Are disputes arbitrable after Section 7 IBC petition is filed? Supreme Court answers [Read Judgment]

The Supreme Court on Friday clarified as to when disputes would be arbitrable in cases wherein a petition for the initiation of corporate insolvency resolution process has been filed under Section 7 of the Insolvency and Bankruptcy Code (IBC) [Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund & Ors]. .The ruling was grounded on the principle that "mere filing of the Section 7 petition and its pendency before admission" cannot be construed as triggering the insolvency process..A Bench of Chief Justice SA Bobde and Justices AS Bopanna and V Ramasubramanian explained that "the trigger point is not the filing of the application under Section 7 of IBC but admission of the same on determining default.".It is only when the National Company Law Tribunal (NCLT) finds that there (i) a debt due to the creditor which (ii) has been defaulted on by the corporate debtor and admits the Section 7, IBC petition that the matter becomes a "proceeding in rem” and the corporate insolvency proceedings commences..At this stage i.e. when it becomes a proceeding in rem, an application made under Section 8 (power to refer parties to arbitration where there is an arbitration agreement) of the Arbitration and Conciliation Act, 1996 would not be maintainable..The judgment, in this regard, stated the following:"If the finding of default is recorded and the Adjudicating Authority (NCLT) proceeds to admit the application, the Corporate Insolvency Resolution Process commences as provided under sub-section (6) and is required to be processed further. In such event, it becomes a proceeding in rem on the date of admission and from that point onwards the matter would not be arbitrable. The only course to be followed thereafter is the resolution process under IBC. Therefore, the trigger point is not the filing of the application under Section 7 of IBC but admission of the same on determining default.”.On the other hand, if the NCLT finds that there is no default of the debt due, and declines to admit the petition filed under Section 7, IBC, then no proceedings in rem exist, the corporate insolvency process would not be triggered and an application to refer the dispute to arbitration is maintainable..The Supreme Court explained how the NCLT ought to proceed when a Section 8, Arbitration Act application is filed at a stage when the Section 7, IBC petition is yet to be admitted:."In any proceeding which is pending before the Adjudicating Authority under Section 7 of IB Code, if such petition is admitted upon the Adjudicating Authority recording the satisfaction with regard to the default and the debt being due from the corporate debtor, any application under Section 8 of the Act, 1996 made thereafter will not be maintainable. In a situation where the petition under Section 7 of IB Code is yet to be admitted and, in such proceedings, if an application under Section 8 of the Act, 1996 is filed, the Adjudicating Authority is duty bound to first decide the application under Section 7 of the IB Code by recording a satisfaction with regard to there being default or not, even if the application under Section 8 of Act, 1996 is kept along for consideration. In such event, the natural consequence of the consideration made therein on Section 7 of IB Code application would befall on the application under Section 8 of the Act, 1996.”.Applying the said ratio to a case between Indus Biotech Private Limited and Kotak India Venture (and entities related to it), the Supreme Court upheld the decision of the NCLT, Mumbai to dismiss a Section 7, IBC petition moved by Kotak..The NCLT had dismissed the Section 7 petition on finding that there was not default of a debt as of yet to trigger corporate insolvency proceedings against Indus Biotech. The ruling was passed also in view of an application moved by Indus Biotech to refer the dispute to arbitration..Before the Supreme Court, Kotak had contended that the NCLT was bound to deal with the case by strictly adhering to the IBC and that the dispute was not arbitrable after the insolvency process had been triggered. Indus Biotech, meanwhile, filed a Section 11, Arbitration Act application before the Supreme Court seeking the appointed of an arbitrator..On facts, the top court disagreed with Kotak over whether there was a default in the payment of a debt, opining that there was no default. .On law, the Bench observed that the dispute would only be non-arbitrable if the there was a finding of default, leading to the admission of Section 7, IBC plea. In this case, since the Court found that there was no default and no admission of the Section 7 petition, it opined that the dispute can be referred for arbitration..[Read Judgment]