CIRP cannot be used to defeat a claim or a dispute which existed prior to the initiation of the insolvency proceedings: Calcutta HC
[ by Kavita Krishnan ]The petitioner (Corporate Debtor) approached the Calcutta High Court for setting aside of an Arbitration Award passed in 2008 contending that the application under Section 34 of The Arbitration and Conciliation Act, 1996 (the 1996 Act) cannot be proceeded since Corporate Insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (the IBC) has been...
The petitioner (Corporate Debtor) approached the Calcutta High Court for setting aside of an Arbitration Award passed in 2008 contending that the application under Section 34 of The Arbitration and Conciliation Act, 1996 (the 1996 Act) cannot be proceeded since Corporate Insolvency proceedings under the Insolvency and Bankruptcy Code, 2016 (the IBC) has been initiated against the petitioner (as the Corporate Debtor).
The Management of the corporate debtor/petitioner was taken over by JK Paper Limited – the Resolution Applicant before the National Company Law Tribunal (NCLT).
1. An Arbitrator was appointed in March 2006 and an arbitral Award was delivered in July 2008 for a sum of Rs.3,21,927.70 at 9% per annum in favour of the respondent/claimant.
2. The present application for setting aside of the Award was filed in October 2008.
3. Operational Creditors initiated proceedings under the IBC against the petitioner (Corporate Debtor) in September 2017.
4. The adjudicating authority declared that the moratorium order under Section 14 shall cease to have effect.
5. An application under Section 34 of the 1996 Act for setting aside of the Arbitral Award was taken up for hearing by Calcutta High Court in December 2019.
The petitioner submitted that the present application for setting aside of the Award cannot continue since the respondent has not taken steps to include its claim before the Resolution Professional (RP).
The award-holder (respondent before the High Court) sought to proceed with the present application for setting aside of the Award while the petitioner/Award debtor (also the corporate debtor before the NCLT) sought to take recourse to the insolvency proceedings by contending that the respondent must first file its claim before the NCLT before it can contest the proceedings for setting aside of the Award.
The question that arose before the Calcutta High Court was whether the present application under Section 34 of the 1996 Act should be kept in abeyance by reason of the provision of the IBC being invoked by operational creditors against the petitioner.
The High Court held that the Arbitral Award delivered in July 2008 was in existence for nine years prior to initiation of the proceedings against the petitioner under the IBC in 2017. The challenge to the Award additionally made the “debt” uncertain and subject to the adjudication of the Section 34 proceedings (under the 1996 Act). The question of the respondent approaching the NCLT for filing a claim in 2017 at the time of initiation of the insolvency proceedings, could not, therefore, arise.
The Court held that this a case wherein the award-holder sought to go on with Section 34 application while the award debtor (petitioner) took the plea of the proceedings before the NCLT.
Justice Moushumi Bhattacharya held that corporate insolvency resolution proceedings (CIRP) cannot be used to defeat a claim or a dispute which existed prior to the initiation of the insolvency proceedings.
The Court rejected the contentions of the petitioner that the challenge to the Award cannot be considered by reason of the proceedings under the IBC on the grounds that the respondent award-holder could not have filed a claim before the NCLT/IRP since the Section 34 proceedings had not been decided in favour of the said respondent in 2017 and hence there was no final or adjudicated claim as on that date.
“Further, once the stage under Section 14 of the IBC, namely, moratorium with regard to continuation of pending proceedings against the Corporate Debtor has been declared to be over, no further embargo remains for continuing to hear suits and other proceedings to which the Corporate Debtor (petitioner) is a party.”
The Court concluded that Section 14(a) of the IBC contemplates suits or continuation of pending proceedings “against” the Corporate Debtor. In this case, the petitioner being the Corporate Debtor/Award Debtor cannot be permitted to take refuge under the provisions of the IBC for relegating the claim of the respondent award-holder to uncertainty for an indefinite period of time on the fallacious plea of the respondent not having gone before the NCLT.