Insolvency Moratorium Does Not Bar Corporate Debtor From Pursuing Counterclaims: Bombay High Court
The Bombay High Court has held that an insolvency moratorium does not prevent a corporate debtor from pursuing its own claims in arbitration, including a counterclaim against the party that initiated proceedings against it.
Justice Somasekhar Sundaresan observed,
“Section 14(1)(a) of the IBC interdicts the institution and continuation of proceedings against the corporate debtor. It does not bar proceedings initiated by the corporate debtor, including a Counter Claim.”
The dispute arose from a development agreement executed between A A Estates Pvt. Ltd. and Govind Co-operative Housing Society Ltd., in 2010. Alleging that the redevelopment had stalled and transit rent had remained unpaid, the society terminated the agreement in 2017. The Developer, A A Estates, disputed the termination and sought specific performance through a counter claim in arbitration. The arbitral tribunal directed the parties to maintain status quo in May 2018.
The Developer was admitted into Corporate Insolvency Resolution Process (CIRP) in 2022. The society moved section 17 Arbitration Act application seeking to vacate the arrangement and appoint new developer. The application was allowed by the arbitral tribunal, leading the Developer to approach the High Court.
Before the High Court, the Developer argued that the arbitral tribunal erred in entertaining the application during the existence of the moratorium. It also submitted that the dispute fell within the exclusive jurisdiction of the NCLT.
Per contra, the Society argued that the moratorium didn't bar proceeding initiated by the corporate debtor itself. It highlighted that agreement terminated before the CIRP, therefore, it is not the asset protected by the moratorium.
The High Court explained that the Society's application to vacate the status quo order was connected with Developer's counterclaim, through which the developer sought to challenge the termination and enforce the development agreement. The fact that the Society's original claim against the corporate debtor could not proceed during the moratorium did not mean that the counterclaim had to continue without appropriate interim protection.
The High Court considered the contention of the Society and discussed the ruling of A.A. Estates (P) Ltd. v. Kher Nagar Sukhsadan Co-operative Housing Society Ltd., wherein it was held that a development agreement terminated before the commencement of the CIRP doesn't automatically become the asset of the corporate debtor.
Considering the facts of the dispute between the parties, the High Court noted that the termination preceded CIRP proceedings and record did not establish that developer had obtained the possession of the property.
Further, the High Court considered the Developer's argument with regard to NCLT's exclusive jurisdiction over the dispute, the High Court noted that as per the judgment of the Tata Consultancy Services Ltd. v. Vishal Ghisulal Jain, the jurisdiction of the High Court cannot be invoked merely because one party is going insolvency; the dispute must necessarily be in connection with insolvency.
Finding no jurisdictional ground to interfere, the High Court dismissed the petition and vacated the stay on the arbitral proceedings.
For Petitioner: Advocates Shadab Jan, Kartik Irabatti instructed by Chinmay Bhojane
For Respondent: Advocate Naushad Engineer, along with Mr. Rashmin Khandekar Limathwalla, Amit T., Fleur D'souza instructed by Asahi Legal