Arbitration Clause Does Not Bar Operational Creditors From Filing Section 9 Applications Under IBC: NCLT Mumbai

The bench held that the presence of such a clause does not impose any restriction on the Operational Creditor's right to pursue a Section 9 Application.

Brief Facts:

The matter pertained to an application filed by Gauder & Co. S.A. (Operational Creditor) under Section 9 of the Insolvency and Bankruptcy Code, 2016 in conjunction with Rule 6 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. The application sought to initiate the Corporate Insolvency Resolution Process (CIRP) against Isinox Limited (the Corporate Debtor).

The dispute arose from a contract between Gaudery Immo S.A. (a foreign entity) and the Corporate Debtor involving the supply of equipment for cable manufacturing. Under this contract, a Schumag Peeling Machine was sold and delivered to the Corporate Debtor and an invoice was issued with payments due in installments. The Corporate Debtor initially made payments but defaulted on the principal amount of EUR 142,045.86/- excluding interest. On 30.11.2020, Gaudery Immo S.A. transferred all its rights and obligations under the contract to Gauder & Co. S.A. which then became entitled to receive payments from the Corporate Debtor. Despite the due date, the amount of EUR 199,046.37 (equivalent to Rs.1,59,23,680/-) along with interest remained unpaid. The Operational Creditor issued a Demand Notice but the Corporate Debtor failed to settle the debt.

Contentions of the Parties:

The Operational Creditor contended that the total value of the contract was EUR 400,000/- with 15% paid in advance and the remaining 85% financed over five years in half-yearly installments. An invoice was issued on 24.11.2015 and the machinery was delivered on 03.12.2015. Despite receiving and accepting the machinery and invoice without objection, the Corporate Debtor made payments up to 31.08.2018 but defaulted thereafter. The Operational Creditor claimed the Corporate Debtor admitted the debt and default in communications and through written reminders. A transfer agreement confirmed that Gaudery Immo S.A.'s rights under the contract were assigned to the Operational Creditor. The Operational Creditor argued that the Application was validly filed with Mr. Thierry Collard authorized to act on behalf of Gauder & Co. S.A. Further, the Operational Creditor disputed the Corporate Debtor's claim of CIRP in progress and the defense of "legal impossibility" due to pending RBI permissions.

On the other hand, the Corporate Debtor denied the debt and argued that it was already under CIRP as per an order. The Corporate Debtor argued that there cannot be two simultaneous CIRP proceedings for a single entity and requested a stay until the NCLAT issues a final decision. It also argued that the claim was time-barred as the default occurred on 28.02.2019 which was beyond the limitation period. The Corporate Debtor highlighted an arbitration clause in the contract and challenged the maintainability of the application under the IBC.

Observations by the NCLT:

The NCLT noted that the Application in Form-5 is signed by Mr. Thierry Collard who is the CEO of the Operational Creditor. Attached to the Application was an extract from the Belgian Chamber of Commerce which indicated that Mr. Collard is the permanent representative of the Operational Creditor, a Belgian entity. Belgian law allows a company to appoint a "permanent representative" for all legal matters. Further, the NCLT noted the Operational Creditor provided evidence showing that Mr. Collard, the sole director, is authorized to act as the permanent representative. Although the Corporate Debtor argued that a Board Resolution is necessary for authorization, the Operational Creditor argued that such a requirement does not apply here due to Mr. Collard being the sole director.

Further, the NCLT noted that the Operational Creditor provided substantial evidence including emails, contracts, invoices, and demand notices showing the debt and default. The Corporate Debtor defaulted on payments due from 28.02.2019 and owes Euro 199,046.37 (Rs. 1,59,23,680/-) exceeding the threshold of one crore rupees under Section 4 of the IBC.

Further, the bench held that the Corporate Debtor's inability to remit payment due to procedural issues with foreign remittance is irrelevant as the default stem from the Corporate Debtor's own actions.

Regarding the argument about multiple CIRP proceedings, the NCLT noted that the Corporate Debtor's appeal against the admission order is pending and it was not represented by any Resolution Professional. Thus, the plea about existing CIRP proceedings was rejected.

Finally, the NCLT noted that the presence of an arbitration clause in the contract does not bar the filing of a Section 9 Application

Therefore, the NCLT held that the matter iswas suitable for admission under Section 9(5)(i) of the IBC.

Case Title: Gauder & Co. S.A. Vs Isinox Limited

Case Number: CP (IB) No.1277/MB/2022

Operational Creditor: Adv. Vinodini Srinivasan.

Corporate Debtor: Adv. Sushant Kareer.

Date of Judgment: 18.07.2024

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