2022 (12) TMI 16 - AT - Insolvency and Bankruptcy

Tribunal overturns decision on related party status in insolvency case, directs Adjudicating Authority to admit application.

The Tribunal allowed the appeal, setting aside the Adjudicating Authority's decision based on related party status under Section 5(24)(j) of the ... Related party - pre-existing dispute - admissibility of Section 9 application notwithstanding arbitration clause - application of Section 21 of the Arbitration and Conciliation Act limited to domestic arbitrations - error in factual appreciation by the Adjudicating AuthorityRelated party - error in factual appreciation by Adjudicating Authority - The Appellate Tribunal reversed the Adjudicating Authority's finding that the appellant was a related party and thereby barred from initiating proceedings under Section 9 of the Code. - HELD THAT: - The Adjudicating Authority had disallowed the Section 9 application on the ground that the appellant was a related party in terms of Section 5(24)(j) and relied on a prior decision in Zoom Communications Pvt. Ltd. The Tribunal held that Zoom Communications was distinguishable because that case involved a finding of a sham transaction, a finding absent in the present record. The Tribunal concluded that the Adjudicating Authority erred in its appreciation of facts and law in treating the appellant as a related party that would preclude initiation of the Section 9 process. The Tribunal further noted that even if related-party consequences (such as exclusion from the Committee of Creditors or bar under Section 29A to be a resolution applicant) exist, those consequences do not ipso facto prohibit presentation of a Section 9 application, and no factual finding equivalent to a sham transaction was recorded here.Finding that the appellant was a related party was not sustained; the Adjudicating Authority's conclusion on this ground was set aside.Pre-existing dispute - admissibility of Section 9 application notwithstanding arbitration clause - application of Section 21 of the Arbitration and Conciliation Act limited to domestic arbitrations - error in factual appreciation by Adjudicating Authority - There was no pre-existing dispute that would bar admission of the Section 9 application; the presence of an arbitration clause (invoking foreign forum) did not preclude the Section 9 proceeding. - HELD THAT: - The Tribunal examined the record and found that the respondent did not raise the complaint of substandard goods in its reply to the pre-trial notice but raised it only in response to the subsequent demand notice, indicating an afterthought. The emails relied upon by the Adjudicating Authority concerned operational and sales improvement and did not evidence a pre-existing dispute over quality of goods. As to arbitration, the Tribunal accepted the appellant's submission that the invoked forum related to foreign (St. Petersburg) proceedings and that Section 21 of the Arbitration and Conciliation Act applies to domestic arbitrations only (as held by the Delhi High Court in Raffles Design), so the mere existence of an arbitration clause and invocation of a foreign arbitral or quasi-judicial forum did not automatically disentitle the appellant from seeking relief under Section 9. For these reasons the Adjudicating Authority's conclusion that a pre-existing dispute or arbitration bar prevented admission of the Section 9 application was an error of appreciation.No pre-existing dispute was proved that would bar the Section 9 application; arbitration clause (referring to foreign forum) did not preclude admission.Final Conclusion: The appeal is allowed; the impugned order dismissing the Section 9 application is set aside for errors in factual appreciation and law. The matter is remitted to the Adjudicating Authority with a direction to admit the appellant's Section 9 application in accordance with law; no order as to costs. Issues:1. Related party status under Section 5(24)(j) of the Insolvency and Bankruptcy Code, 2016.2. Existence of a pre-existing dispute between the parties.Related Party Status Issue:The appeal challenged the Adjudicating Authority's decision dismissing the application under Section 9 of the Code based on the Appellant's related party status. The Respondent argued the Appellant was a related party as per Section 5(24)(j) and cited a judgment in a different case. However, the Tribunal found the cited judgment inapplicable as it dealt with a sham transaction, unlike the present case. The Appellant argued that being a related party would not bar them from filing the application under Section 9. Reference was made to a decision by the Tribunal in another case to support this argument. The Tribunal concluded that related party status does not prevent filing under Section 9 and allowed the appeal, setting aside the Adjudicating Authority's decision.Pre-Existing Dispute Issue:Regarding the pre-existing dispute, the Appellant contended that the Respondent's objection about substandard goods was an afterthought raised after the demand notice. The Adjudicating Authority considered various emails but erred in concluding a pre-existing dispute. The emails discussed operational improvements, not product quality issues. The Respondent mentioned an arbitration clause, but the Tribunal clarified that the clause's applicability is limited to Indian arbitration proceedings. The Appellant's notice was in line with Russian laws, involving a commercial court, not an arbitral tribunal. The Tribunal found errors in the Adjudicating Authority's assessment of facts and evidence, leading to the appeal's allowance and setting aside of the impugned order. The Adjudicating Authority was directed to admit the application as per the law, without costs.