[Mohammad Kaif is a final year student at Campus Law Centre, Faculty of Law, University of Delhi]
The judgment of the National Company Law Appellate Tribunal (NCLAT) Chennai Bench in KK Ropeways Limited v. Billion Smiles Hospitality has significant implications for the interplay between arbitration and insolvency proceedings in India. The central question addressed by the NCLAT was whether a petition filed under section 9 of the Insolvency and Bankruptcy Code, 2016 (IBC) for the implementation of an arbitral award is maintainable. In its ruling, the NCLAT held that such a petition is not maintainable and clarified that arbitration and IBC proceedings cannot run simultaneously. The NCLAT’s ruling clarifies the concept of ‘existence of dispute’ and its impact on the initiation of the corporate insolvency resolution process (CIRP). This post examines the key legal issues and explores the implications of the NCLAT’s verdict in promoting efficiency, discouraging forum shopping, and reinforcing the sanctity of arbitral awards. Additionally, the post will also discuss the Supreme Court’s interpretation of ‘existence of dispute’ in a related case to provide further clarity on the matter.
Background Facts: The Lease Agreement Dispute and the Arbitral Award
The dispute in question originated from a lease agreement between KK Ropeways Limited (the operational creditor) and Billion Smiles Hospitality Private Limited (the corporate debtor). The parties decided to resolve their dispute through arbitration and, on 29 November 2018, the arbitral tribunal issued an ex-parte award in favour of the operational creditor, amounting to Rs. 26,33,022/- along with interest at the rate of 15% per annum.
However, the corporate debtor was dissatisfied with the award and chose to challenge it under section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act). As a result, the award was pending adjudication before a court of law.
In the meanwhile, the operational creditor filed a petition under Section 9 of the IBC seeking the initiation of the CIRP against the corporate debtor, relying on the arbitral award as the basis for the default amount. However, the National Company Law Tribunal (NCLT) rejected the petition, asserting that the appeal against the ex-parte award indicated the existence of a pre-existing dispute between the parties. The NCLT opined that filing such a petition for the implementation of an arbitral award was inconsistent with the objectives of the IBC.
Aggrieved by the NCLT’s order, the operational creditor appealed to the NCLAT.
Legal Issue at Hand: Maintainability of Section 9 Petitions under the IBC
The central legal issue is whether a petition filed under section 9 of the IBC 2016, seeking the implementation of an arbitral award, is maintainable when there is a pending challenge against the arbitral award under section 34 of the A&C Act).
NCLAT’s Verdict: Clarifying the Concept of ‘Existence of Dispute’
The NCLAT examined the concept of ‘existence of dispute’ as a ground for rejecting a section 9 petition under the IBC. It clarified that the term encompasses the act of raising a dispute before a court of law or an arbitral tribunal even before the receipt of a demand notice under section 8 of the IBC. Furthermore, the existence of an appeal against an arbitral award does not nullify the dispute; the dispute remains alive during the pendency of the appeal. However, to dismiss a petition filed under the IBC, the NCLAT emphasized that the dispute raised by the petitioner must not be spurious, imaginary, or hypothetical.
Crucially, the NCLAT held that arbitration proceedings and IBC proceedings cannot be conducted simultaneously. It pointed out that since the arbitral award arose from the rental dispute, and the corporate debtor had already filed an appeal against the award, the operational debt could only be considered under dispute.
The NCLAT emphasized that for the initiation of the CIRP against a corporate debtor, there should be no real dispute existing between the parties involved in the debt. As long as the arbitration award is challenged under the relevant section of the A&C Act, the operational debt remains under dispute. Therefore, in accordance with settled law and the principles laid down in the judgment of the Supreme Court in K. Kishan v. Vijay Nirman Co., the petition under section 9 of the IBC is not maintainable in the present case as the arbitral award in question is disputed by way of a section 34 appeal, and the said appeal is pending.
Supreme Court’s Interpretation of ‘Existence of Dispute’ under the IBC
The Supreme Court of India has provided essential clarity to the provisions of the IBC concerning the existence of a dispute, addressing the need for unambiguous interpretation on this matter. The case in question, Mobilox Innovations (P) Ltd. v. Kirusa Software (P). Ltd., revolves around a contractual dispute between the appellant (Mobilox) and the respondent (Kirusa) arising from tele-voting services provided for the ‘Nach Baliye’ programme on Star TV. Kirusa issued monthly invoices, which Mobilox withheld, claiming a breach of the Non-Disclosure Agreement (NDA).
