Proceedings Pending under Section 34 of the Arbitration and Conciliation Act 1996 does not Constitute a ‘Dispute’ under Section 8 of the Insolvency and Bankruptcy Code, 2016 and Cannot Come in the Way of the Initiation of Corporate Insolvency Resolution Process as Envisaged Under Section 9 of the Code.

MINI SUMMARY:

An appeal was preferred before the Hon’ble National Company Law Appellate Tribunal (hereinafter referred to as “NCLAT”) against an order dated 29.08.2017 passed by the Hon’ble National Company Law Tribunal (hereinafter referred to as “NCLT”) in the case of Vijay Nirman Company Private Limited ( hereinafter referred to as, “the Respondent”) vs. Ksheeraabd Constructions Private Limited (hereinafter referred to as, “ the Appellant”)——- The issue before the Hon’ble NCLAT was that whether pending proceedings arising out of an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 ( hereinafter referred to as “Arbitration Act”) would amount to existence of a dispute as envisaged under Section 8 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as, “ the Code”)—– The Hon’ble NCLAT held that any pending proceedings under Section 34 of the Arbitration Act would not amount to the existence of dispute under Section 8 of the Code, rather it shall only be treated as a record of ‘operational debt’.

NEWS UPDATE:

The Hon’ble NCLAT in the recent case of, “Ksheeraabd Constructions Private Limited vs. Vijay Nirman Company Private Limited” held that pending proceedings under Section 34 of the Arbitration Act will not constitute the ‘existence of a dispute’ as envisaged under Section 8 of the Code. It also observed that at best the same could only serve as a record of the ‘operational debt’ and that the same cannot be used to frustrate proceedings under the Code by preventing the initiation of Corporate Insolvency Resolution Process (hereinafter referred to as “CIRP”) against the Corporate Debtor. The present case arose out of the appeal preferred by the Appellant/Corporate Debtor against the order passed by the NCLT on 29.08.2017 wherein the NCLT had admitted the application filed by the Respondent under Section 9 of the Code and initiated the CIRP against the Appellant. Vide the impugned order, moratorium had been passed and the Insolvency Resolution Professional had also been appointed.

The main plea taken by the Appellant/Corporate Debtor was that there is an ‘existence of a dispute’ and therefore the petition under Section 9 of the Code was not maintainable. It was argued that the Code clearly mandates that there cannot be the initiation of the CIRP when there is ‘existence of a dispute’ or pendency of ‘arbitration proceedings’. The Appellant contented that the raising of counter claim in the arbitration was sufficient proof that there was ‘existence of dispute’ and that the Arbitral Award passed on 21st January 2017 cannot be held to be a ‘decree’ till it is enforceable and thereby extending the logic further it cannot be regarded as ‘debt’ before it is final since the same can be challenged under Section 34 of the Arbitration Act and it was also contended further that as per Section 36 of the Arbitration Act, the Arbitral Award is enforceable as a decree of the court only after the time to make an application to set aside the award under Section 34 of the Arbitration Act, 1996 has expired.

On the other hand, the Respondent/Operational Creditor contended that the Appellant had never raised any dispute until the notice under sub-section (1) of Section 8 of the Code was served upon the Appellant and thereby it cannot be termed as the ‘existence of dispute’. The Hon’ble NCLAT went through both the arguments in detail and came to the conclusion that though the Arbitral Award will be enforceable only after the time period of challenging the Award under Section 34 has passed, re-aliance cannot be placed on the same because, the Code is a complete Code and as per Section 238 of the Code, it will override all the other laws in force. Further the Hon’ble NCLAT observed that provisions made in Form- 5 of the Code read with sub-section (6) of the Section 5 & Section 9 of the Code make it clear that an order of a Court, Tribunal or Arbitral Panel adjudicating the default can only be treated as a ‘record of Operation Debt’, and thereby the appeal was dismissed without an interference with the impugned order dated 29th August 2017.

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