India: Supreme Court Clarifies That Arbitration Proceedings Commencing After Imposition Of Moratorium Under Section 14 Of The Insolvency And Bankruptcy Code, 2016 Is Non Est In Law

Last Updated: 1 December 2017
Article by Vineet Aneja and Kaveri Kumar

The Supreme Court of India while deciding the civil appeal in Alchemist Asset Reconstruction Company Limited Vs. M/s Hotel Gaudavan Private Limited & Ors, Civil Appeal number 16929 of 2017 passed on October 23, 2017 has held that the effect of the Moratorium that comes into effect vide Section 14 (1) (a) of the Insolvency and Bankruptcy Code, 2016 ("I&B Code") is that the arbitration that may be instituted after the aforesaid Moratorium is non est in law.

The facts leading to the present appeal reflect that several proceedings had been resorted to by the parties and ultimately a petition filed under the I&B Code was admitted by the National Company Law Tribunal ("NLCT"), Principal Bench, New Delhi on March 31, 2017. It was basis the admission of the petition that the Moratorium was imposed in view of Section 14 of the I&B Code on the day the Interim Resolution Professional was appointed. Section 14 (1) (a) of the I&B Code specifies that on the Insolvency Commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;

In the meantime, despite the Moratorium the parties invoked the arbitration clause and whereby a Sole Arbitrator was appointed. The NCLT in an order dated May 31, 2017 referred to Section 14 (1) (a) of the I&B Code and stated that given the Moratorium imposed, no Arbitration proceedings can go on.

In view thereof, a first appeal was filed before the District Judge, Jaisalmer, Rajasthan under Section 37 (Appealable Orders) of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") wherein the notice was issued.

It was against the admission of the application that the present Civil Appeal ensues. The Court observed that the mandate of the new I&B Code is that the moment an insolvency petition is admitted, the Moratorium that comes into effect under Section 14 (1) (a) of the I&B Code, expressly interdicts institution or continuation of pending suits or proceedings against Corporate Debtors.

Accordingly, the Court set aside the order of the District Judge dated July 6, 2017 and observed that the effect of Section 14 (1) (a) is that the arbitration that has been instituted after the Moratorium is non est in law.

Prior to Section 14 (1) (a) of the I&B Code, a similar provision prevailed under the repealed Sick Industrial Companies Act, 1985 ("SICA"), wherein once the Company entered reference before the Board for Industrial and Financial Reconstruction, existing proceedings against the Debtor were stalled and no new proceedings could be initiated against the Debtor until the revival of the Company. As a result, the creditors were not able to recover their investments from the Debtor and accordingly their non-performing investment became all the more non-performing. Unlike SICA, the Code postulates a time limit within which the Moratorium operates so that the Debtor is able to come up with a resolution plan for the creditors by settling their dues in a time bound manner.

As such, the legislature's intent is to ensure that the resolution process is a collective one by declaring Moratorium till the time the completion of insolvency resolution process by the Adjudicating Authority which is time-bound i.e. 180 days or 270 days in some cases. However, it still is unclear as to what will be the stand of the Moratorium in the event the insolvency proceedings exceed the aforementioned time limit provided in the Code. In the event, the Moratorium exceeds with the increase in the days of the insolvency process, the Creditor may continue to lose out on opportunities to resort to other modes of recovery of the debt by way of recovery suits or arbitration proceedings at the cost of the insolvency proceedings.

Therefore, it seems vital that the insolvency resolution process is completed by the Adjudicating Authorities in a time-bound manner in order to achieve the purpose of declaration of the Moratorium and the I&B Code as a whole. Further, it appears that the I&B Code may also improve ease of doing business and facilitate more investments leading to higher economic growth and development.

This update is authored by Clasis Law, Clyde & Co's associated firm in India

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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