SYMBIOSIS LAW SCHOOL, PUNE INTERNAL MOOT ELIMINATION- 2019

BEFORE THE HON’BLE SUPREME COURT OF GRIMMAULDIA

CIVIL APPELATE JURISDICTION

UNDER ARTICLE 136 OF THE CONSTITUTION OF GRIMMAULDIA
UNDER SECTION 62 OF THE INSOLVENCY AND BANKRUPTCY CODE

WP No.___/2019 ALONG WITH SLP No.___/2019

In The Matter of Section 9 of the Insolvency and Bankruptcy Code, 2016.

In The Matter of Section 11 of the Arbitration and Conciliation Act, 1996.

HOGSMEADE INTELLIGENSIA..................................................................................APPELLANT 1
EUROWELFARE INCORPORATION.............................................................................APPELLANT 2
VERSUS

FELIX FELICIS PRIVATE LIMITED.........................................................................RESPONDENT 1

FELIX FELICIS INCORPORATION...........................................................................RESPONDENT 2

UPON SUBMISSION TO THE HON’BLE CHIEF JUSTICE AND HIS COMPANION

JUSTICES OF THE HON’BLE SUPREME COURT OF GRIMMAULDIA

MEMORIAL ON BEHALF OF THE APPELLANT

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TABLE OF CONTENTS

TABLE OF CONTENTS ....................................................................................................... ii

LIST OF ABBREVIATIONS ............................................................................................... iii

INDEX OF AUTHORITIES ................................................................................................. iv

STATEMENT OF JURISDICTION .................................................................................... vi

STATEMENT OF FACTS ................................................................................................... vii

ISSUES RAISED.................................................................................................................... ix

SUMMARY OF ARGUEMENTS ......................................................................................... x

ARGUMENTS ADVANCED ................................................................................................. 1

ISSUE I: WHETHER THE UNDERLYING CONTRACT IS VALID UNDER THE

CONTRACT ACT, 1872 OF THE LAW OF GRIMMAULDIA. .................................. 1

ISSUE II: ARGUENDO, EVEN IF THE UNDERLYING CONTRACT IS INVALID,

HIGH COURT HAS STILL ERRED IN NOT APPOINTING THE TRIBUNAL. ..... 3

[2.1] Doctrine of Separability ............................................................................................ 3

[2.2] Kompetenz - Kompetenz Principle ........................................................................... 8

[2.3] Restrictive Scope of Enquiry..................................................................................... 9

ISSUE III: WHETHER THE ADVANCE PAID TO HI CAN BE CONSIDERED AS

‘OPERATIONAL DEBT’ UNDER INSOLVENCY AND BANKRUPTCY CODE,
2016..................................................................................................................................... 10

[1.1] Interpretation and scope of Operational Debt under Insolvency and Bankruptcy Code
.......................................................................................................................................... 11

[1.2] Debt under the insolvency and bankruptcy code do not covers equitable principles
.......................................................................................................................................... 13

PRAYER ................................................................................................................................ 15

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LIST OF ABBREVIATIONS

ABBREVIATION FULL FORM

IBC Insolvency And Bankruptcy Code
Bom Bombay
NCLT National Company Law Tribunal
NCLAT National Company Law Appellant Tribunal
HL House of Lords
CLB Company Law Board
Comp Cas Company Cases
Comp LJ Company Law Journal
AC Appeal Cases
Art Article
DRJ Delhi Reported Journal
DLT Delhi Law Times
HL House of Lords
NCLT National Company Law Tribunal
NCLAT National Company Law Appellant Tribunal
Para Paragraph
POCA Prevention of Corruption Act
PMLA Prevention of Money Laundering Act
SCC Supreme Court Cases
Sec Section
POCA Prevention Of Corruption Act
SC Supreme Court
R/W Read With
HC High Court
GCA Grimmauldia Contract Act
Consti. Constitution
DRJ Delhi Reported Journal
GC Grimmauldia Constitution

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INDEX OF AUTHORITIES

CASES:

