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IBCInsolvency & Bankruptcy CodeWhether a pending proceedings under section 34 of Arbitration and Conciliation Act would constitute as a pre-existing dispute (IBC)

June 18, 2019by GLC & Partners


In the case of  K. Kishan v. Vijay Nirman Company Pvt Ltd (CIVIL APPEAL NO. 21824 OF 2017) it was held by the Hon’ble Supreme Court that when objections are pending under Section 34 or Section 37 of the Arbitration and Conciliation Act it will be held that the amount is disputed debt.

The facts of the case were that the Respondent i.e. M/s Vijay Nirman Company Pvt. Ltd. entered into a sub-Contract Agreement with one M/s Ksheerabad Construction Pvt. Ltd. (KCPL) to undertake 50% of work for construction and widening of highways on behalf of KCPL. Apart from this a separate agreement on the same day was entered into between KPCL and M/s SDM Projects Limited, Bangalore, as a result a tripartite Memorandum of Understanding was entered into between KCPL, M/s SDM Projects Pvt. Ltd. and the Respondent. [1]

During the course of the project disputes arose and matter was referred to an Arbitral Tribunal which delivered an award in favour of the respondent. Three cross claims made by the respondent were rejected. During this a notice was sent by the Respondent to KCPL to pay an amount of Rs. 1,79,00,166/-. Within 10 days KCPL sent a reply stating that the amount was subject matter of an Arbitration proceeding and that the Respondent according to the books of KCPL were liable to pay larger amounts to them. After this they filed a petition under Section 34 of the Arbitration and Conciliation Act against the award. This was within the period of limitation set under 34(3) of the Act.

Only after this was a petition filed under Section 9 of the IBC. The NCLT( Hyderabad bench) held that pending proceedings under Section 34 of the Arbitration and Conciliation Act were irrelevant as the claim has been admitted and there is no stay on the award. An appeal was filed before the Appellate tribunal also stated the same thing along with stating that section 238 of the code which is the non-obstante clause will override the Arbitration Act. It also asserted that according to Form V of Part 5 of the Insolvency & Bankruptcy (Application to Adjudicating Authority) Rules, 2016 an order of an arbitral panel adjudicating the default would be treated as a record of operational debt[2], it said the NCLT admitting the application was justified.

The order was appealed in the Hon’ble Supreme Court. The Hon’ble Supreme Court held that filing of a petition under Section 34 of the Arbitration Act would constitute as a pre-existing dispute which develops at the first stage of the proceedings and continues even after an award till final adjudicatory process has taken place under Section 34 & 37.[3] It also stated that Section 238 of the Act would only apply when there is some inconsistency with another Act and the same is not the case in the present situation.

The order of the NCLAT was set aside and the appeal was allowed.

[1] CIVIL APPEAL NO. 21824 OF 2017

[2] CIVIL APPEAL NO. 21824 OF 2017

[3] CIVIL APPEAL NO. 21824 OF 2017