The National Company Law Tribunal (NCLT), New Delhi, has referred to its President a crucial question under the Insolvency and Bankruptcy Code, 2016: whether an arbitral award arising from a supply contract can be treated as a financial debt for the purpose of initiating insolvency proceedings under Section 7. The Tribunal has also sought clarity on whether a single Section 7 application is maintainable when a creditor’s claim includes both operational dues and alleged financial debt.
The reference follows a split verdict by a Bench comprising Judicial Member Ashok Kumar Bhardwaj and Technical Member Reena Sinha Puri in an insolvency application filed by Brilliant Metals Private Limited against Avyukta Dairy Products Ltd., which was impleaded as the corporate debtor in its capacity as a corporate guarantor.
The dispute traces back to an agreement under which Brilliant Metals supplied milk processing plants and machinery to Avdhesh Construction and Impex Ltd. Avyukta Dairy had furnished a corporate guarantee for the transaction. Upon default in payment, arbitration was invoked, culminating in a final arbitral award dated July 2, 2024. The award held the principal borrower and the guarantors jointly and severally liable to pay around ₹2.46 crore along with interest.
After the award attained finality and remained unsatisfied, Brilliant Metals moved the NCLT under Section 7 of the IBC against Avyukta Dairy. The applicant argued that once an arbitral award directing payment of money becomes final and unpaid, it crystallises into a financial debt capable of triggering insolvency proceedings. Reliance was placed on judicial precedents recognising unpaid money decrees and arbitral awards as financial debt under the Code.
Avyukta Dairy opposed the petition, contending that the nature of the underlying transaction could not be transformed merely because it had been adjudicated through arbitration. It was argued that the original transaction involved supply of machinery and was purely operational in nature, and that an arbitral award cannot convert an operational liability into a financial debt. The corporate debtor further submitted that a corporate guarantor in respect of an operational debt cannot be proceeded against as a defaulter of financial debt under Section 7.
In her opinion favouring admission of the petition, Technical Member Reena Sinha Puri observed that the dispute was not confined to unpaid consideration for machinery supply. Referring to the arbitral award, she noted that a substantial portion of the machinery-related payments had already been made and that the unpaid amount largely related to short-term funds advanced in 2019 to revive the borrower’s business, supported by corporate guarantees. She held that the arbitral award had crystallised this liability and constituted a binding adjudication of financial assistance owed by the corporate debtor.
Judicial Member Ashok Kumar Bhardwaj dissented, holding that the liability arose from a supply contract and that the arbitral award merely quantified dues flowing from an operational transaction. He concluded that such liability could only be treated as operational debt, not financial debt, and that a corporate guarantor for an operational debt cannot be proceeded against as a financial debtor. According to him, permitting such conversion would dilute the statutory distinction between financial and operational debt under the IBC.
Given the divergence of views, the Tribunal invoked Section 419(5) of the Companies Act, 2013, and referred the matter to the President of the NCLT. The reference seeks authoritative clarity on whether an arbitral award founded on a supply contract can alter the character of an operational debt into a financial debt, and whether a composite Section 7 application involving mixed claims is maintainable under the Insolvency and Bankruptcy Code.
