bombay high court

Bombay High Court: While considering the question of whether the provisions of Insolvency and Bankruptcy Code, 2016 (‘IBC Code’) interdict the appointment of an arbitrator by invoking Section 11(6) of Arbitration and Conciliation Act, 1996 (‘1996 Act’), Justice Avinash G. Gharote clarified that nothing appears to be inconsistent between the provisions of 1996 Act and IBC Code.

It was alleged that since the respondent approached the National Company Law Tribunal (‘NCLT’) under Insolvency and Bankruptcy Code (‘IBC Code’), provisions of Section 11(6) of 1996 Act would be inapplicable, and that it would be impermissible to appoint an arbitrator.

The Court analyzed Sections 7 to 9 of IBC Code regarding initiation of insolvency resolution proceedings, resolution by operational creditor and application for initiating Corporate Insolvency Resolution Process (‘CIRP’) by operational creditor. It further pointed towards Section 238 which clarifies that provisions of the IBC Code shall override other laws.

The Court expressed that there is no provision in the 1996 Act to give an overriding effect to it as contemplated by Section 238 of IBC Code. It said that “it is equally trite that the 1996 Act is a special statute governing the field of Arbitration.” The Court further clarified the topic of consideration in the instant matter, i.e., whether there is anything inconsistent in the 1996 Act as against Sections 7 to 9 of IBC Code for the said IBC provisions to prevail.

The Court said that Section 7 grants a financial creditor the right to initiate insolvency proceedings against corporate debtor, but mere filing of such application does not indicate taking cognizance of matter by the Adjudicating Authority. That is why Section 7(4) casts a duty upon the Adjudicating Authority to ascertain the existence of default from records of information or evidence furnished by financial creditor under Section 7(3) of IBC Code within 14 days. The Court opined that “admission of an application after satisfaction of the Adjudicating Authority under Section 7(5) would be the starting point where the bar under Section 238 of the IBC Code can be invoked and the mere filing of an application under Section 7(1) of the IBC Code cannot be said to be enough to invoke the bar.”

The Court relied on Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund, (2021) 6 SCC 436 regarding commencement of CIRP in similar circumstances, wherein, the decision in Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1 was considered. The Court further relied on Jasani Realty (P) Ltd. v. Vijay Corpn., 2022 SCC OnLine Bom 879, stating that it records the correct position of law in the instant matter.

The Court expressed that “nothing appears to be inconsistent between the provisions of 1996 Act and IBC Code, in as much as the provisions of Section 238 of the IBC Code would come into play only upon an order having been passed by the Adjudicating Authority under Section 7(5) of the IBC Code, and therefore, an application under Section 11(6) of 1996 Act, till such time cannot be said to be not maintainable.

Regarding the plea of dispute arising on initiation of proceedings only, the Court said that the position as to be considered in totality and not based on a single communication. On quality of goods being questioned by the applicant, the Court said that the same will have to be considered by the arbitrator based on the material presented. It further said that even if the Adjudicating Authority concludes about existence of a default, it will squarely be governed by Section 238 of IBC Code, but the entertaining of an application under Section 11(6) of 1996 Act would not be prevented.

The Court in the instant matter allowed the application and appointed Justice Z.A. Haq as an arbitrator to adjudicate the disputes between the parties.

[Sunflag Iron & Steel Co. Ltd. v. J. Poonamchand & Sons, 2023 SCC OnLine Bom 1214, decided on 05-06-2023]

Judgment by: Justice Avinash G. Gharote

Advocates who appeared in this case :

For Applicant: Advocate Ashutosh Dharmadhikari;

For Respondent: Advocate Rahul Bhangde.

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