1. INTRODUCTION
The tension between arbitration and insolvency is often described as a "conflict of almost polar extremes". In Re United States Lines Inc.1, this dichotomy is highlighted by contrasting the decentralised approach of arbitration with the centralised nature of bankruptcy legislation. Arbitration policy favors a decentralised resolution of disputes, allowing parties to resolve their disagreements independently through arbitrators often chosen by the parties themselves. Alternatively, bankruptcy law inherently trends towards centralisation to effectively manage and resolve claims within a single unified framework.
In India too, arbitration and insolvency are two critical legal regimes which often find themselves in conflict. Recent judicial interpretations and decisions have provided greater clarity on the conflicting aspects between the Insolvency and Bankruptcy Code, 2016 (IBC) and the Arbitration and Conciliation Act, 1996 (Arbitration Act). However, by no measure has there been a wholistic reconciliation of the procedural and substantive positions of the two legislations.
This separation emerges from the purpose behind the legislations. The Arbitration Act was enacted to consolidate and amend the law on domestic and international proceedings and enforcement mechanisms related arbitral Award. The Arbitration Act can, for all purposes, be used as a recovery mechanism. Per contra, it has been repeatedly held that the provisions of the IBC cannot be used as a recovery mechanism. Rather, it is primarily focused on the determination of default that is relevant for allowing or disallowing an application for the initiation of a Corporate Insolvency Resolution Process (CIRP).
However, a nuanced approach towards both legislations highlights that there are dimensions to both laws that could serve to enhance the facilities under the two legislations. This article sheds light on the interplay between arbitration and insolvency law in India.
To this objective, this detailed guide proceeds in four segments. Firstly, it discusses the process of initiation of arbitration and insolvency proceedings when the law between the two appears to overlap or act as a bar to proceedings. Secondly, it considers the stage post-initiation of arbitration proceedings but before the making of an arbitral Award i.e. when arbitration proceedings are ongoing, and its implication on insolvency proceedings and the CIRP. Thirdly, it highlights the stage post the making of an arbitral Award and its impact on initiation of insolvency proceedings generally and CIRP specifically. Fourthly, it considers the stage where a moratorium is initiated and the effects of the same on the arbitration process. In its limited analysis, this guide aims to provide a categorical, stage-wise development of the law on the interplay between Indian arbitration and insolvency law as it stands currently (September 2024).
II. INITIATION OF PROCEEDINGS
1. Can arbitration be invoked during the pendency of an insolvency petition?
In Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund (formerly Kotak India Venture Limited) & Ors.2, the Supreme Court addressed the contentious issue of arbitrability in cases where a Section 7 petition under the IBC has been filed. The Court held that the key determinant for the 'arbitrability' of a dispute is not simply the filing of the Section 7 petition, but rather the point at which the petition is admitted under the IBC. It was determined that when disputes involving in rem matters — those affecting the rights of the public or a group — fall outside the purview of arbitration and are not within the jurisdiction of arbitral Tribunals. However, the Supreme Court held that the specific stage at which a reference to arbitration is sought prior to the petition's admission by the Adjudicating Authority is critical.
Drawing from its previous ruling in Vidya Drolia & Ors. v. Durga Trading Corporation3, the Supreme Court laid out the criteria for determining when a dispute is non-arbitrable. It was held that a dispute becomes non-arbitrable when it evolves into an in rem proceeding, which under the IBC occurs only after the petition has been admitted by the Adjudicating Authority. The Supreme Court reiterated that for a Section 7 petition to initiate an in rem proceeding, the Adjudicating Authority must conduct a detailed examination; establish the occurrence of a 'default,' and formally admit the petition. This admission triggers rights for all creditors of the insolvent entity. Therefore, the mere filing of a petition, without its admission, does not convert the case into an in rem proceeding. The Supreme Court thus held that the admission of the petition for the CIRP is an important moment that determines the nature and status of the proceedings.
2. How does the presence of an arbitration clause in an agreement impact the initiation of insolvency proceedings?
In TATA Consultancy Services Limited v. Vishal Ghisulal Jain4, the Supreme Court held that the existence of a clause for referring the dispute between parties to arbitration does not oust the jurisdiction of the NCLT to exercise its residuary powers under Section 60(5)(c) of the IBC to adjudicate disputes relating to the insolvency of the Corporate Debtor. The NCLT's authority is not limited by Section 14 of the IBC in terms of the reasons for judicial intervention contemplated under the IBC.5 Under Section 60(5)(c), it can use its residuary jurisdiction to rule on legal and factual issues that arise throughout the insolvency resolution process.