1. Heyman v. Darwins, (1942) A C 356 (A)………………………………………………2

2. Enercon (India) Ltd. and Others v. Enercon GMBH and Another, (2014) 5 SCC…….2

3. National Thermal Power Corporation v Singer Company, (1992) 3 SCC 551…………3

4. Swiss Private International Law Act, 1987…………………………………………….3

5. Heyman v. Darwins Ltd, (1942) A C 356………………………………………………3

6. Prima Paint Corporation v. Flood & Conklin Mfg. Co., 388 U.S. 395………………...3

7. National Agricultural Coop. Marketing Federation India Ltd. v. Gains Trading Ltd….4

8. India Household and Healthcare Ltd. v. LG Household and Healthcare Ltd………….4

9. Buckeye Check Cashing, Inc. v. Cardegna…………………………………………….5

10. Oil and Natural Gas Corporation v. Saw Pipes Ltd, AIR 2003 SC 2629……………….5

11. Shin Satellite Public Co. Ltd vs M/S Jain Studios Limited, (2006) 2 SCC 628……….5

12. Christopher Brown Ltd v. Genassenscaft O.W.R. GmbH, (1954) 1 QB 8……………5

13. Harbour Insurance Co. UK v Ransa General International Ins Co……………………6

14. Karnataka State Road Transport Corporation v M. Keshava Raju, …………………...7

15. Heyman v Darwins Ltd., (1942) A C 356 (A)…………………………………………7

16. Hindustan Petroleum Corporation Ltd v Pinkcity Midway Petroleums,………………7

17. Konkan Railway Corporation Limited v Rani Construction (P) Ltd, (2002) 2 SSC 388.7

18. P Manohar Reddy & Bros. v. Maharashtra Krishna Valley Development Corporation.8

19. Food Corporation of India v Indian Council of Arbitration, AIR 2003 SC 3011………8

20. National Power Corporation. v. Westinghouse, DFT 119 II 380……………………...9

21. Booz Allen and Hamilton Inc. v SBI Home Finance Ltd. and Others………………..10

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22. Duro Felguera, S.A. v. Gangavaram Port Ltd., AIR 2017 SC 5070…………………..10

23. Col. Vinod Awasthy v. AMR Infrastructures Ltd., C.P. No. (IB)-10(PB)/2017……..11

24. Daya Engineering Works Pvt. Ltd. v. UIC Udyog Ltd, CP (IB) No. 547/KB/2017….11

25. K. Kishan v. M/s Vijay Nirman Company Pvt. Ltd. Civil appeal no. 21824 OF 2017..12

26. SHRM Biotechnologies Private Limited v. VAB Commercial Private Limited……..12

27. Mrs. Pramod Yadav and Anr. v. Divine Infracon Pvt. Ltd., No. IB-209/ND/2017…..12

28. Sajive Kanwar v. AMR Infrastructure, C.P(IB) No. 06/KB/2017……………………13

29. Westdeutsche Landesbank Girozentrale v Islington London Borough Council……..13

30. Walford v Miles, [1992] 1 EGLR 207……………………………………………….14

LEGISLATIONS:

1. International Council for Commercial Arbitration; 1998.

2. Arbitration and Conciliation Act, 1996.

3. Insolvency and bankruptcy code, 2016.

BOOKS:

1. Avtar Singh’s Indian Contract Act.

2. Avtar Singh’s Law of Arbitration and Conciliation.

3. Mulla & Pollock’s Law of Contract.

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STATEMENT OF JURISDICTION

Article 136 of the Constitution of Grimmauldia, 1950 reads as under -

Article 136: Special leave to appeal by the Supreme Court

(1) Notwithstanding anything in this Chapter, the Supreme Court may, in its discretion,

grant special leave to appeal from any judgment, decree, determination, sentence or

order in any cause or matter passed or made by any court or tribunal in the territory

of India.

(2) Nothing in clause (1) shall apply to any judgment, determination, sentence or order

passed or made by any court or tribunal constituted by or under any law relating to the

Armed Forces.

Section 62 of the Insolvency and Bankruptcy Code, 2016 reads as under -

Section 62: Appeal to Supreme Court:

(1) Any person aggrieved by an order of the National Company Law Appellate Tribunal

may file an appeal to the Supreme Court on a question of law arising out of such order

under this Code within forty-five days from the date of receipt of such order.

(2) The Supreme Court may, if it is satisfied that a person was prevented by sufficient cause

from filing an appeal within forty-five days, allow the appeal to be filed within a

further period not exceeding fifteen days.

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STATEMENT OF FACTS

INTRODUCTION:

Grimmauldia is a republic in South Asia and Hogwarts is the administrative as well as business

capital of Grimmauldia. Also, it is home to a gamut of politically active organizations. It boasts

a youthful population and is a huge investment market for electronics and smartphones.

PARTIES TO THE DISPUTE:

(a) Hogsmeade Intelligensia (HI) & Eurowelfare Incorporation (EWI)

(b) Felix Felicis Private Limited (FFPL) & Felix Felicis Incorporation (FFI)

CAUSE OF ACTION:

(1) HI is a private limited company which is involved in providing legal policy research,

advocacy and is controlled by EWI. Whereas FFI is a company incorporated in the

United States. FFI established FFPL as a wholly owned subsidiary in Grimmauldia for

business expansion. FFPL engaged HI for their services regarding the PDP Bill, 2018

with a (refundable) advance of Rs. 50,00,000.

