Bombay High Court provides clarity on the conditions for stay under Section 238 of IBC

The Bombay High Court has recently provided clarity on the conditions for stay under Section 238 of the Insolvency and Bankruptcy Code (IBC) and its impact on applications filed under the Arbitration-Conciliation Act (A&C Act). Mere filing of an application under section 7(1) to the Judges does not automatically bar the need to satisfy the officer prescribed in sections 7(4) and 7(5)(a).

This case Sunflag Iron and Steel Co. Ltd. and M/s J. Was connected with the dispute between Poonamchand & Sons. Sunflag had filed an application under Section 11(6) of the A&C Act seeking appointment of an arbitrator. However, M/s. J. Poonamchand & Sons had already approached the National Company Law Tribunal (NCLT) and filed a petition under Section 9 of the IBC against Sunflag, arguing that Section 11(6) of the A&C Act Will not apply due to stoppage under s.

After examining the relevant provisions of both the Acts, the High Court clarified that there is no inconsistency between the A&C Act and the IBC. The court noted that Section 238 of the IBC comes into force only when the Adjudicating Authority passes an order under Section 7(5) of the Code. Unless such an order is passed, an application under Section 11(6) of the A&C Act cannot be treated as non-maintainable.

The court emphasized that the satisfaction of the Adjudicating Authority as per Section 7(4) and 7(5)(a) of the IBC, is vital in giving effect to the ban under Section 238 of the IBC. Further, the court highlighted that Section 7(5)(b) of the IBC permits the Adjudicating Authority to reject an application if it finds that there has been no default. Therefore, filing of an application under section 7(1) of IBC does not bar proceedings under other laws unless the requirements prescribed by section 7(4) read with section 7(5)(a) of IBC are satisfied is not recorded. And the application is approved.

Based on these considerations, the Bombay High Court concluded that an application under Section 11(6) of the A&C Act can be entertained unless the adjudicating authority determines the existence of a default. The court awarded in favor of Sunflag appointing an arbitrator to resolve the disputes between the parties.