The Convergence of Arbitration and Conciliation Act, 1996 and IBC, 2016 In Filing of Application Against Date of Default

Authored by - Arsh Anand (Student, Law College Dehradun, faculty of Uttaranchal University)

Introduction

The mechanism of resolving commercial disputes in India has vouched for a massive shift towards the Arbitration, due to party autonomy, speedily resolution and privacy of matters. Correspondingly, after the enactment of Insolvency and Bankruptcy Code, 2016, the corporate has observed the statute as a powerful means for recovery of debt and corporate restructuring. However, situations pertaining to convergence of Arbitration and Conciliation Act, 1996 and IBC, 2016 raises complex questions regarding limitation, like when a creditor relies upon the arbitral award for initiating proceedings of insolvency.

The most significant timeline which is heavily relied by the court to identify the cause of action for initiating insolvency proceedings is “Theory of Breaking Point”. Now, another significant question which subsequently arises is, from when the limitation period for filing an application for insolvency would actually be counted?

Legal Framework

Default under Insolvency and Bankruptcy Code, 2016

Section 6 r/w 7 of the Code provides that a financial creditor, operational creditor or corporate debtor itself may initiate a Corporate Insolvency Resolution Process (CIRP), where a default is committed. S. 3(12) defines the term Default as “non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not paid by the debtor or the corporate debtor”.

Notably, commitment of default is a mere factual event and CIRP is the procedural aspect for recovering of that debt. S. 238 of the Code provides that, in a situation of conflict with any other legal document or law, this Code will prevail to the extent of inconsistency, ensuring the independency of the IBC in matters including default of payment and CIRP but, S. 238A provides that subject to applicability, the provisions of Limitation Act, 1963 shall apply to all proceedings under this Code before adjudicating authority, NLCT, NCLAT, DRT or DRAT.

Theory of Breaking Point

The “Theory of Breaking Point” is a developed judicial tool to determine the actual date of default to compute the creditor’s cause of action for the purpose of limitation[1]. This is to crystallize the actual moment when the default occurred, often labelled as “date of default”. 

The Supreme Court in the matter of M/S B And T AG Vs. Ministry Of Defence[2] has defined the breaking-point as a situation wherein parties have abandoned efforts to arrive at a settlement contemplated referral of the dispute for arbitration. 

Therefore, it can be construed that, date of default is not subject to any decree or order of the court, a situation of Breaking-Point may arise when the debtor makes a default of payment or, attempt of negotiation fails or, the debtor clarifies the intentio of not clearing off the due payment.

Application of Art. 137 of Limitation Act, 1963

After computation of date of default and breaking-point, an appeal u/s 7 of Code can be filed to respective adjudicating authority. S. 238A of the Code has already clarified that any procedural aspect pertaining to proceedings will be subject to the Limitation Act, 1963. Since, S. 7 of the Code does not provide any time limitation for filing of appeal, the SC held that, this “date of default” shall be used to compute the limitation period of 3 years on which the right to apply accrues to file a CIRP proceeding under Article 137 of the Limitation Act, 1963[3]. 

Adding up, the apex court has also ruled that, condonations to filing of such application can be applied, as provided u/s 5 of the Limitation Act,1963. Not to mention that, if there’s a voluntary acceptance of debt or part payment by the debtor as prescribed u/s 18 and 19 of the Act, the limitation period of right to apply extends, as the acknowledgement of liability keeps the debt alive[4] and, it resets the clock of 3-years limitation period.

Role of Arbitration

In the matter of K. Kishan v. Vijay Nirman Co. (P) Ltd.[5], the Hon’ble Supreme Court ruled that, an application u/s 9 of IBC, 2016 cannot be filed when another application u/s 34 has been moved to the Court challenging the enforceability of the award, based on which the prior application was filed.

Therefore, a significant point to be noted here is that- An arbitral award can only be used as evidence of debt not a means to create a separate cause of action. 

The date of default of debt or breaking point would be decided independently of the arbitration process. Three important points from the ruling of the same judgement has crystallized this convergence of overlapping of provision of these statutes (ACA and IBC):

·       Pending of S. 34 petition mean that the debt is subject to dispute, so a petition u/s 9 of the Code must be outrightly rejected.

·       In such situation, there’s no inconsistency between the ACA and IBC. Therefore, despite independence of statute is bestowed to IBC u/s 238, the petition u/s 9 cannot bypass the procedure of challenge u/s 34.

·       IBC cannot be misused as a tool to recover the debt, especially in situations where the parties don’t agree with the claim amount or, even award clarifying on the debt is under challenge.

The Court also heavily relied on the Mobilox Test wherein Supreme Court observed that, if there’s a pre-existing dispute, even if a plausible one then, the creditor’s application u/s 9 of IBC would be rendered to get rejected.

Analogously, S. 37(1)(c) of the Arbitration and Conciliation Act, 1996 bestows power upon the Court to set aside or refuse to set aside an arbitral award under section 34. It helps to decide the finality of the award.

Conclusion

The interoperability of the provision of Arbitration and Conciliation Act, 1996 and Insolvency and Bankruptcy Code, 2016 in a situation of convergence continues to evolve with time but one established principle still prevails, i.e. IBC is strictly confined only to adjudicating the date of default and is nonaligned with the decision of any arbitral tribunal or court. Therefore, the computation of date of default is independent of date of arbitral award, date of setting aside of award, date of challenge u/s 34, date of appeal u/s 37 or date of decree from a civil court.

Conclusively, it can be summarised that, an application u/s 7 of the Code can be moved to NCLT irrespective of the debt in dispute. Per contra, an application u/s 9 of the Code cannot bypass a pending dispute of debt at the arbitral tribunal or the court, which is liable to be set aside if there’s a pre-existing dispute on the debt.

[1] M/S B And T Ag v. Ministry of Defence, Arbitration Petition (C) No. 13 Of 2023 (2023) (India).

[2] M/S B And T Ag v. Ministry of Defence, Arbitration Petition (C) No. 13 Of 2023 (2023) (India).

[3] B.K. Educational Services (P) Ltd. v. Parag Gupta & Associates, (2019) 11 SCC 633 (2019) (India).

[4] Dena Bank v. C. Shivakumar Reddy, (2021) 10 SCC 330 (2021) (India).

[5] K. Kishan v. Vijay Nirman Co. (P) Ltd. (2018) 17 SCC 662 (2018) (India).