Arbitration Provision Does Not Bar Operational Creditor’s Section 9 IBC Petition: NCLAT Chennai Ruling

Background of the Appeal

The National Company Law Appellate Tribunal (NCLAT), Chennai, in Shahi Md. Karim Vs Kabamy India LLP, considered an appeal filed by the suspended director of Lumiford Private Ltd., challenging an order of the National Company Law Tribunal, Hyderabad Bench – I dated 05.01.2023 in CP (IB) No.289/9/HDB/2022.

The NCLT had admitted an Section 9 application under the Insolvency and Bankruptcy Code, 2016 (The Code) filed by Kabamy India LLP (Operational Creditor) against Lumiford Private Ltd. (Corporate Debtor). The suspended director of the Corporate Debtor questioned both the procedure followed by the NCLT and the substantive basis for admission of the insolvency application.

The NCLAT, after examining the facts and orders passed by the NCLT at various stages, upheld the admission of the Section 9 application and dismissed the appeal. A key legal finding of the Appellate Tribunal was that the mere existence of an arbitration clause in the underlying contract does not bar an operational creditor from initiating insolvency proceedings under Section 9 of the Code.

Contractual Relationship and Origin of the Dispute

Carrying & Forwarding Agreement

The Corporate Debtor had entered into an agreement dated 22.12.2020 with the Respondent/Operational Creditor, appointing the latter as a Carrying & Forwarding Agent (C & F Agent) for the sale of the Corporate Debtor’s products. The contractual arrangement was stated to be effective from 18.12.2020 and intended to run until 31.12.2023.

Key undisputed features noted by the NCLT and referred to in the appellate record include:

  • Existence of a valid CFA Agreement dated 22.12.2020 between the parties.
  • Deposit of Rs.2,00,00,000/- by the Operational Creditor in accordance with the terms of the CFA Agreement.
  • Termination of the CFA Agreement after issuance of due notice.

Operational Creditor’s Claim

The Operational Creditor raised invoices in the course of performance under the CFA Agreement and later claimed outstanding operational dues. The NCLT recorded that:

  • The invoices issued by the Operational Creditor were not disputed before it.
  • No payment had been made by the Corporate Debtor towards the amounts claimed under those invoices.
  • No dispute, within the meaning of Section 8(2) of the Code, was raised that could negate or delay the admission of the Section 9 application.

On this basis, the NCLT concluded that an operational debt exceeding one crore rupees was due and in default, and that the Corporate Debtor had not produced any material to establish discharge of such liability. Consequently, the NCLT held that existence of operational debt and default stood established.

Grounds Urged in Appeal

The suspended director of the Corporate Debtor advanced multiple grounds before the NCLAT, both on procedural and substantive aspects.

Procedural Grievances

The Appellant argued that:

  • The Corporate Debtor did not get a fair opportunity to file a counter before the NCLT.
  • There was confusion and short notice with respect to listing dates and service of documents.
  • The Corporate Debtor allegedly received a copy of the petition only on 02.11.2022 and was “in the dark” about further steps or listings.
  • An application under Section 60(5) of the Code had been filed to recall earlier orders closing the right to file a counter and reserving the matter.

Substantive Objections

On merits, the Appellant contended that: