Latest News
Insolvency of Parties and Impact on Arbitration Part 2
“Existence of Dispute”
There have been many cases in the recent past where the insolvent parties have had arbitration clauses and the NCLT has ruled differently in different circumstances. The existence of a dispute before or after insolvency proceedings were initiated, is one of the most important things to consider for referring an application for the CIRP process under the Insolvency and Bankruptcy Code.
The scheme of an insolvency proceeding under the Code initiated by an operational creditor run as follows:
- The operational creditor, upon the occurrence of a default, delivers a notice to the corporate debtor under section 8 of the Code.
- A period of ten days is provided for the debtor to respond to the notice proving the existence of a ‘dispute’.
- In this regard, section 5(6) defines the meaning of the term ‘dispute’:
“Dispute” includes a suit or arbitration proceedings relating to— (a) the existence of the amount of debt;
(b) the quality of goods or service; or
(c) the breach of a representation or warranty;
The existence of an arbitral proceeding is sufficient to put a stop to the entire proceedings under the Code.
In a situation where an arbitration agreement was enforced against a party before turning insolvent. After the conclusion of the arbitral proceedings between the insolvent company and the other party, the final award has been challenged in a court of law under Section 34 of the Act. Does that include an “existence of dispute”?
The NCLAT in the case of Annapurna Infrastructure Pvt Ltd & Anor v. Soril Infra Resources Ltd (2017) 141 CLA 0293. has clarified that an award once pronounced attains finality, as provided under the Act and hence there is no “existence of dispute” in that situation.
There are differing views on this situation, however. Many NCLT benches have ruled that an award though attaining finality as soon as it is pronounced, will not negate the existence of a dispute on being set aside. Hence an S. 34 application counts as a valid dispute.
The Supreme Court in the recent decision of K Kishan v. M/S Nirman Company Pvt Ltd. Civil appeal number 21825 of 2017, has put to rest whether a pending S. 34 petition counts as a valid existence of dispute. The SC has stated that such pendency of the application counts as existence of a dispute and hence a Corporate Insolvency Resolution Process (CIRP) cannot be initiated against a company awaiting the decision of a setting aside process.
If the NCLT or NCLAT passes an order for not considering the arbitration agreement already in place because of the circumstances of the insolvent company, then the other party is not left with any remedy but to approach the civil court under a civil suit to seek relief against the receiver, in relation to the dispute concerned with the arbitration agreement.
Thus, the existence of an arbitration proceeding affects the adjudication of insolvency proceedings. Similarly, the formation of an arbitration agreement before or after commencement of insolvency proceedings majorly affects the decision to follow.
With the new enactment and constant updates to the IBC, more clarity is needed on the balance of insolvency proceedings and affected arbitration agreements. Hopefully in the coming years, the jurisprudence will develop enough to comment on every situation that the insolvency proceedings may create for adjudication of related disputes.
This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.
- Existence of Dispute
- Annapurna Infrastructure Pvt Ltd & Anor v. Soril Infra Resources Ltd
- K Kishan v. M/S Nirman Company Pvt Ltd.
