In a recent ruling, the Bombay High Court has clarified the conditions under which the bar under Section 238 of the Insolvency and Bankruptcy Code (IBC) can be invoked and its impact on applications filed under the Arbitration and Conciliation Act (A&C Act).
The court held that the mere filing of an application under Section 7(1) of the IBC is not sufficient to invoke the bar, emphasizing the need for the Adjudicating Authority's satisfaction as prescribed by Section 7(4) and 7(5)(a) of the IBC.
Brief Facts:
The case before the Court involved a dispute between Sunflag Iron & Steel Co. Ltd and M/s. J. Poonamchand & Sons. Sunflag had filed an application under Section 11(6) of the A&C Act seeking the appointment of an arbitrator to resolve the disagreement. However, M/s. J. Poonamchand & Sons had already approached the National Company Law Tribunal (NCLT) and filed a petition under Section 9 of the IBC against Sunflag, arguing that the provisions of Section 11(6) of the A&C Act would become inapplicable due to the bar under Section 238 of the IBC.
Contentions of the Applicant:
The applicant sought an arbitrator's appointment under Section 11(6) of the A&C Act based on an undisputed arbitration clause. The applicant, a solvent company, contended that the respondent's proceedings under the IBC are untenable.
Observations of the Court:
The High Court, after examining the relevant provisions of both acts, clarified that there is no inconsistency between the A&C Act and the IBC. It stated that Section 238 of the IBC would come into effect only after the Adjudicating Authority has passed an order under Section 7(5) of the Code. Until such an order is passed, an application under Section 11(6) of the A&C Act cannot be deemed non-maintainable.
The Bench further explained that Section 7(4) of the IBC imposes a duty on the Adjudicating Authority to ascertain the existence of a default within 14 days of receiving the application. Only after the Adjudicating Authority records its satisfaction, as contemplated by Section 7(5)(a) of the IBC, can the application be admitted. The court emphasized that the satisfaction of the Adjudicating Authority marks the starting point for invoking the bar under Section 238 of the IBC.
Additionally, the Court highlighted that Section 7(5)(b) of the IBC allows the Adjudicating Authority to reject an application if it determines that a default has not occurred. This provision indicates that the mere filing of an application under Section 7(1) of the IBC does not act as a bar to proceedings under other statutes until the satisfaction prescribed by Section 7(4) read with Section 7(5)(a) of the IBC is recorded and the application is admitted.
The Decision of the Court:
Based on these considerations, the Bombay High Court concluded that until the Adjudicating Authority determines the existence of a default, an application under Section 11(6) of the A&C Act can be entertained. The High Court ruled in favor of Sunflag and appointed an arbitrator to resolve the disputes between the parties.
Case Name: M/s Sunflag Iron & Steel Co. Ltd vs M/s. J. Poonamchand & Sons
Coram: Hon’ble Justice Avinash G. Gharote
Case No.: MCA 374 of 2020
Advocate of the Petitioners: Adv. Mr. Ashutosh Dharmadhikari
Advocate of the Respondent: Adv. Mr. Rahul Bhangde
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