India – Insolvency Law Update
In a recent judgment in the case of K. Kishan v. Vijay Nirman Company Pvt. Ltd., India’s Supreme Court (the “Supreme Court”) has examined whether an insolvency process can be put into operation when there is a pending proceeding challenging an arbitral award.
Vijay Nirman Company Pvt. Ltd. (the “Respondent”) entered into a sub-contract Agreement with Ksheerabad Constructions Pvt. Ltd. (“KCPL”) dated February 1, 2008 for construction and widening of a highway. A dispute arose between the parties, and an arbitral award dated January 21, 2017 was passed under which one of the claims was allowed in favor of the Respondent. At this stage a notice under Section 8 of the Insolvency and Bankruptcy Code, 2016 (the “Code”) was issued by the Respondent on KCPL. Within ten days of receiving the notice, KCPL disputed the invoice that was referred to in the notice stating that the amount was, in fact, the subject matter of an arbitration proceeding.
Thereafter, a Section 34 application was filed under the Arbitration and Conciliation Act, 1996 (the “1996 Act”) by KCPL challenging the award, following which a petition was filed by the Respondent under Section 9 of the Code in the National Company Law Tribunal (“NCLT”) to initiate insolvency proceedings against KCPL. According to the NCLT, the fact that a Section 34 application was pending was irrelevant, as the claim stood admitted and there was no stay of the award. This ruling was upheld by the National Company Law Appellate Tribunal, and the Section 9 petition under the Code was admitted.
Ruling of the Supreme Court
On appeal, the Supreme Court ruled in the favor of KCPL. Relying on an earlier Supreme Court decision in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, the Supreme Court held that operational creditors cannot prematurely invoke the Code or initiate proceedings under it for extraneous considerations. The insolvency process, particularly in relation to operational creditors, cannot be used to bypass the adjudicatory and enforcement process of a debt contained in other statutes. A small operational debt under an arbitral award should not be used to jeopardize an otherwise solvent company.
The Supreme Court also held that the only issue to be assessed in such cases is whether the operational debt is disputed. A section 34 petition under the 1996 Act against an arbitral award indicates that a pre-existing dispute exists, which continues until the final adjudicatory process under Sections 34 and 37 of the 1996 Act conclude.
This is a welcome decision by the Supreme Court. The judgment upholds the provisions of Section 9(5)(ii)(d) of the Code, under which an application under Section 8 of the Code for initiating insolvency proceedings must be rejected, if notice of a dispute has been received by the operational creditor. The outcome of this decision is that companies with disputes pending in arbitration cannot be pushed into insolvency proceedings for debts arising out of these pending disputes. The decision clarifies that a challenge to an arbitral award will constitute a dispute under the Code, and that a debt will be due only once the dispute is finally adjudicated upon.
Moreover, the rejection of insolvency proceedings commenced by an operational creditor due to a pending dispute is not limited to a dispute pending in arbitration. Under Section 5(6) of the Code, a dispute includes, both, a suit and arbitral proceedings. Therefore, even if a suit or other court proceeding is pending in relation to a debt, an operational creditor cannot initiate insolvency proceedings against the debtor under the Code. However, it is important note that there is no restriction under the Code preventing an operational creditor from submitting a claim to the resolution professional under an existing insolvency proceeding filed by a financial creditor.