Fate of Arbitrations in the IBC Age : Clearing the Interpretive Thicket around the ‘Moratorium’ Provisions of IBC

Bar & Bench May 31 2019

H.S. ‘Bobby’ Chandhoke & Rajan Raj

This article studies the impact of the passing of a moratorium order in proceedings against a corporate debtor (CD) under the Insolvency and Bankruptcy Code (IBC) on arbitration proceedings pending at various stages by and/or against the said CD. 

Relevant Legal Provisions

A. The objects and reasons of IBC are stated, inter alia,  as follows:

“An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership forms and individuals in a timebound manner for maximization of value of assets of such persons….”

B. "14. (1) Subject to provisions of sub- sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:-- 

(a) the institution of suits or continuation of pending suits or proceedings against corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;" (emphasis supplied)

C."238. Provisions of this Code to override other laws.-- The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law."

Possible Scenarios

During the course of a  typical arbitration, the following scenarios can arise:

  1. Claims are only made by the CD with no counter claims against the CD 
  2. Claims are only made against the CD with no counter claims by the CD
  3. Claims (and counter claims) are made inter se the corporate debtor and the Opposite Party(ies)
  4. Post arbitral proceedings are pending in the nature of ss. 34/36 of the Arbitration and Conciliation Act, 1996 (”Arbitration Act”)
    1. the arbitral award being in favor of CD
    2. the arbitral award being against CD
    3. the arbitral award being an admixture of (a) and (b) above
  5. Enforcement proceedings against the CD under a foreign award are pending before courts in India. 

This article attempts to examine the impact of, inter alia,  ss. 14 and 238 of the IBC on the aforesaid scenarios. 

The Legal Position 

Scenario A

As far as scenario A is concerned i.e. claims are made by a CD with no counter claims against it, s. 14(1)(a) does not ex facie constitute a bar to the continuance of such arbitration proceedings as the said provision only interdicts the institution of suits or continuation of pending suits or proceedings against the CD. Thus, the arbitration claim by the CD will continue or can be instituted. 

Scenario B

As far as scenario B is concerned, i.e. claims are only made against the CD with no counter claims by the CD, s. 14(1)(a)  ex facie constitutes a bar to the institution/ continuance of such arbitration proceedings. 

The Hon’ble Supreme Court in Alchemist Asset Reconstruction Company Ltd. v Hotel Gaudavan Pvt. Ltd. AIR 2017 SC 5124 (“Alchemist”) has 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 s. 14(1)(a) expressly interdicts institution or continuation of pending sits or proceedings against Corporate Debtors.”

5. This being the case, we are surprised that an arbitration proceeding has been purported to be started after the imposition of the said moratorium and appeals under Section 37 of the Arbitration Act are being entertained. Therefore, we set aside the order of the District Judge dated 06.07.2017 and further state the effect of Section 14(1)(a) is that the arbitration that has been instituted after the aforesaid moratorium is non est in law." 

Though Alchemist dealt with an arbitral proceeding instituted after the imposition of moratorium under IBC, the NCLAT in its order dated January 30, 2018, passed in KS Oils Ltd. v The State Trade Corporation of India Ltd. & Ors. [2018] 146 SCL 588 (“K.S. Oils Ltd. “) applied the aforesaid principle to pending arbitral proceedings i.e. arbitral proceeding which had commenced before the imposition of moratorium under IBC as well. 

According to the NCLAT, this position also obtained from s. 238 of the IBC which provided overriding effect to the IBC over the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

The NCLAT was of the view that the after initiation of the corporate insolvency resolution process, all creditors (including parties to the pending arbitration) could file their claims before the Resolution Professional pursuant to the declaration of moratorium and public announcement under s. 13/14 of the IBC.  The NCLAT in the operative portion of the KS Oils Ltd. order said:

“13. In view of the provisions as referred to the above and the decision of the Hon'ble Supreme Court in "Alchemist Asset Reconstruction Company Ltd. v. M/s. Hotel Gaudavan Pvt. Ltd. & Ors." we hold that the arbitral proceeding pending between 'M/s K.S. Oil Ltd.' (Corporate Debtor) and 'The State Trade Corporation of India Ltd.' (Financial Creditor) before the Indian Council of Arbitration cannot proceed during the moratorium period…..

The NCLAT judgment in KS Oils Ltd. does not reveal whether the arbitration in question involved both claims and counter claims. It appears that the liberty given to both parties to file their respective claims and counter claims before the Resolution Professional would fall foul of the NCLAT order in Jharkhand Bijli Vitran Nigam Limited v IVRCL Ltd. (Corporate Debtor) & Anr. CP (IB) No. 294/7/HDB/2017 discussed below. 

Scenario C

As far as scenario C is concerned, i.e. claims (and counter claims) are made inter se the corporate debtor and the Opposite Party(ies), there has been some divergence of opinion, which appears to have been settled by the NCLAT. Of course, this is till such time the Hon’ble Supreme Court reconsiders this position.

