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Mumbai: A recent National Company Law Appellate Tribunal (NCLAT) order refusing to initiate insolvency proceedings against a corporate debtor in a case where an arbitration order was already issued will reduce a lot of unnecessary insolvency proceedings, legal experts said.

Aegis Forging (a corporate debtor) had borrowed money from some investors on the basis of a personal guarantee by Shaikh Mohammed Tariq (a financial creditor). When Aegis defaulted on the repayment, Tariq filed a section 7 application against Aegis before the company law tribunal, alleging his personal guarantee was fully covered by section 5(8)(i) of IBC and is financial debt. However, Tariq had already won an arbitration award in 11 November 2013, based on his personal guarantee, and the arbitration proceedings were already being executed.

Aegis Forging challenged the IBC move in the NCLAT, where a bench of justices Ashok Bhushan and Alok Srivastava refused to admit the case under section 7. NCLAT said an arbitration award to pay Tariq cash security of 3.64 crore with interest was already passed, and since the financial creditor was already executing the award, this was good enough reason to refuse the section 7 application.

Srijan Sinha, an insolvency expert at Edictum Law & Co., said, “The observation and reasoning will bring in a lot of subjectivity to IBC section 7 petitions, which is a distinct remedy from arbitration." While one is for restructuring a defaulting company, the other is for recovery, and this may have to be tested in an appeal before the Supreme Court, Sinha said.

Sandeep Bajaj, managing partner, PSL Advocates & Solicitors disagrees. “The NCLAT judgement cannot be read as propounding the law on this subject as the law has already been settled by the SC in Dena Bank (now Bank of Baroda) vs. C. Shivakumar Reddy and Anr, wherein it observed that a judgement or a decree for money passed by any court or tribunal in favour of a financial creditor would give rise to a fresh cause of action for maintaining an application under section 7 of IBC seeking initiation of CIRP in the matter of the corporate debtor."

ABOUT THE AUTHOR

Priyanka Gawande

Priyanka Gawande is a senior legal correspondent at Mint. She has worked as legal reporter for four years with both television and digital mediums. Based in Mumbai, she reports on disputes across sectors including banking, corporates and finance. This also includes insolvency and bankruptcy cases and intellectual property rights (IPR) litigation. Her focus also comprises tracking capital markets and disputes relating to securities law. Previously, Priyanka worked with Informist Media for 2.5 years covering major insolvency and bankruptcy cases and corporate developments. She started her career in journalism with Business Television India (BTVi) where she reported on primary markets, banking, finance and insurance companies.
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