SUBJECT: INSOLVENCY AND BANKRUPTCY LAWS

TOPIC: ARBITRABILITY OF INSOLVENCY DISPUTES

SUBMITTED TO – DR ROHIT SHARMA

SUBMITTED BY – VANSHIKA MAAN

ENROLLMENT NUMBER – 1020202101

 ACKNOWLEDGEMENT

I want to extend my heartfelt gratitude to my professor, Dr Rohit Sharma, who

supported and guided me throughout the research project.

The topic allotted to me is of utmost practical usage and helped me to study and
research the jurisprudential value of the debate surrounding the question of
arbitrating insolvency disputes with relevant cases and provisions.

The completion of this project would not have been possible without the help of
the library resources extended to me by the HPNLU library.

Vanshika Maan

BA LLB (Hons.)
 TABLE OF CONTENTS

INTRODUCTION....................................................................................................................4

MORATORIUM AND ARBITRABILITY............................................................................6

Effect on ongoing or fresh Arbitration...............................................................................7

Pre – Award Stage.................................................................................................................8

Post-Award Stage..................................................................................................................9

GLOBAL PERSPECTIVE....................................................................................................10

CONCLUSION.......................................................................................................................11
 INTRODUCTION

The tensions of the strained relationship between parallel insolvency and arbitration
proceedings have been the subject of much scholarship.1 While arbitration law prioritises
party autonomy, insolvency law is a self-contained beneficial legislation enacted with the
intention to reduce distressed assets in a time-bound manner and provide for maximisation of
the value of the assets of the CD. Before analysing other aspects relating to the scope of the
moratorium on ongoing arbitration proceedings, it is relevant to examine certain key concepts
under IBC.

A financial2 or operational3 creditor or a CD who has defaulted on payment of debts to its

creditors can seek initiation of the Corporate Insolvency resolution Process (CIRP) by filing
an insolvency application before the adjudicating authority.

The distinction between the filing of a petition seeking initiation of CIRP and its admission
has been addressed by the Indian courts on several occasions.4 Under Indian law, the mere
filing of an application seeking initiation of CIRP against the CD while it is pending
admission does not constitute a bar on an Arbitral Tribunal from proceeding with ongoing
arbitration proceedings. The Indian judiciary has unequivocally held that rights and remedies
would be available to a party until CIRP proceedings are admitted.

Globally, the pace of intricate corporate deals, commercial transactions, and economic
expansion has quickened recently. As a result, the efficiency of conflict resolution procedures
is even more crucial. However, where the two legal frameworks of insolvency and arbitration
laws intersect, it becomes challenging to proceed with such efficiency. A fairly centralized
legal framework governs insolvency law, which necessitates the aggregation of all debtor-
related claims and conflicts.

On the other hand, arbitration involves little to no court control, it encourages

decentralization. In light of this, arbitration might be seen as a body of law that respects party
autonomy, upholds privacy and secrecy. However, given the complexity of the approaches,

1
Deyan Draguiev, “The Effect of Insolvency on Pending International Arbitration: What is and What Should Not
Be”, (2015) 32 Journal of International Arbitration, Issue 5, pp. 511-542.
2
Insolvency and Bankruptcy Code, 2016, S. 5(7).
3
Insolvency and Bankruptcy Code, 2016, S. 5(20).
4
Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund, (2021) 6 SCC 436, para 26; Jasani Realty (P) Ltd. v.
Vijay Corpn., 2022 SCC OnLine Bom 879, paras 17 and 21.
understanding the impact of arbitration on insolvency is critical to the effectiveness of dispute
resolution.

The contradiction between arbitration and insolvency was characterized as “a conflict of

almost polar extremes.” In Re United States Lines Inc.5, it was held that wherein arbitration
policy favours a decentralized approach to dispute resolution but bankruptcy legislation trends
unavoidably towards centralization. The Insolvency law “is structured to support the domestic
economy, even though both systems aim to resolve claims.” Insolvency ensures the best
potential return for each shareholder by raising the value of the corporate debtor assets and
maximizing stakeholder returns. Hence, by offering a variety of bankruptcy resolution
options, insolvency benefits the greatest number of stakeholders.

5
197 F.3d 631.
 MORATORIUM AND ARBITRABILITY

Under Black's Law Dictionary6 “moratorium” is defined as “delay in performing an obligation

or taking an action legally authorised or simply agreed to be temporary”. The origin of the
moratorium under IBC can be traced to Section 446(1) of the Companies Act, 1956 7, wherein
it was stated that once a winding-up order has been made or the Official Liquidator has been
appointed, no legal proceeding shall be commenced against the company.

Under IBC, upon admission by the National Company Law Tribunal (NCLT) of an
application under Sections 7, 9 or 10 of the Code, a moratorium under Section 14 IBC is
declared by the adjudicating authority. A moratorium as envisaged under Section 14
specifically, bars: (a) the institution of suits or continuation of pending suits or proceedings
against the CD including execution of a judgment, decree, or order in any court of law,
tribunal, arbitration panel or other authority; (b) transferring, encumbering, alienating, or
disposing of by the CD of any its assets or any legal right or beneficial interest therein; and (c)
any action to foreclose, recover or enforce any security created by the CD.

