CIRP Can Be Initiated Based On An Unchallenged Arbitral Award: NCLT Kolkata

Facts Of The Case

The Corporate Debtor was in process of entering into contracts with the Government Authorities in respect of the scheme of 'Smart City and Data Centre Projects', hence was in requirement of various types of equipments. The Operational Creditor (Viom Infra Ventures Ltd.) agreed to provide equipments lying in its possession and also agreed to acquire certain equipments and provide them on monthly lease/rental basis to the Corporate Debtor. A Master Lease Agreement ('Agreement') was executed between the parties on 09.07.2018. When disputes had arisen in terms of the Agreement, the matter was referred to arbitration wherein the Corporate Debtor was directed to pay an amount of Rs.27,58,58,278/- to the Operational Creditor, the latter could only pay Rs. 15,92,78,600/-. On 07.06.2021 the Operational Creditor had issued a Demand Notice under Section 8 of the IBC to the Corporate Debtor for the remaining amount. Thereafter, a petition under Section 9 of the IBC was filed before the Adjudicating Authority on 29.07.2021 by the Operational Creditor, seeking initiation of CIRP against the Corporate Debtor for defaulting on payment of Rs.12,28,74,980.61/-.

Contentions Of The Operational Creditor

The Operational Creditor submitted that after certain disputes had arisen in terms of the Agreement between the parties, the Corporate Debtor had cancelled the Agreement on 04.09.2019, requesting waiver of lease rent. The Operational Creditor had intimated the Corporate Debtor that the cancellation of the Agreement would give rise to claim for liquidated damages and outstanding rentals.

It was submitted that on 24.10.2019 the Operational Creditor had invoked Arbitration Clause of the Agreement and a Senior Advocate was appointed as the Sole Arbitrator. On 27.08.2020 the Arbitral Tribunal, after hearing the contentions of the parties, passed an arbitral award directing the Corporate Debtor to pay a sum of Rs.27,58,58,278/- to the Operational Creditor, within two months, failing which payment of interest calculated at 9% per annum on the aforesaid amount until the date of payment was also payable.

Subsequently, the Corporate Debtor transferred a sum of Rs. 15,92,78,600/- to the Operational Creditor, leaving a sum of Rs.11,65,79,678/-. The Corporate Debtor failed to pay the outstanding amount in stipulated period despite reminders. Therefore, Operational Creditor had issued a Demand Notice under Section 8 of the IBC to the Corporate Debtor and subsequently filed a petition under Section 9 of the IBC before the Adjudicating Authority for defaulting on payment of Rs.12,28,74,980.61/-.

Contentions Of The Corporate Debtor

The Operational creditor contended that the debt amount of Rs.12,28,74,980.61/- (including interest) is on account of the outstanding balance towards the arbitration dispute; therefore, application under Section 9 of the IBC is not maintainable. The definition of 'Operational Debt' as given under Section 5(21) of IBC does not include the dues arisen due the non-compliance of an Arbitral Award passed by an Arbitrator. It was further submitted that the Corporate Debtor had undergone severe financial crisis due to pandemic and other reasons and has been trying to resolve the same to pay the dues of the Operational Creditor. It was also contended that the purpose of the IBC is not to be used as a weapon, but it is rather a mechanism for resolution of the insolvency of a Corporate Body.

Observations Made By The Adjudicating Authority

The Adjudicating Authority framed the following two issues for adjudication:

1. Is there any pre-existing dispute between the parties?
2. Can CIRP be initiated based on Arbitral Award?

The Adjudicating Authority observed that the Corporate Debtor has neither raised any dispute with respect to the services of the Operational Creditor nor challenged the Arbitral Award dated 27.08.2020 by way of Section 34 petition under the Arbitration and Conciliation Act, 1996. Therefore, the debt is not disputed.

It was further observed that in a petition under Section 9 of IBC, the prime point of defence is the existence of the dispute and/or pendency of a suit or arbitration prior to the receipt of the demand notice under Section 8 of the IBC, however, in the instant case both these defences are not present.

The Adjudicating Authority placed reliance on the Supreme Court judgment in K. Kishan v. Vijay Nirman Company Private Limited, (2018) 17 SCC 662, wherein it has been held that in order to initiate CIRP in case of arbitral award under Section 9 of IBC, the debt needs to be undisputed. A CIRP cannot not be initiated on basis of Arbitral Award on the following grounds:

1. When a counterclaim exceeding the claim awarded was rejected by the Arbitral Tribunal on merits, and such rejection is also a matter of challenge before the Courts; and
2. When a challenge had also been filed against the Arbitral Award.

Decision

The Adjudicating Authority admitted the petition filed under Section 9 of IBC and initiated CIRP against the Corporate Debtor. Mr. Anneel Saraogi has been appointed as the Interim Resolution Professional.

Case Title: Viom Infra Ventures Limited v Bahula Infotech Private Limited, C.P (IB) No. 197/KB/2021.

Counsel for the Operational Creditor: Adv. Shaunak Mitra and Adv. Saurav Jain.

Counsel for the Corporate Debtor: Adv. Suparna Sardar.

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