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Although the primary aim of the Insolvency and Bankruptcy Code, 2016 (IBC), is to revive financially distressed entities and ensure their continued operation, its practical application often diverges from this goal. Creditors frequently leverage IBC proceedings to secure favourable settlements and maximise debt recovery, bypassing the conventional judicial process. Faced with the prospect of insolvency, corporate debtors often opt for settlement over the uncertainty of outcomes under the IBC.

Recently, the Supreme Court in reiterated that the IBC was not debt recovery legislation and called on creditors to curb this practice of debt recovery through the IBC.

The appellant, HPCL-Biofuels, contracted the respondent, Shahaji Bhanudas Bhad to expand process stations for its biofuel manufacturing business. The appellant claimed that the respondent had failed to meet agreed standards of service and materials. The respondent alleged that the appellant had not paid for work properly carried out. The respondent issued a demand notice under section 8 of the IBC. The appellant did not respond.

The respondent then invoked arbitration and made a first application to the Bombay High Court for the appointment of an arbitrator under the Arbitration and Conciliation Act, 1996 (act). The respondent withdrew this application without seeking liberty to re-apply, instead filing a petition under section 9 of the IBC to initiate the corporate insolvency resolution process (CIRP) against the appellant. The (NCLT) admitted the case and commenced the CIRP.

On appeal, the National Company Law Appellate Tribunal (NCLAT) overturned the NCLT¡¯s order, holding that the appellant had consistently disputed its liability due to genuine pre-existing disputes. The NCLAT also noted that the respondent¡¯s invocation of arbitration itself indicated the existence of a dispute. The respondent unsuccessfully appealed to the Supreme Court.

The respondent then applied a second time to the Bombay High Court for the appointment of an arbitrator under the act, six years after invoking arbitration and outside the three-year limitation period in the Limitation Act, 1963. The appellant contested the proceedings because the first application had been withdrawn unconditionally and the second was time-barred.

The high court held that the second application was not, on the face of it, time-barred. The respondent had made efforts to recover its dues, albeit before the wrong forum, the NCLT. This decision led to the Supreme Court appeal.

A key issue was whether, under section 14(2) of the Limitation Act, the respondent could exclude the time spent pursuing the section 9 petition in calculating the limitation period for the second application. Section 14(2) requires the relief sought in both proceedings to be the same. The Supreme Court held that the section 9 period could not be excluded under section 14(2) of the Limitation Act, because the relief sought in those proceedings and the second application were fundamentally different. Unlike arbitration, which focuses on resolving disputes over specific debts between the parties, the IBC aims to rehabilitate the corporate debtor, not merely recovering outstanding debt. While debt recovery may occur incidentally, it is not the primary objective of the IBC. Arbitration deals only with the debt between the litigants; the IBC addresses the resolution of the company¡¯s overall financial liabilities.

This welcome decision underscores the economic importance of the IBC in ensuring companies remain going concerns. Excluding the time spent in prosecuting IBC proceedings from the limitation period for subsequent recovery actions will deter creditors from using the IBC as a tool to pressure corporate debtors. This approach will also alleviate the workload of the NCLTs.

Significantly, the Supreme Court has ruled that order XXIII of the Code of Civil Procedure, 1908, applies to applications under the act. Recalcitrant litigants often try to revive claims previously dismissed under sections 38 or 32(c) of the act by initiating fresh arbitration proceedings. The application of order XXIII to applications under the act and to those in arbitral proceedings will be a safeguard against parties misusing arbitration to reopen claims previously abandoned.

Sneha Jaisingh is a partner and Akshay Ayush is an associate at Bharucha & Partners.