In the case of Hasan Shafiq v. CT Technologies6, the NCLAT ruled that despite the presence of an arbitration clause in the agreement between the parties, an application under Section 9 of the IBC is fully maintainable. The Tribunal held that the existence of an arbitration clause does not bar the Operational Creditor from filing a Section 9 application. The NCLAT held that the procedures under the IBC have been given an overriding effect over other legal provisions including arbitration agreements. It held that this is in line with Section 238 of the IBC which states that the provisions of the IBC prevail over any other law or contractual agreement to the extent of any inconsistency. It held that the right of an Operational Creditor to file a Section 9 application is not hindered by any arbitration agreement in the contract. If the Operational Creditor chooses to proceed under Section 9, the application cannot be dismissed solely based on the arbitration clause in the underlying agreement. This was later reinforced by a recent decision of NCLT Mumbai in Gauder & Co. S.A. Vs Isinox Limited7 where it was held that an arbitration clause in an agreement does not prevent an Operational Creditor from filing an application under Section 9 (IBC). The Bench held that the presence of such a clause does not impose any restriction on the Operational Creditor's right to pursue a Section 9 Application under the IBC.
In Mitcon Consultancy & Engineering Services Ltd. v. Vitthal Corporation Ltd.8, the NCLAT held that the mere presence of an arbitration clause in an agreement does not, by itself, establish the existence of a dispute. It held that the existence of an arbitration clause cannot be relied upon to argue that a dispute was already in existence prior to the initiation of insolvency proceedings. Similarly, in Dinesh Chand Jain and Ors v. Fabulous Buildcon (P) Ltd. and Ors.9, the NCLT Delhi ruled that the presence of an arbitration clause in an agreement does not prevent the commencement of insolvency proceedings under Section 7 of the IBC.
In Achenbach Buschhutten CMBHbh & Co. v. Arcotech Ltd.10, the NCLAT held that the mere presence of an arbitration clause in an agreement does not constitute an "existence of dispute" for the purpose of rejecting an application filed under Section 9 of the IBC. The Bench clarified that the arbitration clause alone is insufficient to demonstrate that a dispute is pending before the Arbitral Tribunal and thus cannot be used as a ground to refuse an insolvency application under the IBC.
3. How does the initiation of arbitration after the issuance of a demand notice under Section 8(1) of the IBC affect the insolvency proceedings?
In Mobilox Innovations Pvt. Ltd v. Kirusa Software (P) Limited11, the Supreme Court held that when an Operational Creditor files a complete application, the Adjudicating Authority must reject the application under Section 9(5)(2)(d) of the IBC if the Operational Creditor has received a notice of dispute or if there is a record of dispute in the information utility. The Supreme Court held that this notice must inform the Operational Creditor of the "existence" of a dispute or that a suit or arbitration proceeding related to the dispute is pending between the parties. At this stage, the Adjudicating Authority's role is to determine whether there is a plausible contention that warrants further investigation and that the "dispute" is not merely a weak legal argument or an unsubstantiated factual claim. The Supreme Court held that the "existence" of a dispute and/or any related suit or arbitration proceeding must be 'pre-existing' meaning that it must exist prior to the receipt of the demand notice or invoice. It held that the dispute must be present before the demand notice is received.
In Sushil Kanugolu Vs. Samunnati Agro Solutions Pvt. Ltd12, the NCLAT noted that the demand notice had been issued 24.06.2019. However, the Operational Creditor filed an arbitration petition on 3 November 2020, and the Corporate Debtor initiated arbitration proceedings on 7 December 2020. The Bench held that since both arbitration petitions — filed by the Operational Creditor and the Corporate Debtor — were initiated after the demand notice was issued, they could not be considered as evidence of a pre-existing dispute. It held that according to the legal provisions of the IBC, a pre-existing dispute is recognised only if it predates the issuance of the demand notice. Therefore, the Bench dismissed the contention of a pre-existing dispute.
4. Can arbitration proceedings create 'pre-existing dispute' under section 9?
In Parmod Yadav & Anr. v. Divine Infracon Pvt. Ltd.13, the NCLAT held that the commencement of arbitral proceedings under Section 21 of the Arbitration Act constitutes the existence of a dispute. Similarly, in Sobha Limited v. Pancard Clubs Ltd.14 the Corporate Debtor demonstrated to the Adjudicating Authority that arbitration proceedings under Section 11 of the Arbitration Act had been initiated before the service of the notice under Section 8(1) of the IBC. The presence of these arbitration proceedings established the existence of a dispute. Consequently, the Adjudicating Authority declined to entertain the application under Section 9 of the IBC.
However, in Ahluwalia Contracts (India) Limited v. Raheja Developers Limited15, the NCLAT held that a claim constitutes a right to payment, even if it is disputed. Therefore, it held that merely disputing a claim or showing that there is a counterclaim does not establish the existence of a pre-existing dispute unless there is evidence that the dispute was raised prior to the issuance of the demand notice under Section 8(1) of the IBC.
