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Supreme Court Holds Reference To Arbitration Is Maintainable If Insolvency Resolution Petition Is Not Admitted

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Supreme Court Holds Reference To Arbitration Is Maintainable If Insolvency Resolution Petition Is Not Admitted
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The Supreme Court recently held that arbitration reference under Section 8 of the Arbitration and Conciliation Act, 1996 is not maintainable if it has been filed after admission of Insolvency Resolution Application under Section 7 of the Insolvency and Bankruptcy Code, 2016.

In this case, the dispute arose between the Indus Biotech Private Limited and the Kotak India Venture (Offshore) Fund which includes a Mauritius based Company and other Respondent Companies based out of India, which are sister ventures of the Mauritius based Company. The appellant filed a petition under Section 7 of IB Code before the NCLT seeking appointment of Resolution Professional. In the said proceedings, the respondent filed a Miscellaneous Application under Section 8 of the Arbitration Act seeking a direction to refer the parties to arbitration. NCLT allowed the said application and also dismissed the petition under Section 7 IBC observing that that there is no default.

The Supreme Court held that any proceeding which is admitted by the Adjudicating Authority under Section 7 of the IBC deciding the presence of default and the debt being due from the corporate debtor then thereafter any Application under Section 8 of the Act of 1996 will not be maintainable.

The three-Judges Bench of SC comprising of CJI SA Bobde, Justice AS Bopanna and Justice V. Ramasubramanian observed, “In a situation where the petition under Section 7 of IB Code is yet to be admitted and, in such proceedings, if an application under Section 8 of the Act, 1996 is filed, the Adjudicating Authority is duty bound to first decide the application under Section 7 of the IB Code by recording a satisfaction with regard to there being default or not, even if the application under Section 8 of Act, 1996 is kept along for consideration. In such event, the natural consequence of the consideration made therein on Section 7 of IB Code application would befall on the application under Section 8 of the Act, 1996.”

The bench uphold the NCLT order and stated:

“In that circumstance though in the operative portion of the order dated 09.06.2020 the application filed under Section 8 of the Act, 1996 is allowed and as a corollary the petition under Section 7 of the IB Code is dismissed; in the facts and circumstances of the present case it can be construed in the reverse. Hence, since the conclusion by the Adjudicating Authority is that there is no default, the dismissal of the petition under Section 7 of IB Code at this stage is justified. Though the application under Section 8 of the Act, 1996 is allowed, the same in any event will be subject to the consideration of the petition filed under Section 11 of the Act, 1996 before this Court. The contention as to whether payment of investment in preferential shares can be construed as financial debt was raised in the written submissions. However, we have not adverted to that aspect since the same was not the basis of the impugned order passed by the Adjudicating Authority.”

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