Summary
An unadmitted section 7 IBC application did not by its mere filing become an insolvency proceeding in rem barring arbitration. NCLT had first to determine default, notwithstanding a section 8 arbitration application. On these preference-share conversion facts, the finding that default had not yet occurred justified rejecting the insolvency application. The Court constituted arbitral tribunals with common members for the separate agreements, preserving the distinction between international and domestic proceedings.
Issues
- Whether a section 8 arbitration application can displace NCLT’s duty to determine a pending section 7 IBC application.
- Whether insolvency proceedings become non-arbitrable on filing or admission and whether default was established here.
- How tribunals should be constituted for the separate international and domestic agreements.
Provisions considered
- Sections 7 and 238, Insolvency and Bankruptcy Code, 2016NCLT must first determine default under the overriding insolvency framework; admission gives the proceeding its in-rem character. (¶¶ 14-18, 24-28)
- Section 8, Arbitration and Conciliation Act, 1996An arbitration request cannot independently defeat a pending section 7 application; its outcome follows the prior determination of default. (¶¶ 25-27, 33)
- Section 11(3), (4)(a) and (12)(a), Arbitration and Conciliation Act, 1996The Court constituted tribunals with common members for separate agreements, retaining distinct international and domestic proceedings. (¶ 34-38)
- Section 61, Insolvency and Bankruptcy Code, 2016The NCLT order also disposing of section 7 was appealable to NCLAT; direct consideration here rested on the special circumstance of the pending appointment petition. (¶ 13)
Held
- A section 7 application becomes an in-rem insolvency proceeding upon admission after determination of default, rather than upon filing. Admission engages creditors’ third-party rights and prevents reference of that insolvency dispute to arbitration. (¶¶ 17, 22-24)
- Before admission, NCLT must consider the creditor’s material and the debtor’s defence and decide default first, even if an arbitration application is pending. A moonshine defence or arbitration clause cannot defeat insolvency where debt is payable and default established. If no default is found, rejection leaves the parties free to seek an arbitral tribunal through the appropriate procedure. (¶ 25-27)
- The parties had begun the preference-to-equity conversion process before the contractual redemption date and had not resolved the conversion formula or resulting repayment. On the particular documents and discussions, default was premature to find. The Court upheld rejection of section 7 while expressing no view on the underlying share-conversion merits or whether the investment itself constituted financial debt. (¶¶ 19-21, 28-33)
- The four agreements warranted separately constituted tribunals with the same members. The tribunal could arrange separate international proceedings and club domestic disputes. Justice V.N. Khare was treated as the joint nominee of company and promoters; Justice R.M. Lodha was appointed for the other side, with the two to choose the chair. (¶ 34-37)
Result
Civil appeal dismissed; Arbitration Petition 48 of 2019 allowed with tribunal-constitution directions. Parties to bear their own costs. Underlying merits left to arbitration.