Natural justice in insolvency proceedings: rejection without hearing on Section 9 merits was quashed and remitted for fresh decision.

An insolvency petition rejected without hearing the petitioner on the merits of the Section 9 claim violated natural justice and could not stand. The Karnataka HC noted that the petitioner had been heard only on the request for reference to arbitration under Section 8 of the Arbitration and Conciliation Act, while the maintainability and merits of the insolvency proceeding were not addressed. Because the adjudication affected the insolvency claim without affording a hearing on that issue, the impugned order was quashed. The Tribunal was directed to reconsider both the Section 8 application and the maintainability of the Section 9 proceeding afresh after hearing both parties.

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Issues: Whether the order of the Tribunal rejecting the insolvency petition without affording the petitioner an opportunity of hearing on the merits of the claim was liable to be quashed and the matter remitted for fresh decision.

Analysis: The petition challenged the Tribunal's order by which the respondent's application under Section 8 of the Arbitration and Conciliation Act, 1996 was allowed and the petitioner's proceeding under Section 9 of the Insolvency and Bankruptcy Code, 2016 was rejected. The record showed that the petitioner's submissions had been heard only on the request for reference to arbitration, while the merits of the Section 9 proceeding were not heard. An adjudication that determines the insolvency claim without hearing the petitioner on that aspect is contrary to the principles of natural justice. In such circumstances, it was unnecessary to examine the rival contentions on arbitrability or alternative remedy.

Conclusion: The impugned order was quashed and the Tribunal was directed to decide both the Section 8 application and the issue of maintainability of the Section 9 proceeding afresh after hearing both parties.

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