In this case, it was undisputed that the Respondent initiated arbitration proceedings on 24 May 2018 nearly a month after the demand notice under Section 8(1) was issued on 28 April 2018. As a result, the NCLAT held that the Corporate Debtor could not rely on the arbitration proceedings to claim a pre-existing dispute. Additionally, there was no evidence on record to suggest that the Corporate Debtor had raised any pre-existing dispute regarding the quality of work performed by the Appellant.
III. POST-INITIATION OF PROCEEDINGS AND BEFORE THE MAKING OF AN ARBITRAL AWARD
5. Can an arbitrator be appointed while an insolvency petition is pending?
A Single Bench of the Bombay High Court in Sunflag Iron & Steel Co. Ltd . v. M/s Poonamchand & Sons16 clarified the legal position regarding the appointment of arbitrators during ongoing insolvency proceedings. It was held that the initiation of proceedings under Section 7 of the IBC does not preclude the appointment of an Arbitrator under Section 11(6) of the Arbitration Act. The Bombay High Court held that the bar under Section 238 of the IBC17 applies only after the NCLT has admitted the Section 7 application. In other words, the mere filing of a Section 7 application does not automatically trigger the bar under Section 238 of the IBC.
The High Court further clarified that an application under Section 11(6) of the Arbitration Act remains maintainable until the NCLT adjudicates on the occurrence of default under Sections 7(4) and 7(5) of the IBC. The High Court referred to Indus Biotech Private Limited18 and held that the NCLT must apply its mind to the application and record findings on the occurrence of default for the proceedings to be considered in rem.
The Delhi High Court in Millennium Education Foundation v. Educomp Infrastructure And School Management Limited19 held that merely because an insolvency petition is pending, it cannot be an embargo on the power of the Court to decide arbitration applications. It held that only when the insolvency petition is admitted, and the moratorium is declared that the proceedings under the Arbitration Act would be non-maintainable.
6. Can the CIRP be initiated if arbitration proceedings are already ongoing and no arbitral Award has been passed?
The Delhi High Court in Pitambar Solvex Pvt Ltd And Anr. Vs Manju Sharma And Ors.20 held that the mere initiation of the arbitration proceedings does not bar the Corporate Debtor from pursuing his other remedies including those under the IBC.
In Chennai Metro Rail Ltd. v. Lanco Infratech Ltd.21, the Madras High Court held that under Section 33(5) of the IBC, there is no requirement to obtain leave from the Adjudicating Authority to continue arbitral proceedings. The High Court held that the power to grant leave inherently includes the power to deny it.
In Reliance Commercial Credit Limited v. Ved Cellulose Ltd.22, the NCLT Mumbai held that the pendency of arbitration proceedings does not bar the initiation of the CIRP under Section 7 of the IBC.
7. Can an Arbitral Tribunal pass an arbitration Award during the CIRP?
In Mr. Atul Rajwadkar v. HDFC Bank Limited & Ors.23, the NCLT addressed the issue of whether an arbitral order passed after the initiation of CIRP contravenes the moratorium imposed under Section 14 of the IBC. The order in question, dated 23 January 2020, was issued subsequent to the admission of CIRP on 17 September 2019. The NCLT held that this arbitral order violated the objective of the IBC and contravened the moratorium provisions under Section 14. Consequently, the arbitral Award was set aside.
In contrast, in Ranjit Das & Ors. v. MSX Mall Pvt. Ltd.24, the NCLAT took a different stance. The Tribunal allowed the continuation of arbitration proceedings and held that while the proceedings could continue, any Award passed by the Arbitral Tribunal against the Corporate Debtor during the moratorium period would not be given effect.
In Bharat Heavy Electricals Ltd vs M/s Zillion Infraprojects Pvt Ltd25, the Delhi High Court held that an Arbitral Tribunal can issue an interim Award based on admissions made by a party before the Interim Resolution Professional (IRP) during the CIRP. The Bench dismissed the Appellant's argument that admissions made before the IRP could not be considered as admissions in the arbitral proceedings. The High Court held that Order XII Rule 6 of the Code of Civil Procedure, 1908 (CPC) is broadly framed and allows for the consideration of admissions made in pleadings or otherwise. Order XII Rule 6 CPC grants Courts the authority to pass judgment or orders based on admissions of fact made by the parties, regardless of whether these admissions occur in pleadings or other contexts.
In Tata Motors Finance Ltd. v. Jadoun International Pvt. Ltd. & Anr26, the NCLAT dealt with a hypothecation agreement between the Corporate Debtor and the Appellant, Tata Motors Finance Ltd. After CIRP commenced, the Appellant, acting on an Arbitral Award, repossessed two trucks from the Corporate Debtor. The NCLAT held that the moratorium under Section 14 prohibits any action against the Corporate Debtor's assets including repossession and sale.
