Introduction
The approach towards the proceedings adopted by the Insolvency and Bankruptcy Code (“IBC”), 2016 is relatively distinct from that under the Arbitration & Conciliation Act (“A&C”), 1996. While the A&C prioritises consent and consensus, the IBC has been enacted with the purpose of reducing distressed assets by maximising their value that too in a time-bound manner.
The provisions under IBC lead to a single, centralised, right in rem proceeding against the debtor by paving the way for the third parties (creditors) to invoke their rights against the common debtor, whereas arbitration, by virtue of its nature, promotes a decentralised, party autonomy with a focused approach leading towards a proceeding in personam. If the case in hand involves a right in rem, the same is not arbitrable.[i] However, would that mean that the commencement of proceedings under IBC takes the case out of the purview of arbitration? This article further aims to discuss this aspect by visiting the fourfold test, propounded by the Supreme Court in the matter of Vidya Drolia & Ors. v. Durga Trading Corporation, 2021 2 SCC 1.
The Four-Fold Test
The Hon’ble Supreme Court of India has propounded a four-fold test to determine as to when a matter becomes non-arbitrable.[ii] The first two folds are relevant for the contemporary discussion:
- when the cause of action and subject matter of the dispute relates to actions in rem,
- when the cause of action and subject matter of the dispute affects third-party rights with the effect of breach of such rights, and require centralized adjudication.
In reference to these principles, the Court has held that the insolvency matters, given the fact that they rise to a right in rem, must be handled by a centralised forum, competent to resolve such matters.
Interpretation of Section 14
Section 14(1)(a) of the IBC, 2016 provides that on the date of commencement of insolvency proceedings, the Adjudicating Authority shall order a moratorium on the institution of new suits or continuation of pending suits or execution of any judgement, decree, or order of any Court, Tribunal, Arbitral Panel etc.[iii]
The legislative intent behind this provision is to ensure the appropriate protection and representation of the interests of the creditors, which would not be possible through arbitration. An arbitration proceeding initiated after the imposition of a moratorium would be void.[iv]
It would be imperative to observe that a mere literal interpretation of Section 14, would indicate that all kinds of proceedings are prohibited on account of the imposition of a moratorium, although that is not the case. The High Court of Delhi has clarified that such a blanket ban on all kinds of proceedings is not what is intended under Section 14 of the IBC. When the proceedings in question are for the benefit of the Corporate Debtor, a moratorium under this section would not be applicable. For instance, a moratorium can be invoked for proceedings initiated for debt recovery action, however, not for the one intended to maximise the value of the assets of the Corporate Debtor.[v]
Pre-Award Stage
When the moratorium has been imposed and the issuance of an award is still pending, the counter-claim filed by the Creditor against the Corporate Debtor falls within the ambit of Section 14, however, the counter-claim filed by the Corporate Debtor does not. Any claim leading to a loss for the Corporate Debtor by making him pay damages or another amount cannot be enforced during the moratorium as no recovery can take place during this period.[vi]
Despite this, the Court cannot adopt a hard and fast approach and has to see whether the purpose and intent behind the imposition of a moratorium is being satisfied or being defeated in reference to the facts of each case. Section 14 is not to be invoked unless the amount which is pending recovery, is determined.[vii] This implies that at a pre-award stage, Section 14 may not impact the arbitral proceeding itself, however, might impact only the enforcement of the award, that too only in the event, that the award is not in the favour of the Corporate Debtor.
Post-Award Stage
An arbitral award may be challenged under Section 34 (Application for setting aside arbitral award)[viii] and Section 36 (Enforcement)[ix] of the A&C Act, 1996, however, during a moratorium such challenge is only allowed to continue if the award is in the favour of the Corporate Debtor or not contrary to the interests of the Corporate Debtor.