The Report of the Bankruptcy Law Reforms Committee 8 states that the intent behind the
moratorium is to create a “calm period” so that it is value maximising for the CD to continue
operations even as viability is being assessed during the insolvency resolution process. The
Supreme Court of India elaborated upon this, holding that the purpose of the moratorium was
to provide debtors with a “breathing spell” during which they could seek to reorganise their
business.9 The question that arises is whether the “calm period” should provide complete
immunity to the CDs. While Indian courts have applied the literal rule of interpretation to
Section 14 IBC, the following section of this article discusses the interplay between
insolvency and arbitration at various stages of the proceedings.

The term “proceedings” is mentioned in Section 14 but is not defined under IBC. A literal
reading of Section 14 suggests that all proceedings are barred from the time of imposition of
moratorium. The High Court of Delhi in Power Grid Corpn. of India Ltd. v. Jyoti Structures

6
Bryan A. Garner, Black's Law Dictionary (2014).
7
Companies Act, 1956, S. 446(1).
8
Report of the Bankruptcy Law Reforms Committee Volume I : Rationale and Design (November 2015).
9
Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407, para 14.
Ltd.15 (Power Grid Corporation)10, however, clarified that the term ”proceedings” as
mentioned in Section 14(1)(a) is not preceded by the word ”all”, indicating that the
moratorium proceedings would not apply to all the proceedings against the CD. In particular,
Section 14 would not apply to proceedings which are for the benefit of the CD.

Effect on ongoing or fresh Arbitration

A bare reading of Section 14 makes clear that the arbitration proceedings must be stayed by
an order of moratorium. Commenting on the impact of moratorium on arbitration
proceedings, the Supreme Court of India in Alchemist Asset Reconstruction Co. Ltd. v. Hotel
Gaudavan (P) Ltd.,11 (Alchemist) held that,

“4. The mandate of the new Insolvency Code is that the moment an insolvency petition
is admitted, the moratorium that comes into effect under Section 14(1)(a) expressly
interdicts institution or continuation of pending suits or proceedings against corporate
debtors.” Accordingly, the Court expressed its surprise that arbitration proceedings
began after the imposition of a moratorium and further held that, “the arbitration that
has been instituted after the moratorium is non est”12.

The ratio of Alchemist13 was applied by Nclat in K.S. Oils Ltd. v. State Trade Corpn. of India
Ltd.14,wherein Nclat observed that arbitral proceedings pending on the date of commencement
of CIRP cannot proceed during the moratorium.

Thus, where arbitration proceedings are initiated after the imposition of moratorium, such
proceedings are non est in law. Where arbitration proceedings have been initiated after the
declaration of moratorium, the continuation of the arbitration proceedings could depend on
whether the claims are (a) for value maximisation of the assets of the CD; or (b) in the nature
of a debt recovery action against the CD.

Pre – Award Stage

Another scenario may arise in which arbitration proceedings are ongoing, however, the
issuance of an award may be pending during the moratorium period. In this scenario, there
may exist claims and counterclaims by and against the CD. In Jharkhand Bijli Vitran Nigam

10
2017 SCC OnLine Del 12189, paras 5 and 10.
11
(2018) 16 SCC 94.
12
Alchemist Asset Reconstruction Co. Ltd. v. Hotel Gaudavan (P) Ltd., (2018) 16 SCC 94, para 5.
13
Supra note 10.
14
2018 SCC OnLine NCLAT 352, para 14.
Ltd. v. IVRCL Ltd.,15 Nclat was tasked with determining whether a counterclaim in an
arbitration could proceed during the moratorium period. Nclat held that the counterclaim filed
by the creditor would be a proceeding against the CD and hence fall within the ambit of the
embargo under Section 14.

However, the counterclaim filed by the CD could proceed before the Arbitral Tribunal even
during the moratorium period. Nclat went further, stating that both the claim and counterclaim
ought to be heard and decided despite the moratorium. However, Section 14 would apply if
the CDs were directed to pay damages or any other amounts as no recovery can take while the
moratorium is in place. The High Court of Delhi took a similar position in SSMP Industries
Ltd. v. Perkan Food Processors (P) Ltd. 16 While discussing a claim filed by a CD and a
counterclaim, the High Court of Delhi held that:

“8…. Section 14 has created a piquant situation i.e. the corporate debtor undergoing
insolvency proceedings can continue to pursue its claims, but the counterclaim would be
barred under Section 14(1)(a). When such situations arise, the Court has to see whether
the purpose and intent behind the imposition of moratorium is being satisfied or
defeated. A blinkered approach cannot be followed, and the Court cannot blindly stay
the counterclaim and refer the defendant to the NCLT/resolution professional for filing
its claims.”

The High Court of Delhi clarified that even though a counterclaim is a proceeding against the
CD, its continuation per se is not a threat to the assets of the CD. Section 14 is triggered only
when the amount to be paid or recovered is determined. Thus, arbitrations involving claims
and counterclaims by and against a CD may not be hit by Section 14(1) during the pre-award
stage. The moratorium may come into effect depending on the award passed in the
proceeding. If the award is not in favour of the CD, the moratorium will apply to bar any
recoveries.

