Insolvency proceedings cannot be used to defeat a claim existing prior to the initiation of insolvency proceedings, Calcutta HC

A Single Bench of the Calcutta High Court comprising Justice Moushumi Bhattacharya recently held that the corporate insolvency resolution procedure enumerated under the Insolvency and Bankruptcy Code, 2016 (IBC) cannot be used as a tool to curtail any claim which arose prior to the commencement of the insolvency proceedings..The ruling was passed while dealing with the question of whether an application under Section 34 of Arbitration and Conciliation Act (Arbitration Act) should be kept in abeyance when the operational creditors have already initiated corporate insolvency proceedings under the IBC..A reference was made on June 18, 2001 and an Arbitrator was appointed on March 2, 2006.The arbitral award was delivered on July 7, 2008 for a sum of Rs 3,21,927.70/- @ 9% p.a. in favour of the respondent/claimant.The instant application for setting aside of the award was filed on October 31, 2008.Operational Creditors initiated proceedings under the IBC against the petitioner in September, 2017.An adjudicating authority on July 19, 2018 declared a moratorium under Section 14 of IBC.The instant application under Section 34 of the Arbitration Act to set aside the arbitral award was taken up for hearing by the Court in December 2019..The petitioner contended before the Court that the application under Section 34 of the Arbitration Act for setting aside of the award cannot be proceeded with since Corporate Insolvency proceedings under the IBC has already been initiated against him as the ‘Corporate Debtor’..It was further submitted by the petitioner that since the management of the petitioner/corporate debtor has already been taken over by JK Paper Limited (the resolution applicant before the NCLT) and the respondents have also not made any efforts to place their claim before the Resolution Professional (“RP”), the said application under Section 34 of the Arbitration Act cannot be proceeded with against the petitioner..Thus, it was the contention of the petitioner before the Court that the respondent must first file its claim before the NCLT before it can contest the proceedings for setting aside of the award..Per contra, the respondent (arbitral award holder) argued before the High Court to continue with the hearing of the instant application for setting aside of the arbitral award..The counsel on behalf of the respondent also placed reliance on the case of Mobilox Innovations Pvt. Ltd. vs. Kirusa Software Pvt. Ltd. (2018) 1 SCC 353 wherein the Supreme Court had held that operational creditors cannot use the IBC prematurely or as a substitute for debt enforcement procedures..Relying on the law laid down by the Supreme Court in the case of K. Kishan Vs. Vijay Nirman Company Pvt. Ltd. (2018) 17 SCC 622 and Mobilox, the Calcutta High Court eventually found that,.“….it is evident that the view of the Supreme Court was that the IBC cannot be used in terrorem to extract a sum of money when that sum is a subject-matter of a pending adjudication.”.While the Court noted that the case of K. Kishan was different from the instant case in certain factual aspects, the intention underlying the Supreme Court’s judgment was found relevant i.e. that “the corporate insolvency proceedings cannot be used in cases where there is a pre-existing and an ongoing dispute between the parties.”.In view of the same, the High Court proceeded to hold that,.“…corporate insolvency resolution proceedings cannot be used to defeat a claim or a dispute which existed prior to the initiation of the insolvency proceedings… … Both K. Kishan and Mobliox make it clear an earlier dispute or notice of a suit or an arbitration must be given precedence to the insolvency proceedings.”Calcutta High Court.In this case the Arbitral award was passed on July 7, 2008 i.e. 9 years prior to the initiation of the proceedings under IBC against the petitioner (in the year September, 2017)..The Court thus, disagreed with the plaintiff’s contention that the challenge to the Arbitral Award cannot be considered by reason of the proceedings under the IBC. The Judge observed,.“…the petitioner being the Corporate Debtor/Award Debtor cannot be permitted to take refuge under the provisions of the IBC for relegating the claim of the respondent award-holder to a limbo for an indefinite period of time on the specious plea of the respondent not having gone before the NCLT.”.The Court thus, stall the hearing on the application under Section 34 of the Arbitration Act and directed the application to be listed on January 21, 2020..The petitioner was represented by Advocates Syamantak Banerjee, Prasanta Dutt, and Susanta Dutt. The respondent was represented by Advocates Sudip Deb, Deepak Jain and Riju Ghosh.Read Judgment