IBC cannot be used as a threat

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insolvency

In a recent judgment, the Calcutta High Court dealt with the question of whether an application under section 34 of the Arbitration & Conciliation Act, 1996, can be kept in abeyance owing to the Insolvency and Bankruptcy Code, 2016 (IBC) being invoked by operational creditors against the petitioner.

In Sirpur Paper Mills Ltd v IK Merchants Pvt Ltd, the petitioner/debtor prayed for the setting aside of an award dated 7 July 2008, and contended that the present application under section 34 of the arbitration act could not proceed, since corporate insolvency proceedings under the IBC were initiated against the petitioner as the corporate debtor.

It was further submitted by the petitioner that since the management of the petitioner/corporate debtor was taken over by JK Paper, the resolution applicant before the National Company Law Tribunal (NCLT), and the respondents had also not made any efforts to place their claim before the resolution professional, the said application under section 34 of the arbitration act could not proceed.

The court observed that reference was made on 18 June 2001, and the arbitrator was appointed on 2 March 2006. The arbitral award was delivered on 07 July 2008 for a sum of ₹321,927 (US$4,297) at 9% per annum in favour of the respondent/claimant, against which the present application for setting aside of the award was filed on 31 October 2008. Whereas the operational creditors initiated proceedings under the IBC against the petitioner (corporate debtor) in September 2017, and by an order dated 19 July 2018, the adjudicating authority declared that the moratorium order u/s 14 shall cease to have effect. The application under section 34 of the arbitration act was taken up for hearing by the high court on 11 December 2019.

Disagreeing with the contention of the petitioner and relying on the law laid down by the Supreme Court in the cases of K Kishan v Vijay Nirman Company Pvt Ltd (2018) and Mobilox v Kirusa (2018), the Calcutta High Court observed that the IBC cannot be used in terrorem (as a legal threat) to extract money that is the subject matter of a pending adjudication.

Further, the corporate insolvency proceedings cannot be used in cases where there is a pre-existing and ongoing dispute between the parties. Once the award is challenged in arbitration, the debt becomes disputed and is subject to a decision as per section 34 of arbitration act proceedings.

The high court held that the petitioner, being a corporate debtor, cannot be permitted to take refuge under the provisions of the IBC for relegating the claim of the respondent award holder to a limbo for an indefinite period on the plea of the respondent not having gone before the NCLT, and thus the prayer was rejected.

The dispute digest is compiled by Bhasin & Co, a corporate law firm based in New Delhi. The authors can be contacted at lbhasin@gmail.com. Readers should not act on the basis of this information without seeking professional legal advice.