Home  > Recent Judgements >The Role Of Pre-Existing Disputes In Insolvency Proceedings

 August 02, 2024

BACKGROUND

In the case of Chandra Nirman Pvt. Ltd. v. Orient Paper & Industries Ltd. before the National Company Law Appellate Tribunal (the “NCLAT”), the Appeal is filed against the order of the Adjudicating Authority wherein the National Company Law Tribunal (the “NCLT”) dismissed the application under Section 9 of the Insolvency and Bankruptcy Code, 2016 (the “IBC”) filed by the Appellant on the ground of pre-existing dispute. The Appellant sent Section 8(1) demand notice dated 28.03.2022 by post on 30.03.2022 which was served on 01.04.2022. Thereafter, a reply notice was also given to the demand notice which mentioned about passing of an additional award by the arbitrator and referred about the two pending arbitrations in two different courts at Jabalpur and Shahdol. A transfer application was filed by the Appellant for the transfer of the pending arbitration proceedings to the Jabalpur Court. Thereafter, the Appellant filed an application under Section 9 of the IBC (Section 9) before the Adjudicating Authority. This Application was dismissed by NCLT on the grounds of pre-existing disputes between the parties. Therefore, the present Appeal.

ISSUES

  1. Whether the disputes existing between the parties prior to the issuance of the demand notice constituted a pre-existing dispute under the IBC?
  2. Whether the Corporate Debtor’s acknowledgment of dues in proceedings under Section 34 of the Arbitration & Conciliation Act, 1996, should lead to the admission of the Section 9 application?

OBSERVATION OF THE COURT

  1. Pending Arbitration Proceedings:
    There were ongoing arbitration proceedings between the parties before the demand notice was issued. Specifically, the demand notice dated 28.03.2022 was served on 01.04.2022, and the reply to the notice, dated 18.04.2022, highlighted the existence of ongoing arbitrations and an additional award by the arbitrator dated 29.01.2019.
  1. Section 8(2)(a) of IBC 2016:
    The authority referenced Section 8(2)(a) of the IBC, which states that arbitration proceedings pending before the receipt of a demand notice constitute an existing dispute. This was pivotal in determining the pre-existing nature of the dispute.
  1. Adjudicating Authority’s Findings:
    The Adjudicating Authority concluded that an application under Section 34 of the Arbitration and Conciliation Act, 1996, constitutes a pre-existing dispute. Therefore, an arbitration award under challenge cannot be enforced as an operational undisputed debt under Section 9 of the IBC.

DECISION OF THE COURT

The court upheld the decision of the Adjudicating Authority (National Company Law Tribunal, Cuttack Bench), which dismissed the Section 9 application on the grounds of a pre-existing dispute. The court noted that the ongoing arbitration proceedings between the parties existed prior to the issuance of the demand notice, as highlighted in the reply notice dated 18.04.2022. The court further emphasized that an application under Section 34 of the Arbitration and Conciliation Act, 1996, constitutes a pre-existing dispute under the IBC. Therefore, the acknowledgment of dues in the Section 34 application does not negate the existence of these disputes. Consequently, the court found no error in the Adjudicating Authority’s order and dismissed the appeal, reaffirming that the disputes should be resolved through arbitration.

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