Insolvency proceedings can’t be used to defeat a claim existing prior to the initiation of insolvency proceedings: Calcutta HC

Ease from Calcutta High Court for Durga Puja Pandals

Justice Moushumi Bhattacharya of Calcutta High Court on January 10, 2020 held that the corporate insolvency resolution procedure enumerated as under the Insolvency and Bankruptcy Code, 2016 (IBC) cannot be used as a tool to curtail any claim which arose prior to the commencement of the insolvency proceedings.

Prior Facts:

On June 18, 2001 a reference was made and on March 2, 2006 an Arbitrator was appointed. On July 7, 2008 a sum of Rs 3, 21,927.70/- @ 9% p.a as the arbitral award was delivered for in favour of the respondent.  An application for setting aside of the award was filed on October 31, 2008. In September, 2017 the Operational Creditors initiated proceedings under the IBC against the petitioner. An adjudicating authority on July 19, 2018 declared a moratorium under Section 14 of IBC. The instant application under Section 34 of the Arbitration Act to set aside the arbitral award was taken up for hearing by the Court in December 2019.

Key Features:

  • It was the contention of the petitioner before the Court that the respondent must first file its claim before the NCLT before it can contest the proceedings for setting aside of the award.
  • The petitioner contended before the Court that the application under Section 34 cannot be proceeded with since Corporate Insolvency proceedings under the IBC has already been initiated against him as the ‘Corporate Debtor’.
  • Petitioners also added that the respondents have also not made any efforts to place their claim before the Resolution Professional (“RP”).
  • The respondent relying on the judgement in the case of Mobilox Innovations Pvt. Ltd. vs. Kirusa Software Pvt. Ltd. (2018) 1 SCC 353 wherein the Supreme Court had held that operational creditors cannot use the IBC prematurely or as a substitute for debt enforcement procedures submitted for its claim.

Judgement:

The court relied on the law laid down by the Supreme Court in the case of K. Kishan Vs. Vijay Nirman Company Pvt. Ltd. (2018) and Mobilox vs. Kirusa (2018) making observations that corporate insolvency resolution proceedings cannot be used to defeat a claim or a dispute which existed prior to the initiation of the insolvency proceeding. Both cases of K. Kishan and Mobliox make it clear an earlier dispute or notice of a suit or an arbitration must be given precedence to the insolvency proceedings. As the court noted that the case cited of K.Kishan is different from the instant case in certain factual aspects, the intention underlying the Supreme Court’s judgment was found relevant i.e. that “the corporate insolvency proceedings cannot be used in cases where there is a pre-existing and an ongoing dispute between the parties.” The court also said that it is evident that the view of the Supreme Court was that the IBC cannot be used in terrorem to extract a sum of money when that sum is a subject-matter of a pending adjudication. The Court thus, disagreed with the plaintiff’s contention that the challenge to the Arbitral Award cannot be considered by reason of the proceedings under the IBC. The Judge observed, that 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 a limbo for an indefinite period of time on the specious plea of the respondent not having gone before the NCLT and thus stall the hearing on the application under Section 34 of the Arbitration Act and directed the application to be listed on January 21, 2020.

Edited by J. Madonna Jephi

Approved & Published – Sakshi Raje

References:

  • Case of Sirpur Paper Mills Ltd. vs. K. Merchants Pvt. Ltd. (Formerly Known as I.K. Merchants), A.P. No.550 of 2008, decided by Calcutta High Court on 10.01.2020.
  • Bar & Bench Indian Legal News
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Vaibhav Goyal is a 3rd year BA.LLB (H) student of UILS, Panjab University, Chandigarh, India. He also basically belongs to the “City Beautiful-Chandigarh”. He had interned and have work experience at various Central and State Government bodies of India including the National Human Rights Commission, New Delhi; the Central Information Commission, New Delhi; U.T. Legal Services Authority, Chandigarh, etc. His research projects includes the study on the Right to Emergency Services (PSHRC), Resettlement of Migrant People (NHRC), Implications of RTI in Financial Institutions (CIC), etc. His publications involve articles in different fields of law like administrative, jurisprudence, etc. on online journals including the Juscholars Blog, Burnished Law Journal, etc. His research paper on Prison Reform was published in the Panjab University Journal and his paper was selected in category of best abstract on the topic of Naxalism: A State of Lawlessness and Arbitrariness. He had scored well in various competitions of law consisting of Quiz, Essay Writing, Lecture, Declamation, etc. He had also participated in various conferences including the World Law Forum Conference on Strategic Lawsuits on Public Participation held in New Delhi on Oct 20, 2018 and the National Law Conclave 2020 held at Vigyan Bhawan, New Delhi on Jan 11, 2020.