When Both Arbitration And Insolvency Petitions Are Pending, Petition U/S 7 Of IBC Has To Be Decided First: NCLAT

The NCLAT New Delhi Bench of Justices Ashok Bhushan, Barun Mitra and Arun Baroka held that if at the time of filing a petition under section 7 of the IBC, arbitration proceedings are pending, the Adjudicating Authority is obligated to first decide the petition under section 7 and record a satisfaction as to the existence of a debt and default. Pendency of the arbitration proceedings is immaterial.

Brief Facts

This Appeal has been filed challenging the Order dated 10.07.2024 passed in I.A. filed by the Appellant. The Adjudicating Authority by the Impugned Order rejected the I.A. 542/2024 against by which Order the Appeal has been filed.

In the Year 2015, Century Aluminium Manufacturing Company Limited, the Corporate Debtor approached the Financial Creditor, seeking financial assistance, by sanction letter dated 26.08.2015, loan against the Property for an amount of ₹12,50,00,000/- was sanctioned.

Corporate Debtor created Security Interest by hypothecation of assets and equitable mortgage in favour of the Financial Creditor, State Bank of India and Canara Bank, being factory, land 9.34 acres, building and other constructions.

Financial Creditor filed an Application under Section 7 against the Corporate Debtor before the Adjudicating Authority Kolkata bench. v. On 20.12.2023, Corporate Debtor filed its Reply to the Section 7 Application.

After filing of the Reply by the Corporate Debtor, an Application was filed being I.A. 542/2024 on 12.03.2024, seeking reference to Arbitration under Section 8 of the Arbitration and Conciliation Act, 1996. The Application filed by the Corporate Debtor was opposed by the Financial Creditor. vi. Adjudicating Authority heard Counsel for the Parties and by Impugned Order rejected the Application. Adjudicating Authority held that Section 7 Application need to be decided, the commencement of the Arbitration Proceeding before or after filing of Section 7 Application is immaterial.

Contentions

The appellant submitted that Arbitration Proceedings were initiated by Financial Creditor, 4 years prior to filing of the Section 7 Petition. The Financial Creditor consciously chose to refer the dispute to Arbitration. Having opted for arbitration, the Financial Creditor cannot initiate Section 7 proceeding, Arbitration Proceedings between the Parties is still pending and in subsistence.

• That the observation of the Adjudicating Authority that default per se is not arbitrable is unsustainable. Arbitral tribunal is not powerless to determine whether default in payment has occurred or not.

Per contra, the respondents submitted that Application seeking reference to Arbitration was not maintainable. Appellant had already filed a Reply to the Petition under Section 7 on 28.12.2023, whereas Application was filed under Section 8 of the Arbitration Act on 12.03.2024. Application was filed by the Corporate Debtor only to delay the proceeding under Section 7.

• That In view of the Law laid down by the Hon'ble Supreme Court in `Indus Biotech Pvt. Ltd.' Case Adjudicating Authority is duty bound to advert to the material available along with the Petition under Section 7 to indicate default and record satisfaction as to whether there is a debt and default or not. In case the conclusion is reached that there is debt and default payable then the Adjudicating Authority has to first decide Petition under Section 7 of the Code even if the arbitration proceedings are pending.

NCLAT's Analysis

The NCLAT at the outset referred to Section 8 of the Arbitration and Conciliation Act, 1996 which provides that a Party to the Arbitration Agreement, not later than date of submitting his first statement on the substance of the dispute may file the Application.

The tribunal referred to the Delhi High Court judgment in Assam Petroleum Ltd. & Ors. Vs. China Petroleum Technology Development Corporation & Ors. (2024) wherein it was held that thus, once the defendant has submitted himself to the jurisdiction of the Court, he cannot seek referral of the disputes to arbitration under Section 8 of the Arbitration & Conciliation Act, 1996 having abandoned the application after filing.”

Based on the above, the tribunal observed that in the present case, the Reply to Section 7 was filed in December 2023, whereas Application under Section 8 has been moved on 07.03.2024. We, thus, find substance in the submission of the Appellant that right to move Section 8 Application was forfeited since Corporate Debtor did not choose to file the Application.

The tribunal further placed reliance on the Supreme Court judgment in Indus Biotech Pvt. Ltd.' Vs. `Kotak India Venture (Offshore) Fund, (Earlier known as Kotak India Venture Limited) & Ors. (2021) wherein the court held that if a petition under section 7 of the IBC is admitted, subsequent petition under section 8 of Arbitration Act would not be maintainable. The court further observed that even when an application under section 7 of the IBC is yet to admitted and in such proceedings a petition under section 8 of the Arbitration Act is moved asking to refer the matter to arbitration, section 7 petition must be decided first.

Applying the ration of the above case to the present case, the tribunal observed that allowing the Application under Section 8 filed by the Corporate Debtor amounts to asking the Adjudicating Authority to wait till Arbitration Proceedings are decided which is not in accord with the scheme of the IBC and shall defeat the entire purpose and object of the IBC. Adjudicating Authority in the Impugned Order has rightly rejected Application under Section 8 filed by the Corporate Debtor for referring to the dispute between the parties to the Arbitrator.

The tribunal further concluded that even for arguments sake, we accept the submission of the Appellant that Arbitration Proceeding which were initiated by Financial Creditor are still pending, that neither preclude the Financial Creditor from filing a Section 7 Application nor preclude the Adjudicating Authority to proceed to consider the debt and default in Section 7 Application.

Accordingly, the present appeal was dismissed.

Case Title: Century Aluminium Company Limited v. Religare Finvest Limited

Case Reference: Company Appeal (AT) (Insolvency) No. 1719 of 2024 & I.A. No. 6230 of 2024

Judgment Date: 29/10/2024

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