Supreme Court Rules Insolvency Proceedings Time Not Excludable in Arbitration Limitation Period

Case Background

This case involves a contractual dispute between HPCL Bio-Fuels Ltd. (a government-owned biofuel company and subsidiary of Hindustan Petroleum Corporation Ltd.) and Shahaji Bhanudas Bhad (a proprietor engaged in supplying equipment and services for sugar factories). The dispute arises from a series of contracts where Shahaji Bhanudas Bhad supplied equipment and completed certain enhancement works for HPCL Bio-Fuels’ production plants in Bihar. Payments totaling ₹19.02 crore were made by HPCL Bio-Fuels, but a balance of ₹18.12 crore remained disputed. HPCL Bio-Fuels cited concerns about the quality of materials, non-compliance with project timelines, and performance issues by the respondent.

After failed attempts to resolve the matter, the respondent initiated proceedings to recover the unpaid dues, which included attempts at both arbitration and insolvency. This journey through multiple forums forms the basis of the present case before the Supreme Court.

Key Dates

1. 2012: Contracts awarded by HPCL Bio-Fuels to Shahaji Bhanudas Bhad for enhancement works.
2. 2012-2014: Equipment supplied, and invoices raised; partial payments made.
3. 2016: Legal notice issued by the respondent demanding outstanding payments and invoking arbitration.
4. 2018: First Section 11 arbitration application filed by the respondent, later withdrawn.
5. 2018: Respondent filed a Section 9 insolvency application under IBC.
6. 2020: NCLT admitted the insolvency application, but NCLAT set it aside due to a pre-existing dispute.
7. 2022: Supreme Court dismissed the respondent’s appeal on insolvency, upholding the existence of a pre-existing dispute.
8. 2022: Respondent filed a fresh Section 11 arbitration application in the Bombay High Court, which was allowed.
9. 2024: Supreme Court hears HPCL Bio-Fuels’ appeal against the Bombay High Court’s decision to appoint an arbitrator.

Key Issues

The Supreme Court addressed the following issues:

1. Maintainability of the Second Arbitration Application: Could the respondent file a new application for arbitration under Section 11(6) of the Arbitration Act after having previously withdrawn an identical application without permission to re-file?
2. Application of Order 23 Rule 1 of the CPC: Does the principle of Order 23 Rule 1 CPC, which bars re-litigation after withdrawal without liberty, apply to arbitration applications?
3. Limitation Period and Exclusion of Time under Section 14 of the Limitation Act: Whether the time spent by the respondent pursuing insolvency proceedings could be excluded in calculating the limitation period for filing the arbitration application.
4. Existence of a Pre-Existing Dispute: Did the existence of a pre-existing dispute prevent the respondent from initiating insolvency proceedings under Section 9 of the IBC?
5. Nature of Arbitration vs. Insolvency Proceedings: Could the respondent pursue arbitration after previously attempting to recover dues through insolvency proceedings, and was such forum-switching permissible?

Court’s Reasoning and Ratio

1. Maintainability of the Second Arbitration Application

• The court addressed whether the respondent’s second arbitration application was maintainable given that the first application was withdrawn without court permission to re-file. It discussed the applicability of Order 23 Rule 1 of the CPC, which restricts re-filing without liberty, to non-suit proceedings like arbitration applications.
• Ratio: The court held that the principles underlying Order 23 Rule 1 of CPC, which aim to avoid redundant litigation, extend to arbitration applications. The second Section 11(6) application was therefore not maintainable as the first application had been withdrawn without permission to re-file.

2. Application of Order 23 Rule 1 of CPC

• The court cited Sarguja Transport Service v. State Transport Appellate Tribunal, where principles of finality and res judicata were extended beyond civil suits to writ petitions, to assert that the same principles could apply to arbitration applications under Section 11(6).
• Ratio: Order 23 Rule 1 principles are applicable to arbitration applications to ensure procedural efficiency and prevent abuse of process. Hence, an arbitration application withdrawn without liberty to re-file would typically bar a subsequent application on the same cause.

3. Limitation Period and Exclusion of Time under Section 14 of the Limitation Act

• The court examined whether the time spent in pursuing insolvency proceedings could be excluded under Section 14 of the Limitation Act when calculating the limitation period for arbitration. Section 14 allows for excluding time if the proceedings were pursued in good faith but in a court that lacked jurisdiction. Here, insolvency proceedings under IBC and arbitration differ significantly in objectives and relief (in rem vs. in personam), raising questions about whether they could be considered part of the same “cause.”
• Ratio: The court held that since insolvency and arbitration have fundamentally different remedies, the time spent in insolvency proceedings could not be excluded under Section 14 of the Limitation Act for calculating the limitation period for the arbitration application.

4. Existence of a Pre-Existing Dispute in Insolvency Proceedings

• HPCL Bio-Fuels raised objections about performance and quality well before the respondent filed for insolvency, establishing the presence of genuine disputes between the parties. The NCLAT had previously set aside the NCLT’s admission order based on this pre-existing dispute, a decision upheld by the Supreme Court.
• Ratio: In line with the precedent set in Mobilox Innovations Private Limited v. Kirusa Software Private Limited, the court reaffirmed that a pre-existing dispute bars insolvency proceedings under Section 9 of the IBC. Consequently, the respondent’s insolvency petition was correctly dismissed.

5. Nature of Arbitration vs. Insolvency Proceedings

• The court differentiated between arbitration, which addresses disputes between parties (in personam), and insolvency, which concerns the rights of all creditors against a debtor’s estate (in rem). The respondent’s attempt to recover dues through insolvency proceedings followed by arbitration raised concerns of forum shopping.
• Ratio: Although parties may seek alternative remedies, switching forums should not undermine the principles governing each. The court cautioned against utilizing different legal avenues without justification, which could imply procedural abuse.

Final Decision

The Supreme Court ruled in favor of HPCL Bio-Fuels Ltd., concluding that:

• The second arbitration application under Section 11(6) was not maintainable since the first application was withdrawn without liberty to re-file.
• The arbitration application was time-barred, as the period spent in insolvency proceedings could not be excluded under Section 14 of the Limitation Act.

Conclusion

This judgment establishes important legal principles related to the procedural interplay between arbitration and insolvency. It highlights:

Pre-existing Disputes in Insolvency: The court reaffirmed that pre-existing disputes are a valid ground to dismiss insolvency petitions, protecting the IBC from being used as a debt collection tool in contested claims.

Applicability of Procedural Restrictions: The court extended principles from civil procedure to arbitration, upholding rules that prevent redundant litigation and ensure finality.

Exclusion under Limitation Law: The judgment clarifies that only proceedings pursued in the same “cause” are eligible for exclusion under Section 14, and insolvency and arbitration, being fundamentally different, do not fall under this category.