Tribunal holds that statutory remedy under IBC prevails over arbitration clause; Appellant recognized as operational creditor entitled to initiate CIRP despite pre-existing dispute claims.
In a significant judgment dated August 27, 2026, the National Company Law Appellate Tribunal (NCLAT), Chennai bench, ruled in favor of M/s Posco International Corporation (formerly Posco Daewoo Corporation), affirming that the existence of an arbitration clause in a contract does not preclude a creditor from initiating insolvency proceedings under the Insolvency and Bankruptcy Code (IBC), 2016. This judgment clarifies the interplay between private contractual remedies and statutory insolvency procedures, reinforcing the precedence of the latter in cases involving operational debts.
The dispute arose out of an international shipment contract executed in December 2016 between Posco International and M/s Mohana Cotton Ginning Private Limited for the supply of 300 metric tonnes of Indian raw cotton. The parties faced disagreements over the quality of 291 metric tonnes supplied, which led to a settlement agreement in September 2017. Under this settlement, Mohana Cotton was to pay Posco USD 74,342 by September 20, 2017, with default interest payable thereafter.
Despite repeated assurances and acknowledgments of the debt by Mohana Cotton through emails and correspondence, the payment remained outstanding. Posco issued multiple notices, including a demand notice under Section 8 of the IBC, followed by filing an application under Section 9 for initiation of the Corporate Insolvency Resolution Process (CIRP).
The Learned National Company Law Tribunal (NCLT), Amaravati Bench, initially rejected Posco's application, relying heavily on the existence of a pre-existing dispute related to the quality of goods and the arbitration clause embedded in the contract. The tribunal held that the dispute should be resolved through arbitration, and that Posco did not qualify as an operational creditor since it allegedly did not supply goods or services directly.
On appeal, the NCLAT bench comprising Justice Sharad Kumar Sharma and Member (Technical) Jatindranath Swain overturned the NCLT's order. The Tribunal emphasized the following key points:
1. Arbitration Clause and Statutory Remedy: The presence of an arbitration clause is a private arrangement and does not override the statutory remedy available under the IBC. The Tribunal cited precedents including the Supreme Court's decision in Indus Biotech Pvt Ltd vs. Kotak India Venture and earlier NCLAT judgments clarifying that even if arbitration proceedings are initiated or contemplated, the creditor's right to initiate insolvency proceedings under Section 9 remains intact if the debt and default are established.
2. Status as Operational Creditor: The Tribunal held that Posco qualifies as an operational creditor under Section 5(20) of the IBC since the debt owed arises from the provision of goods (raw cotton supply) as defined under Section 5(21). The NCLT's reasoning that Posco did not supply goods or services was rejected as contrary to the facts and settled law.
3. Pre-existing Dispute: While the Respondent claimed a pre-existing dispute regarding breach of contract and damages, the Tribunal found no substantive evidence that such dispute was genuine or adjudicated prior to the demand notice. A mere assertion of dispute for the first time in reply to the demand notice does not constitute a pre-existing dispute under the IBC framework, as clarified in the Tribunal's own prior rulings and Supreme Court precedents such as Mobilox Innovation Pvt Ltd.
4. Acknowledgment of Debt: Various email correspondences and the settlement agreement clearly indicated acknowledgment of the debt and liability by the Respondent, which supports the claim of default.
Consequently, the NCLAT quashed the impugned order of the NCLT and directed it to admit the Section 9 petition filed by Posco International and proceed with the insolvency process, including the imposition of the moratorium.
This ruling underscores the principle that statutory insolvency remedies are not to be defeated by contractual arbitration clauses or vague claims of disputes without concrete evidence. It reinforces the protection of creditors' rights under the IBC, facilitating timely resolution of defaults and preventing undue delays caused by strategic invocation of arbitration.
The case serves as a critical precedent for operational creditors seeking to initiate insolvency proceedings despite arbitration agreements and alleged pre-existing disputes, emphasizing the need for bona fide and substantiated disputes to bar such statutory remedies.
Bottom Line:
Arbitration clause in a contract does not override statutory remedies under the Insolvency and Bankruptcy Code (IBC), 2016. The existence of an arbitration clause does not preclude filing an application under Section 9 of the IBC when debt and default are established.
Statutory provision(s):
Insolvency and Bankruptcy Code, 2016 Sections 5(20), 5(21), 8, 9, 238