(2) After some time, differences arose between the HI and FFPL. They both resolved and

discharged their obligations under the respective contracts. FFPL pursued the recovery

of advance paid to which HI did not respond and FFPL filed an application before the

NCLT under Section 9 of the IBC. NCLT accepted the application and later HI filed

an appeal in NCLAT which again upheld the decision of the subordinate court.

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(3) Meanwhile, HI sent a notice to FFPL invoking the arbitration clause under the contract.

As FFPL failed to appoint an arbitrator despite continuous reminders, HI approached

the High Court of Hogwarts under section 11 of the Arbitration and Conciliation Act,

1996 to appoint an arbitrator. The High Court refused to appoint the tribunal.

TIMELINE:

DATE EVENT

September 1, 2018 Agreement signed between HI and FFPL

September 3, 2018 FFPL paid Rs. 50,00,000 as advance to HI

December 14, 2018 HI was discharged from the contract

March 1, 2019 FFPL sent a notice for the recovery of the advance paid

March 12, 2019 FFPL filed an application in NCLT under S. 9 of IBC, 2016

March 26, 2019 HI sent a notice to FFPL invoking Arbitration Clause

April 14, 2019 HI approached High Court under S. 11 of ACA, 1996

CURRENT STATUS:

Aggrieved by the decision of the NCLAT and High Court of Hogwarts, HI filed respective

appeals under Section 62 of IBC and Article 136 of the Constitution of Grimmauldia to the

Supreme Court. Hence, Supreme Court decided to club both the appeals and is now posted for

final hearing.

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ISSUES RAISED

~ISSUE I~

WHETHER THE CONTRACT IS VALID UNDER THE CONTRACT ACT, 1872 OF

THE LAW OF GRIMMAULDIA.

~ISSUE II~

ARGUENDO, EVEN IF THE UNDERLYING CONTRACT IS INVALID, HIGH

COURT HAS STILL ERRED IN NOT APPOINTING THE TRIBUNAL.

~ISSUE III~

WHETHER THE ADVANCE PAID TO HI CAN BE CONSIDERED AS

‘OPERATIONAL DEBT’ UNDER THE INSOLVENCY AND BANKRUPTCY CODE,
2016.

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SUMMARY OF ARGUEMENTS

~ISSUE I~

WHETHER THE CONTRACT IS VALID UNDER THE CONTRACT ACT, 1872 OF

THE LAW OF GRIMMAULDIA.

It is contended before the Hon’ble Supreme Court that the prayers sought by the SLP appellant

before the Supreme Court is maintainable as under Art. 136. As the agreement suffices all the

essentials and the ingredients, the contract between HI and FFPL is perfectly valid and

enforceable. Hence, under this contract FFPL is bound to perform his part of the contract and

make full payment to HI.

~ISSUE II~

ARGUENDO, EVEN IF THE UNDERLYING CONTRACT IS INVALID, HIGH

COURT HAS STILL ERRED IN NOT APPOINTING THE TRIBUNAL.

It is humbly contended that even if the underlying contract is assumed to be unenforceable but

still the court has to send the matter to the Arbitration Tribunal to decide the validity itself in

the first place because of the Kompetenz-Kompetenz Principle and with the Separability clause

the contract can be separated from the unenforceable contract.

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~ISSUE III~

WHETHER THE ADVANCE PAID TO HI CAN BE CONSIDERED AS

‘OPERATIONAL DEBT’ UNDER THE INSOLVENCY AND BANKRUPTCY CODE,
2016.

It is contended before the Hon’ble Supreme Court that the prayers sought by the SLP appellant

before the Supreme Court is maintainable as under Art. 136. High court have the power to grant

appropriate remedy to the petitioners which the former failed to provide. Hence the arguments

to justify the same comes in a Two-fold Manner: Interpretation and scope of operational debt

under insolvency and bankruptcy code. Debt will not come under the scope of operational debt

as services were not provided fully. Debt under the insolvency and bankruptcy code covers

Equitable Principles. Debt under this code do not cover equitable principle as commercial

transactions do not comes under the ambit of equitable priciples.

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 ARGUMENTS ADVANCED

ISSUE I: WHETHER THE UNDERLYING CONTRACT IS VALID UNDER THE

CONTRACT ACT, 1872 OF THE LAW OF GRIMMAULDIA.

