NCLAT dismissed the appeal, upholding the rejection of the arbitration reference and affirming the priority of the Section 7 application under the IBC in insolvency proceedings.
The National Company Law Appellate Tribunal (NCLAT), Principal Bench headed by Justice Ashok Bhushan (Chairperson) and Technical Members Mr. Barun Mitra and Mr. Arun Baroka reviewed an appeal and held that once a Section 7 application is filed under the Insolvency and Bankruptcy Code (IBC), the Adjudicating Authority must first determine whether there is a debt and default before entertaining an application under Section 8 of the Arbitration and Conciliation Act, 1996, and any prior or pending arbitration proceedings cannot prevent the authority from proceeding with the IBC application.
In the present case, an appeal was filed challenging the order dated 10.07.2024 passed by the Adjudicating Authority, which rejected the Corporate Debtor’s application (I.A. 542/2024) seeking a referral to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996. The Corporate Debtor had previously acknowledged its debt to the Financial Creditor, State Bank of India, and Canara Bank, in connection with a loan sanctioned in 2015. The loan was secured against the Debtor’s assets, and a default occurred in 2019, with partial payments continuing until 2020. Despite these defaults, the Corporate Debtor acknowledged the liability in letters dated 22.08.2019 and 25.05.2022.
The Financial Creditor initiated arbitration proceedings in 2019, but these were later terminated by the arbitrator in 2021, ruling that the appointment of an arbitrator was contrary to the law laid down by the Supreme Court. Following this, in June 2023, the Financial Creditor filed a Section 7 application before the Adjudicating Authority, seeking to initiate insolvency proceedings for the outstanding debt. The Corporate Debtor, however, filed a Section 8 application in March 2024, requesting a referral to arbitration, which was opposed by the Financial Creditor. The Adjudicating Authority, after hearing both parties, rejected the Corporate Debtor’s application, holding that the Section 7 application needed to be decided first, regardless of the prior or ongoing arbitration.
In the appeal, the Corporate Debtor contended that the Financial Creditor had already initiated arbitration proceedings and, therefore, could not simultaneously pursue a Section 7 petition under the Insolvency and Bankruptcy Code (IBC). The Corporate Debtor argued that since the arbitration proceedings were initiated before the Section 7 application, the Adjudicating Authority should have referred the matter to arbitration. The Appellant emphasized that the termination of the arbitration proceedings was not in accordance with Section 32 of the Arbitration Act, and the failure to refer the dispute to arbitration was an error.
The Financial Creditor countered by stating that the Corporate Debtor's application for arbitration was a delaying tactic and should not have been entertained after the reply to the Section 7 petition was filed. The Financial Creditor also noted that the Corporate Debtor had already acknowledged the debt, and there was no need for arbitration to determine the default.
The NCLAT upheld the Adjudicating Authority’s decision, agreeing that the Section 7 application under the IBC should be prioritized. It cited the Supreme Court’s decision in Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund, (Earlier known as Kotak India Venture Limited) and Others, REEDLAW 2021 SC 03573 and concluded that even if arbitration proceedings were ongoing, they could not obstruct the IBC process. The NCLAT observed that the Corporate Debtor had forfeited its right to file a Section 8 application by not doing so at the time of its response to the Section 7 petition. Consequently, the NCLAT dismissed the appeal, finding no merit in the Corporate Debtor’s claims. The appeal was therefore dismissed.
Mr. Joy Saha, Sr. Advocate with Ms. Saumya Datta, Mr. Avishek Guha, Ms. Kriti Gera, Mr. Siddhant Upmanyu and Ms. Tanya Malhotra, Advocates represented the Appellant.
Mr. Sanjeev Singh, Ms. Taniya Bansal, Mr. Sandipa Bhattacharjee and Ms. Meenakshi S., Advocates appeared for the Respondent.
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