Arbitral Awards as Proof of Debt
An arbitral award in the favour of the Corporate Debtor can be considered valid proof of debt.[x] In order to start the machinery of the Corporate Insolvency Resolution Process under Section 7 of the IBC,[xi] the award needs to be undisputed.[xii]
Writ Jurisdiction of High Courts and Supreme Court
Section 238 of the IBC provides that the provisions under the Code override the provisions of any other statute.[xiii] But what is the extent of this overriding? The Constitution of India being the law of the land, the writ powers of the Supreme Court under Article 32[xiv] and the High Courts under Article 226[xv] cannot be curtailed by any legislation in place. The IBC is no exception. The moratorium does not affect any case pending under the aforesaid provision in either the Supreme Court or the High Courts.[xvi]
When an Arbitration Agreement Exists
The Mumbai Bench of the National Company Law Tribunal (NCLT) arrived at a rather surprising decision in 2020, when it implicitly held that the A&C Act prevails over the IBC by rejecting a Section 7 IBC application based on the rationale that an arbitration agreement already existed.[xvii]
Contrastingly, the NCLT, Ahmedabad Bench, in reference to Sections 238 and 14 had previously held that Section 14 cannot be overridden by provisions of other statutes. The specific statute in question here was the Electricity Act, of 2003.[xviii] The NCLT, Ahmedabad while having observed the aforesaid, had placed reliance upon the decision of the Supreme Court, wherein the Hon’ble Apex Court had observed that it is a settled law that when there are two enactments passed by the Parliament, and if there is any provision contained in such Acts which is repugnant to another, the provisions contained in the Act, which is later in point of time, shall prevail.[xix]
Strangely, both these contradictory decisions stand as valid law today creating the possibility of a paradox of sorts but still the general understanding in legal circles seems to be that once a judicial forum has satisfied itself of the applicability of Section 7 in a case, an arbitration agreement or the applicability of any other statutory provision outside the purview of IBC would not restrict it from initiating CIRP against the corporate debtor, although this is far from a settled position.
Conclusion
The efforts by Courts to bring about parity between IBC and A&C, although commendable, are not enough and may also not be ideal in every situation. The contemporary position of the judiciary in these matters can lead to a situation, wherein a claimant is not left with any remedy. This is an outcome of the conflicting approaches of the two domestic laws. The legislature needs to step in where required to resolve such conflicts and address issues whenever required. Not all of the issues revolving around insolvency proceedings are complex in nature. Some are very basic, however, they manage to get deeply engrained to the extent that they end up striking the very root of the law’s standing, such as the validity and impact of an arbitration agreement in insolvency proceedings as discussed above. An arbitration agreement happens to be the point of inception for arbitral proceedings and in the event of a persisting lack of clarity surrounding such fundamental principles, it is certainly bound to leave behind a sour taste in the mouths of both investors as well as the lawyers. Express provisions addressing how exactly the interplay between insolvency and arbitration proceedings is supposed to take place if at all, will surely make the lives of legal practitioners and investors easier and accordingly, the same is likely to go a long way in improving the investment scenario in the country. A protracted lack of clarity on such rudimentary issues is very injurious to the legal and commercial health of India in the long run, especially in view of the fact that both the enactments, the IBC and the A&C hold extremely pivotal positions within the existing legal framework of the nation.
References:
[i] Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd., AIR 2011 SC 2507.
[ii] Vidya Drolia & Ors. v. Durga Trading Corporation, 2021 2 SCC 1.
[iii] Insolvency and Bankruptcy Code, 2016,§ 14, No. 31, Acts of Parliament, 2016 (India).
[iv] Alchemist Asset Reconstruction Co. Ltd. v. Hotel Gaudavan (P) Ltd., (2018) 16 SCC.
[v] Power Grid Corpn. of India Ltd. v. Jyoti Structures Ltd., 2017 SCC OnLine Del 12189.
[vi] Jharkhand Bijli Vitran Nigam Ltd. v. IVRCL Ltd., 2018 SCC OnLine NCLT 18197.
[vii] SSMP Industries Ltd. v. Perkan Food Processors (P) Ltd., 2019 SCC OnLine Del 9339.
[viii] Arbitration and Conciliation Act, 1996,§ 34, No. 26, Acts of Parliament, 1996 (India).
[ix] Arbitration and Conciliation Act, 1996,§ 36, No. 26, Acts of Parliament, 1996 (India).
[x] Annapurna Infrastructure (P) Ltd. v. SORIL Infra Resources Ltd., 2017 SCC OnLine NCLAT 380.
[xi] Insolvency and Bankruptcy Code, 2016,§ 7, No. 31, Acts of Parliament, 2016 (India).
[xii] K. Kishan v. Vijay Nirman Co. (P) Ltd., (2018) 17 SCC 662.
[xiii] Insolvency and Bankruptcy Code, 2016,§ 238, No. 31, Acts of Parliament, 2016 (India).
[xiv] INDIA CONST. art. 32, 1950.
[xv] INDIA CONST. art. 226, 1950.
[xvi] Canara Bank v. Deccan Chronicle Holdings Ltd., 2017 SCC OnLine NCLAT 255.
[xvii] Indus Biotech Private Limited and Ors. v. Kotak India Venture Fund-I and Ors., MANU/NC/6604/2020.
[xviii] ABG Shipyard Ltd. v. ICICI Bank Ltd., CP (IB) No. 53/7/NCLT/AHM/2017.
[xix] KSL and Industries Ltd. v. Arihant Threads Ltd., Civil Appeal No. 5225 Of 2008.
