Pranav B Prem

The National Company Law Tribunal (NCLT), New Delhi, has referred to its President the question of whether an arbitral award arising out of a supply contract can be treated as a financial debt for the purpose of initiating insolvency proceedings under Section 7 of the Insolvency and Bankruptcy Code, 2016. The Tribunal has also sought clarity on whether a single insolvency petition under Section 7 is maintainable when a creditor’s claim involves a mix of operational dues and alleged financial debt.

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The reference arose following a split verdict by a Bench comprising Judicial Member Ashok Kumar Bhardwaj and Technical Member Reena Sinha Puri in a Section 7 application filed by Brilliant Metals Pvt. Ltd. against Avyukta Dairy Products Ltd., which was arrayed as the corporate debtor in its capacity as a corporate guarantor.

The dispute originated from an agreement under which Brilliant Metals supplied milk processing plants and machinery to Avdhesh Construction and Impex Ltd., with Avyukta Dairy acting as a corporate guarantor. Upon payment defaults, arbitration was invoked, culminating in a final arbitral award dated July 2, 2024. By the award, the principal debtor and the guarantors were held jointly and severally liable to pay approximately ₹2.46 crore along with interest.

After the arbitral award attained finality and remained unpaid, Brilliant Metals approached the NCLT by filing a Section 7 application against Avyukta Dairy. The petitioner contended that once an arbitral award directing payment of money becomes final and unsatisfied, it constitutes a financial debt capable of triggering insolvency proceedings. Reliance was placed on judicial precedents recognising that unpaid money decrees and arbitral awards can constitute financial debt under the IBC.

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Avyukta Dairy opposed the petition, contending that the nature of the underlying transaction could not be altered merely because it had been adjudicated through arbitration. It was argued that the original transaction was purely operational in nature, involving the supply of machinery, and that an arbitral award could not convert an operational liability into a financial debt. The corporate debtor also contended that a corporate guarantor in respect of an operational debt cannot be proceeded against as a defaulter in relation to a financial debt.

In her opinion allowing admission of the petition, Technical Member Reena Sinha Puri observed that the case was not limited to unpaid consideration for supply of machinery. She noted that the arbitral award itself indicated that a substantial portion of the machinery-related payments had already been made. According to her, the unpaid amount primarily arose from short-term funds advanced in 2019 to revive the borrower’s business, which were supported by corporate guarantees. She held that the arbitral award crystallised this unpaid financial assistance and constituted a binding adjudication of liability against the corporate debtor, observing that the correspondence and conduct relied upon by the debtor did not extinguish or discharge the debt.

Judicial Member Ashok Kumar Bhardwaj, however, dissented from this view. He held that the liability stemmed from a contract for supply of machinery and that the arbitral award merely quantified dues arising from that operational contract. He observed that the transaction between the parties was operational in nature and governed by a supply agreement, and therefore any liability arising under the award could only be characterised as operational debt and not financial debt. He further held that a corporate guarantor for an operational debt cannot be treated as a defaulter in respect of a financial debt, and that allowing such conversion would defeat the statutory distinction maintained under the IBC.

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In view of the difference of opinion between the Members, the Tribunal invoked Section 419(5) of the Companies Act, 2013, and referred the matter to the President of the NCLT for appropriate determination. The reference seeks authoritative clarity on whether an arbitral award based on a supply contract can alter the character of an operational debt into a financial debt and whether a composite Section 7 application involving both operational and alleged financial claims is maintainable under the Insolvency and Bankruptcy Code.

Appearance

For Applicant: Advocates Shankari Mishra and Mehak Khandelwal

For Respondent: Advocates Aditya Madaan and Digvijay S.

Cause Title: Brilliant Metals Private Limited v. Avyukta Dairy Products Ltd.

Case No: (IB)-131/ND/2025

Coram: Judicial Member Ashok Kumar Bhardwaj , Technical Member Reena Sinha Puri