Restoration of Appeal under Section 37 of the Arbitration Act vis-a-vis pre-existing dispute under the Insolvency Code.

In?M/s. Jai Balaji Industries?v.?D.K. Mohanty & Anr., when appeals under Section 37 of the Arbitration and Conciliation Act, 1996?(“Arbitration Act")?were dismissed in default on 22 November 2019, the Respondent company moved the applications for restoration on 17 December 2019 with advance notice to the Appellant. However, in the meantime the Appellant issued Notices under Section 8 of the Insolvency and Bankruptcy Code, 2016, (“Code”)?on 14 February 2020?claiming operational debts under the two arbitral awards, and the same were responded to on 25 February 2020 asserting that?the pending arbitral proceedings constituted a pre-existing dispute?which pre-dated the issuance of?the demand notices.?Whilst the applications under Section 9 of the Code were filed on 2 March 2021(though sworn on 29 February 2021), even the appeals under Section 37 of the Arbitration Act were restored on the very same day.?Appeals accordingly came to be filed before the Apex Court under Section 62 of the Code, against the order passed by National Company Law Appellate Tribunal, ("NCLAT") which had set aside the order of the National Company Law Tribunal ("NCLT") and held that the claim of the operational creditor was not free from a pre-existing dispute.

The Apex Court observed that?the Appellant sought to assert itself to be an operational creditor, for the reason of having a claim?(which?was?the?subject matter of arbitral proceedings in which awards were made in its?favour)?against the Respondent company and according to the Appellant, challenge to the awards came to an end upon dismissal of appeals and hence,?any event occurring?subsequent?to issuance of demand notices cannot have any bearing on adjudication of the applications moved for initiation of CIRP.?It?was further observed that the approach of the Appellant was mis-founded inasmuch as it sought to use the Code as an avenue for recovery, despite the?fact?that in?Swiss Ribbons Private Limited & Anr. v. Union of India & Ors.,?the Apex Court has underscored the fact that in its scheme and framework, the Code is a beneficial legislation to put the corporate debtor on its feet, and not a mere recovery legislation for the creditors.?It?has been repeatedly impelled in a?catena?of judgments, that an operational creditor cannot use the Code for extraneous considerations or as a substitute for debt enforcement procedures; and the object of the Code is to allow the insolvency process against the corporate debtor to be taken up at the instance of an operational creditor only in the clear case, where a real dispute between the parties as to the alleged debt does not exist.?

Reiterating its enunciations in?Mobilox Innovations Pvt. Ltd. v. Kirusa Software Pvt. Ltd. and?K. Kishan v. Vijay Nirman Company Pvt. Ltd.,?wherein to?prevent an anomalous situation, it was laid down by the Court that, the objective of the Code with regards to operational debts was to ensure that these debts did not enable operational creditors to initiate insolvency resolution process against the corporate debtors prematurely, since debts owed to operational creditors were generally smaller than those owed to financial creditors. Therefore, it was held that, to stave off the initiation of insolvency resolution process for extraneous consideration, it was enough to be noticed that a dispute existed between the parties.

The Court further observed that mere factum of challenge to an award would be sufficient to state that the award was in dispute, rendering it to be a case of a pre-existing ongoing dispute since?an operational debt in an arbitral award could not be allowed to jeopardise a solvent company, which could state that the award was being challenged.

Moreover,?even if a Section 34 petition had been instituted in an incorrect forum and application under Section 14 of the Limitation Act to?overcome the bar of limitation was being pursued, the insolvency process could not be put into operation without an adjudication on the applicability of Section 14 of the Limitation Act. The Court observed that same analogy would apply, rather with more emphasis and force, in relation to a default dismissal where there had not been any adjudication on merits and where the prayer for restoration is pending consideration.?

Accordingly, the Apex Court held that without a final decision on the prayer for restoration, the insolvency process at the instance of an operational creditor cannot be put into operation. The fact of moving an application for restoration of appeal under Section 37 of the Arbitration Act and bringing it to the notice of the operational creditor was sufficient to bring the matter within the four corners of?"pre-existing dispute", so as to effectively negate any attempt by the operational creditor to seek insolvency resolution.

The Judgment passed may be accessed using the link provided below;