(1) According to Section 2 (h)1, A contract is defined as - an agreement enforceable by law is

a contract.

(2) The essentials for a valid contract are given under Section 102-

(a) Proposal and acceptance = Agreement

 Proposal is defined3 as- When one person signifies to another his willingness to

do or to abstain from doing anything with a view to obtaining the assent of that

other to such act or abstinence, he is said to make a proposal.

 Acceptance is defined4 as- When the person to whom the proposal is made

signifies his assent thereto, the proposal is said to be accepted. A proposal, when

accepted, becomes a promise.

 Agreement is defined5 as- Every promise and every set of promises forming the

consideration for each other is an agreement.

FFPL approached HI to engage their services and to seek their advice with respect to the

obligations under the various provisions of and for research and suggestions on the PDP Bill

which was accepted by HI and hence a valid agreement was formed.

1
Indian Contract Act, 1872, Section 2 (h).
2
Indian Contract Act, 1872, Section 10.
3
Indian Contract Act, 1872, Section 2 (a).
4
Indian Contract Act, 1872, Section 2 (b).
5
Indian Contract Act, 1872, Section 2 (e).
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(b) Competency -

Every person who is of the age of majority which is given under Indian Majority Act6 and who

is of sound mind and is not disqualified from contracting by any law to which he is subject.

‘Person’ includes legal person such as company, statutory incorporations etc. Hence, FFPL and

HI are competent to enter into an enforceable agreement.

(c) Lawful consideration and Lawful object -

“Consideration or object of an agreement is unlawful if it - (i) is forbidden by law; or (ii) is of

such nature that, if permitted, would defeat the provisions of any law; or (iii) is fraudulent; or

(iv) Involves or implies, injury to person or property of another; or (v) Court regards it as

immoral, or opposed to public policy.”7 The object of the agreement is to seek advice and

suggestions for the PDP Bill and the consideration from the FFPL was Rs. 50,00,000 as an

advance and the remaining Rs. 50,00,000 is payable on the passage of the PDP Bill.8

(d) Free consent –

First, that in order to constitute a contract, both the parties must consent to the agreement, and

secondly, even if both the parties have consented to the agreement, consent of one of them may

not be said to be free if the same had been obtained by coercion, undue influence,

misrepresentation, fraud.9 It is very clear from the facts that both the parties consented to the

contract with free will.

6
Indian Majority Act, 1875, Section 3.
7
Indian Contract Act, 1872, Section 23.
8
Article IV, Annexure 2, Moot Compromise.
9
Mulla & Pollock, The Indian Contract Act, 1872 (14th Ed.).
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(e) Not to be expressly declared void –

If the agreement is declared void by the Contract Act under the sections 23-30 or by any other

law, it is not enforceable.

(3) As the agreement suffices all the essentials and the ingredients, the contract between HI

and FFPL is perfectly valid and enforceable. Hence, under this contract FFPL is bound to

perform his part of the contract and make full payment to HI.

(4) If a dispute arises associated with or arising from this contract, it will be resolved according

to the Article IX10 of the agreement signed by both the parties.

ISSUE II: ARGUENDO, EVEN IF THE UNDERLYING CONTRACT IS INVALID,

HIGH COURT HAS STILL ERRED IN NOT APPOINTING THE TRIBUNAL.

Assuming but not admitting that the agreement is null and void under section 23 of the Indian

Contract Act, 1872, the arbitration clause stands effective. [2.1] The ‘Doctrine of Separability’

and [2.2] ‘Kompetenz-Kompetenz’ principle applies along with the [2.3] restrictive scope of

enquiry under section 1111.

[2.1] DOCTRINE OF SEPARABILITY

(5) The separability doctrine provides that an arbitration agreement, even though included in

and related closely to an underlying commercial contract, is a separate and autonomous

agreement.

10
Moot Compromise, Annexure 2, Article IX.
11
Arbitration and Conciliation Act, 1996, Section 11.
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(6) Indeed, the arbitration clause and the underlying agreement are two different agreements

despite the fact that both exist within the same text and the two should be assessed together.

While the underlying agreement creates a relationship of obligation between the parties, the

arbitration agreement solely addresses the settlement of disputes between the parties. It can be

said that, when the parties to an agreement containing an arbitration clause enter into that

agreement, they conclude not one but two agreements, the arbitral agreement survives any

defect or acquired disability of the principal agreement.12

(7) The position with respect to whether an arbitration agreement contained in a contract is

separable is a settled law and the separability doctrine is respected by all courts.13

The failure of the main contract constitutes the occasion for the application of the arbitration

clause. The main contract does not become irrelevant. That still provides the framework within

which the rights and liabilities of the parties would be determined.14 This principle has been

recognized and enshrined in countries like Switzerland15, England16, United States17, France18.

