2022 (4) TMI 1212 - HC - Insolvency and Bankruptcy

Interpretation of Statute - Appointment of Arbitral Tribunal - whether mere filing of a proceeding under Section 7 of the Insolvency and Bankruptcy Code 2016 would amount to any embargo on the Court considering an application under Section 11 of the Arbitration and Conciliation Act, 1996 to appoint an arbitral tribunal? - proceedings in rem - HELD THAT - It may be observed that in the present case a Section 8 of the ACA application was not filed by the applicant before the NCLT. It is in the context of a Section 8 application being filed by Indus Biotech for referring the dispute to arbitration the Supreme Court in paragraph 25 observed as to what should be the course to be adopted by the adjudicating authority (NCLT) when the application under Section 8 of the ACA is filed seeking reference to arbitration. Reiterating the legal position that before the Section 7 proceedings are admitted it would not be an action in rem the Supreme Court observed that notwithstanding the fact that the corporate debtor files an application under Section 8 of the ACA an independent consideration of the same by the NCLT de hors the application filed under Section 7 of the IBC and the material produced therewith will not arise. It was observed that the adjudicating authority (NCLT) is duty bound to advert to the material available before it alongwith the application under Section 7 of the IBC by the financial creditor to indicate the default alongwith the version of the corporate debtor. In the context that even if an application under Section 8 of the ACA is filed it was observed that the adjudicating authority has a duty to advert to the contentions put forth under an application filed under Section 7 of the IBC by examining the material placed before it by the financial creditor and record a satisfaction as to whether there is default or not. At the same time while doing so the contention being put forth by the corporate debtor is to be noted to determine as to whether there is substance in the defence and to arrive at the conclusion whether there is default. It was categorically observed that if the irresistible conclusion of the adjudicating authority (NCLT) is that there is default and the debt is payable the bogey of arbitration to delay the process would not arise despite the position that the agreement between the parties contains an arbitration clause. Thus mere filing of the proceedings under Section 7 of the IBC cannot be treated as an embargo on the Court exercising jurisdiction under Section 11 of the ACA for the reason that only after an order under sub-section (5) of Section 7 of the IBC is passed by the NCLT the Section 7 proceedings would gain a character of the proceedings in rem which would trigger the embargo precluding the Court to exercise jurisdiction under the ACA and more particularly in view of the provisions of Section 238 of the IBC which would override all other laws - In the facts of the present case as the Corporate Insolvency Resolution Process as initiated by the respondent under Section 7 of the IBC is yet to reach a stage of the NCLT passing an order admitting the said proceedings the Court would not be precluded from exercising its jurisdiction under Section 11 of the ACA when admittedly there is an arbitration agreement between the parties and invocation of the arbitration agreement has been made which was met with a refusal on the part of the respondent to appoint an arbitral tribunal. Once the Section 7 IBC proceedings are admitted the provisions of Section 238 of the IBC would get triggered to override the application of all other laws as in such event the Corporate Insolvency Resolution Process would commence against such corporate debtor as per the provisions of Section 13 of the IBC which would be proceedings in rem. The Court would be required to allow this application by appointing an arbitral tribunal for adjudication of the disputes and differences which have arisen between the parties under the agreements in question. However a formal order appointing an arbitral tribunal is not required to be made as after the judgment was reserved the parties just two days back have settled the disputes stating that an arbitration is not warranted - Petition disposed off.

Summary

Issues:
1. Whether the mere filing of a proceeding under Section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) creates an embargo on the Court considering an application under Section 11 of the Arbitration and Conciliation Act, 1996 (ACA) to appoint an arbitral tribunal.
2. The maintainability of the Section 11 application in light of prior proceedings filed under Section 7 of the IBC.
3. The impact of the Supreme Court decision in "Indus Biotech Private Limited vs. Kotak India Venture (Offshore) Fund" on the present case.
4. Whether the applicant should have filed an application under Section 8 of the ACA before the NCLT.

Detailed Analysis:

Issue 1: Embargo on Court Considering Section 11 ACA Application
The core question was whether the filing of a Section 7 IBC proceeding creates an embargo on the Court's ability to consider a Section 11 ACA application to appoint an arbitral tribunal. The Court noted that the arbitration agreement between the parties was undisputed, and the invocation of the arbitration agreement had occurred. The Court emphasized that the primary consideration for exercising jurisdiction under Section 11(6) ACA was present.

Issue 2: Maintainability of Section 11 Application
The respondent opposed the maintainability of the Section 11 application, arguing that it was an afterthought to dilute the prior IBC proceedings. The respondent contended that the applicant had admitted liability and issued a dishonored cheque, thus the Section 11 application was an attempt to evade IBC consequences. The Court, however, observed that the mere filing of Section 7 IBC proceedings does not preclude the Court from exercising jurisdiction under Section 11 ACA, as the Section 7 proceedings had not yet been admitted by the NCLT.

Issue 3: Impact of Supreme Court Decision in "Indus Biotech"
Both parties referred to the Supreme Court's decision in "Indus Biotech." The respondent argued that IBC proceedings should be given primacy until the NCLT passes an order under sub-section (5) of Section 7. The applicant countered that pre-admission IBC proceedings do not create an embargo on Section 11 ACA applications. The Court agreed with the applicant, noting that the Supreme Court had distinguished between pre-admission and post-admission stages of Section 7 IBC proceedings, with only post-admission proceedings gaining the status of proceedings in rem.

Issue 4: Necessity of Filing Section 8 ACA Application Before NCLT
The respondent contended that the applicant should have filed a Section 8 ACA application before the NCLT. The Court rejected this argument, stating that accepting it would lead to an anomalous situation where mere filing of Section 7 IBC proceedings would oust the remedy available under the ACA. The Court held that the right to enforce an arbitration agreement remains until the Section 7 IBC proceedings are admitted.

Conclusion:
The Court concluded that the mere filing of Section 7 IBC proceedings does not create an embargo on exercising jurisdiction under Section 11 ACA. The Court would not be precluded from appointing an arbitral tribunal as the NCLT had not yet admitted the Section 7 IBC proceedings. However, the Court noted that a formal order appointing an arbitral tribunal was unnecessary as the parties had settled their disputes, rendering arbitration unwarranted. The petition was accordingly disposed of.