1.

The Insolvency and Bankruptcy Code, 2016 (“IBC”) allows a financial

creditor under Section 7 to initiate a Corporate Insolvency Resolution

Process (“CIRP”) on happening of a “default”. Section 3(12) of IBC

defines “default” as non-payment of debt when the same becomes due

and payable. The term “debt” as used in Section 3(12) is defined under

Section 3(11) provides an inclusive definition stating it to be a liability

in respect of a claim and includes any financial debt or operational

debt. Section 3(6) defines a “claim” as a right to payment or any remedy

arising out of breach of contract. Therefore, where there is a subsisting

claim for an amount and the same is due and payable but is not paid

an application under Section 7 shall be admitted.

2. The IBC vide Section 4 states that where the amount in default exceed

Rs. 1,00,000 (Rupees One Lakh) an application can be preferred either

by Financial Creditor under Section 7. A “financial creditor” is defined

under Section 5(7) and includes person who owes any financial debt.

Section 5(8) defines “financial debt” as debt along with interest and

disbursed against the time value of money. In Nikhil Mehta v. AMR

Infrastructure1 the Hon’ble NCLAT has held that the for any debt to be

classified as a financial debt it is important that the disbursal should

be against the time value of money. The court has interpreted the

phrase “time value of money” as

1
 “the price associated with the length of time that an investor must
wait until an investment matures or the related income is earned” 

3. If the person claiming to be financial creditor fails to show that the

loan amount disbursed by it to the corporate debtor is against

consideration of time value of money, it does not fall within the

meaning of “financial creditor”.2 The Hon’ble Supreme Court in

Pioneer Urban Land and Infrastructure Limited v. Union of India &

Ors.3 has held that a claim for unliquidated damages which is due

and payable but not paid falls within the ambit of Section 5(8) of

IBC. It was stated by the Hon’ble Supreme Court that:

“It is precisely to do away with judgments such as Raman Iron

Foundry (supra) that “claim” is defined to mean a right to payment or
a right to remedy for breach of contract whether or not such right is
reduced to judgment. What is clear, therefore, is that a debt is a
liability or obligation in respect of a right to payment, even if it arises
out of breach of contract, which is due from any person,
notwithstanding that there is no adjudication of the said breach,
followed by a judgment or decree or order. The expression “payment”
is again an expression which is elastic enough to include
“recompense”, and includes repayment.”

4. In M/s Innoventive Industries Limited v ICICI Bank 4, the Hon’ble

Supreme Court has provided the scheme of IBC with respect to

Section 7 application. It has held that an application under Section

7 can be triggered on happening of a default and ascertainment of

the same through records of the information utility or other

2
Dr. B.V.S. Lakshmi v. Geometrix Laser Solutions (P.) Ltd. [2018] 89 taxmann.com 352 (NCLAT)
3
Para 60
4
Para 29
 evidence produced by the corporate debtor. Contrasting the scheme

of Section 7 with Section 9 it was also held that a dispute regarding

debt is of no relevance until it is “due”. However, if the payment is

interdicted by some law or has not yet become “due” the application

under Section 7 can be rejected. Therefore, if the adjudicating

authority is satisfied that a financial debt is established and there

is a default it will admit the application under Section 7(5)(a). 5 If the

dispute is only about the amount of loan and not about the loan

itself, application under Section 7 is required to be admitted. 6

5. In Dr. H.N. Nagaraj v. Edelweiss Assets Reconstruction Co. Ltd.7 the

applicant, before the NCLAT argued that the restructured loan

instalments were to be paid by selling immovable properties but the

financial creditor has obtained an injunction from the court against

such sale, and hence the reason of default should be considered

while admitting Section 7 application. The appellate authority

refusing to hold the applicants contention stated that if there is a

debt and default under Section 7, application is required to be

admitted. Reasons for default are not relevant under IBC. Merely

because a company is going through temporary financial

5
State Bank of India v. Videocon Industries (2018) 148 SCL 506
6
Reliance Commercial Finance v. Noble Resourcing Business and Solutions (2018) 150 SCL 279
7
(2018) 148 SCL 447 = 84 taxmann.com 326 (NCLAT)
 constraints, is not sufficient to dismiss application filed by financial

creditor to initiate CIRP.8

6. The respondents of the present appeal i.e. State Bank of Malta,

Macs Enterprises and Shawn’s Enterprises within a year of the

account of the corporate debtor being classified as an NPA preferred

an application under Section 7 before the Hon’ble NCLT of Varsh.

