India: NCLAT Holds Section 34 Proceedings Is Record Of Operational Debt

In a recent decision of M/s Ksheeraabd Constructions Private Limited v M/s Vijay Nirman Company Private Limited, the National Company Law Appellate Tribunal (NCLAT) has held that proceedings pending under Section 34 of the Arbitration and Conciliation Act, 1996 (Act) does not constitute a 'dispute' under Section 8 of the Insolvency and Bankruptcy Code, 2016 (Code) and cannot come in the way of initiation of the insolvency resolution process, in terms of Section 9 of the Code.

Background

The Respondent, M/s Vijay Nirman Company Private Limited (the Respondent), being an operational creditor of M/s Ksheeraabd Constructions Private Limited (the Appellant), had initiated the Corporate Insolvency Resolution Process against the Appellant by way of an application under Section 9 of the Code. Subsequently, vide order dated 29 August 2017, the National Company Law Tribunal (NCLT), while admitting the application, passed an order of moratorium and appointed an Insolvency Resolution Professional (IRP).

In view of the order appointing the IRP, the Appellant in the present case approached the NCLAT on the ground that the pendency of a petition under Section 34 of the Act arising out of an arbitral award would amount to 'existence of a dispute' and therefore the application for initiation of the corporate insolvency resolution process under Section 9 of the Code is not maintainable.

Contentions of the Parties

The Appellant made two primary submissions before the NCLAT. First, that in the arbitral proceedings, the Appellant had also filed a counter claim, which in itself was proof of existence of a dispute, which was brought to the notice of the operational creditor as required under Section 8 of the Code and second, that the arbitral award is currently not final and is not a 'decree' as it has not yet been made enforceable for the purpose of Section 36 of the Act and consequently, there exists no 'debt' that is payable to the Respondent.

The Respondent opposed the above submission by contending that on the arbitral award having been passed, the dispute stood decided and the sums awarded therein constitute a 'debt' payable to the Respondent. Further, the Respondent also brought to the attention of the NCLAT that the Appellant had not raised any dispute prior to the notice under Section 8 of the Code and therefore, there was no 'existence of a dispute'.

Finding of the NCLAT

The issue before the NCLAT was whether pending proceedings under Section 34 of the Act can be considered as an existing dispute under the Code.

In arriving at its decision that proceedings pending under Section 34 of the Act do not constitute a dispute in existence, the NCLAT noted that no reliance can be placed on Section 34 of the Act to determine whether an arbitral award has attained finality and is a 'decree'. In support of this finding, the NCLAT relied on Section 238 of the Code which expressly states that the Code shall override all other laws, which would include the Act. Therefore, the provisions of the Code would prevail over the provisions of the Act as to whether an arbitral award is final or not.

In view of this finding, the NCLAT referred to Section 9 of the Code, and Form-5 under the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 according to which an order of an arbitral panel is evidence of default by the debtor i.e. while the pendency of a suit or arbitration proceedings is evidence of the existence of a dispute, an order of a court, tribunal or an arbitral panel is actually a record of an operational debt and not merely the existence of a dispute.

In view of the aforesaid, the NCLAT held that "no person can take advantage of pendency of a case under Section 34 of the Arbitration and Conciliation Act, 1996 to stall 'Corporate Insolvency Resolution Process' under Section 9 of the I&B Code".

Comment

The NCLAT has conclusively held that proceedings pending under Section 34 of the Act would not imply that there is a dispute in existence regarding the operational debt, and in fact, the arbitral award passed in such proceedings would be a record of the operational debt.

The intention of the NCLAT that pending proceedings challenging an arbitral award cannot come in the way of a genuine corporate insolvency resolution process is clear and the order is strictly in accordance with the provisions of the Code. However, by holding that the Code overrides the provisions of the Act rather than attempting to harmoniously construe the two legislations, the NCLAT seems not to have considered the consequence of a stay being granted by a court on the operation of the arbitral award in terms of Section 36 of the Act, during the pendency of proceedings under Section 34. Further, once the IRP is appointed, the corporate insolvency resolution process is an irreversible one and the implication of this decision with respect to an arbitral award that is subsequently set aside under Section 34 remains unclear.

It remains to be seen whether this order of the NCLAT is challenged before the Supreme Court of India. If the order is taken up in appeal, the decision of the Supreme Court should provide some clarity on the manner in which the Code is to be interpreted vis-à-vis the provisions of the Act.

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