NCLAT’s interpretation of terms ‘dispute’ and ‘existence of dispute’ under the Insolvency Code

By Dr. Amit George

The recent judgment of the National Company Law Tribunal (‘NCLAT’) in Kirusa Software Private Ltd. v. Mobilox Innovations Private Ltd. [Judgment dated 24.05.2017 in Company Appeal (AT) (Insolvency) 6 of 2017] has been welcomed for having provided an authoritative pronouncement on the meaning of the terms ‘dispute’ and ‘existence of dispute’ as appearing in Sections 8 and 9 of the Insolvency & Bankruptcy Code, 2016 (‘Insolvency Code’).

While the judgment provides some much needed definitional clarity on certain fundamental concepts that lie at the very heart of the Insolvency Code, it is relevant to take note of certain obiter observations in the judgment relating to arbitral awards which seem to run afoul of the settled law on the subject.

The observations in question can be found in paragraph no. 32 of the judgment, wherein the NCLAT endeavors to provide examples of what exactly would constitute a ‘debt’ in the context of the Insolvency Code. Though the case at hand before the NCLAT did not deal with a situation where a decree or arbitral award was being made the basis of the insolvency petition, and thus the said observations would constitute an obiter, the NCLAT proceeded to explain the status of the maintainability of an insolvency petition under Section 9 of the Insolvency Code founded on the basis of a decree of a court or the award of an arbitral tribunal in the following words:

“32. There may be other cases such as a suit relating to existence of amount of debt stands decided and decree is pending for execution. Similarly, existence of amount of debt or quality of goods or service for which a suit have been filed and decreed; an award has been passed by Arbitral Panel, though petition under Section 34 of Arbitration and Reconciliation ((Sic; Conciliation) Act, 1996 may be pending. In such case the question will arise whether a petition under Section 9 will be maintainable particularly when it was a suit or arbitration proceeding is not pending, but stand decided? Though one may argue that Insolvency resolution process cannot be misused for execution of a judgment and decree passed in a suit or award passed by an arbitration Tribunal, but such submission cannot be accepted in view of Form 5 of Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules 2016 wherein a decree in suit and award has been shown to be a debt for the purpose of default on non-payment.”

(emphasis in underlining supplied)

In the aforesaid passage, it is important to note that the NCLAT specifically poses to itself the question as to whether a pending petition under Section 34 of the Arbitration and Conciliation Act, 1996 against an arbitral award would render non-maintainable an insolvency petition under Section 9 of the Insolvency Code. Though not so expressly answering the question which was posed, a reading of the entire paragraph seems to suggest that the unarticulated premise of the NCLAT’s reasoning seems to be that an arbitral award, though under challenge under Section 34 of the Arbitration and Conciliation Act, 1996, would constitute a debt for the purpose of the Insolvency Code. The NCLAT seems to presume the finality of an arbitral award and presumes that it is ‘not pending, but stand decided’ during the pendency of a petition under Section 34 and compares it with a suit that stands decreed and is pending for execution.

Such a presumption, and if this is indeed what the NCLAT intends to convey, is diametrically opposed to the award challenge and enforcement methodology contemplated under the Arbitration and Conciliation Act, 1996. It is relevant to take note of Sections 35 and 36 of the Arbitration and Conciliation Act, 1996 in this regard, which are as under:

“35. Finality of arbitral awards. -Subject to this Part an arbitral award shall be final and binding on the parties and persons, claiming under them respectively.  

36. Enforcement.- Where the time for making an application to set aside the arbitral award under section 34 has expired, or such application having been made, it has been refused, the award shall be enforced under the Code of Civil Procedure, 1908 (5 of 1908) in the same manner as if it were a decree of the court.”

The aforesaid provisions make it clear that upon a petition being filed under Section 34 of the Arbitration and Conciliation Act, 1996, the arbitral award in question becomes un-executable. The unequivocal and mandatory nature of this provision was explained by the Supreme Court in National Aluminum Co. Ltd. vs. Pressteel & Fabrications (P.) Ltd. & Anr., reported as (2004) 1 SCC 540, wherein it was held as under:

“10. … At one point of time, considering the award as a money decree, we were inclined to direct the party to deposit the awarded amount in the court below so that the applicant can withdraw it on such terms and conditions as the said court might permit them to do as an interim measure. But then we noticed from the mandatory language of Section 34 of the 1996 Act, that an award, when challenged under Section 34 within the time stipulated therein, becomes unexecutable. There is no discretion left with the court to pass any interlocutory order in regard to the said award except to adjudicate on the correctness of the claim made by the applicant therein. Therefore, that being the legislative intent, any direction from us contrary to that, also becomes impermissible. On facts of this case, there being no exceptional situation which would compel us to ignore such statutory provision, and to use our jurisdiction under Article 142, we restrain ourselves from passing any such order, as prayed for by the applicant.”

While on the subject, it is important to note that with the 2015 amendments to the Arbitration and Conciliation Act, 1996, Section 36 of the Arbitration and Conciliation Act, 1996 has been amended to read as under:

“36. (1) Where the time for making an application to set aside the arbitral award

under section 34 has expired, then, subject to the provisions of sub-section (2), such award shall be enforced in accordance with the provisions of the Code of Civil Procedure, 1908, in the same manner as if it were a decree of the court.

(2) Where an application to set aside the arbitral award has been filed in the Court under section 34, the filing of such an application shall not by itself render that award unenforceable, unless the Court grants an order of stay of the operation of the said arbitral award in accordance with the provisions of sub-section (3), on a separate application made for that purpose.

(3) Upon filing of an application under sub-section (2) for stay of the operation of the arbitral award, the Court may, subject to such conditions as it may deem fit, grant stay of the operation of such award for reasons to be recorded in writing:

Provided that the Court shall, while considering the application for grant of stay in the case of an arbitral award for payment of money, have due regard to the provisions for grant of stay of a money decree under the provisions of the Code of Civil Procedure, 1908.” 

A reading of the un-amended Section 36 would show that the filing of a petition under Section 34 amounts to an automatic stay on the execution of the arbitral award. Under the amended Section 36, though there is no automatic stay, the Court hearing a petition under Section 34 can order a stay of the arbitral award on such terms as it might deem fit.

Notwithstanding such a stay of the arbitral award being in existence, if the judgment of the NCLAT is to be read to permit the initiation of an insolvency process on the basis of the arbitral award in question, then it would totally negate the award-challenge mechanism under Section 34 of the Arbitration and Conciliation Act, 1996, in as much as a party would be forced to face legal consequences under the Insolvency Code in relation to an arbitral award which it has otherwise challenged and obtained a stay of under the provisions of the Arbitration and Conciliation Act, 1996. Such an incongruous situation would obviously not have been the intention of the legislature while enacting the Insolvency Code and, it is hoped, not that of the NLCAT as well.

Read the order