ors.', which held that a party forfeits its right to arbitration if it submits to the court's jurisdiction by filing a reply. Thus, the tribunal found that the Corporate Debtor's application under Section 8 was not maintainable. 3. Acknowledgment of Debt: The tribunal considered the acknowledgment of debt by the Corporate Debtor, which was relevant to the Section 7 application. The Financial Creditor had pleaded that the Corporate Debtor acknowledged its outstanding liability through letters dated 22.08.2019 and 25.05.2022. These acknowledgments were made within the limitation period, extending the limitation for the debt claim. The tribunal noted that the acknowledgment of debt by the Corporate Debtor in its One Time Settlement offers further substantiated the existence of debt and default. The tribunal concluded that the acknowledgment of debt supported the Financial Creditor's claim under Section 7, reinforcing the adjudicating authority's decision to proceed with the insolvency application. Conclusion: The tribunal dismissed the appeal, affirming the adjudicating authority's decision to reject the Corporate Debtor's application under Section 8 of the Arbitration Act. The tribunal held that the initiation of arbitration did not bar the Section 7 application under the IBC, and the Corporate Debtor's acknowledgment of debt substantiated the Financial Creditor's claim. The tribunal emphasized the priority of insolvency resolution under the IBC, ensuring that the process is not delayed by arbitration proceedings.
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