Two Paths, Two Proceedings – An Interpretation Web of Arbitration and Insolvency
– Shikha Chandlekar
In India, the relationship between Insolvency and Arbitration is quite contrasting as insolvency aims to centralize all the proceedings against a debtor to one jurisdiction hence giving proceedings in rem effect and thereby creating third party rights whereas arbitration on the other hand prescribes a decentralized approach and promotes party autonomy resulting in in personam proceeding. The Indian law has already established that if the subject matter of the dispute gives rights to multiple parties then the same is not arbitrable. As the insolvency proceedings create third party rights, thus, once the insolvency proceedings commence, the subject matter becomes non-arbitrable. Therefore, these two laws are constantly at war with each other.
With the passage of the Insolvency and Bankruptcy Code, 2016 (the “Code” or “IBC”), India’s approach to insolvency underwent a radical transformation. Aside from the implementation of a moratorium, there are no provisions in the Code that specify how the insolvency procedures may affect an arbitration. The Indian Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), too, does not stipulate the effect or impact of the corporate resolution insolvency process (‘CIRP’) or liquidation under the Code.
INSOLVENCY VS ARBITRATION: WHAT TO PRIORITIZE?
“There are decades where nothing happens, and there are weeks where decades happen”
-Vladimir Lenin
The legislative intent behind introduction of the Code was to ensure that the objective of the economic legislation is maintained by highlighting obvious distinctions between operational and financial creditors of a debt-ridden entity. IBC fast tracks the debt recovery process for its creditors. Honourable Justice Nariman once claimed that; “The economy has been restored to its proper position and the defaulter’s paradise is lost.”
Therefore, the relationship between bankruptcy and arbitration is very distinctive because bankruptcy seeks to consolidate all legal actions against a debtor under one jurisdiction, giving those actions legal effect and granting third parties rights. Arbitration, on the other hand, advocates party autonomy, leading to in personam proceedings. As a result, numerous arbitral processes have been hampered by the initiation of insolvency proceedings because there is a dearth of regulatory foundation on this interaction.
A lot of academic and judicial debates in the international arena have focused heavily on arbitration and insolvency. It has been acknowledged in academic literature as well as judicial statements that parties have frequently utilised the initiation of insolvency proceedings to obstruct arbitration. However, these talks are limited to only a few high-tech nations. Discussions regarding arbitration triggering insolvency solely on the latter’s trigger have been gaining traction. Even when there was a legitimate agreement in existence, courts have been reluctant to refer parties to arbitration because the other party used the ‘I’ phrase enough to cause a pause. Arbitration has long been victimised by insolvency.
Does the Arbitration Act take precedence over the IBC Code, or vice versa?
The legislation does not distinguish between ongoing arbitration proceedings and those that were started after the start of insolvency proceedings. It does not outline a precise legal process for getting beyond the moratorium the Code imposes on starting or continuing arbitration. However, an arbitrating party may be allowed to request continuation of the arbitration procedures if they can show that the arbitration was started to benefit the corporate debtor, to maximise the business debtor’s assets, or in a way that would not adversely affect the corporate debtor’s assets. Clarity in this regard would be provided by an NCLT decision.
In the case of Indus Biotech Private Limited v. Kotak India Venture Fund (“Indus Biotech Case”), the Supreme Court referred parties to arbitration while insolvency proceedings were pending and addressed the crucial question of which statute prevails in case of a conflict. In this case, Kotak India had filed an application before the NCLT Mumbai under Section 7 of the Code seeking commencement of Corporate Insolvency Resolution Process (“CIRP”) against Indus Biotech for its alleged default in redeeming the preference shares subscribed by Kotak India under an agreement. However, during the pendency of the said CIRP application, Indus Biotech filed a miscellaneous application before the NCLT under Section 8 of the Arbitration Act praying to refer the matter to arbitration for settling their disputes.
NCLT rejected Section 7 application on the ground of non-existence of ‘default’ and further allowed the Section 8 Arbitration Application and referred the matter to Arbitration. The said decision was challenged before the Apex Court on the ground that the NCLT usurped its jurisdiction while allowing a Section 8 Arbitration Application in an in-rem insolvency proceeding amidst the absence of any specific power conferred under the Code to refer parties to Arbitration.
This case covered the scope of insolvency disputes’ arbitrability and attracted the attention of academics and arbitration practitioners for its explanation of the interrelationship between insolvency and arbitration proceedings under Indian law.
Is it possible for a party to the arbitration to submit a claim in the CIRP?
To answer it simply, no express prohibition against this exists. The definition of debt (financial or operational) under the Code does not extend to a claim made pursuant to an arbitration agreement. However, the claim might be presented to the resolution professional if it falls underneath the category of financial or operational debt on its own or Insolvency Resolution Process (IRP) as the case may be. If the IRP declines to include the claim, the creditor may appeal to the NCLT; if the NCLT likewise declines to include the claim, the claim will be listed in the information memorandum as a pending dispute. In such cases, the applicant shall have sole discretion over the determination and handling of such claims. Such claims are often given no value, or the resolution plan will include a provision stating that upon the conclusion of an insolvency, all pending claims shall be extinguished.
In this regard, the Supreme Court recently on January 21, 2022 granted a decision in the case of Fourth Dimension Solution Solutions Ltd. v. Ricoh India Ltd. wherein the Hon’ble Court granted permission to an operational creditor of the corporate debtor to continue arbitration proceedings despite the Committee of Creditors and the Apex Court’s approval of the corporate insolvency resolution plan. The Court noted that the operational creditor’s admitted claims were marked as ‘Nil,’ with an appended note stating that, “The FDSL claims have been contested and are currently before the arbitrators/appellate authorities. The outcome of these proceedings determines the liability“.
Arbitral Award: Debt Proof Under the 2016 Code?
In the case of K. Kishan v. M/s. Vijay Nirman Company, the Supreme Court ruled that arbitral awards are valid records of operational debt. However, the credit must be uncontested.
The bench of NCLT Mumbai in the case of Agrocorp International Private (PTE) Limited v. National Steel and Agro Industries Limited has adopted a different stance and determined that sustaining an insolvency claim against a corporate debtor is not dependent on the enforcement of a foreign award. The foreign award in this instance was not contested, and that was the justification given for admitting the insolvency petition. According to the NCLT’s reasoning, a foreign judgement is a legitimate proof of debt as long as it has reached finality at the place of arbitration. As a result, a foreign creditor may utilise a foreign award to start insolvency proceedings in India. A foreign award is a genuine proof of debt that can be utilised by a foreign creditor to start insolvency proceedings in India as long as it has reached finality at the place of arbitration, according to one argument in favour of the ruling. It would be interesting to watch whether and how the National Company Law Appellate Tribunal (NCLAT) handles any appeals against the NCLT’s ruling.
AHEAD OF US
We have an interesting road ahead of us as the Code was put on hold for a year starting on March 25, 2020 due to the introduction of Covid-19. Despite the corporate debtor being saved, the arbitral proceedings’ parties were effectively awarded nothing, leaving them with no recourse. If the law is not properly addressed, the number of cases where arbitral proceedings are compromised by the initiation of insolvency proceedings against the corporate debtor will rise due to businesses failure as a result of the pandemic’s effects. This will have an adverse effect on investor confidence in the ability to enforce contracts and the convenience of conducting business in India.
The ability to participate in the insolvency resolution process, the impact of insolvency proceedings on a foreign seated arbitration, and the enforcement of an arbitral award in light of such proceedings are just a few of the many issues that parties are facing due to the lack of clarity regarding laws and judicial precedents. Both rules appear to be at odds with one another, and the point of intersection is unclear.
There is a need to strike a delicate balance between erasing the legal rights of the parties to the legal proceedings (including arbitration proceedings) who are ineligible to pursue their claim due to the imposition of the moratorium order and, subsequently, giving a clean slate to the new management (incoming investors) upon successful completion of CIRP. With the development of a new insolvency regime in India, discussion of the confluence between arbitration and insolvency is of utmost importance.