On 21st January 2020, the High Court at Bombay gave its decision in the case of Nahar Builders Ltd. v. Housing Development and Infrastructure Ltd. where it briefly dealt with the scope of section 14 under the Insolvency and Bankruptcy Code, 2016 (“IBC”).

Brief Facts:

Nahar Builders Ltd. (“Petitioner”) filed Commercial Arbitration Petition No. 74 of 2017 against Housing Development and Infrastructure Ltd. (“Respondent”) in relation to disputes under a Memorandum of Understanding (“MoU”) that pertained to the sale of some Transferable Development Rights seeking inter alia an order to provide security. Accordingly, on an undertaking given by the Respondent, the Respondent was permitted to furnish an unconditional bank guarantee in the sum of Rs. 8 crores payable on demand to the Petitioner. It was also agreed that if the Respondent fails to furnish the bank guarantee, the Respondent will deposit the sum of Rs. 8 crores with the Prothonotary & Senior Master. The parties further agreed to refer the disputes under the MoU to the sole arbitrator.

Since, the Respondent failed to furnish the bank guarantee, the Petitioner filed a contempt petition. Pursuant thereto, the Respondent furnished a pay order for Rs. 8 crores in favour of the Prothonotary & Senior Master. Hence, the contempt petition was disposed of.

Thereafter, the Arbitrator concluded the proceedings on 13th August 2019 and awarded the Petitioner an amount of Rs. 8 crores and directed the Respondent to pay this amount with interest of 8% per annum from 23rd March 2016. The said Award was not challenged under section 34 of the Arbitration and Conciliation Act, 1996.

Subsequently, the Petitioner filed the Interim Application for permission to withdraw the amount of Rs. 8 crores along with the interest accrued.

Issue:  

The issue which arose for consideration before the High Court at Bombay was whether the amount of Rs. 8 crores deposited in court is the property of the Respondent within the meaning of Section 14 of the IBC.

Decision:

The High Court at Bombay held that once an amount is deposited in court, it is placed beyond the reach of either party without permission of the Court and therefore is not the property of either party pending an adjudication as to its entitlement by the Court.

It observed that once the Arbitrator held that it was the Petitioner that was entitled to the amount, and the award became enforceable as a decree of the court, then no question remained of the amount being claimed by the Respondent.

It was further held that the provisions regarding a moratorium cannot possibly apply to cash deposits made in court and that there is no bar to applications for withdrawal as they cannot be considered a suit, proceeding or execution within the meaning of Section 14(1)(a) of the IBC.

Appeal:

In appeal, the Respondent (‘Appellant’) contended that in view of Section 14 of the IBC, there would be an automatic stay on any disbursements.

The Appeal was dismissed on a statement made by the Respondent-Petitioner that the amounts received by it would be subject to orders passed by the National Company Law Tribunal.

Copies of the orders are attached for your perusal.

This update has been contributed by Aashdin B Chivalwala (Senior Associate).