Arbitration In IndiaInsolvency & BankruptcyNavigating Legal Intersections between Arbitration and Insolvency Proceedings

The High Court of judicature at Bombay, Nagpur Bench, in the case of M/s. Sunflag Iron & Steel Co. Ltd. v. M/s. J. Poonamchand & Sons, Misc Civil Application no. 374/2020 decided on 05/06/2023 held that mere filing of an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) does not bar  an application under Section 11 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “A&C Act”).

FACTS

M/s. J. Poonamchand & Sons (hereinafter referred to as “Respondent”) sent a legal notice to the M/s. Sunflag Iron & Steel Co. Ltd. (hereinafter referred to as “Applicant”) intimating the intention to initiate proceedings under section 9 of the IBC. Subsequently, the Applicant, initiated an application for the appointment of an Arbitrator under section 11(6) of the A&C Act against Respondent before the Hon’ble Bombay High Court of, invoking the arbitration clause in the agreement dated 30/08/2019.

The Respondent, in turn, initiated proceedings under the IBC and filed an application  under Section 7 of the IBC before the National Company Law Tribunal (hereinafter referred to as “NCLT”) contending that there is no dispute at all as there is an admission by the Petitioner as to its liability to pay as the Petitioner vide e-mail dated October 23, 2019  has stated that due to financial crunch the Petitioner will pay the dues later.

ISSUES BEFORE THE HIGH COURT

The Following issues were taken into consideration by the Bombay High Court:

1. Whether the provisions of the IBC bar the appointment of an arbitrator by invoking section 11(6) of the A&C Act?

2. Whether the bar under section 238 of the IBC has overriding effects over other laws?

CONTENTIONS OF THE PARTIES

The Petitioner submitted that since no order had, as yet been passed in proceedings initiated by the Respondent under Section of the IBC, therefore, mere initiation of proceedings did not injunct the High Court from considering and deciding the Section 11 Application. The Petitioner had relied upon the precedent set in the case of Jasani Realty Pvt. Ltd. v. Vijay Corporation (Commercial Arbitration Application (L) No. 1242/2022, Decided on 25/04/2022) to support their stance.

Furthermore, the Petitioner contended that as a solvent company, the proceedings initiated by the Respondent before the NCLT under the IBC lack merit altogether.

The Petitioner also stated that once the conditions prescribed under Section 11 of the A&C Act are admitted to exist, the Court has to appoint an Arbitrator.

On the contrary, the Respondent asserted that since he had approached the NCLT under the provisions of the IBC, due to the superseding effect of the IBC as enumerated under section 238 of IBC, Section 11(6) of the A&C Act would not apply, making it impermissible to appoint an arbitrator.

To this effect, the Respondent further argued that once the NCLT is seized of the matter under the IBC, it would override Section 11(6) of the A&C Act, again relying on Section 238 of the IBC. The Respondent further also submitted that Section 7 of the IBC has primacy and therefore argued that the application under Section 11 of the A&C Act has been filed merely to obviate the proceedings before the NCLT and hence the same is not maintainable.

DECISION AND FINDINGS

The Hon’ble Bombay High Court analyzed and defined the extent of the pertinent Sections and Provisions within the A&C Act and IBC, the Court noted that the A&C Act does not contain any provision having overriding effect as opposed to Section 238 of the IBC. However, given that the A&C Act is a specialized statute governing arbitration and cannot be ignored. . Addressing Section 7 of the IBC, the Hon’ble Court clarified that while it provides a financial creditor the right to initiate insolvency proceedings against a corporate debtor, the mere filing of such an application does not signify that the Adjudicating Authority, has taken cognizance of the matter.

The Court affirmed that Jasani Realty Pvt. Ltd. (supra) accurately reflects the legal position, rejecting the Respondent’s contrary arguments and differentiating the cited judgments. It also held that there is no inconsistency between the provisions of the A&C Act and the IBC, as Section 238 of the IBC would only come into play upon an order being passed by the Adjudicating Authority under Section 7(5) of the IBC. Thus, an application under Section 11(6) of the A&C Act remains maintainable until such an order is made.

The High Court was of the view, that the admission of an application after recording its satisfaction as contemplated by Section 7(5) of the IBC would be the starting point where the bar under Section 238 of the IBC can be said to be capable of being invoked and the mere filing of an application under Section 7(1) of the IBC cannot be said to be enough to invoke the bar. Further, it was also noted that Section 7(5)(b) of the IBC permits the Adjudicating Authority to reject the application where it is of the opinion that default has not occurred, thereby indicating that the mere filing of an application under Section 7(1) of the IBC, would not act as a bar to any proceedings under other statutes. The High Court also held that the provisions of Section 238 of the IBC would come into play only upon an order having been passed by the Adjudicating Authority under Section 7(5) of the IBC and therefore an application under Section 11(6) of the A & C Act, till such time cannot be said to be not maintainable.

In view of the above, the Hon’ble High Court observed that there was no impediment in appointing an Arbitrator to adjudicate the disputes between the parties.

AMLEGALS REMARKS

The decision of the Hon’ble High Court in the present case provides clarity on the interplay between the A&C Act and the IBC.

By determining that initiating proceedings under the IBC does not hinder the appointment of an arbitrator under the A&C Act, the Hon’ble Court emphasizes the importance of respecting arbitration agreements and preserving parties’ autonomy in resolving disputes through arbitration. This decision reaffirms the principle that arbitration clauses in contracts should be given effect unless there are clear and compelling reasons to the contrary, thus promoting the efficiency and expediency of dispute resolution mechanisms outside of traditional litigation avenues. Additionally, the Court’s emphasis on the distinctiveness of the A&C Act and the IBC underscores the need for a nuanced understanding of each legal framework and the careful consideration of their respective provisions in adjudicating disputes.

-Team AMLEGALS

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