[IBC, 2016] Bar U/s. 238 Is Not Capable Of Being Invoked Upon Mere Filing Of An Application U/s. 7(1): Bombay HC

The Bombay High Court held that the admission of an application after recording its satisfaction as contemplated by Section 7(5) of IBC would be the starting point where the bar under Section 238 of IBC can be said to be capable of being invoked and the mere filing of an application under Section 7(1) of IBC cannot be said to be enough to invoke the bar.

The Single Judge Bench of Justice Avinash G. Gharote, therefore, clarified that “Section 7(5)(b) of the IB Code permits the Adjudicating Authority to reject the application where it believes that default has not occurred, thereby indicating that the mere filing of an application under Section 7(1) of the I B Code, would not act as a bar to any proceedings under other statutes, until and unless the satisfaction as contemplated by Section 7(4) r/w Section 7(5)(a) of the IB Code is recorded by the Adjudicating Authority and the application is admitted”.

Advocate Ashutosh Dharmadhikari appeared for the Applicant and Advocate Rahul Bhangde appeared for the Respondent

In this case, the Applicant filed an application under Section 11 (6) of the A&C Act for the appointment of an Arbitrator to resolve the dispute between them and the Respondent. However, the Respondent alleged that there was no dispute and the Applicant had already admitted his liability to pay. It was only when the Respondent expressed their intention to invoke provisions of IBC through a notice dated 25/08/2020, that the applicant filed dated 15/09/2020 after which the present application under Section 11 of the A & C Act came to be filed on 23/10/2020, consequent to which, a petition under Section 9 of the IBC was filed by the Respondent before the NCLT on 22/01/2021.

After perusing the submissions and relevant provisions, the High Court examined Section 7 of IBC and stated that Section 7 grants a right to a financial creditor to initiate insolvency proceedings against a corporate debtor.

However, the mere filing of such an application by itself, does not mean that the Adjudicating Authority, has taken cognizance of the matter, added the Court.

The Bench elaborated that sub-section 4 of Section 7 of IBC casts a duty upon the Adjudicating Authority, within fourteen days of the receipt of such application to, ascertain the existence of a default from the records of an information utility or based on other evidence furnished by the financial creditor under sub-section 3 of Section 7 of IBC.

“The proviso to Section 7(4) of the IB Code further enjoins the Adjudicating Authority to record reasons for not ascertaining the factors, as contemplated by Section 7(4), within the time frame stipulated therein. Further Section 7(5) of the IB Code enjoins upon the Adjudicating Authority to record its satisfaction that the default has occurred and no disciplinary proceedings are pending against the proposed resolution professional and upon such satisfaction permits the admission of such application,” added the Bench.

The Bench noted that there does not appear to be anything inconsistent between the provisions of the A&C Act and the IBC, since the provisions of Section 238 of the IBC would come into play only upon an order having been passed by the Adjudicating Authority under Section 7(5) of the IBC and therefore an application under Section 11(6) of the A&C Act, till such time cannot be said to be not maintainable.

Therefore, observing that Section 11(6) of the A&C Act provides a narrow escape for judicial adjudication, the High Court allowed the application and appointed Justice Z. A. Haq, a Former Judge of the Bombay Court as an Arbitrator to adjudicate the disputes between the parties in the case.

Cause Title: M/s. Sunflag Iron & Steel Co. Ltd. v. M/s. J. Poonamchand & Sons

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