Section 9 IBC Petition Does Not Bar Arbitration Under Section 11(6) Of Arbitration Act: Telangana High Court

Section 9 of the IBC deals with the application for initiation of the corporate insolvency resolution process by an operational creditor.

Section 11 of the Arbitration Act allows parties to agree on a procedure for appointing the arbitrator or arbitrators. If the parties do not agree on such a procedure, Section 11 provides court for the,

Brief Facts:

Valmar Projects LLP (Applicant) and Isthara Parks Private Limited (Respondent) entered into a Facilities Service Agreement and a Catering Service Agreement. Under the Catering Service Agreement, the Respondent was required to supply food to the inmates of the Applicant's hostel. Under the Facility Service Agreement, the Respondent was obligated to provide housekeeping services to the hostel inmates. A dispute arose between the parties which led to the termination of the agreements.

Following the termination, the Respondent issued a notice under Section 8 of the Insolvency and Bankruptcy Code, 2016, to which the Applicant replied. Subsequently, the Respondent filed a petition under Section 9 of the IBC before the National Company Law Tribunal (NCLT), Hyderabad. In this petition, the NCLT directed the issuance of notice to the Applicant. Upon receiving the notice of the proceeding pending before the NCLT, the Applicant issued a notice under the Arbitration and Conciliation Act, 1996. The Applicant approached the High Court for the appointment of an arbitrator.

The Applicant argued that the existence of the arbitration agreement and the disputes between the parties were undisputed by the Respondent. It further submitted that the agreement envisages the reference of disputes to a sole arbitrator. It contended that despite the ongoing proceedings before the NCLT, the Court can address the arbitration applications on their merits as there is no statutory bar.

Conversely, the Respondent argued that these applications for appointing an arbitrator were filed as a countermeasure to the Respondent's proceedings before the NCLT. It argued that the Applicant initiated these proceedings with ulterior motives.

Observations by the High Court:

The High Court referred to Section 21 of the Arbitration Act and noted that unless otherwise agreed upon by the parties, the arbitral proceedings concerning a specific dispute begin on the date when the request for that dispute to be referred to arbitration is received by the Respondent. It referred to the Supreme Court's ruling in State of Goa vs. Praveen Enterprises which clarifies that Section 21 mandates a party to outline the disputes in the notice but does not require the quantification of the amount in dispute. This means that the absence of a specified amount in the notice does not invalidate the claim or bar it from being referred to arbitration.

Furthermore, the Supreme Court in Indus Biotech Private Limited vs. Kotak India Venture (Offshore) Fund where the Supreme Court held that merely filing an application under Section 7 of the IBC, which has not yet been admitted, does not constitute a proceeding in rem and therefore does not prevent the invocation of arbitration under the Arbitration Act. The High Court noted that the Respondent initiated proceedings under Section 9 of the IBC, which are pending before the NCLT. However, the mere filing of this petition does not preclude the commencement of arbitration proceedings under Section 11(6) of the Arbitration. It held that there is no statutory provision that bars a party from initiating arbitration proceedings under Section 11, and since no order has been passed in the Section 9 IBC proceedings, the arbitration proceedings are maintainable.

Therefore, the High Court appointed Justice P. Naveen Rao, former Acting Chief Justice of the Court, as the sole arbitrator to adjudicate the dispute.

Case Title: Valmar Projects Llp vs Isthara Parks Private Limited

Case Number: ARBITRATION APPLICATION Nos.6 AND 7 OF 2024

Citation: 2024 LiveLaw (TS) 111

Date of Judgment: 27 June, 2024

Click Here To Read/Download Order or Judgment