Can Arbitral Award Convert Operational Debt Into Financial Debt? NCLT Delhi Refers Issue To Tribunal President

The National Company Law Tribunal (NCLT) at Delhi, has referred to its President whether an arbitral award based on a supply contract can be treated as financial debt for initiating insolvency under the Insolvency and Bankruptcy Code. It has also sought clarity on whether a single insolvency petition under section 7 is maintainable when a creditor's claim involves both operational dues and alleged financial debt.

The reference arose after a split verdict by a bench comprising Judicial Member Ashok Kumar Bhardwaj and Technical Member Reena Sinha Puri on a Section 7 petition filed by Brilliant Metals Pvt Ltd against Avyukta Dairy Products Ltd.

While the Technical Member was of the view that the petition deserved admission, the Judicial Member dissented, holding that, "the transaction between the Petitioner and the PD was operation in nature and was governed by the contract of supply of goods. Thus, the liability of the PD in terms of the Award (if any) could be for operational debt and not for financial debt."

The dispute arose from a agreement between under which Brilliant Metals supplied milk processing plants and machinery to Avdhesh Construction and Impex Ltd, with Avyukta Dairy acting as a corporate guarantor.

When payment defaults occurred, arbitration was invoked. By a final arbitral award dated July 2, 2024, the principal debtor and guarantors were held jointly and severally liable to pay about Rs 2.46 crore with interest.

After the award attained finality and remained unpaid, Brilliant Metals approached the NCLT under Section 7 of the IBC against Avyukta Dairy in its capacity as corporate guarantor.

Brilliant Metals argued that once an arbitral award for payment of money becomes final and unsatisfied, it constitutes a financial debt capable of triggering insolvency proceedings, in light of apex court rulings that recognisied unpaid money decrees and arbitral awards as financial debt.

Avyukta Dairy opposed the plea, contending that the underlying transaction was purely operational, involving the supply of machinery, and that an arbitral award could not alter the character of the original liability.

In admitting the petition, Technical Member Reena Sinha Puri said the case was not just about unpaid machinery dues. She pointed out that the arbitral award itself showed that most payments for the machinery had already been made. The real unpaid amount, she said, came from short-term funds given in 2019 to help revive the borrower's business. Those funds, she noted, were backed by corporate guarantees.

Holding that the award crystallized this unpaid financial assistance, she observed that “The Arbitral Award, having attained finality, constitutes a binding adjudication of liability against the CD. The correspondence and conduct relied upon by the CD do not discharge or extinguish the debt.”

Judicial Member Bhardwaj rejected this approach, stressing that the liability traced back to the supply contract.

He held that “Once, the Award is in respect of the contract for supplying machinery etc. and consideration for the same, the claim decreed in terms thereof cannot be described as financial debt. The Corporate Guarantor in respect of an operational debt can also be not treated as defaulter in respect of a financial debt. ”

Given the difference of opinion, the tribunal referred the disputed issues to the NCLT President under Section 419(5) of the Companies Act. 

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