Section 10 Of CPC Does Not Lay An Embargo In Proceeding With Arbitration During Pendency Of Insolvency Proceedings: Delhi High Court

The Single Bench of Justice Sanjeev Sachdeva held that the issues involved in the insolvency proceedings and the issue involved in the arbitral proceedings were completely different and therefore the embargo of Section 10 of CPC does not apply.

The petitioner Tata Capital Financial Services Ltd had filed a petition before the High Court for appointment of an arbitrator to adjudicate the disputes between the petitioner and the respondent Naveen Kachru. The Court had passed an ex parte order whereby an arbitral tribunal constituted by a sole arbitrator was appointed to adjudicate the disputes between the parties. The respondent/Applicant filed an application under Order 9 Rule 13 of the Code of Civil Procedure, 1908 (CPC) to set aside the ex parte order passed by the Court appointing a sole arbitrator.

The Counsel for the respondent/Applicant submitted before the High Court that the respondent had already initiated proceedings for being declared as an insolvent under the Provincial Insolvency Act, 1920 and therefore, proceedings before the arbitral tribunal could not continue. The Counsel placed reliance on the judgment of the Supreme Court in Booz Allen and Hamilton Inc versus SBI Home Finance Ltd. & Others (2011) and contended that the proceedings of insolvency and winding up matters were beyond the adjudicatory power of an arbitral tribunal.

The Counsel averred that the arbitral proceedings would be hit by Section 10 of CPC as the insolvency petition filed by the respondent before the Insolvency Court was prior in point of time. The Counsel added that the respondent did not dispute the liability owed to the petitioner however, it did not have any money to pay the amount and that it was insolvent. The Counsel for the petitioner Tata Capital submitted that the respondent had initiated the proceedings before the Insolvency Court only to try and defeat the rights of the petitioner to recover his money.

Section 10 of the Code of Civil Procedure, 1908 provides that no Court shall proceed with the trial of any suit in which the matter in issue is also directly and substantially in issue in a previously instituted suit between the same parties. Section 29 of the Provincial Insolvency Act, 1920 provides that any Court in which a suit or other proceeding is pending against a debtor shall, on proof that an order of adjudication has been made against him under the Insolvency Act, either stay the proceedings, or allow it to continue on such terms as such Court may impose.

The Court observed that Section 29 of the Insolvency Act empowers the Court, where a suit is pending against a debtor, to either stay the proceedings or continue the proceedings on such terms as the Court may decide. Therefore, there is no absolute prohibition on the Court in proceeding with the suit against the debtor. Also, the Court added that the embargo of Section 29 comes into play only after an order of adjudication has been made under the Insolvency Act. Since, it was admitted by the respondent that only an order admitting the petition under the Insolvency Act had been passed and no order of adjudication against the respondent had been passed, the Court ruled that the embargo of Section 29 did not apply.

The Court added that the reliance placed by the respondent on the judgment of the Supreme Court in Booz Allen and Hamilton Inc (2011) did not advance the case of the respondent since the Supreme Court had held that non arbitrable disputes were inter alia disputes pertaining to insolvency and winding up. The Court observed that the petitioner Tata Capital was not seeking reference of the insolvency proceedings to the arbitral tribunal but only his claim for recovery of money against the respondent. The Court ruled that this was a pure and simple contractual dispute which could certainly be referred to the arbitral tribunal.

Also, the Court ruled that the embargo laid by Section 10 CPC comes into play only in a case where the proceedings were between the same parties and the matter in issue was directly and substantially in issue in the previously instituted suit.

The Court held that the petition filed by the respondent before the Insolvency Court was not a lis between the respondent and the petitioner but it was a lis in rem. The Court ruled that even though the debt of the petitioner may have been mentioned in the insolvency proceedings yet it did not become a lis between the respondent and the petitioner. The Court held that the issues involved in the insolvency proceedings and the issue involved in the arbitral proceedings were completely different and as such the embargo of Section 10 CPC did not apply.

The Court added that the averment of the respondent that he does not have the money to pay, which was disputed by the petitioner, gave rise to an arbitrable dispute which requires reference to an arbitral tribunal.

The Court thus dismissed the application filed by the respondent for setting aside the ex parte order appointing a sole arbitrator.

Case Title: Tata Capital Financial Services Limited versus Naveen Kachru Proprieter of M/S South Delhi Motorcycle & Ors.

Citation: 2022 LiveLaw (Del) 293

Dated: 06.04.2022 (Delhi High Court)

Counsel for the Petitioner: Mr. Saryasachi Sahai and Mr. Kushagra Aman

Counsel for the Respondent(s): Mr. Ritesh K.Chowdhary

Click Here To Read/Download Order