(8) The Indian law of Arbitration, which is based on the UNCITRAL Model Law, also

explicitly adopts this approach in Section-16(1) (b)19

“(1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections

with respect to the existence or validity of the arbitration agreement, and for that purpose, --

12
Heyman v. Darwins, (1942) A C 356 (A).
13
Enercon (India) Ltd. and Others v. Enercon GMBH and Another, (2014) 5 SCC 1.
14
National Thermal Power Corporation v Singer Company, (1992) 3 SCC 551.
15
Swiss Private International Law Act, 1987.
16
Heyman v. Darwins Ltd, (1942) A C 356 (A); Section 7 of the Arbitration Act, 1996.
17
Prima Paint Corporation v. Flood & Conklin Mfg. Co., 388 U.S. 395.
18
Mayer P., The Limits of Severability of the Arbitration Clause, Kluwer Law International, 14th International
Council for Commercial Arbitration; 1998.
19
Arbitration and Conciliation Act, 1996, Section 16 (1).
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(a) an arbitration clause which forms part of a contract shall be treated as an agreement

independent of the other terms of the contract; and (b) a decision by the arbitral tribunal that

the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.”

(9) The Indian courts have frequently relied upon the separability presumption to reject

jurisdictional challenges, but these decisions cannot properly be considered final, substantive

application of the separability presumption. In National Agricultural Coop. Marketing

Federation India Ltd. v. Gains Trading Ltd.20 , the Supreme Court held that an arbitration clause

is a collateral term in the contract, which relates to resolution of disputes, and not performance.

However, in a landmark decision in India Household and Healthcare Ltd. v. LG Household

and Healthcare Ltd.21, the Honourable Supreme Court observed that the decisions upholding

the separability doctrine rather reflect principles of Kompetenz-Kompetenz and a procedural

allocation of competence to render an initial decision on the jurisdictional dispute. The Indian

Act has adopted the doctrine in a way to minimize the intervention of courts in the arbitration

process and speed up the proceedings.

(10) The “separability doctrine” was articulated comprehensively by the United States

Supreme Court in Prima paint Corp v. Flood & Conklin Manufacturing Co. where the Court

ruled that arbitration clauses can be ‘separable’ from the contracts in which they are included.

The rationale for the separability doctrine is that the parties’ agreement to arbitrate consists of

promises that are distinct and independent from the underlying contract.

20
(2007) 5 SCC 692
21
(2007) 5 SCC 510.
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(11) When the Supreme Court revisited this doctrine in 2006 in Buckeye Check Cashing, Inc.

v. Cardegna22, it set down three guiding principles that should have made quick work of both

of these cases:

First, as a matter of substantive federal arbitration law, an arbitration provision is severable

from the remainder of the contract. Second, unless the challenge is to the arbitration clause

itself, the issue of the contract’s validity is considered by the arbitrator in the first instance.

Third, this arbitration law applies in state as well as federal courts.

(12) Arbitration rules derive their authority from the intentions of the parties who refer to them

in their arbitration agreement. Consequently, where the parties have referred to arbitration rules

which states the doctrine of separability of the arbitration agreement, those parties are

presumed to have intended that the arbitration agreement be treated separately from the main

contract. When the terms of the contract are clear and ambiguous then its meaning is to be

gathered only from the words used therein.23 The Arbitration Clause clearly states that any

dispute or question arising related to the existence or validity will also be settled by the

arbitration.24

(13) The proper test for deciding validity or otherwise of an agreement or order is 'substantial

severability' and not 'textual divisibility'. It is the duty of the court to severe and separate trivial

or technical part by retaining the main or substantial part and by giving effect to the latter if it

is legal, lawful and otherwise enforceable. In such cases, the Court must consider the question

whether the parties could have agreed on the valid terms of the agreement had they known that

the other terms were invalid or unlawful. If the answer to the said question is in the affirmative,

