Referring a matter to Arbitration under Section 8 of the Arbitration and Conciliation Act is beyond the scope of Section 9 of the IBC: NCLAT

Referring a matter to Arbitration under Section 8 of the Arbitration and Conciliation Act is beyond the scope of Section 9 of the IBC: NCLAT

The NCLAT Principal Bench comprising of Justice Anant Bijay Singh, Judicial Member and Ms. Shreesha Merla, Technical Member in the matter of Trafigura V. TDT Copper Ltd. (Company Appeal (AT) (Insolvency) No. 742 of 2020) arising out of order dated 15.07.2020 in Company Petition (IB) No. 2817/ND/2019 passed by the Adjudicating Authority (National Company Law Tribunal, New Delhi Bench Court-V) adjudicated on the issue whether a matter can be referred to arbitration by the Adjudicating Authority while exercising its power under Section 9 of the Insolvency and Bankruptcy Code, 2016 (“Code”).

Facts

The Appellant and the Respondent entered into the Master Sale Agreement (MSA) dated 27.01.2016 under which the Respondent agreed to buy and the Appellant agreed to sell on the terms and conditions set out in the MSA, a specified quantity of copper cathodes (‘Material’). Invoices issued by the Appellant for the supply of Material were required to be paid by the Respondent within 30 days from the date of the invoice with an interest on the unpaid amount at the rate of 4% per annum from (and including) the due date for payment to (and including) the date of receipt of such unpaid amount by the Appellant.

As, the Respondent failed to make payment to the Appellant, the parties had to enter into a Settlement Agreement on 20.11.2018 whereby the Respondent has unequivocally acknowledged and admitted that an amount of Rs. 63,81,63,368/- was due and payable which the Respondent acknowledged to pay along with interest at the rate of 10.9% per annum compounded monthly to the Appellant by 30.04.2019 as per the Payment Schedule appended to the Settlement Agreement.

As the Respondent till 10.12.2018 only paid an amount of Rs. 12,30,59,615/- to the Appellant, by way of Extension Notice dated 30.04.2019 addressed by the Appellant to the Respondent, the deadline of 30.04.2019 provided under clause 5(c) of the Settlement Agreement was extended to 15.05.2019. However, the Respondent failed to pay the Appellant the entire amount due to which Appellant sent a Demand Notice under the Code for a recovery of outstanding dues of Rs. 64,13,59,330/ i.e., the total amount along with interest. As, the Respondent denied the sums owned by it to the Appellant.

Subsequently, the Appellant filed the Application under Section 9 of the Code against the Respondent seeking the initiation of the CIRP in respect of the Respondent as on 24.10.2019 an amount of Rs. 59,72,40,162/- was due and payable by the Respondent to the Appellant. The Adjudicating Authority dismissed the Application on the ground that unpaid amounts under a Settlement Agreement do not constitute ‘operational debt’ under Section 5(21) of the IBC and hence, the Appellant filed the present appeal.

Contentions of the Appellant

The Appellant contended that the Respondent vide the Settlement Agreement clearly acknowledged its liability to pay an amount of INR 63.81 crores and agreed to pay the same along with 10% interest per annum compounded annually by 30.04.2019 (extended to 15.05.2019).

The claims arising under the MSA are covered under the definition of ‘operational debt’ under Section 5(21) of the IBC and debts arising under Settlement Agreement have to be treated as ‘operation debt’ and Corporate Insolvency Resolution Process should be initiated against the Respondent.

Contentions of the Respondent

The Respondent contended that the claims arising under the Settlement Agreement are not ‘operational debt’ and that Section 9 is not triggered as the debt did not become ‘due’ and consequently there has been no ‘default’. The Settlement Agreement provided that the Respondent shall reduce the outstanding amount from Rs. 63,81,63,368/- to 52,50,00,000/- by 30.11.2018 failing which the entire outstanding amount shall become due and payable immediately further, in the event the parties fail to conclude a further contract for supply of material for 2019 by 21.12.2018. Hence, the Respondent paid an amount of Rs. 12.3 crores to the Appellant reducing its exposure to less than INR 52,50,00,000/- by 30.11.2018. It is further submitted that since the Respondent had complied with the terms of the Settlement Agreement, the amounts claimed by the Appellant did not become due and payable as on 30.04.2019.

Held

The Bench held that the Adjudicating Authority rightly concluded that default of instalment of Settlement Agreement does not come within the definition of ‘operational debt’ as it does not fall within the definition of additional debt as per Section 5(21) of the IBC.

Moreover, with respect to the prayer sought by the Appellant that the matter be referred to Arbitration under Section 8 of the Arbitration and Conciliation Act, the Bench held that held that as the role of National Company Law Tribunal is very limited while exercising its power under Section 7, 9 and 10 of the IBC, 2016, referring the matter to arbitration is beyond the scope of Section 9 of the IBC.

This Article has been Compiled by Ayushi Misra (Senior Associate) and Arun Gupta (Partner). 

  You can direct your queries or comments to the author at info@factumlegal.com

  Disclaimer-

  The contents of this article should not be construed as legal opinion. This article is             intended to provide a general guide to the subject matter. Specialist advice should be     sought about your specific circumstances. We expressly disclaim any financial or other   responsibility arising due to any action taken by any person on the basis of this article.