Challenge to Arbitral Award is a dispute under Insolvency Code

Upholding the principles laid down in Mobilox Innovations, a Supreme Court bench
of Justices R.F Nariman and Indu Malhotra has ruled that insolvency cannot be
triggered when the corporate debtor has challenged an arbitral award passed
against it.
The arbitral award in question being the debt awarded in favour of the creditor
based on which insolvency is sought to be triggered.
In the case of K. Kishan vs. Vijay Raman Company Pvt Ltd, a dispute regarding
claims arising out of a project was referred to an arbitral tribunal. While the
arbitration award was passed in favour of the creditor (the company), the debtor
(Kishan) challenged the said arbitration amount for counterclaims which are larger
than the actual debt claimed by the creditor.
The challenge to the arbitral award under Section 34 of the Arbitration and
Conciliation Act, was made by the debtor during the 10 days notice period which
is provided under the IBC for operational creditor filings. Despite a dispute being
raised during the 10-day statutory period, an application was filed by the creditor
with the NCLT.
Despite the existence of a dispute, the NCLT admitted the case ruling that the
Section 34 petition filed by the debtor was irrelevant for the reason that the claim
stood admitted. On an appeal filed, the NCLAT upheld the NCLT’s order and ruled
that Section 238 of the IBC would override the Arbitration Act.
After hearing arguments made by Senior Advocate Gourab Banerji (for
debtor/appellant) and Advocate P.V Amarnadha Prasad (for
creditor/respondent), the Bench observed that the counterclaims made by the
debtor during arbitration proceedings were rejected only for lack of evidence and
other technical reasons.
Referring to precedents laid down in Mobilox, the Bench found it necessary to
briefly delve into the legislative history of IBC and some problems envisaged during
its drafting stage, such as improper use of IBC as a debt enforcement mechanism.
The Bench thought that the case before it was an instance of the aforesaid
problem,
“…it becomes clear that operational creditors cannot use the Insolvency Code
either prematurely or for extraneous considerations or as a substitute for debt
enforcement procedures”.
It then reiterated the three questions that need to be answered by the NCLT while
dealing with an application under IBC, and said that if one of the conditions is
missing, the application would be rejected:
(i) Whether there is an “operational debt” as defined exceeding Rs 1 lakh?
(ii) Whether the documentary evidence furnished with the application shows that
the aforesaid debt is due and payable and has not yet been paid? and
(iii) Whether there is existence of a dispute between the parties or the record of
the pendency of a suit or arbitration proceeding filed before the receipt of the
demand notice of the unpaid operational debt in relation to such dispute?
Following this, the court reiterated that the object of the IBC, “at least insofar as
operational creditors are concerned, is to put the insolvency process against a
corporate debtor only in clear cases where a real dispute between the parties as
to the debt owed does not exist.”
The Court agreed with the Singapore High Court’s line of reasoning that where
debtor appears to have a valid counterclaim or cross-demand which is equivalent
to or exceeds the amount of debt, the insolvency process will not be put against
such debtor. At the same time, it rejected the high thresholds of fraud, collusion
and miscarriage of justice imposed by Australian High Court to disprove a debt
and held that they cannot be applied in the Indian context of IBC.
Accordingly, the Bench observed that a Section 34 petition against an arbitral
award shows a pre-existing dispute which culminates at the first stage of the
proceedings in an award and continues even after the award. The Bench while
setting aside the NCLAT ruling, held that,
“The very fact that there is a possibility that Mr. Banerji’s client may succeed on
these cross-claims is sufficient to state that the operational debt, in the present
case, cannot be said to be an undisputed debt.”
Senior Advocate Gourab Banerji was assisted by AOR Bharati Reddy, along
with Sushanth Reddy, Harsha Peechare, Gautam Singh, Subhro P.
Mukherjee and Raka Chatterjee.
Read the judgment