22
546 U.S. 440 (2006).
23
Oil and Natural Gas Corporation v. Saw Pipes Ltd, AIR 2003 SC 2629.
24
Moot Compromise, Annexure 2, Article IX.
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the doctrine of severability would apply and the valid terms of the agreement could be enforced,

ignoring invalid terms.25

(14) It is not the law that arbitrators, if their jurisdiction is challenged or questioned, are bound

immediately to refuse to act until their jurisdiction has been determined by some court which

has power to determine it finally.26 They are entitled to inquire into the merits of the issue

whether they have jurisdiction or not, not for the purpose of reaching any conclusion but for

the purpose of satisfying themselves of the preliminary matter about whether they ought to go

on with the reference or not.27 The court of appeal held that the arbitration clause was wide

enough to include such ques and the arbitrator was not precluded from determining the issue

of initial invalidity.28 It would be entirely self-defeating if a breach of contract or a claim that

the contract was voidable was sufficient to terminate the arbitration clause as well.29

(15) In order to conduct arbitration proceedings, the arbitration clause should remain

unaffected by the claim of invalidity. Conferment of such power on the arbitral tribunal has

been done with the intention of and objective of setting the arbitral proceedings in motion

without any hurdles in future also.30 An arbitration does not cease to be binding because the

contract has been discharged.31 The other possible view was that the arbitrator may decide the

preliminary ques of law as well. If his decision was not according to law, it could be brought

before the court. The Supreme Court has considered this course to be proper that the

preliminary question should also be decided by the arbitrator.32 Even where the question is

25
Shin Satellite Public Co. Ltd vs M/S Jain Studios Limited, (2006) 2 SCC 628.
26
Christopher Brown Ltd v. Genassenschaft O.W.R. GmbH, (1954) 1 QB 8
27
Ibid.
28
Harbour Insurance Co. UK v Ransa General International Ins Co., [1993] 1 Llyod’s Rep 445 CA.
29
Law and Practice of International Arbitration, Alan Redfern and Martin Hunter, Fourth Edition, pp- 3-60.
30
Karnataka State Road Transport Corporation v M. Keshava Raju, AIR 2004 Kant 104.
31
Heyman v Darwins Ltd., (1942) A C 356 (A).
32
Avtar Singh, Law of Arbitration and Conciliation (7th Ed.).
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pending before the court, the arbitral tribunal can go on with the reference as provided in

section 8 (3)33 and make its award.34

[2.2] KOMPETENZ - KOMPETENZ PRINCIPLE

(16) Kompetenz-Kompetenz is now a foundational principle of the modern law of

arbitration. According to that principle, an arbitral tribunal is competent to decide its own

competence. In other words, the tribunal has jurisdiction to decide its own jurisdiction. That

principle demands, in turn, that the arbitral tribunal, and not the court, should in the first

instance decide the tribunal’s competence.

(17) Arbitrators’ power to continue with arbitral proceedings despite one party’s challenge to

arbitration agreement. At a minimum, the Kompetenz-Kompetenz principle enables the arbitral

tribunal to continue with the proceedings even where the existence or validity of the arbitration

agreement has been challenged by one of the parties for reasons directly affecting the

arbitration agreement, and not simply on the basis of allegations that the main contract is void

or otherwise ineffective. The principle of the arbitration agreement is autonomous of the main

contract is sufficient to resist a claim that the arbitration agreement is void, because the contract

containing it is invalid, but it does not enable the arbitrators to proceed with the arbitration

where the allege invalidity directly concerns the arbitration agreement. That is a consequence

of the Kompetenz-Kompetenz principle alone.

33
Arbitration and Conciliation Act, 1996, Section 8 (3).
34
Supra, note 32.
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(18) Objections regarding applicability of the arbitration clause in the agreement to the facts of

the case, though go to the root of the jurisdiction, even so they must be raised before the

arbitrator for decisions.35 Without this rule, an arbitral tribunal would always be precluded from

hearing any dispute which raised a question about the validity or existence of the contract

containing the arbitration agreement.36 Parties are granted liberty to raise and pursue all

objections and contentions before him as envisaged under section 16 of the act and also on

merits.37

(19) In case of any dispute, the arbitrator appointed as per the arbitration clause, has the

competence to separate the arbitration clause from the underlying contract, and decide the

issues and provide the Arbitral Tribunal to rule on its own jurisdiction, including ruling on any

objections with respect to the existence or validity of the arbitration agreement.38

Thus, this doctrine was recognised mainly in the context of ensuring jurisdiction of the Arbitral

