Interplay of Moratorium and Arbitration

Abhilekh Tiwari*

Introduction

Dispute resolution and revival of sick companies are amongst the most important aspects in the development of the country. Arbitration and Conciliation Act, 1996 (“Arbitration Act”) was enacted with a view to settle the disputes efficiently and Insolvency and Bankruptcy Code, 2016 (“IBC”) was enacted for revival of companies that were in financial distress and for returning the debts owed to the creditors. There has been a common question in most occasions of Corporate Insolvency Resolution Process (“CIRP”) as to the extent of applicability of moratorium in arbitration or arbitration proceedings per se. The verbatim of the relevant section does expressly states the phrase ‘arbitration proceedings’. At times the courts have, through judicial pronouncement have attempted to establish the position.

Precedents imposing Stay on Arbitration

• What is ‘proceedings’ under Section 14 of the IBC?

This question was answered in the case of Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd. (2018). Hon’ble Delhi High Court stated that not all proceedings will be barred under the ambit of moratorium. Court applied purposive interpretation and laid that that the intent of Section 14 was to enable a ‘calm period’ during which corporate debtor can recover from the financial liabilities. This case clarified that the proceedings that benefit corporate debtor will not be stayed  and only ‘debt recovery actions’ are barred under the moratorium. This was also stated in the November 2015 report of the Bankruptcy Law Reforms Committee (5.3.1). Further, the report also stated that claims or expected claims are also barred. If any proceeding is helping in betterment of financial condition of the corporate debtor which would in turn reduce the claims, shall be allowed to proceed with.

• Whether ‘arbitration proceedings’ can be barred under Section 14?

In the case of Alchemist Asset Reconstruction Company Limited v. M/s. Hotel Gaudavan Private Limited & others (2017) arbitration clause was invoked after moratorium was imposed. Section 14 do not expressly state that arbitration proceedings will be barred under the moratorium. However, Hon’ble Supreme Court, in this case it was held that the arbitration proceedings initiated after imposition of moratorium will be considered ‘non est’ in law. The Hon’ble Supreme Court stated that arbitration proceedings are included within the ambit of moratorium and if post imposition of moratorium, any arbitration proceedings are initiated then it would be considered as non-existent (nonest) in law. However, in an arbitration proceedings there are claims and counterclaims and hence it might not be possible to determine as to whether the proceedings are in favour or against the corporate debtor and whether it should be proceeded with or not as per the Power Grid Corporation case. This issue was dealt in the case of K.S. Oils Ltd. v. State Trade Corporation of India Ltd. &Anr. (2017).

• Whether all ‘arbitration proceedings shall be stayed after imposition of moratorium?

In the case of Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd. it was laid that only debt recovery actions shall be barred. Later in the case of K.S. Oils Ltd. v. State Trade Corporation of India Ltd. &Anr. (2017), Hon’ble NCLAT held that arbitration proceedings can be carried out but if the award is rendered against the corporate debtor ultimately leading to recovery of debts, then the corporate debtor shall be exempted. In most cases there is a counter claim so it would be difficult to infer whether a proceeding is in favour of corporate debtor or against. The final award should not ultimately affect the financial condition of corporate debtor in a negative manner as it would be against the objective of moratorium. If all the claims are not put forth before the resolution professional on time then the CIRP process will be affected which again will hamper the objective of IBC of timely reorganisation and payment of dues.

Thereafter in the case of Jharkhand Bijli Vitran Nigam Limited v. IVRCL Ltd. (2018), it was laid by the Hon’ble NCLT Hyderabad and later reaffirmed by NCLAT that the award must be viewed in totality and the final award in the arbitration proceeding should not be against corporate debtor.

Position in International Arbitration

Before understanding the technicalities involved in the interplay between moratorium and International Arbitration, it is essential to understand the difference between enforceability and execution of an award. Enforceability is the capability of any award to be enforced or when the validity of an award is checked. Enforceability precedes execution. Execution means if an award is held valid and enforceable then the award is executed like a court decree. Until the case of Fuerst Day Lawson Ltd. v. Jindal Export (2001), separate proceedings were carried for enforcement and execution.

