national company law appellate tribunal

National Company Law Appellate Tribunal, Chennai: While upholding the impugned order passed by the Adjudicating Authority, a Division bench comprising of M. Venugopal,* J., and Ms. Shreesha Merla (Technical Member), held that an appeal filed under Section 34 of Arbitration and Conciliation Act, 1996 (the Act, 1996) against an ex-parte arbitral award is a ‘pre-existing dispute’ and, therefore, a valid ground for the rejection of an application preferred under Section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC).

Factual Matrix

In the instant matter, an Arbitral Award was passed on 29-11-2018 in favour of the appellant-Operational Creditor for non-payment of lease rentals as per the Lease/Rent Agreement’, water and electricity charges, Common Area Maintenance charges, diesel generator charges and TDS.

The appellant then preferred an application under Section 9 of the IBC read with R. 6 of the Insolvency and Bankruptcy (AAA) Rules, 2016 for the initiation of Corporate Insolvency Resolution Process (CIRP) against the respondent-Corporate Debtor. The respondent objected to the application by contending that the defaulted sum purportedly arose from the Arbitral Award dated 29-11-2018. The respondent has preferred an appeal under Section 34 of the Act, 1996 before the High Court of Delhi against the Arbitral Award dated 29-11-2018.

Vide order dated 27-04-2021, the Adjudicating Authority dismissed the appellant’s application on the ground that the operational debt in question deemed to be a ‘dispute’ and the application was filed for recovery of amount awarded in Arbitration. Aggrieved by the impugned order dated 27-04-2021 by the Adjudicating Authority, the appellant as an affected person preferred an appeal before the NCLAT, challenging the same.

Moot Point

Whether the application preferred under Section 9 of the IBC read with Rule 6 of the Insolvency and Bankruptcy (AAA) Rules, 2016 by the Operational Creditor is per se ‘maintainable’, for the purpose of executing the Arbitral Award?

NCLAT’s Observation

The NCLAT observed that a ‘dispute in existence’ means and includes raising a dispute before a Court of Law or an Arbitral Tribunal, before the receipt of notice under Section 8 of the IBC and the dispute continues where there is a challenge to an ‘Arbitral Award’ in an appeal under Section 34 of the Act, 1996. The NCLAT further observed that the Adjudicating Authority and NCLAT is to reject any application filed under the IBC, if the dispute truly exists in fact and it is “not ‘spurious’ or an ‘imaginary’, and not a ‘hypothetical’ one.” The NCLAT opined that “an ‘Arbitration Proceedings’, and ‘IBC Proceedings’, cannot go on together.”

The NCLAT observed that the respondent has preferred an appeal under S. 34 of the Act, 1996, challenging the Arbitral Award and the fact that an appeal is filed against the ex-parte award by the respondent shows that prima facie there exist a ‘pre-existing dispute’. The NCLAT further observed that in the present case, an award was passed on the ‘rental dispute’, therefore, when the same is challenged in the appeal, it will be considered as ‘dispute’ only, not ‘Operational Debt’.

“…for ‘initiating’ a ‘Corporate Insolvency Resolution Process’, against the ‘Corporate Debtor’, there ought to be ‘no real dispute’, existing between the respective ‘Parties’, to the ‘Debt’, owed in question. So long as the ‘Arbitration Award’, was challenged under the relevant Section of the Arbitration and Conciliation Act, 1996, the ‘Operational Debt’, in the instant ‘Appeal’, is considered to be under ‘Dispute’.”

NCLAT’s Verdict

In the light of facts and circumstances of the present case, the NCLAT comes to an ‘inescapable’, ‘inevitable’ and ‘irresistible’ conclusion that the Adjudicating Authority’s order is free from any legal error and the Section 9 application filed for recovering the Sum awarded in an arbitration proceedings was rightly dismissed.

[KK Ropeways Ltd. v. Billion Smiles Hospitality (P) Ltd., 2023 SCC OnLine NCLAT 271, order dated 12-06-2023]

*Judgment by Justice M. Venugopal

Advocates who appeared in this case :

Mr. Manu Kulkarni and Mr. Madhur A. Kalyanshetty, Counsel for the Appellant.

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