Merely Because An Application Under Section 7 Of IBC Is Filed, It Is Not An Embargo On The Court Exercising Jurisdiction Under Section 11 Of The A&C Act: Bombay High Court

The Single Bench of Justice G.S. Kulkarni has held that an application filed under S.7 of the IBC creates an erga omnes effect or involves third party rights only after it has been admitted by the adjudicating authority, however, before its admission, there is no embargo on the power of the court to decide on an application filed under S.11 of the A&C Act for the appointment of an arbitrator.

The Court further clarified that there is no requirement for the defendant to necessarily file an application under S.8 of the A&C Act before taking recourse to the remedy available under S.11 of the Act.

Facts

The parties entered into loan agreements. The applicant failed to pay back the loan in terms of the agreement. The respondent filed an application under S.7 of the IBC for initiation of the CIRP against the applicant. The application is at the pre-admission stage.

The applicant filed an application under S. 11 of the A&C on the ground that the agreements between the parties contain an arbitration clause.

Contention Of The Parties

The applicant sought the appointment of the arbitrator on the following grounds:

• Admittedly, there is an arbitration agreement between the parties
• The insolvency proceeding is at the pre-admission stage and the courts have not passed any order on the application of the respondent.
• It is only when the insolvency application is admitted that the dispute becomes non-arbitrable. An application that is not yet admitted would not operate as an embargo on the power of the High Court under S. 11 of the A&C Act.

The respondent objected to the maintainability of the application under S. 11 of the A&C Act on the following grounds:

• It has already filed an application under S. 7 of the IBC which is pending consideration before the adjudicating authority.
• The applicant has already admitted its liability.
• The applicant ought to have filed an application under S. 8 of the A&C Act before the adjudicating authority.
• In view of the Supreme Court decision in Indus Biotech Pvt. Ltd. v. Kotak India Venture, SLP(C) No. 8120 of 2020, wherein the Court has expressly held that when an application under S.7 is admitted it is an action in rem and the arbitration is not possible in such a scenario. It further held that even if an application under S.8 of the A&C is moved before the application under S. 7 of IBC is admitted, the adjudicating authority must first decide the insolvency application. Therefore, the application is also not maintainable.

Analysis By The Court

The Court held that merely because an application under S.7 of IBC is filed before the adjudicating authority which is pending consideration does not oust the jurisdiction of the High Court to entertain an application filed under S. 11 of the A&C Act.

The Court distinguished the judgment of the Hon'ble Supreme Court in Indus Biotech (supra) on the ground that the findings in that judgment were with respect to an application under S. 8 of the A&C Act. The SC itself held that the insolvency application would have an erga omnes effect only after it is admitted by the adjudicating authority and not before that. Therefore, there was nothing in the SC judgment that prohibited the court from entertaining the application.

The Court held that an application filed under S.7 of the IBC creates an erga omnes effect or involves third party rights only after it has been admitted by the adjudicating authority, however, before its admission, there is no embargo on the power of the court to decide on an application filed under S.11 of the A&C Act for the appointment of an arbitrator. Admittedly, the insolvency application was at a pre-admission stage, therefore, the argument that the court could not entertain the application was meritless.

The Court further clarified that there is no requirement for the defendant to necessarily file an application under S.8 of the A&C Act before taking recourse to the remedy available under S.11 of the Act.

Case Title: Jasani Realty Pvt. Ltd. v. Vijay Corporation, COMMERCIAL ARBITRATION APPLICATION (L) NO. 1242 OF 2022

Date: 25.04.2022

Counsel for the Applicant: Dr. Birendra Saraf, Senior Advocate a/w. Anshul Anjarlekar i/b. Raval Shah & Co.

Counsel for the Respondent: Mr.Yusuf Iqbal Yusuf i/b. Y. and A Legal

Click Here To Read/Download Order