VN Pvt. Ltd. (VNPL) entered into a Sub-contract Agreement with KC Pvt. Ltd. (KCPL) to undertake road construction works. During the course of the project, disputes and differences arose between the parties and the same w

Section 5(6) of the Insolvency and Bankruptcy Code, 2016 defines the meaning of the word 'dispute'. According to this, the term 'dispute' includes a suit or arbitration proceedings relating to (a) the existence of the amount of debt; (b) the quality of goods or service; or (c) the breach of a representation or warranty. The facts of the case is similar to the case decided by the Supreme Court of India in the matter of K Kishan v. Vijay Nirman Co. (P.) Ltd. , August 14, 2018. The question before the Supreme Court was whether an arbitral award that has been challenged under Section 34 of the Arbitration and Conciliation Act, 1996 by the award debtor can form the basis for an action under Section 9 of the Insolvency and Bankruptcy Code, 2016. The Supreme Court overturned the decision of the National Company Law Appellate Tribunal (NCLAT) and held that the pendency of an application under Section 34 of the Arbitration and Conciliation Act, 1996 constitutes a 'dispute' under Section 8 of the Code. Accordingly, the challenge to the arbitral award bars the initiation of the corporate insolvency resolution process (CIRP), under Section 9 of the Code. The Supreme Court had opined that operational creditors cannot use the Insolvency and Bankruptcy Code, 2016 either prematurely or for extraneous considerations or as a substitute for debt enforcement procedures. Such a company would be well within its rights to state that it is challenging the Arbitral Award passed against it, and the mere factum of challenge would be sufficient to state that it disputes the Award. We repeat that the object of the Code, at least insofar as operational creditors are concerned, is to put the insolvency process against a corporate debtor only in clear cases where a real dispute between the parties as to the debt owed does not exist. The Supreme Court decision overturned the position assumed by the NCLT and the NCLAT that proceedings pending under Section 34 of the Arbitration and Conciliation Act, 1996 do not imply the existence of a dispute and that an arbitral award that has been challenged does not constitute a record of the operational debt. The Court held that whilst the final adjudication of a challenge to an award is pending under the Arbitration and Conciliation Act, 1996, the provisions of the Code may not be legitimately attracted. This in effect is a harmonious construction by the Supreme Court of the two legislations, considering situations where a corporate debtor is put under the resolution process before final adjudication of a challenge to an award under the Arbitration and Conciliation Act, 1996. If the arbitral award is subsequently set aside under Section 34 of the Arbitration and Conciliation Act, 1996, the damage to the corporate debtor would be irreparable and the legal position under the two legislations thereby, irreconcilable. Thus, the Award passed under the Arbitration and Conciliation Act, 1996 shows that operational debt is disputed and the Code cannot be invoked in respect of operational debt where an Arbitral Award has been passed against corporate debtor, which has not yet been finally adjudicated upon.