The NCLT, Hyderabad Bench in Jharkhand Bijli Vitran Nigam Limited v IVRCL Ltd. (Corporate Debtor) & Anr. CP (IB) No. 294/7/HDB/2017 held that in the arbitration proceedings in question, the claim made by the corporate debtor could proceed but the counter claim filed against the corporate debtor could not be allowed to proceed.

The NCLT, however, recognized the difficulties involved in segregating a lis in such a manner and left it upon the arbitral tribunal to take an independent view whether the claim of the corporate debtor and counterclaim against the corporate debtor could be separately proceeded or not. 

The NCLAT  reversed the aforesaid decision of the NCLT vide its order dated August 3, 2018, passed in Jharkhand Bijli Vitran Nigam Limited v IVRCL Ltd. (Corporate Debtor) & Anr. [Company Appeal (AT)(Insolvency) No. 285 of 2018]. The NCLAT allowed the arbitration proceedings to continue and held, 

“3. As the claim of the Corporate Debtor can be determined  only after determination of counter claim made by the Appellant in the same very arbitral proceedings and if counter claim or part of it is set off with the claim made by the Corporate Debtor, were of the view that both the claim and the counter claim of parties should be heard together by the Arbitral Tribunal in absence of any bar under Insolvency and Bankruptcy Code, 2016.

4. However, on determination, if it is found that the Corporate Debtor is liable to pay a certain amount, in such case, no recovery can be made during the period of moratorium.” (emphasis supplied)

Thus, arbitrations involving claims (and counter claims) made by and against the corporate debtor may not be hit by section 14(1)(a) during the pre-award stage and will be proceeded with. Thus, the moratorium may come into effect depending on the award in the arbitration proceedings. If the award is against the corporate debtor, the moratorium will apply for the period stated in the IBC to bar a recovery action.

The question that arises is as to whether a s. 34 application under the Arbitration Act filed by Opposite Party to set aside an award in favor of the CD would be maintainable. This question is answered in the succeeding scenario. 

Scenario D

As far as scenario D is concerned, i.e. post arbitral proceedings being pending in the nature of ss. 34/36 of the Arbitration and Conciliation Act, 1996 (”Arbitration Act”) with

  1. the arbitral award being in favor of CD
  2. the arbitral award being against CD
  3. the arbitral award being an admixture of (a) and (b) above;

In light of the limitations to a strict interpretation approach to s. 14,  the courts have adopted a purposive interpretative approach keeping in mind the object/ policy behind the IBC. In the event, an award is in favor of the CD, the moratorium under s. 14 would not bar the recovery of such dues owed to the CD by way of execution of such award under s. 36 of the Arbitration Act.

However, if the monetary award is against the CD, the moratorium under s. 14  would be triggered to bar recovery of such dues owed by the CD by way of execution of such award under s. 36 of the Arbitration Act. 

A question arose as to whether a s. 34 proceeding would lie against the award in favor of the CD. This was answered by the Hon’ble Delhi High Court in its judgment dated 11.12.2017 in  Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd. 246 (2018) DLT 485 (“Power Grid”) while construing the scope of s. 14(1)(a) of the IBC, has held,

“8. The object of the Code is to provide relief to the corporate debtor through “standstill” period during which its assets are protected from dissipation or diminishment, and as a corollary, during which it can strengthen its financial position, ………. To determine the true meaning of the statute, the provision would have to be construed in the context of the statute as a whole, for which purpose interpretative criteria may have to be applied even when the statutory language is apparently free from any semantic ambiguity……

10. In the light of above purpose or object behind the moratorium, Section 14 of the Code would not apply to the proceedings which are in the benefit of the corporate debtor, like the one before this court in as much these proceedings are not a 'debt recovery action' and its conclusion would not endanger, diminish, dissipate or impact the assets of the corporate debtor in any manner whatsoever and hence shall be in sync with the purpose of moratorium which includes keeping the corporate debtor's assets together during the insolvency resolution process and facilitating orderly completion of the process envisaged during the insolvency resolution process and ensuring the company may continue as a going concern.

In striking this purposive interpretative approach, the court, inter alia, held that ‘proceedings’ under s. 14(1)(a) of the IBC did not include ‘all proceedings’ and the term “proceeding” would be restricted to the nature of action that follows it i.e. debt recovery action against assets of the corporate debtor.

The court further held that the moratorium under s. 14(1)(a) of the IBC is intended to prohibit debt recovery actions against the assets of the corporate debtor and continuation of proceedings which do not result in endangering, diminishing, dissipating or adversely impacting the assets of corporate debtor are not prohibited under section 14(1)(a) of the IBC. 

The court further observed that the Arbitration Act draws a distinction between proceedings under section 34( i.e. objections to the award) and under section 36 (i.e. the enforceability and execution of the award).

The proceedings under section 34 are a step prior to the execution of an award. Only after determination of objections under section 34, the party may move a step forward to execute such award and in case the objections are settled against the corporate debtor, its enforceability against the corporate debtor then certainly shall be covered by moratorium of section 14(1)(a).

H.S. ‘Bobby’ Chandhoke is a Senior Partner and Rajan Raj is a Partner at L&L Partners (formerly known as Luthra & Luthra Partners)

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