Arbitration Is A Private Remedy, It Cannot Override Statutory Rights Under IBC: NCLAT Chennai

The National Company Law Appellate Tribunal (NCLAT), Chennai on 27 August observed that an arbitration clause in a contract, being a private remedy agreed between parties, cannot override or take away the statutory remedy available under the Insolvency and Bankruptcy Code, 2016 (IBC).

A Bench comprising Judicial Member Justice Sharad Kumar Sharma and Technical Member Jatindraath Swain set aside the NCLT, Amravati order and directed it to admit Posco International Corporation's application under Section 9 of the IBC against Mohana Cotton Ginning Private Limited. The Tribunal held:

“...any arrangement for resolving of a dispute by way of an arbitration clause which is a private legal remedy, will not deprive the Appellant to invoke a statutory remedy, which is otherwise reserved to the party, under the intention of law to be availed by person, who seeks to recover the defaulted amount, which is due to be paid.”

Posco International Corporation had supplied raw cotton to Mohana Cotton Ginning Private Limited under an international shipment arrangement. Disputes subsequently arose over the quality of the cotton supplied. The parties entered into a settlement agreement dated 1 September 2017, under which Mohana Cotton agreed to pay USD 74,342 to Posco International by 20 September 2017.

Despite repeated assurances, the amount remained unpaid. Posco International subsequently issued a demand notice under Section 8 of the IBC and filed an application under Section 9 before the NCLT, Amravati, seeking initiation of the Corporate Insolvency Resolution Process (CIRP).

The NCLT rejected the application, holding that initiation of CIRP is for the benefit of all creditors and not the Appellant alone. It also held that the dispute was in personam and had to be resolved through arbitration under the agreements between the parties rather than through proceedings under the IBC. It further held that Posco International had not directly supplied any goods or services to Mohana Cotton and, therefore, the amount claimed could not be treated as an operational debt under the IBC.

Challenging the order, Posco International argued that the NCLT had erred in requiring it to produce evidence showing that Mohana Cotton owed payments to other creditors. It submitted that the IBC does not impose any such condition for initiating CIRP.

Mohana Cotton, on the other hand, argued that the settlement agreement could not be treated as an admission of liability as it had been executed only to continue the business relationship between the parties.

The NCLAT rejected the NCLT's finding that the arbitration clause created a bar to proceedings under Section 9 of the IBC. It observed:

“The finding which has been recorded by the Learned Tribunal in para-10 of the impugned order about the effect of the existence of an arbitral clause, taking it as to be creating a hurdle in invocation of the proceedings under Section 9 of the Code is an absolute misinterpretation of the settled law for the reasons extended hereafter.”

Relying on Indus Biotech Pvt Ltd v. Kotak India Venture (Offshore) Fund & Ors., [(2021) 6 SCC 436], the Bench reiterated that the existence of an arbitration agreement does not by itself prevent initiation of insolvency proceedings where debt and default are established.

It also rejected the finding that Posco International was not an operational creditor merely because it had not directly supplied goods or services to Mohana Cotton. It held that the debt arose from the transaction involving the supply of raw cotton and therefore constituted an operational debt under Section 5(21) of the IBC.

On the issue of a pre-existing dispute, it noted that Mohana Cotton had raised the dispute only in its reply to the Section 8 demand notice.

Accordingly, the NCLAT quashed the NCLT's order and directed it to admit the Section 9 application.