Kirusa subsequently sent a demand notice under section 8 of the IBC, prompting Mobilox to assert the existence of serious and bona fide disputes between the parties, suggesting that the demand notice was a pressure tactic. The matter was brought before the NCLT which initially dismissed the application. However, the NCLAT later remitted the case to the NCLT, stating that the corporate debtor had failed to fulfil the condition stipulated in section 8(2) of the IBC, making the defence of claiming a dispute vague and motivated to evade liability.
The Supreme Court provided significant directions to the adjudicating authority (AA) when examining the admissibility of an application under section 9 of the IBC. The AA is required to determine whether there is an ‘operational debt’ exceeding Rs. 1 lakh and whether the documentary evidence furnished with the application shows that the debt is due and payable and has not been paid. Moreover, the AA must ascertain the existence of a dispute between the parties or the record of a pending suit or arbitration proceeding related to the unpaid operational debt. Failure to meet any of these conditions would result in the rejection of the application.
The Court resolved the conflict between the words ‘and’ and ‘or’ in section 8(2)(a) of the IBC, which deals with the obligation of the corporate debtor to bring to the notice of the operational creditor the existence of a dispute or record of pendency of a suit or arbitration proceedings. The Court interpreted the legislative intent and held that the term ‘and’ should be read as ‘or’ to avoid anomalous situations where disputes could arise shortly before triggering the insolvency process, leaving no time to approach an arbitral tribunal or a court.
The Court also discussed the meaning of ‘genuine dispute’, drawing insights from international judgments. It stated that the AA should look for a plausible contention requiring investigation and that the dispute should not be patently feeble or spurious. The Court emphasized that it is not necessary to examine the merits of the dispute at this stage, and a genuine dispute exists if there is a real dispute as to payment between the parties.
Overall, the judgment in Mobilox Innovations is crucial as it provides a broad construction of the term ‘dispute’ under the IBC, resolving doubts and clarifying the scope of the dispute. It stands in contrast to previous judgments that adopted a more rigid view, ensuring that disputes are not used as mere bluster to evade insolvency proceedings.
Implications of NCLAT’s Verdict
The NCLAT’s ruling has several implications on the interaction between arbitration and insolvency laws in India:
Clarity on Timing and Sequencing of Actions
The verdict clarifies that parties must be mindful of the timing and sequencing of actions concerning arbitration and insolvency matters. Initiating a CIRP under the IBC based on an arbitral award that is under challenge may lead to the dismissal of the petition due to the existence of a pre-existing dispute.
Prevention of Forum Shopping
The ruling discourages parties from engaging in forum shopping, where they attempt to pursue simultaneous remedies in both arbitration and insolvency forums to achieve favourable outcomes. It promotes the resolution of disputes through appropriate channels without causing procedural delays or inconsistent decisions.
Efficiency and Streamlining of Proceedings
By emphasizing that arbitration and insolvency proceedings cannot run concurrently, the NCLAT ensures a more efficient and streamlined resolution of disputes related to debt and insolvency. This approach avoids duplication of efforts and minimizes the burden on both parties and the judicial system.
Encouragement of Compliance and Good Faith
The verdict encourages parties to act in good faith during arbitration proceedings and comply with arbitral awards without resorting to tactics aimed at delaying or evading enforcement. It reinforces the sanctity of arbitral awards and their enforceability.
The NCLAT’s verdict in KK Ropeways Limited clarifies the maintainability of a petition under section 9 of the IBC for the implementation of an arbitral award. The ruling underscores that arbitration and insolvency proceedings cannot be conducted simultaneously and that a genuine dispute existing between the parties involved in the debt prevents the initiation of the CIRP. This landmark judgment ensures a more efficient and effective resolution of disputes related to debt and insolvency in India, promoting the sanctity of arbitral awards and encouraging parties to act in good faith during the arbitration process. Parties engaged in arbitration and insolvency matters must be mindful of this ruling’s implications to avoid procedural hurdles and achieve timely resolution of their disputes.
– Mohammad Kaif