Arbitration initiated after declaration of moratorium is non-est in law

Bar & Bench November 5 2017
In an important ruling in the case of Alchemist Asset Reconstruction Company Limited vs. M/s. Hotel Gaudavan Private Limited & others dated October 23, 2017 (Available Here), the Supreme Court of India (“Supreme Court”) has ruled that arbitration proceedings initiated after the imposition of the moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) is non est in law.
Factual Matrix:
1. M/s. Hotel Gaudavan Private Limited (“Corporate Debtor”) was sanctioned a term loan of INR 24,00,00,000 (Indian Rupees Twenty Four Crore only) and a cash credit limit of INR 1,00,00,000 (Indian Rupees One Crore only) by the State Bank of India (“SBI”) on January 4, 2008.
2. The Corporate Debtor was irregular with the repayment of both the principal as well as the interest amounts.
3. SBI had issued a recall notice to the Corporate Debtor recalling the abovementioned loan on November 1, 2014. SBI had also filed for recovery before the Debt Recovery Tribunal, Jaipur (“DRT, Jaipur”) with respect to the aforesaid loan.
4. The SBl on March 20, 2014 vide an assignment agreement assigned the debt of the Corporate Debtor to Alchemist Asset Reconstruction Company Limited (“Financial Creditor”) under Section 5 of the Securities and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002. By the virtue of the abovementioned assignment agreement, the Financial Creditor had replaced SBI in the proceedings underway at the DRT, Jaipur, as on April 9, 2015.
5. The Financial Creditor has since then approached the Principal Bench of the National Company Law Tribunal at New Delhi (“Principal Bench”) via an application under Section 7 of IBC. The said application was admitted by the Principal Bench on March 31, 2017 and the moratorium in terms of Section 14 of IBC had been imposed on the Corporate Debtor.
6. Pursuant to the admission of the abovementioned application and the start of the moratorium period, the Corporate Debtor vide a letter invoked the arbitration clause between the Financial Creditor and the Corporate Debtor, and appointed a sole arbitrator.
7. The Principal Bench vide an order dated May 31, 2017 declared the abovementioned arbitration proceeding as illegal and unlawful. Further, they expressly restrained the holding of any arbitration proceeding against the Corporate Debtor which was already under the corporate insolvency resolution process.
8. In spite of the abovementioned facts, the Corporate Debtor filed a First Appeal before the District Judge, Jaisalmer, Rajasthan under Section 37 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act, 1996”) and the said court vide an order dated July 6, 2017 asked the appeal to be registered and a notice was issued awaiting a reply.
Findings of the Supreme Court:
1. The Supreme Court held that “The mandate of the new Insolvency Code is that the moment an insolvency petition is admitted, the moratorium that comes in effect under Section 14(1)(a) expressly interdicts institution or continuation of pending suits or proceedings against Corporate Debtors.”
2. Further, the Supreme Court was surprised to find that an arbitration proceeding had started after the imposition of the moratorium period and appeals under Section 37 of the Arbitration Act, 1996 were being entertained by the lower courts.
3. The Supreme Court therefore set aside the July 6, 2017 order of the District Judge, Jaisalmer, Rajasthan and held that the due to the effect of Section 14(1)(a) of the IBC, the arbitration that has been instituted after the moratorium is non est in law.

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