On August 14, 2018, the Supreme Court of India passed a judgment in the matter of K. Kishan v. M/s Vijay Nirman Company Private Limited, (C.A. No. 21824 of 2017). 

Issue:

Whether the Insolvency and Bankruptcy Code, 2016 (“IBC”) can be invoked in respect of an operational debt where an arbitral award has been passed against the operational debtor, which has not yet been finally adjudicated upon? 

Facts in brief: 

An arbitral award dated January 21, 2017 was passed in favour of M/s Vijay Nirman Company Private Limited (“Respondent”) for payment of certain sum of money by one M/s Ksheerabad Constructions Private Limited (“KCPL”). On February 6, 2017, a notice was issued by the Respondent to KCPL under section 8 of the IBC. The said notice was disputed on the grounds that the said amount was the subject-matter of an arbitration proceeding. Subsequently, on April 20, 2017, a petition was filed by KCPL under section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) challenging the aforesaid arbitral award. Thereafter, on July 14, 2017, a petition was filed under section 9 of IBC. The said petition filed under section 9 of IBC was admitted by the NCLT, stating, inter alia, that the fact that a Section 34 of the Arbitration Act petition was pending was irrelevant for the reason that the claim was admitted and there was no stay of the award.  

Judgement: 

Reference was made to section 9(5)(ii)(d) of the Code, as per which, an application under Section 8 must be rejected if notice of a dispute has been received by the operational creditor. The Supreme Court held that the object of IBC, at least insofar as operational creditors are concerned, is to put the insolvency process against a corporate debtor only in clear cases where a real dispute between the parties as to the debt owed does not exist. Reference was also made to the judgement of the Supreme Court in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, (2018) 1 SCC 353, wherein it was held that operational creditors cannot use the IBC either prematurely or for extraneous considerations or as a substitute for debt enforcement procedures. It further held that in case of an operational debt, all that must be seen is whether the said debt can be said to be disputed, and filing of a Section 34 of the Arbitration Act petition against an arbitral award shows that a pre-existing dispute which culminates at the first stage of the proceedings in an award, continues even after the award, at least till the final adjudicatory process under section 34 and section 37 of the Arbitration Act has taken place. 

It was further held that there may be cases where petition under section 34 of the Arbitration Act challenging an arbitral award may clearly and unequivocally be barred by limitation. It is only in such clear cases that the insolvency process may then be put into operation. There may also be other cases where a Section 34 petition may have been instituted in the wrong court, as a result of which the petitioner may claim the application of Section 14 of the Limitation Act, 1963 to get over the bar of limitation laid down in Section 34(3) of the Arbitration Act. In such cases also, it is obvious that the insolvency process cannot be put into operation without an adjudication on the applicability of Section 14 of the Limitation Act, 1963.