Supreme Court Examines Maintainability of Arbitration Reference after Insolvency Petition u/s7 IBC Is Filed & Admitted

Supreme Court Examines Maintainability of Arbitration Reference after Insolvency Petition u/s7 IBC Is Filed & Admitted

The Supreme Court (SC) in the case titled Indus Biotech Private Limited (Petitioners) v. Kotak India Venture (Offshore) Fund & Ors. (Respondents) examined the issue of maintenance of arbitration reference wherein a petition for the initiation of the corporate insolvency resolution process (CIRP) has been filed under Section 7 of the Insolvency and Bankruptcy Code (IBC).

The SC bench comprising of Chief Justice SA Bobde and Justices AS Bopanna and V Ramasubramanian stated that "The trigger point is not the filing of the application under Section 7 of IBC but an admission of the same on determining default." The Court clarified that mere filing of application u/s 7 of the IBC will not invoke the trigger if the admission is pending.

The litigation background of the case is that a petition was filed u/s 7 of IBC before the National Company Law Tribunal (NCLT) for seeking the appointment of Resolution Professional. A Miscellaneous Application was filed by Indus Biotech Private Limited under Section 8 of the Arbitration Act for seeking a direction to refer the parties to the arbitration.

The NCLT allowed the application of Indus Biotech Private Limited and dismissed the petition filed u/s 7 of IBC. It held that there is no default of the debt due, and declines to admit the petition filed under Section 7 IBC. It stated that no proceedings in rem exist, the CIRP would not be triggered and an application to refer the dispute to arbitration is maintainable.

The issue was referred to the Top Court wherein it was contended that the order of the Tribunal for admitting application u/s 8 of the Arbitration Act was invalid.

The Top Court observed that "The position of law that the IB Code shall override all other laws as provided under Section 238 of the IB Code needs no elaboration. In that view, even though the alleged corporate debtor applied u/s 8 of the Arbitration Act shall be the independent consideration of the same dehors the application filed under Section 7 of IB Code and materials produced therewith will not arise."

It added, "The Adjudicating Authority is duty-bound to advert to the material available before him as made available along with the application under Section 7 of IB Code by the financial creditor to indicate default along with the version of the corporate debtor. This is for the reason that, keeping in perspective the scope of the proceedings under the IB Code and there being a timeline for the consideration to be made by the Adjudicating Authority, the process cannot be defeated by a corporate debtor by raising moonshine defense only to delay the process."

The Court emphasized that even if an application u/s 8 of the Arbitration Act is filed, the NCLT must advert to contentions put forth on the application filed u/s 7 of the IBC, examine the material placed before it by the financial creditor and record a satisfaction as to whether there is default or not.

The SC clarified that when it becomes a proceeding in rem; an application filed u/s 8 that deals with the power to refer parties to arbitration where there is an arbitration agreement would not be maintainable.

The Court stated in its judgment that wherein the NCLT has recorded the finding of default and it proceeds to admit the application, the Corporate Insolvency Resolution Process (CIRP) commences. In that case, it becomes a proceeding in rem from the date the application is admitted and after admission, the matter would not be arbitrable. The Court added that the only course that is to be followed is the resolution process under IBC.

The Supreme Court stated, "To sum up the procedure, it is clarified that in any proceeding which is pending before the NCLT u/s 7 of the IBC if such petition is admitted by the adjudicating authority recording satisfaction about the default and the debt being due from the corporate debtor any application u/s 8 of the Arbitration Act shall not be maintainable."

The Court held, "In this case, since the conclusion by the Adjudicating Authority is that there is no default, the dismissal of the petition under Section 7 of IB Code at this stage is justified. Though the application under Sec. 8 of the Arbitration Act is allowed, the same in any event will be subject to the consideration of the petition filed under Section 11 of the Arbitration Act before this Court."

The Court concluded that the dispute would only be non-arbitrable if there was a finding of default and the petition u/s 7 of IBC is admitted. In the instant matter, the Court found that there was no default and no admission of the Section 7 petition by the Adjudicating Authority and hence the dispute can be referred for arbitration.