The Supreme Court recently comprising of a bench of CJI SA Bobde, Justices AS Bopanna and V. Ramasubramanian observed that in any proceeding which is pending before the Adjudicating Authority under Section 7 of Insolvency and Bankruptcy Code, if such petition is admitted upon the Adjudicating Authority recording the satisfaction with regard to the default and the debt being due from the corporate debtor, any application seeking reference to arbitration under Section 8 of the Arbitration and Conciliation Act made thereafter will not be maintainable. (Indus Biotech Private Limited vs. Kotak India Venture (Offshore) Fund)
The bench Observed, "In a situation where the petition under Section 7 of IB Code is yet to be admitted and, in such proceedings, if an application under Section 8 of the Act, 1996 is filed, the Adjudicating Authority is duty bound to first decide the application under Section 7 of the IB Code by recording a satisfaction with regard to there being default or not, even if the application under Section 8 of Act, 1996 is kept along for consideration. In such event, the natural consequence of the consideration made therein on Section 7 of IB Code application would befall on the application under Section 8 of the Act, 1996."
Facts Of The Case
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 the 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 the Indus Biotech Private Limited and dismissed the petition filed u/s 7 of the IBC. It held that there is no default of the debt due, and declines t o admit the petition filed under section 7IBC. 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.
Contention Of The Parties
The learned senior counsel for the Kotak India Venture contended with regard to a serious error said to have been committed by the NCLT in entertaining an application under Section 8 of the Act, 1996 in the backdrop of the legal duty cast on NCLT to proceed strictly in accordance with the procedure contemplated under Section 7 of IB Code.
It was further contented that Indus Biotech Private Limited having defaulted, the event enabling the petition under Section 7 of IB Code has occurred and the dispute sought to be raised is not arbitrable after the insolvency proceeding is commenced.
Dr. Singhvi, learned senior counsel while seeking to repel the contention put forth on behalf of the Indus Biotech Private Limited emphasised that a proceeding under Section 7 of IB Code is to be considered in a stringent manner.
Referring to the Preamble to the IB Code, it was contended that the same has evolved after all the earlier processes like civil suit, winding up petition, SARFAESI proceeding and SICA have failed to secure the desired result. The provision under the IB Code is with the intention of making a debtor to seek the creditor. In that regard, Dr. Singhvi referred to the decisions in the case of Swiss Ribbons Private Limited and Another vs. Union of India and Others (2019) 4 SCC 17 and Booz Allen and Hamilton INC. vs. SBI Home Finance Limited and Others (2011) 5 SCC 532 and contended that the proceeding under Section 7 of IB Code is an action in rem. As such insolvency and winding up matters are non-arbitrable.
Courts Observation & Judgment
The bench Observed, “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, notwithstanding the fact that the alleged corporate debtor filed an application under Section 8 of the Act, 1996, the independent consideration of the same dehors the application filed under Section 7 of IB Code and materials produced therewith will not arise.”
The Supreme Court discussed the case of Vidya Drolia and Others Vs. Durga Trading Corporation (2021 2 SCC 1), wherein a test was laid down to determine as to when the subject matter is not arbitrable and on applying such test, the Supreme Court said that actions in rem is not arbitrable.
In view of the aforesaid case, the Supreme Court observed that a dispute will be non-arbitrable when a proceeding is in rem and IBC proceedings are to be considered in rem only when the petition is admitted.
Similarly, the Supreme Court held that any proceeding which is admitted by the Adjudicating Authority under Section 7 of the IBC deciding the presence of default and the debt being due from the corporate debtor then thereafter any Application under Section 8 of the Act of 1996 will not be maintainable.
“ 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.”
It observed that in the event where the Application under Section 7 of the IBC is yet to be admitted and if meanwhile an Application under Section 8 of the Act of 1996 is filed then it is the duty of the Adjudicating Authority to first decide the Application under Section 7 of IBC. In this situation, the natural consequence of the consideration made therein on Section 7 of the IBC would befall on the Application under Section 8 of the Act of 1996. It is an obligation on the Adjudicating Authority to first decide whether any default has occurred or not.
The Supreme Court reconsidered the observations recorded in the NCLT Order dated 09.06.2020 and upheld the said Order in view of the fact that by dismissing the Application under Section 7 of the IBC, the NCLT has decided that there is no ‘default’ caused by the Petitioner.
“In that circumstance though in the operative portion of the order dated 09.06.2020 the application filed under Section 8 of the Act, 1996 is allowed and as a corollary the petition under Section 7 of the IB Code is dismissed; in the facts and circumstances of the present case it can be construed in the reverse. Hence, 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 Section 8 of the Act, 1996 is allowed, the same in any event will be 36 subject to the consideration of the petition filed under Section 11 of the Act, 1996 before this Court.”
In this view, the Supreme Court proceeded to constitute the Arbitration Tribunal for adjudication of the disputes between the Parties.
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