The Bombay High Court (“High Court”) vide its judgment dated June 5, 2023 in the case titled, M/s Sunflag Iron & Steel Company Limited v. M/s. J. Poonamchand & Sons (Misc. Civil Application No. 374/2020), held that, mere filing of an Application under Section 7 of Insolvency and Bankruptcy Code, 2016 (“IBC”) does not bar an Application under Section 11 of the Arbitration & Conciliation Act 1996 (‘Act’) for the appointment of an Arbitrator:

1. BRIEF FACTS:

The Applicant, M/s. Sunflag Iron & Steel Co. Limited, filed an application under Section 11(6) of the Act for appointment of an Arbitrator in view of an arbitration clause in the agreement dated August 30, 2019  between the parties, the existence and invocation of which was not in dispute.

However, it is the Respondent’s case that only when the respondent expressed its intention to invoke the provisions of the IBC by its notice dated August 25, 2020, that the dispute was first created by the Applicant by its Reply dated September 15, 2020 after which the present application under Section 11 of the Act came to be filed. The Respondent’s case is that there is no dispute at all as there is an admission by the Applicant as to its liability to pay as the Applicant vide e-mail dated October 23, 2019  has stated that due to financial crunch the Applicant will pay the dues later.

2. CONTENTIONS OF THE PARTIES:

 i.    Applicant’s contentions:

The Applicant submitted that once the conditions prescribed under the Section 11 of the Act are admitted to exist, the Court has to appoint an Arbitrator. The Applicant further submitted that since no order had, as yet been passed in proceedings initiated by the respondent under Section 7 of the IBC, therefore, mere initiation of proceedings did not injunct the High Court from considering and deciding the Section 11 Application. It was further submitted that the matter at hand is covered by the ruling of the High Court in the matter of ‘Jasani Realty Private Limited v. Vijay Corporation (Commercial Arbitration Application (L) No.1242/2022). The Applicant further submitted that being a financially stable company, the proceedings initiated by the respondent before the National Company Law Tribunal (“NCLT”) under the IBC was evidently unfounded.

ii.    Respondent’s Contentions:

The Respondent submitted, that since the Respondent has approached the NCLT under the provisions of the IBC, the provisions of Section 11(6) of the Act, would become inapplicable and, therefore, it would be impermissible to appoint an Arbitrator. The Respondents further submitted that once the NCLT is seized of the matter under the provisions of the IBC, it would have an overriding effect on Section 11(6) of the Act which then cannot be invoked, for which, the Respondent has placed reliance upon Section 238 of the IBC. The Respondent further also submitted that Section 7 of the IBC has primacy and therefore argued that the application under Section 11 has been filed merely to obviate the proceedings before the NCLT and hence the same is not maintainable.

3. ISSUE BEFORE THE COURT:

Whether the provisions of the IBC interdict the appointment of an Arbitrator by invoking Section 11(6) of the Act?

4. DECISION OF THE COURT:

The High Court observed that Section 7 of the IBC grants a right to a financial creditor to initiate insolvency proceedings against a corporate debtor. However, the mere filing of such an application by itself, does not mean that the Adjudicating Authority, has taken cognizance of the matter. 

The High Court further observed that the Section 7 (4) of the IBC, casts a duty upon the Adjudicating Authority, within fourteen days of the receipt of such application to ascertain the existence of a default. Further, Section 7(5) of the IBC enjoins upon the Adjudicating Authority to record its satisfaction that the default has occurred and there is no disciplinary proceedings pending against the proposed resolution professional and only upon such satisfaction permits admission of such application.

The High Court was of the view, that the admission of an application after recording its satisfaction as contemplated by Section 7(5) of the IBC would be the starting point where the bar under Section 238 of the IBC can be said to be capable of being invoked and the mere filing of an application under Section 7(1) of the IBC cannot be said to be enough to invoke the bar. Further, it was also noted that Section 7(5)(b) of the IBC permits the Adjudicating Authority to reject the application where it is of the opinion that default has not occurred, thereby indicating that the mere filing of an application under Section 7(1) of the IBC, would not act as a bar to any proceedings under other statutes. The High Court also held that the provisions of Section 238 of the IBC would come into play only upon an order having been passed by the Adjudicating Authority under Section 7(5) of the IBC and therefore an application under Section 11(6) of the A & C Act, till such time cannot be said to be not maintainable.

In view of the above, the Hon’ble High Court observed that there was no impediment in appointing an Arbitrator for adjudicating the disputes between the parties.

5. CONCLUSION AND ANALYSIS:

The High Court has rightly appreciated that mere filing of an application under Section 7(1) of the IBC, would not act as a bar to any proceedings under other statutes, until and unless the satisfaction as contemplated by Section 7(4) read with Section 7(5)(a) of the IBC is recorded by the Adjudicating Authority and the application is admitted. It is clear that until an order has been passed by the Adjudicating Authority under Section 7(5) of the IBC, it cannot be stated that an application under Section 11(6) of the Act is not maintainable, as the provisions of Section 238 of the IBC would only be triggered at that point.

Therefore, the High Court has correctly appreciated the law laid down in the case titled ‘Indus Biotech Private Limited v.  Kotak India Venture (Offshore) Fund and others, (2021) 6 SCC 436’ and ‘Vidya Drolia and others v. Durga Trading Corporation (2021) 2 SCC 1’ to hold that the trigger point is not the filing of the Application under Section 7 of the IBC but admission of the same on determining default as mere filing of the petition and its pendency before the admission cannot be construed as the triggering of a proceeding in rem.

Please find attached a copy of the judgement.

This update has been contributed by Namitha Mathews (Partner) and  Pragalbh Bhardwaj (Associate).

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