Tribunal Resolves Divergent Views on Arbitral Award as Basis for Financial Debt Under IBC
In a landmark decision, the National Company Law Tribunal (NCLT), New Delhi Bench, has admitted a petition filed by Brilliant Metals Private Limited against Avyukta Dairy Products Ltd., paving the way for the initiation of the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016. This ruling resolves a significant legal question regarding whether an arbitral award related to a supply contract can transform an operational debt into a financial debt under Section 7 of the IBC.
The dispute arose from an arbitral award dated July 2, 2024, which held Avyukta Dairy Products Ltd., along with other guarantors, liable to pay a sum exceeding Rs. 2.46 crores. The award, encompassing both the principal amount and accrued interest, remained unpaid, prompting Brilliant Metals Private Limited to seek insolvency proceedings against the corporate debtor.
The NCLT bench, comprising Sh. Ashok Kumar Bhardwaj and Ms. Reena Sinha Puri, was divided on the matter, leading to a referral to the Hon'ble President under Section 419(5) of the Companies Act, 2013. Ms. Reena Sinha Puri, Member (T), argued that the arbitral award constituted a financial debt under Section 5(8) of the IBC, as affirmed by Supreme Court precedents in Dena Bank v. C. Shivakumar Reddy and Kotak Mahindra Bank Ltd. v. A. Balakrishnan. In contrast, Sh. Ashok Kumar Bhardwaj, Member (J), opined that an arbitral award concerning a supply contract cannot convert operational debt into financial debt.
This divergence was settled, with the tribunal ultimately admitting the petition. The decision underscores the enforceability of arbitral awards as decrees once the statutory period for challenging them under Section 34 of the Arbitration and Conciliation Act, 1996, lapses without appeal. The NCLT emphasized that such awards can form the basis for initiating CIRP under the IBC if the debt remains unpaid, aligning with the principle of consistency and judicial discipline in insolvency proceedings.
The tribunal appointed Mr. Sanjay Mehra as the Interim Resolution Professional to manage the insolvency process, marking a significant step forward in addressing the financial distress of Avyukta Dairy Products Ltd. The decision reinforces the legal framework governing the transformation of arbitral awards into financial debts within the ambit of the IBC, setting a precedent for similar cases in the future.
Bottom Line:
Insolvency and Bankruptcy Code - Whether an arbitral award related to a supply contract can convert an operational debt into a financial debt under Section 7 of IBC.
Statutory provision(s): Insolvency and Bankruptcy Code, 2016 - Section 7, Section 5(8); Arbitration and Conciliation Act, 1996 - Section 36
