- Richa Bhargava & Raahat Tara
The Insolvency-Arbitration crossroad: The Way Ahead
The Insolvency and Bankruptcy Code 2016 (IBC) came into force to overcome the problems brought about by the previously instated insolvency laws. It aimed at transforming the Indian insolvency regime. With the introduction of a new insolvency law in India, the interaction between arbitration and insolvency has taken on significant prominence and has resulted in the institution of certain, pertinent legal standards. Many arbitral processes have halted because of the beginning of insolvency proceedings due to the lack of regulatory guidance on the matter. While several jurisdictions have established legal precedent in this area and have additionally legislated guidelines, India is a novice to the list. The halt to the arbitration proceedings is rather adverse for the legal community as it aims to reduce the supervisory role of the courts and moreover, advocates for the will of the parties to choose a forum of their choice for dispute resolution. To set the appropriate stage for the sequel, the way to achieve the will of the parties is to ensure that the environment in the Indian judicial landscape is made more arbitration friendly. [A1] With the doors of the NCLTs and NCLATs being shut for a year due to the pandemic, there must also be a large influx of disputes which now need to be dealt with. In times like these, in order to streamline and uncomplicate the legal setting, alternate methods of dispute resolution are a saving grace as they help demystify legal procedure and decongest judicial backlog while also ushering in greater party autonomy and equal access.
Insolvency proceedings and arbitral proceedings: A crossover
Insolvency proceedings deal with defaults and try to help companies to protect the creditors’ interests and assets. Arbitration on the other hand, provides a dispute resolution mechanism to parties that want to opt out of going to courts in case of any dispute. Arbitration and insolvency though possess conflicting policy objectives still intersect in the legal and judicial landscape in a variety of ways.
The recent landmark judgement of the Indian Supreme Court in the Vidya Drolia v. Durga Trading Corporation has led to the dismantling of numerous controversies concerning the applicability and scope of arbitration. The Court laid down that in matters which give rise to rights in rem or result in an erga omnes effect, arbitration as a mode for dispute resolution cannot be enforced. It was also held that in cases where the subject-matter of a dispute is in connection with the public welfare duties of the State or if certain statutes have expressly or implicitly rendered particular subject-matters as non-arbitrable, arbitration cannot be utilised as the method of adjudication.
Section 14 of the IBC contains the provision for the institution of a moratorium. This stipulation expressly bars the execution of any arbitration panel as well. Section 238 of the IBC enshrines the supremacy of the Code over other laws in the event of any inconsistencies. [A2] [A3] This position of the law was further solidified by the Apex Court in Alchemist Asset Reconstruction Company Ltd. v Hotel Gaudavan Pvt. Ltd. Various judicial pronouncements have made an attempt to deliver an inference on whether an insolvency petition can be filed during an ongoing arbitration proceeding. In Reliance Commercial Finance Limited v. Ved Cellulose Limited, the court stated that an arbitration proceeding that is pending, does not serve as a bar to halt the filing for an insolvency petition.
The case of Indus Biotech Pvt. Ltd. v Kotak India, further clarified the inadmissible nature of an application seeking adjudication of a matter through arbitration under Section 8 of the Arbitration and Conciliation Act, if there already exist ongoing proceedings under Section 7 of the Code which deals with the commencement of the corporate insolvency resolution process (CIRP) by the creditor. The Court held that the order of the National Company Law Tribunal which referred the dispute for arbitration before any insolvency proceedings having begun was valid.
In the landmark case of Kotak India Venture Fund- I v Indus Biotech Private Limited, the NCLT directed parties to enter into an arbitration during the continuation of an insolvency proceeding and addressed the crucial question of which statute should be given primacy in the event of a clash between the two. It was believed that arbitration proceedings cannot continue in cases wherein the provisions of the Code apply. This is evidently giving effect to the provision on moratorium over the continuance of arbitral proceedings. Thus, an arbitral proceeding is to be halted on the application of the moratorium period which is issued by the NCLT stipulated by the Insolvency and the Bankruptcy Code.
It is after the Authority’s consideration on the existence of a default having occurred that the rights of the third party or the creditors come into existence, drawing a distinction between rights in rem and rights in personam. It is following the creation of a general interest that the matter cannot be directed for arbitration or any other legal proceeding. This decision is also in consonance of the rule laid down in Swiss Robbins in which while assessing the legality of Section 12A of the Code, the Supreme Court held that the submission of the application initiating insolvency proceedings mandates that the collective approval of the creditors be taken before any individual claims are settled due to the existence of rights in rem.
The effect of the moratorium period on arbitral proceedings
The goal of establishing a moratorium is to keep the corporate debtor's assets intact so that the company uses the pretext of a 'going concern’ to operate. This implies that it has the rights to operate and function till some evidence proves the contrary opinion. When discussing the purpose of the moratorium, the Supreme Court of India in P. Mohanraj and Others v. Shah Brothers Ispat Pvt. Ltd asserted that the supply of goods and services that are absolutely essential to the corporate debtor during the moratorium period cannot be terminated, suspended, or even interrupted, because the corporate debtor would be unable to perform its duties and function as a going concern otherwise.
The question that begs clarification is whether there is an effect of the moratorium period on the arbitration proceedings that have been filed along with insolvency proceedings. The law makes no distinction between ongoing arbitration proceedings and those that began after the insolvency proceedings were initiated. There is no particular statutory method for overriding the Code's moratorium on the beginning or maintenance of arbitration. Nevertheless, the current NCLT position on the matter states that if an arbitrating party can show that the arbitration is being held for the advantage of the corporate debtor, to optimize the company debtor's assets, or to avoid harming the corporate debtor's assets, the arbitration proceedings may be continued.
The moratorium under S.14 of the code should not be treated as an indefinite moratorium. It is specifically designed to ensure that it persists from the date on which it is declared through an order till the time the insolvency proceedings of a particular corporate matter culminate. Thus, the period is time bound and dependent on the duration of the insolvency proceedings. However, the moratorium does have an adverse effect on the arbitration proceedings that concern the same matter.
Both insolvency and arbitration are founded on contrary legal principles but amalgamate in the arena of corporate law. Access to judicial mechanisms of dispute redressal is an integral facet of human rights and must be made readily available to all parties. With the onset of the COVID-19 pandemic, the already glaring discrepancies in terms of legal representation and access have widened exponentially. Early 2020 also saw the suspension of the IBC for approximately a year. It is even more interesting to note how when the Code was brought back into force in March 2021, the threshold limit for filing an application was increased from Rs. 1 lakh to Rs. 1 Crore. This move has severely disadvantaged creditors with claims less than 1 crore as there is no legal recourse for them. They are already barred under Company law to seek redressal from civil courts, as the institution of NCLTs was done to provide a specialized forum to deal with such matters. With the recent judicial advancement brought in the Indian landscape, the dispute between two parties becomes non-arbitrable only on the condition that it has been admitted as a CIRP application. Although, there is an exception that has been carved out, the preference given to the insolvency provisions is apparent.
Even though the enforcement of a moratorium is integral to insolvency proceedings they must not be allowed to act as hindrances to justice and commercial development. The establishment of tribunals was aimed at greater decentralisation in an era of a highly globalised economy. With India already becoming a hub for international arbitration matters, it is necessary that both insolvency law and arbitration be harmoniously construed so that the courts and legislature recognise the importance of such ‘out of court’ mechanisms to effectively disperse principles of justice.