Read Order: Jasani Realty Pvt.Ltd v. Vijay Corporation 

Tulip Kanth

New Delhi, April 26, 2022: Placing reliance on the judgment of the Apex Court in Indus Biotech Private Limited vs. Kotak India Venture (Offshore) Fund, the Delhi High Court has affirmed that mere filing of the proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016 cannot be treated as an embargo on the Court exercising jurisdiction under Section 11 of the Arbitration and Conciliation Act,1996 to appoint an arbitral tribunal.

On the factual aspects of the case, Justice G.S. Kulkarni opined that as the Corporate Insolvency Resolution Process was yet to reach a stage of the NCLT passing an order admitting the said proceedings, the Court would not be precluded from exercising its jurisdiction under Section 11 of the Arbitration & Conciliation Act, when there is an arbitration agreement between the parties and invocation of the arbitration agreement has been made.

It was the case of the applicant that the respondent in the usual course of its business provided financial assistance to the applicant of an amount of Rs 4,50,00,000  for which a loan Agreement dated April 23, 2015 was entered between them. When the business scenario underwent a change, it created a negative impact during the subsistence of first Agreement and second agreement dated July  5, 2016 was executed between the parties, under which, the date of repayment of the borrowing was extended from June 30, 2015 to March 31, 2017. Except for such variation, it was contended that the terms and conditions in such agreement were similar to the ones as contained in the first Agreement.

Nonetheless, there were defaults on the part of the applicant in the payment of the loan installments. It was the case of the applicant that in discharge of its liability towards the respondent under such agreements, the applicant issued a cheque to the respondent being the repayment of the respondent’s dues upto August 31,2021 but such cheque was dishonoured.In these circumstances, the respondent approached the National Company Law Tribunal by initiating proceedings against the applicant under Section 7 of the IBC. So far no order had been passed by the NCLT admitting the petition as per the provisions of sub-section (5) of Section 7 of the IBC.

In the proceedings before the NCLT, it was the case of the applicant that both the agreements entered between the parties being interconnected, when read together, contained an arbitration agreement between the parties in Clause 16. The applicant invoked the arbitration agreement and called upon the respondent to agree to appoint an arbitral tribunal to adjudicate the disputes and differences between the parties under the said loan agreements. The applicant also suggested the name of the proposed sole arbitrator but as the respondent failed to agree to appoint an arbitral tribunal, the present application was filed under Section 11(6) of the Arbitration Act praying that an arbitral tribunal be appointed.

At the outset, the Bench observed that the primary consideration for the Court to exercise jurisdiction under Section 11(6) were certainly present because there was no dispute in regard to the existence of the arbitration agreements between the parties which is contained in Clause 16 of the agreement and the invocation of the arbitration agreement. 

The main issue before the Bench was whether mere filing of a proceeding under Section 7 of the IBC would amount to any embargo on the Court considering an application under Section 11 of the Arbitration Act to appoint an arbitral tribunal.

The Bench referred to the decision of the Top Court in Indus Biotech’s case(Supra) wherein it was observed that once the proceedings under Section 7 of the IBC are admitted, then such proceedings would assume the status of proceedings in rem.

In Indus Biotech’s Case (Supra) the situation before the Supreme Court was that both the Section 7 IBC and Section 8 Arbitration Act proceedings were before the NCLT. In such context the Supreme Court held that when an application under Section 8 was filed by a corporate debtor in a pending Section 7 proceedings filed by the creditor, which were at the pre-admission stage, in such event, it would be the duty of the NCLT in considering the Section 7 proceedings to determine as to whether there is a default. Also, if the NCLT is satisfied that there is a default, in that case, any Section 8 application which possibly may be filed with an intention to delay the process before the NCLT is rendered inconsequential. However, in making such observation there is no dilution of the principle that before the Section 7 proceedings are admitted, the character of the Section 7 proceedings does not get converted into proceedings in rem.

Discussing such reasoning of the Top Court in detail, Justice Kulkarni said, “The above observations as made by the Supreme Court would lead this Court to come to an inevitable conclusion that mere filing of the proceedings under Section 7 of the IBC cannot be treated as an embargo on the Court exercising jurisdiction under Section 11 of the ACA, for the reason that only after an order under sub-section (5) of Section 7 of the IBC is passed by the NCLT, the Section 7 proceedings would gain a character of the proceedings in rem, which would trigger the embargo precluding the Court to exercise jurisdiction under the ACA, and more particularly in view of the provisions of Section 238 of the IBC which would override all other laws.”

In the facts of the present case as the Corporate Insolvency Resolution Process as initiated by the respondent under Section 7 of the IBC is yet to reach a stage of the NCLT passing an order admitting the said proceedings, the Court would not be precluded from exercising its jurisdiction under Section 11 of the Arbitration  Act, when admittedly, there is an arbitration agreement between the parties and invocation of the arbitration agreement has been made, which was met with a refusal on the part of the respondent to appoint an arbitral tribunal, added the Bench.

Further, the Bench said “Once the Section 7 IBC proceedings are admitted, the provisions of Section 238 of the IBC would get triggered to override the application of all other laws, as in such event, the Corporate Insolvency Resolution Process would commence, against such corporate debtor as per the provisions of Section 13 of the IBC which would be proceedings in rem.”

The Court noted that it would be required to allow this application by appointing an arbitral tribunal for adjudication of the disputes and differences which have arisen between the parties under the agreements in question. However, a formal order appointing an arbitral tribunal was not required to be made as after the judgment was reserved, the parties just two days back, settled the disputes stating that an arbitration was not warranted.

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