2018 (9) TMI 1533 - SC - Insolvency and Bankruptcy

Corporate insolvency process - invoking Insolvency and Bankruptcy Code, 2016 in respect of an operational debt where an Arbitral Award has been passed against the operational debtor, which has not yet been finally adjudicated upon - Held that - Under our Code, insofar as an operational debt is concerned, all that has to be seen is whether the said debt can be said to be disputed, and we have no doubt in stating that the filing of a Section 34 petition against an Arbitral Award shows that 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. We may hasten to add that there may be cases where a Section 34 petition challenging an Arbitral Award may clearly and unequivocally be barred by limitation, in that it can be demonstrated to the Court that the period of 90 days plus the discretionary period of 30 days has clearly expired, after which either no petition under Section 34 has been filed or a belated petition under Section 34 has been filed. It is only in such clear cases that the insolvency process may then be put into operation. There may also be other cases where a Section 34 petition may have been instituted in the wrong court, as a result of which the petitioner may claim the application of Section 14 of the Limitation Act to get over the bar of limitation laid down in Section 34(3) of the Arbitration Act. In such cases also, it is obvious that the insolvency process cannot be put into operation without an adjudication on the applicability of Section 14 of the Limitation Act. With regard to the submission of learned counsel for the respondent, that the amount of ₹ 1.71 Crores stood admitted by Mr. Banerji s client, as was recorded in the Arbitral Award, suffice it to say that cross-claims of sums much above this amount has been turned down by the Arbitral Tribunal, which are pending in a Section 34 petition challenging the said Award. The very fact that there is a possibility that Mr. Banerji s client may succeed on these cross-claims is sufficient to state that the operational debt, in the present case, cannot be said to be an undisputed debt. Appellate Tribunal was in error in referring to Section 238 of the Code. 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. Appellate Tribunal, when it relied upon Form V Part 5 of the 2016 Rules to state that the operational debt would, therefore, be said to have been proved, missed the vital sub-clause (iii) in para 34 of Mobilox Innovations (2017 (9) TMI 1270 - SUPREME COURT OF INDIA). 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. The judgment of the Appellate Tribunal needs to be set aside and is therefore reversed.

Issues Involved:
1. Applicability of the Insolvency and Bankruptcy Code, 2016 (the Code) to operational debts arising from an Arbitral Award under challenge.
2. Interpretation of "dispute" under Section 9(5)(ii)(d) of the Code.
3. The relevance of pending Section 34 petitions under the Arbitration and Conciliation Act, 1996 in insolvency proceedings.
4. The role of cross-claims and counterclaims in determining the existence of a dispute.
5. The applicability of Section 238 of the Code in cases involving arbitration awards.

Detailed Analysis:

1. Applicability of the Insolvency and Bankruptcy Code, 2016 (the Code) to Operational Debts Arising from an Arbitral Award Under Challenge:
The central issue was whether the Code can be invoked for an operational debt arising from an Arbitral Award that is under challenge. The court noted that the Code aims to resolve insolvency issues but not to replace debt adjudication and enforcement under other statutes like the Arbitration Act. It emphasized that the insolvency process should not be used prematurely or for extraneous considerations, especially when the debt is still under dispute due to pending adjudicatory processes.

2. Interpretation of "Dispute" Under Section 9(5)(ii)(d) of the Code:
Section 9(5)(ii)(d) mandates the rejection of an application if there is a notice of dispute. The court highlighted that the existence of a dispute must be pre-existing before the receipt of the demand notice. In this case, the court found that the dispute existed due to the pending Section 34 petition challenging the Arbitral Award. The court reiterated that a dispute includes any plausible contention requiring further investigation and is not a patently feeble legal argument.

3. The Relevance of Pending Section 34 Petitions Under the Arbitration and Conciliation Act, 1996 in Insolvency Proceedings:
The court held that the mere filing of a Section 34 petition against an Arbitral Award indicates a pre-existing dispute. It emphasized that the insolvency process should not be used to bypass the adjudicatory and enforcement process of a debt contained in other statutes. The court clarified that the pendency of a Section 34 petition shows that the dispute continues until the final adjudicatory process under Sections 34 and 37 is completed.

4. The Role of Cross-Claims and Counterclaims in Determining the Existence of a Dispute:
The court acknowledged that cross-claims and counterclaims play a significant role in determining the existence of a dispute. It noted that in this case, the counterclaims rejected by the Arbitral Tribunal were substantial and their rejection was also under challenge in the Section 34 petition. The court concluded that the existence of such counterclaims indicates that the operational debt cannot be considered undisputed.

5. The Applicability of Section 238 of the Code in Cases Involving Arbitration Awards:
The court disagreed with the Appellate Tribunal's application of Section 238 of the Code, which states that the Code would override other laws in case of inconsistency. The court found no inconsistency between the Code and the Arbitration Act in this case. It clarified that the Award and the steps taken to challenge it only indicate that the operational debt is disputed.

Conclusion:
The court set aside the judgment of the Appellate Tribunal, emphasizing that the operational debt in question was disputed due to the pending Section 34 petition and substantial counterclaims. It reiterated that the Code should not be used to bypass the adjudicatory process of other statutes and that the existence of a dispute must be recognized in insolvency proceedings. The appeals were allowed, and the bank guarantees furnished were discharged.

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