Mere Initiation Of Arbitration Proceedings Doesn't Bar Corporate Debtor From Pursing Remedies Under IBC: Delhi High Court Allows Section 11(6) Petition

Brief Facts:

The Respondents, who were the founders/promoters of Petitioner No.1, approached OFB Tech Private Limited and Petitioner No.2 with the intent of selling 100% of their shares in Petitioner No.1 to OAgri Farms Private Limited (Petitioner No. 2). Following discussions, the Respondents signed and executed a term sheet, projecting an average EBITDA of approximately Rs.17.92 Crores for the Financial Year 2021-22 based on a turnover of Rs.501 Crores and Rs.390 Crores for the years 2021-22 and 2022-23, respectively. However, the actual average EBITDA of Petitioner No.1, according to the books, was about Rs.4.50 Crores, significantly lower than projected.

The Petitioners alleged that the Respondents assured them that the EBITDA reflected in the books was not a true indicator of the company's valuation and claimed the actual EBITDA was around Rs.17.92 Crores. The Respondents allegedly depicted a promising picture of future growth which led Petitioner No.2 to enter into a Share Purchase Agreement.

The Petitioners claimed that they later discovered that the accounting figures for previous years were falsified and that the Respondents failed to provide transitional services, which adversely affected the company's operational efficiency and customer relationships. The Petitioners served a Notice of Invocation which was met with a detailed denial from the Respondents. The Respondents argued that the terms were negotiated and denied any fraud or misrepresentation, stating that amounts were due from the Petitioners, which needed to be cleared to avoid civil litigation. Subsequently, the Petitioners served a notice of arbitration to which the Respondents replied on 21.12.2023. With no Arbitrator appointed, the Petitioner approached the Delhi High Court (“High Court”) for appointment of an arbitrator.

The Respondents argued that there were two separate agreements (Share Purchase Agreement and Credit Facility Agreement) with different signatories which caused a misjoinder of causes of action. They contended that the petition was flawed on these grounds. Furthermore, the Respondents claimed there was no actual dispute between the parties and that the Petitioners owe admitted amounts. They argued that a petition under Section 7 of the Insolvency and Bankruptcy Code was filed in NCLT, Jaipur, and the petition under Arbitration Act was a tactic by the Petitioners to evade the proceedings in NCLT by fabricating disputes.

Observations by the High Court:

The High Court clarified that the arbitrator has the liberty to register the two arbitrations separately if it is determined that the agreements constitute separate causes that cannot be consolidated into one arbitration.

Regarding the second objection, the Respondents contended that there was no dispute between the parties and that the outstanding amounts were admitted by the Petitioners. The High Court rejected this argument and held that various disputes had been explicitly disclosed in both the Legal Notice and the Notice of Invocation of Arbitration. Furthermore, the Respondents' reply dated 02.12.2023, in response to the Notice of Invocation, made claims for certain amounts as due from the Petitioner, indicating that disputes indeed existed.

The High Court further stated that the initiation of arbitration proceedings does not bar the corporate debtor from pursuing other remedies, including those under the IBC.

Consequently, the High Court appointed Justice Mukta Gupta (Retd.) as the Sole Arbitrator to adjudicate the disputes between the parties.

Case Title: Pitambar Solvex Pvt Ltd And Anr. Vs Manju Sharma And Ors.

Citation: 2024 LiveLaw (Del) 713

Case Number: ARB.P. 212/2024, I.A. 9821/2024

Advocate for the Petitioner: Mr. B.B. Gupta, Sr. Advocate with Ms. Arundhati Kajju, Mr. Sanyam Khetarpal, Mr. Achal Gupta and Ms. Lekha, Advocates

Advocate for the Respondent: Mr. Ankit Sareen, Adv. for R-1. Mr. Prakul and Mr. Yash Tandon, Advocates for R-2.

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