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NCLAT rules that the existence of an Arbitration Clause does not prevent Insolvency Proceedings

The National Company Law Appellate Tribunal (NCLAT), Chennai Bench comprising Justice M. Venugopal, Judicial Member and Ms. Shreesha Merla, Technical Member was hearing an appeal filed by the Ex-Director of the Corporate Debtor challenging the order of admission of Section 7 Application by the Adjudication Authority. The NCLAT Chennai bench ruled that the existence of an arbitration clause did not prevent insolvency proceedings and the application was within the limitation period.

In the present case of C.P. (IB) No. 135/BB/2021, the suspended Director of M/s Value Designbuild Private Limited (referred to as the 'Corporate Debtor') appealed a decision made by the National Company Law Tribunal (NCLT), Bengaluru Bench, on 13/04/2023. The NCLT had admitted an application by M/s India Resurgence ARC Private Limited, a financial creditor, under Section 7 of the Insolvency and Bankruptcy Code, 2016 (referred to as 'the Code'). The financial creditor claimed that the Corporate Debtor defaulted on an amount of Rs. 19,29,97,717/- (Rupees Nineteen Crores Twenty-Nine Lacs Ninety Seven Thousand Seven Hundred Seventeen Only) as of 31.08.2021.

The appellant contended that the NCLT's order was non-speaking and lacked sufficient reasoning. They argued that the application was time-barred as the default date mentioned in the application was 31/07/2016, and the limitation period had expired on 31/07/2019, while the petition was filed on 24/09/2021.

The appellant also claimed that there was no written acknowledgement of liability, so Section 18 of the Limitation Act, 1963, could not be applied. They further argued that no financial debt existed, as they had made payments totalling Rs. 26,96,83,213/- (Rupees Twenty Six Crores Ninety Six Lakhs Eighty-Three Thousand Two Hundred and Thirteen Only) between January 2015 and July 2019. They issued legal notices challenging the financial debt but received no response. The appellant also mentioned the existence of an arbitration clause in the agreement and an attempt to initiate arbitration under Section 8 of the 'Arbitration and Conciliation Act, 1996', which was closed as infructuous in the impugned order.

The NCLAT (National Company Law Appellate Tribunal) found that the application was filed within the limitation period, taking into account the part payments made by the Corporate Debtor and excluding certain periods for limitation calculation. The NCLAT also considered entries in the books of accounts as an acknowledgement of debt as defined under Section 18 of the Limitation Act, 1963.

The appellant argued that the initiation of arbitration proceedings should prevent admission under the Insolvency and Bankruptcy Code, but the NCLAT held that IBC overrides other laws, and an application under Section 7 must examine the material presented by both parties to determine if there is default.

The NCLAT emphasized the importance of swiftly ascertaining the existence of default, and since the debt and default were established and the application was within the limitation period, the appeal was dismissed at the admission stage.


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