Tribunal so appointed, to adjudicate upon the matter, irrespective of the challenges to the

underlying contract.39

[2.3] RESTRICTIVE SCOPE OF ENQUIRY

35
Hindustan Petroleum Corporation Ltd v Pinkcity Midway Petroleums, AIR 2003 SC 2881; Konkan Railway
Corporation Limited v Rani Construction (P) Ltd, (2002) 2 SSC 388.
36
P Manohar Reddy & Bros. v. Maharashtra Krishna Valley Development Corporation, AIR 2009 SC 1776.
37
Food Corporation of India v Indian Council of Arbitration, AIR 2003 SC 3011.
38
National Power Corporation. v. Westinghouse, DFT 119 II 380.
39
Roman Feehily, The effect of invalidity of underlying contract on the Arbitration Clause: A Critique on the
Doctrine of separability in Arbitration, Arbitration International, Volume 34, Issue 3, September 2018, Pages
355–383.
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(20) The nature and scope of issues arising for consideration in an application under Section

11 of the Act for appointment of arbitrators, are far narrower than those arising in an application

under Section 8 of the Act, seeking reference of the parties to a suit to arbitration.40

(21) While deciding the application under section 11, the chief justice or his designate would

not look into the arbitrability of the subject matter of the agreement. If there exists an arbitration

agreement, the court is bound to leave the issue of arbitrability to the Arbitral tribunal.

(22) Addition made to the Section 11 (6) by the 2015 Amendment, reads as follows:

11. (6-A) The Supreme Court or, as the case may be, the High Court, while

considering any application under sub-section (4) or sub-section (5) or sub-

section (6), shall, notwithstanding any judgment, decree or order of any court,

confine to the examination of the existence of an arbitration agreement."41

From a reading of Section 11(6-A), the intention of the legislature is crystal clear i.e. the court

should and need only look into one aspect the existence of an arbitration agreement.42 After

the amendment, all that the courts need to see is whether an arbitration agreement exists nothing

more, nothing less.

ISSUE III: WHETHER THE ADVANCE PAID TO HI CAN BE CONSIDERED AS

‘OPERATIONAL DEBT’ UNDER INSOLVENCY AND BANKRUPTCY CODE, 2016.

(23) It is humbly contended before the honorable Supreme Court, that the refundable advance

paid to the HI cannot be considered as operational debt under Insolvency and bankruptcy code

40
Booz Allen and Hamilton Inc. v SBI Home Finance Ltd. and Others, AIR 2011 SC 2507.
41
Arbitration and Conciliation Act, 1996, Section 11 (6-A).
42
Duro Felguera, S.A. v. Gangavaram Port Ltd., AIR 2017 SC 5070.
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2016. Hence the arguments to justify the same comes in a three-fold Manner: [1.1]

Interpretation and scope of operational debt under insolvency and bankruptcy code [1.2] Debt

under the insolvency and bankruptcy code covers Equitable Principles.

[1.1] INTERPRETATION AND SCOPE OF OPERATIONAL DEBT UNDER INSOLVENCY AND

BANKRUPTCY CODE

(24) The term “operational debt” is defined in section 5(21) of IBC 43. According to section

5(21), “operational debt” means: “a claim in respect of the provision of goods or services

including employment or a debt in respect of the repayment of dues arising under any law for

the time being in force and payable to the Central Government, any State Government or any

local authority.” In the case of Col. Vinod Awasthy v. AMR Infrastructures Ltd.44, stated

“operational debt does not include debt other than a financial debt and is confined to only four

categories, viz. goods, services, employment and government dues. NCLT held that since the

advances were sought to be recovered on account of delay in possession (and the debt did not

arise on account of these four categories), the applicants are not operational creditors of the

companies”.

(25) In the present case, the respondent is also contending that the advance for the contract is

operational debt and comes under the ambit of section 9 of insolvency and bankruptcy code,

201645. In the case of Daya Engineering Works Pvt. Ltd. v. UIC Udyog Ltd 46, UIC udyog

made advance payments for certain materials, for which there was a short supply. An

application was, therefore, filed under section 9 of the IBC, but the matter was dismissed on

43
Insolvency and bankruptcy code, 2016.
44
Col. Vinod Awasthy v. AMR Infrastructures Ltd., C.P. No. (IB)-10(PB)/2017.
45
Moot Compromis, Para 16, line 4.
46
Daya Engineering Works Pvt. Ltd. v. UIC Udyog Ltd, CP (IB) No. 547/KB/2017.
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the ground that the amount due to the applicant did not fall under any of the aforementioned

elements of the definition of operational debt, and hence, there exists no operational debt at

all47.

(26) To determine whether the application is at all maintainable, the NCLT deliberated on the

term “operational debt” as contained in the IBC. According to section 5(21), “operational debt”

means48:

(a) claim in respect of provision of- (i) goods or (ii) services, including employment; or

(b) debt in respect of payment of dues arising under any law for the time being in force and

payable to- (i) the Central Government,(ii) any State Government; or (iii) any local authority.