Post-Award Stage
Following the issuance of an award by an Arbitral Tribunal, the award may be challenged
under Sections 34 or 36 of the Arbitration Act26. The principle under Section 14 IBC relating

15
2018 SCC OnLine NCLT 18197.
16
2019 SCC OnLine Del 9339.
to maximisation of the value of the assets of the CD apply to such proceedings. That is, if the
monetary award is against the CD, the moratorium will be triggered to bar such recovery.

Challenges to an arbitral award may, therefore, only be permitted to continue if the award is in
favour of the CD or if continuation of such proceedings does not harm the CD in any manner.
Another issue which the courts have considered is whether a final arbitral award can be
considered as evidence of debt. In Annapurna Infrastructure (P) Ltd. v. SORIL Infra
Resources Ltd.17, Nclat held that an arbitral award against a CD constitutes a default under
IBC. The Supreme Court of India in K. Kishan v. Vijay Nirman Co. (P) Ltd. 18, held that even
though arbitral awards are valid proof of debt, they will have to be undisputed in order to
enable initiation of CIRP by operational creditors. The foregoing analysis reveals that Indian
courts are inclined to limit further obligations and liabilities of the CD.

17
2017 SCC OnLine NCLAT 380.
18
(2018) 17 SCC 662.
 GLOBAL PERSPECTIVE

The United Nations Convention on the Recognition and Enforcement of Foreign Arbitral
Awards, states that member state courts have the right to refuse to enforce foreign awards if
this would be contrary to their disclosure politics. Because enforcement proceedings are
essentially domestic proceedings where courts are likely to refuse to enforce arbitral awards
against the insolvent party, even non-fundamental issues may not be resolved because courts
may rely on public policy.

One of the cornerstones of the country’s economic and legal system is insolvency legislation,
which promotes market stability and economic stability and growth. Therefore, insolvency
legislation can be seen as part of the country’s public policy. It’s interesting to note that the
Indian court in Cruz City 1 Mauritius Holdings v. Unitech 19 held that enforcement of an
arbitral decision can only be refused if doing so would be against the natural justice, morality,
and general policy of Indian law.

In Parsons and Whittemore20 case US court stated that there is a difference between
government policy and public policy, such that government policy cannot override
international accord obligations. In this specific case, the arbitral award was upheld, and
eventually the decision stated that enforcement of the award should not conflict with the
overriding laws of morality and justice of a country. Moratoriums in bankruptcy law consider
violations of automatic stay as violators of public order, which means no further proceedings
can be taken against non-existent companies and their assets with stringent penalties imposed
on defaulters. Therefore, an arbitration award that violates the Bankruptcy Code is void and
unenforceable; however, an arbitration decision settling other contractual disputes between
debtors would be valid.

Insolvency laws grant stay orders on arbitration proceedings upon the commencement of
insolvency proceedings to ensure just and equitable treatment for creditors. Core matters, such
as initiation of insolvency proceedings, verification of creditor’s claims, and winding up of
companies, are considered non-arbitrable under insolvency jurisprudence. Arbitrators are not
competent to settle these core matters.

19
EA(OS) Nos.316/2015.
20
Parsons & Whittemore Overseas Co. v. Societe Generale de L'Industrie du Papier (RAKTA), 508 F.2d 969.
 CONCLUSION

A glimmer of hope was the creation of the UNITRAL Model Law on Cross-Border
Insolvency and Arbitration. However, it did not succeed in recalibrating the coherence of the
relationships of the legislation. The presence of different approaches in different countries
even on the same subject highlights the lack of consistency and uniformity in both legal
systems. An innovative approach should be followed for deciding whether or not insolvency
conflicts may be arbitrated, which seeks to create a win-win situation by advocating for a way
to separate non-arbitrable matters from insolvency. This concept aims to achieve a careful
equilibrium by taking into account a viewpoint that tries to reduce the inconsistency of laws
while maintaining a feeling of equal power to both parties.

While Indian courts have filled the gaps in the law and have sought to balance, as far as
possible, the competing objectives of insolvency and arbitration law, several legal and policy
issues are left to be addressed by the Indian legislature. The judicial precedent set out in the
analysis above make it clear that with the exception of proceedings which are for the benefit
of the CD, arbitration proceedings cannot continue against a CD once a moratorium has been
imposed against them. This leaves much to be desired from the perspective of a claimant in an
arbitration proceeding, who may be left without any remedy when an insolvency proceeding
is commenced against a respondent in an arbitration proceeding. This conflicting outcome is
unsurprising given the considerable differences in arbitration and insolvency law. It is,
therefore, necessary for the legislature to address the practical and legal concerns in relation to
the effects of insolvency on arbitration proceedings, such as the validity of arbitration
agreements, the difference (if any) in how arbitration proceedings which are pending are to be
treated versus those which are initiated post the initiation of insolvency, and the conduct of
arbitration proceedings, among others. Express legislative provisions addressing the foregoing
issues and governing the relationship between arbitration and insolvency will not only provide
investors with greater clarity but will also significantly improve the predictability of the
arbitral process.