Enforcing an Arbitral Award under Section 9 of the IBC – By Harshal Chhabra and Shaswat Kashyap

Enforcing an Arbitral Award under Section 9 of the IBC

Harshal Chhabra, 2nd year student at Gujarat National Law University
Shaswat Kashyap, 3rd year student at Gujarat National Law University

Section 9 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) bestows the authority upon the operational creditor to initiate the Corporate Insolvency Resolution Procedure (“CIRP”). This initiation becomes permissible either when the operational creditor does not receive payment from the corporate debtor (Section 8 (1) of the IBC), or when no notification of a dispute is received (Section 8 (2) of the IBC). The presence of an actual dispute is a legitimate factor that can lead to the dismissal of the petition for CIRP. The application for CIRP can only be turned down if the dispute is genuinely grounded in reality, rather than being frivolous, hypothetical, or unreal. In such cases, the adjudicating authority is compelled to decline the application. Now the question that remains unanswered is how does the adjudicating authority determine that the dispute is bona fide? In this blog we will answer this question by delving deep into the nuanced landscape of pre-existing disputes within the context of CIRP under Section 9 of the IBC and suggest an alternative approach to decide the same.

In the recent ruling by the National Company Law Appellate Tribunal (“NCLAT”), Chennai in the case of M/s. KK Ropeways Limited v. M/s Billion Smiles Hospitality Private Limited (2023) ibclaw.in 392 NCLAT, it was established that enforcing an arbitral award under Section 9 of the IBC is not permissible when a challenge has been raised under Section 34 of the Arbitration and Conciliation Act, 1996 (“A&C Act”) against the said award.

I. Factual Background

On March 9, 2015, M/s Billion Smiles Hospitality Private Limited (“Respondent”) and M/s. KK Ropeways Limited (“Appellant”) entered into a rent agreement for operating a food court in a complex owned by the Appellant. The agreement required the Respondent to make monthly payments for certain charges, but the Respondent defaulted on these payments since the beginning of the agreement. The Appellant invoked arbitration and obtained an arbitral award in their favour for recovery of INR 26,33,022 along with interest. The Respondent challenged this award by filing a petition under Section 34 of the Arbitration Act (“Appeal”) before the Delhi High Court.

Meanwhile, during the Appeal’s pendency, the Appellant tried to recover the awarded amount by issuing a demand notice under the Insolvency and Bankruptcy Code (IBC) to the Respondent. The Appellant demanded payment within 10 days. Four months after issuing the Demand Notice, the Appellant filed a petition against the Respondent under Section 9 of the IBC. The NCLT, Bengaluru ruled that the operational debt mentioned in the Section 9 Petition was deemed to be in dispute due to the pendency of the Appeal. Consequently, the Section 9 Petition was dismissed (“Impugned Order”).

The Appellant appealed against the Impugned Order before the NCLAT, arguing that the amount owed by the Respondent had not been disputed and had been crystallized in the form of the Impugned Award (considered an operational debt). The Respondent, on the other hand, contended that the Impugned Award (which was the basis of the Appellant’s claim for operational debt) was disputed and pending adjudication in the Appeal before the Delhi HC.

The NCLT affirmed the challenged ruling and determined that in order to commence the CIRP against the corporate debtor, there must not be any genuine disagreement between the involved parties regarding the outstanding debt. Additionally, the presence of the dispute remains relevant even when one party contests an arbitration award. Furthermore, the tribunal determined that the act of bringing an issue before a court of law or an arbitral tribunal prior to the receipt of a demand notice under Section 8 of the IBC constitutes a genuine dispute.

II. Pre-Existing Dispute vis-à-vis Section 34 of the A&C Act

As per Section 8(2)(a) of the IBC, a ‘Dispute in Existence’ refers to and includes filing a ‘Dispute’ with a court of law or an arbitral tribunal prior to receiving the Notice. This dispute also persists during the stage where an appeal challenges an “Arbitral Award” initiated by one of the parties. This principle is exemplified in the Vijay Nirman Company Pvt. Limited [2018] ibclaw.in 01 SC case, wherein the Supreme Court clarified that even if a Section 34 A&C Act petition might have been filed in the wrong court, the insolvency process should not be set in motion.

