NCLT Mumbai: Arbitration Clause Does Not Bar Insolvency Proceedings on Proven Default
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TL;DR
- NCLT Mumbai admitted insolvency proceedings despite an arbitration clause in the contract.
- The tribunal held the existence of default was proven and that arbitration remedies do not bar proceedings under Section 7 of the IBC.
- Golden Medows Export's petition against PS IT Infrastructure was allowed, and a Corporate Insolvency Resolution Process was initiated.
- A moratorium was declared, and an Interim Resolution Professional was appointed.
Overview
The National Company Law Tribunal (NCLT), Mumbai Bench, admitted a Section 7 application filed by Golden Medows Export Private Limited against PS IT Infrastructure & Services Limited to initiate Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC), despite the debtor's reliance on an arbitration clause in the underlying contract.
What Happened
Golden Medows Export Private Limited disbursed Rs. 2.90 crore to PS IT Infrastructure & Services Limited as an Inter Corporate Deposit (ICD) in 2024, secured by a Memorandum of Understanding (MoU) that included an arbitration clause.
Upon non-repayment by the due date in June 2025, the creditor filed a Section 7 application before NCLT Mumbai, claiming total default of over Rs. 3.1 crore, including interest.
The debtor challenged the application, arguing the dispute should be arbitrated and that the company was not insolvent.
The NCLT found that the default was established by documentary evidence and held that the presence of an arbitration clause does not preclude insolvency proceedings under the IBC once default is proven.
The tribunal admitted the application, commenced CIRP, imposed a moratorium, and appointed an Interim Resolution Professional.
Context
Section 7 of the IBC allows a financial creditor to initiate insolvency proceedings upon a proven default. Disputes over recovery versus insolvency resolution and the interplay between arbitration clauses and the IBC have been subject to prior Supreme Court judgments.
The NCLT referenced Supreme Court decisions affirming that arbitration clauses in loan or funding contracts do not override the statutory remedies and jurisdiction under the IBC.
Why It Matters
- The ruling confirms the prevailing position that arbitration clauses do not block insolvency proceedings in India under the IBC once default is established.
- The order supports creditors' ability to seek insolvency remedies even when contracts contain arbitration agreements, preserving the jurisdiction of the NCLT in such matters.