As per Rule 4 of the Insolvency and Bankruptcy (Application to

Adjudicating Authority) Rules, 2016 in Form 1 the financial

creditors claimed that financial debt arose in respect of ‘loss of

business revenue’ amounting to Rs. 1000 Cr, (One Thousand

Crores only).9 The Hon’ble NCLT of Varsh adjudicated that the claim

fall within the definition of a “financial debt” under Section 5(8)(i)

and reason for default being irrelevant for the purpose of admission

of Section 7 application, the NCLT declared moratorium and

appointed Mr. Tucker as an Interim Resolution Professional.

Against the order of the Hon’ble NCLT, Varsh the corporate debtor

preferred an appeal before the Hon’ble NCLAT, Varsh. The NCLAT

accepted the findings of the NCLT and upheld its order.

7. Against the said order of the NCLAT, the corporate debtor has

preferred an appeal before this Hon’ble Supreme Court on the

grounds of the [A.] non-exercise of jurisdiction by the NCLT and [B.]

8
Loiz Oil PTC Ltd. v. Interlink Petroleum (2018) 149 SCL 672 = 97 taxmann.com 627 (NCLT); Deepak Seth v. Moods
Hospitality (2018) 149 SCL 681 = 97 taxmann.com 418 (NCLT)
9
Para 23, Moot Proposition
 failure to uphold the legislative mandate under Section 8 of the

Arbitration and Conciliation Act, 1996 (“Arbitration Act”)10 It is

contention of the appellants that since the agreement dated

05.02.2005 between them and the respondents contained a

arbitration clause where all dispute arising out of the said

agreement was to be referred to the arbitral tribunal appointed

solely by the appellant, the NCLT ought to have referred the dispute

to the arbitral tribunal for its determination.

A. NON-EXERCISE OF JURISDICTION BY THE NCLT

8. It was stated by the Hon’ble Supreme Court in Swiss Ribbon v.

Union of India11 the adjudicating authority under IBC can exercise

inherent powers given under Rule 11 of the NCLT Rules, 2016. Rule

11 of the NCLT Rules, 2016 states that NCLT has inherent powers

to make such orders as may be necessary for meeting ends of

justice or to prevent the abuse of process of the court. The inherent

powers under Rule 11 are similar to inherent power of the Company

Law Board (“CLB”) under Regulation 44.

9. The inherent powers of the CLB are similar to the inherent powers

of the civil court under Section 151 of the Civil Procedure Code,

1909.12 Tribunals should be construed to be endowed with such

10
Para 24 of the Moot Proposition
11
Para 52
12
Sri Ramdas Motor Transport v. Karedla Suryanarayana (2002) 36 SCL 361
 ancillary or incidental powers as are necessary to discharge its

function effectively and to do justice between the parties. 13 In Union

of India v. Paras Laminates (P.) Ltd.14 the Supreme Court held:

“Tribunal functions as a court within the limits of its jurisdiction. It has

all the powers conferred expressly by the Statute. Further, being
judicial body, it has all those incidental and ancillary powers which
are necessary to make fully effective the express grant of statutory
powers. Powers of Tribunal are no doubt limited, but within the
bounds of its jurisdiction, it has all the powers expressly and impliedly
granted”

10. The Hon’ble NCLAT in Thota Gurunath Reddy & Ors. v.

Continental Hospitals Pvt. Ltd. & Ors.15 has held that the NCLT

constituted under Section 408 of the Companies Act, 2013, while

passes an order under Section 43 and 45 of the Arbitration Act,

1996, such order is not passed as a Tribunal constituted under

Section 408 but in the capacity of ‘judicial authority’. It is further

stated that:

“…it is clear that under Section 420 of the Companies Act, 2013, the
National Company Law Tribunal passes an order as a ‘Tribunal’,
whereas under the provisions of Section 7 or Section 9 or Section 10 or
sub-section (5) of Section 60, the same very Tribunal passes an order as
an ‘Adjudicating Authority’ and the same Tribunal in the capacity of
‘judicial authority’ passes order under Section 8 or Section 45 of the
Arbitration Act, 1996. As the Tribunal is empowered to pass orders in
different capacities under different provisions of the Act…”

13
AIR 1981 SC 606
14
Para 30 and 31
15
 On reference to the above judgement, it becomes clear that the

NCLT has the power to act under different capacitates while

adjudicating a matter before it.

[B.] LEGISLATIVE MANDATE UNDER SECTION 8 OF

ARBITRATION ACT

11. It is the contention of the appellants that the NCLT failed

to exercise its powers as a ‘judicial authority’. The loan-

agreement between the appellants and the respondents

contained an arbitration clause and the appellant requested

the Adjudicating Authority to refer the dispute to arbitration in

terms of the said agreement. However, the NCLT acted solely

under the powers vested to it by the IBC while choosing

ignoring its functions under Section 8 of the Arbitration Act,

1996.

12. Section 8 is in form of a legislative command to the

judicial authority and once the prerequisite conditions are

satisfied, the judicial authority must refer the parties to

arbitration.16 The provision reads as:

“a judicial authority, before which an action is brought in a

matter which is the subject of an arbitration agreement shall, if
a party to the arbitration agreement or any person claiming
through or under him, so applies not later than the date of
submitting his first statement on the substance of the dispute,

16
Magma Leasing and Finance Ltd. v/s. Potluri Madhavilata, 2009 (4) Arb LR 1 (SC).
 then, notwithstanding any judgment, decree or order of the
Supreme Court or any Court, refer the parties to arbitration
unless it finds that prima facie no valid arbitration agreement
exists.”
13. The Hon’ble Supreme Court in P. Anand Gajapathi Raju v/s.

P.V.G. Raju17 has categorically held that the language of Section

8 is peremptory in nature, Therefore, in cases where there is an

arbitration clause in the agreement, it is obligatory for the

judicial authority to refer the parties to arbitration in terms of

their judicial authority to refer the parties to arbitration in terms

of their arbitration agreement, and nothing remains to be decided

by the judicial authority in the original action after such an

application is made, except to refer the dispute to an arbitrator.

14. The Hon’ble Karnataka High Court in Ozone Propex Private

Limited v. Urban Infrastructure Trustee Limited 18 while exercising

its supervisory jurisdiction upon the NCLT has directed the

adjudicating authority to decide a dispute in its capacity as a

judicial authority and refer the parties to arbitration. The

question before the court was whether in a Section 7 application

under IBC where underlying agreement contains an arbitration

clause the ‘determination of breach of contract’ should be sent to

arbitration ? The court held that such cases should be decided

17
P. Anand Gajapathi Raju v/s. P.V.G. Raju (2000) 4 SCC 539.
18
W.P. No 41710 of 2019 Order dated 25.09.2019 at page 8
 by the NCLT under Section 8 of the Arbitration Act, 1996 and not

under Section 7 of IBC, 2016.

15. Section 238 of the IBC which provides overriding effect to

IBC compared to any other law for the time being in force shall

not have any effect upon an application under Section 8 of the

Arbitration Act, 1996. Section 5 of the Arbitration Act, 1996 also

provides for a non-obstante clause. The rules of statutory

interpretation states that  in case of an inconsistency arising

between two special legislations, the latter enacted legislation will

have an overriding effect on the previously enacted legislation.19

However, this is not the rule of thumb. The Hon’ble Supreme

Court in Life Insurance Corporation of India and Ors. v.

D.J.Bahadur & Ors.20 has laid down that a statute can be treated

as special legislation vis-à-vis one legislation but there may be

situation where the special statute will be treated as a general

statute vis-à-vis another special statute. The court stated:

“What is special or general is wholly a creature of the subject

and context and may vary with situation, circumstances and
angle of vision. Law is no abstraction but realises itself in the
living setting of actualities. Which is a special provision and
which general, depends on the specific problem, the topic for
decision, not the broad rubric nor any rule of thumb. The
peaceful co-existence of both legislations is best achieved, if
that be feasible, by allowing to each its allotted field for play.

19
Solidaire India Ltd. v. Fairgrowth Financial Services Ltd., (2001) 3 SCC 71
20
AIR 1980 SC 2181 para 50 to 56
 Sense and sensibility, not mechanical rigidity gives the flexible
solution.”
16. The present issue before us is one related to ‘breach of

contract’. The anatomy of the IBC is such that it does not deal

with determination of disputes and does not concern itself with

fact finding. The alpha and omega of IBC is to consolidate and

amend the laws relating to reorganization and insolvency

resolution of corporate persons, partnership firms and

individuals in a time-bound manner for maximization of value

of assets of such persons, to promote entrepreneurship,

availability of credit and balance the interests of all the

stakeholders.21 In contrast, Arbitration Act, 1996 is a complete

code for resolution of dispute. The object of the code is to

provide speedy resolution of dispute between the parties. 22

Determination of breach of contract is not within the purview

of IBC. The IBC is not intended to substitute a recovery

forum.23 Therefore, in an issue related to breach of contract,

IBC vis-à-vis Arbitration Act, would be considered as a general

statute and would have no overriding effect.

21
Swiss Ribbons v UOI
22
Kandla Exports Corporation and Ors. v OCI Corporation and Ors. (2018) 14 SCC 715
23
Transmission Corporation of Andhra Pradesh Limited vs. Equipment Conductors and Cables Limited, Civil
Appeal No. 9597 of 2018, para 15,(Supreme Court). Judgment dated October 23, 2018