(27) If the claim of debt falls within one of the three categories as listed above can such a claim

be categorized as an operation debt49. In case if the amount claimed does not fall under any of

the categories mentioned as above, the claim cannot be categorized as an operational debt, and

even though there might be a liability or obligation due from one person, namely Corporate

Debtor to another, namely Creditor other than the Government or local authority, such a

creditor cannot categorize itself as an “operational creditor” as defined under Section 5(21) of

IBC, 201650.

(28) The respondent could definitely not be categorized as Central Government, any State

Government or any local authority. The next question for consideration was whether the debt

would fall under the ambit of “claim in respect of the provision of goods or services or

employment.” It can be observed that the applicant has not complete service, nor provided any

47
K. Kishan v. M/s Vijay Nirman Company Pvt. Ltd. Civil appeal no. 21824 OF 2017.
48
SHRM Biotechnologies Private Limited v. VAB Commercial Private Limited,CP (IB) No. 799/KB/2018.
49
Mrs. Pramod Yadav and Anr. v. Divine Infracon Pvt. Ltd., No. IB-209/ND/2017.
50
Sajive Kanwar v. AMR Infrastructure, C.P(IB) No. 06/KB/2017.
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goods to the corporate debtor. Thus, the respondent’s contention of operational debt against

appellant is unacceptable.

(29) Even if the appellant assumes that the debt comes under the ambit of section 9 of IBC and

is operational debt. Then it means that the respondent is operational creditor and the appellant

is operational debtor and to the relationship of operational debtor and operational creditor, both

must be in the valid contract. Operational creditor is defined under Section 5(20) of the IBC to

mean "any person to whom an operational debt is owed and includes any person to whom such

debt has been legally assigned or transferred". And on the other side the respondent is

contending that the contract itself is unenforceable. Thus, the respondent’s argument of

operational debt is refuting.

[1.2] DEBT UNDER THE INSOLVENCY AND BANKRUPTCY CODE DO NOT COVERS EQUITABLE

PRINCIPLES

(30) The uncertainty of the general duty of equitable principles has been attributed as one of

the most prominent reasons why the doctrine has remained at the backstage. Uncertainty is a

word used when situation are not predictable. Commercial transaction relies on certainty. The

general duty of equity which is one of the outcomes of equity comes with it the non-

predictability associated with most if not all doctrines of equity. Where the law is not

predictable, that is, the courts do not work with precedents there is a very high tendency for the

judicial system to be abused and it will weaken the certainty that comes with commercial

transactions, highlighted this by stating “such a vague principle invites judges to act on their

own idiosyncratic views of fair dealings” It is evidence that no two people think alike if the

facts of case are left at the mercy of the judge in question for interpretation then there can never

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be any two decisions alike. The globalization of businesses has even made it even more difficult

for the equitable doctrine of equitable principles to find a place in English law.

(31) Also in commercial transaction “…if the law is certain, the outcome of a dispute may be

predicted and the parties may resolve it without resort to litigation” Where the outcome of

contractual defaults can be predictable it will serve as a check and deterrent for the contracting

parties because then the strict interpretation of common law unlike the loose nature of equitable

principle gives the parties an idea of what to expect should they breach their own side of the

bargain. But where the law is not predictable people will be more willing to gamble. Lord

Brown Wilkinson in the case of Westdeutsche Landesbank Girozentrale v. Islington London

Borough Council51 warned against the importation of the equitable principles into commercial

transaction for its lack of speed and certainty. Lord Ackner clearly pointed this out in the case

of Walford v Miles52 where he argued that negotiation in equitable principles was full of

uncertainty and quite difficult to enforce an would be inherently repugnant to the ‘adversarial

position of the parties when involved in negotiations’. So in the present case also, Debt will

not come under the ambit of principle of equitable principle.

51
Westdeutsche Landesbank Girozentrale v Islington London Borough Council, HL 22 MAY 1996.
52
Walford v Miles, [1992] 1 EGLR 207.
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PRAYER

Wherefore, in light of the issues raised, arguments advanced and authorities cited may this

Hon’ble court be pleased to declare/adjudge/hold that:

1) HOLD the contract valid and order the payment of remaining Rs. 50, 00,000.

2) SET ASIDE the order of the High Court of Hogwarts and invoke arbitration clause if

dispute arises.

3) DECLARE that debt do not comes under the ambit of operational debt

AND/OR

Pass any other Order, Direction, Relief that it may deem fit in the Best Interests of Justice,

Fairness, Equity and Good Conscience.

For this act of Kindness, the Respondent shall duty bound forever pray

Sd/-

Counsel for the Appellant

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