The New Delhi bench of the National Company Law Appellate Tribunal ( NCLAT ) held that the petition under section 7 of Insolvency Bankruptcy Code ( IBC ),2016 has to be decided first when both arbitration & insolvency petitions are pending.
The appellate changed the Order passed the Adjudicating Authority. Century Aluminium Manufacturing Company Limited, the Corporate Debtor approached the Financial Creditor, seeking financial assistance, by sanction letter dated 26.08.2015, loan against the Property for an amount of ₹12,50,00,000/- was sanctioned. Corporate Debtor created Security Interest by hypothecation of assets and equitable mortgage in favour of the Financial Creditor, State Bank of India and Canara Bank, being factory, land 9.34 acres, building and other constructions.
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Financial Creditor filed an Application under Section 7 against the Corporate Debtor before the Adjudicating Authority,, Corporate Debtor filed its Reply to the Section 7 Application. After filing of the Reply by the Corporate Debtor, an Application was filed being I.A. 542/2024 on 12.03.2024, seeking reference to Arbitration under Section 8 of the Arbitration and Conciliation Act, 1996. The Application filed by the Corporate Debtor was opposed by the Financial Creditor. Adjudicating Authority held that Section 7 Application need to be decided, the commencement of the Arbitration Proceeding before or after filing of Section 7 Application is immaterial.
The appellant submitted that Arbitration Proceedings were initiated by Financial Creditor, 4 years prior to filing of the Section 7 Petition. The Financial Creditor consciously chose to refer the dispute to Arbitration. Having opted for arbitration, the Financial Creditor cannot initiate Section 7 proceeding, Arbitration Proceedings between the Parties is still pending and in subsistence.
That the observation of the Adjudicating Authority that default per se is not arbitrable is unsustainable. The NCLAT at the outset referred to Section 8 of the Arbitration and Conciliation Act, 1996 which provides that a Party to the Arbitration Agreement, not later than date of submitting his first statement on the substance of the dispute may file the Application.
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The tribunal referred to the Delhi High Court judgment in Assam Petroleum Ltd. & Ors. Vs. China Petroleum Technology Development Corporation & Ors. (2024) wherein it was held that “ once the defendant has submitted himself to the jurisdiction of the Court, he cannot seek referral of the disputes to arbitration under Section 8 of the Arbitration & Conciliation Act, 1996 having abandoned the application after filing.”
The tribunal comprising Justices Ashok Bhushan, Barun Mitra and Arun Baroka observed that allowing the Application under Section 8 filed by the Corporate Debtor amounts to asking the Adjudicating Authority to wait till Arbitration Proceedings are decided which is not in accord with the scheme of the IBC and shall defeat the entire purpose and object of the IBC. Adjudicating Authority in the Impugned Order has rightly rejected Application under Section 8 filed by the Corporate Debtor for referring to the dispute between the parties to the Arbitrator.
The tribunal further concluded that Arbitration Proceeding which were initiated by Financial Creditor are still pending, that neither preclude the Financial Creditor from filing a Section 7 Application nor preclude the Adjudicating Authority to proceed to consider the debt and default in Section 7 Application.
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