In case of International Arbitration, when a foreign award is passed, execution cannot be carried out like that of a domestic award, rather the award has to be checked whether it can be enforced or not. The opposing party has to set certain defences available under Section 48 of the arbitration act and the applicant will furnish proof through evidences that the award is in their favour.

It should be noted that if an arbitration proceedings are international in nature then there exists an ambiguity in context of Alchemist Assets Reconstruction v. Hotel Gudavan which entirely barred arbitration proceedings to be conducted.

Questions Remain

The interplay between moratorium and International Arbitration is a complicated one. There are still many unanswered questions pertaining to issues like jurisdictional conflict, cross border insolvency, purposive interpretation of Section 14 of IBC, extent of applicability of IBC in international disputes and many more.

Purposive Interpretation

Section 14 of the IBC states only ‘proceedings’ and enforcement of an arbitral award are barred and hence ‘arbitration proceedings’ per se will not hamper the objective of moratorium. An arbitral award is not directly enforced, rather enforcement and execution has to be sought under the relevant provisions of the Arbitration act.

Furthermore, had the intent of legislature been to include arbitration proceedings under the ambit of Section 14, it would have been specifically stated as it has been done in other provisions in the IBC. Section 5(6), Section 8(2)(a) and Section 25(2)(b) of IBC states the term ‘arbitral proceedings’ as the intent of the legislature was to specifically and expressly include the arbitral proceedings within the ambit of the provision. Legislature was conscious while drafting the IBC that there has to be differentiation between ‘suit’ and ‘arbitration proceedings’.

Issue arising if ‘Arbitration Proceedings’ are included within ambit of Section 14 of IBC

Arbitration proceedings, irrespective of international or domestic, renders award which is ultimately enforced and executed. In a circumstance when the company is being liquidated or even during the corporate insolvency resolution process, if the party which has a potential award in its favour seeks to send their claim (award) to Resolution Professional or Liquidator then it would not be permitted by law as the arbitration proceedings are barred by moratorium. Resolution Professional or Liquidator is not a dispute resolution body per se, if there is an award then it would be convenient for the party to put forth their claim.

International Arbitration and Jurisdictional Conflict

IBC is national legislation applicable only to the territory of India. If an arbitration is international in nature, then it would be difficult for the party undergoing resolution to stay the arbitration proceedings. Though the Alchemist Assets Reconstruction case specifically barred arbitration proceedings to take place, it did not give any comment regarding arbitrations which are international. If an award is passed against the insolvent party that would ultimately not be enforced and executed will dissolve the purpose of arbitration as the tribunal has rendered unenforceable award. However, if arbitration is not carried out then either of the party will have suffer damages and will have no remedy available. The better position could be allowing the international arbitration and have an award with the party that could ultimately be used to seek relief in form of claim or award.

Cross Border Insolvency and International Arbitration

If the government is in agreement with the other country, then arbitration can be stayed in the other country as well. The IBC will be made applicable to the other country and Section 238 will be applicable which states that IBC will have an overriding effect over the other laws. However, there is still some ambiguity regarding the applicability of Section 14 of IBC in arbitration proceedings.

Conclusion

There is still a lot of dust to be settled to understand the intricacies of interplay between arbitration and insolvency. Whereas purposive interpretation of Section 14 hints that legislative intent was never to stay the arbitration proceedings, however, Alchemist Assets Reconstruction case entirely barred the invoking of arbitration clause. Complexities increase if an arbitration is international in nature. Resolution of this issue will be possible only if there is settled position of law in national domain and if the countries or international bodies come together in deliberation of an established convention. Ambiguities will further increase the pending cases which would result in delayed justice delivery ultimately affecting the parties, creditors and debtors.

*The author is a fourth-year law student of Institute of Law, Nirma University, Ahmedabad.