In the case of Mobilox Innovations Pvt. Ltd. Vs. Kirusa Software Pvt. Ltd. [2017] ibclaw.in 01 SC, the Supreme Court introduced the idea that the dispute and/or legal proceedings or arbitration must be “pre-existing”. In this context, it was evident that the basis for the Section 8 notice was the issuance of an arbitral award against the operational debtor. The court, in this instance, introduced a fresh criterion – the “plausible contention” – to ascertain the “existence of dispute”. When the adjudicating authority examines a Section 9 application under the Code, it must evaluate the following aspects:

1. Is there an “operational debt” exceeding Rs 1 lakh?
2. Does the provided documentary evidence establish that the debt is unpaid and due?
3. Is there a dispute between the parties, or has a lawsuit or arbitration been initiated before the demand notice concerning the outstanding operational debt related to that dispute was received?

Should any of these conditions remain unmet, the application will be dismissed.

In the K. Kishan v. Vijay Nirman Company Pvt. Ltd. [2018] ibclaw.in 01 SC case, the Supreme Court concluded that when the applicant challenges an arbitration award under Section 34 of the A&C Act, it signifies the existence of a dispute. In such instances, instigating the CIRP becomes unnecessary, and instead, efforts should be directed towards resolving the dispute through alternative channels.

Whenever a genuine dispute emerges between the parties, even if it may not necessarily be a “bona fide dispute” with a strong likelihood of legal success, the Insolvency Code cannot be invoked. To grasp this concept more comprehensively, one must first comprehend what constitutes the presence of a dispute under Section 34 of the A&C Act. According to the current position of law, the mere fact that a Section 34 petition is pending serves as evidence of a bona fide dispute existing between the parties, which was pre-existing and culminated in an arbitral award that has not yet attained finality. However, it becomes pertinent for a set standard to exist in order to make the award reach it’s finality.

III. Evaluating Genuine Disputes Over Debts: Moving Beyond Mere Appeals

Determining whether a debt is genuinely disputed depends on evaluating a lot of relevant factors. In our view, just filing an appeal against a court judgement doesn’t automatically mean a debt is disputed.

As has rightly been held in the case of LKM Investment Holdings Pte Ltd v Cathay Theatres Pte Ltd we need to take into account the situation under which the judgement was issued. If the judgement was made after a complete trial, during which the company owing the debt had the chance to present evidence and arguments to challenge the claim’s validity, it’s not enough to just file an appeal and claim the debt is disputed. Filing an appeal alone doesn’t remove the responsibility of the company to present a strong initial case showing there’s a real question to be addressed. In fact, if the court has already ruled against the company in the initial trial, it’s likely that the company doesn’t have a solid defence. Therefore, any further argument about the debt being disputed won’t likely be seen as genuine. In this scenario, the company needs to provide logical arguments and circumstances that support their continued disagreement with the debt’s validity. Only then can they convince the court that, despite the earlier judgement, the dispute over the debt is still valid.

IV. Establishing Genuine Disputes: Criteria And Considerations For Valid Debt Related Claims

To meet the general principle, the dispute needs to be sincere both from a personal belief standpoint and from an objective perspective. This means that the reason for not making the payment for the impugned debt must be genuinely believed to be valid and must have substantial or reasonable grounds. “Substantial” here means that the reason has merit and isn’t frivolous, which means the court shouldn’t dismiss these types of disputes. There must be significant doubt and uncertainty about the responsibility to pay the debt, leading the court to recognize that there’s a valid issue to be resolved, which, in our opinion can not possibly be the case when the court is not even referring to the merits of the case.

The responsibility lies with the company to present an initial case that convinces the court there’s a valid dispute to be addressed, either through legal action or some other means. The court considers various factors, including whether the company has been granted permission to defend against a legal claim with substantial evidence, if there’s a counter-argument based on strong grounds, whether the company has appealed a judgement related to the debt in question, and if the company alleges that the initial judgement was obtained unfairly due to fraud. However, these factors aren’t definitive, as the court’s decision will be based on the overall situation at hand.

V. Conclusion

It is widely acknowledged that the term “dispute” encompasses not only an arbitration award but also the challenge initiated by the applicant under Section 34 of the A&C Act. Operational creditors are prohibited from using the IBC prematurely, for ulterior motivations, or as a substitute for debt collection methods. However, the primary objective of Section 9 of the IBC is to institute the insolvency process against a corporate debtor solely in cases where a “bona fide dispute” concerning the owed debt is absent.

The presence of a dispute as outlined in Section 34 of the A&C Act, assumes significant importance when instigating the CIRP under Section 9 of the IBC. This clause specifies that if any party challenges the legality of an arbitration agreement or if a dispute exists between the parties, the court has the authority to withhold the enforcement of the arbitral award. In essence, the dispute must be resolved prior to the enforceability of the arbitration award.

Disclaimer: The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws. The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.