IV. POST THE MAKING OF AN ARBITRAL AWARD
8. Can the CIRP be initiated if an arbitral Award has been passed but is still pending a challenge under Section 34 or Section 37 of the Arbitration Act?
In K. Kishan v. Vijay Nirman Company Pvt Ltd.27, the Supreme Court addressed a scenario where an Operational Creditor obtained a favourable arbitral Award, which was subsequently challenged by the judgment-debtor under Section 34 of the Arbitration Act. While the proceedings to set aside the Award were still pending, the Operational Creditor approached the NCLT to initiate insolvency proceedings based on the arbitral Award. The Supreme Court held that the ongoing proceedings challenging the Award therein constituted a pre-existing dispute, which precluded the Operational Creditor from filing an insolvency application until the resolution of the challenge under Section 34 of the Arbitration Act, or the completion of enforcement proceedings under Section 37 of the Arbitration Act.
However, the Supreme Court in Kotak Mahindra Bank Limited v. A. Balakrishnan28 clarified that this restriction does not apply to Financial Creditors. If a Financial Creditor possesses a favorable arbitral Award or Court decree, the Award or decree could serve as: (a) a fresh cause of action; and (b) valid proof of debt for the initiation of insolvency proceedings under the IBC. Thus, Financial Creditors are not hindered by the presence of a pre-existing dispute in the same way that Operational Creditors are.
In the case of M/s Jai Balaji Industries v. D.K. Mohanty & Anr.29, the Respondent company challenged the legality and validity of the arbitral Awards through petitions filed under Section 34 of the Arbitration Act. These petitions were dismissed by the District Court and the Respondent company subsequently Appealed under Section 37 of the Arbitration Act before the High Court of Calcutta. However, these Appeals were dismissed in default due to non-appearance. The Respondent company then filed applications for the restoration of the Appeals.
Before the Appeals could be restored, the Appellant sent two separate demand notices under Section 8 of the IBC. Eventually, the High Court allowed the restoration applications. The NCLT held that, at the time the Appellant served the demand notices and filed applications under Section 9 of the IBC, no proceedings were pending to challenge the arbitral Awards. Consequently, the NCLT held that no dispute regarding the debt owed to the appellant existed on the relevant dates.
In a final Appeal, the Supreme Court held that the insolvency process initiated by an Operational Creditor cannot proceed without a final decision on the prayer for restoration. It held that when an Appeal is dismissed in default and later restored by the Court upon satisfaction of the cause shown for default, the restoration revives the proceedings to their status prior to the dismissal.
In M/s Pragat Akshay Urja Ltd. v. M/s Madhya Pradesh Urja Vikas Nigam Ltd.30, the NCLAT dismissed an Appeal against an order of the NCLT, Ahmedabad Bench. The NCLT rejected an application filed under Section 9 of the IBC on the grounds of a pre-existing dispute. The NCLT noted that arbitration proceedings were already commenced between the parties which resulted in an arbitral Award. Further, the Corporate Debtor filed an application under Section 34 of the Arbitration Act challenging the Award and this application was still pending. Given these circumstances, the NCLT held that the existence of a pre-existing dispute barred the initiation of insolvency proceedings under the IBC.
In M/s. KK Ropeways Ltd. v. M/s. Billion Smiles Hospitality Pvt. Ltd.31, the NCLAT held that that the "existence of a dispute" encompasses disputes that have been raised before a Court or an Arbitral Tribunal prior to the receipt of the Demand Notice under Section 8 of the IBC. The NCLAT further held that a dispute persists even when a party challenges an Arbitral Award on Appeal. If the dispute raised by a party is not frivolous, imaginary, or hypothetical, the Adjudicating Authority is obligated to reject the petition filed under the IBC. The Tribunal held that "an Arbitration Proceeding and IBC Proceedings cannot proceed simultaneously."
9. Can the CIRP be initiated directly based on an Arbitral Award?
Insolvency proceedings under the IBC can be initiated by Financial Creditors, Operational Creditors, and the Corporate Debtor itself with the primary trigger for such proceedings being a default. This means that insolvency proceedings cannot be initiated unless the Corporate Debtor has failed to meet its obligations.
Under the IBC, Award-holders are considered creditors regardless of whether they are classified as Financial or Operational Creditors. The key requirement for initiating insolvency proceedings is the existence of a debt that has gone into default. A joint reading of Sections 3(11) and 3(12) of the IBC makes it clear that insolvency can only be triggered when a Corporate Debtor fails to pay a crystallised obligation or liability. Section 3(10) of the IBC defines a "Creditor" as any person to whom a debt is owed. This includes Financial Creditors, Operational Creditors, Secured Creditors, Unsecured Creditors, and decree-holders.
According to Section 36 of the Arbitration Act, when the time for filing an application to set aside an arbitral Award under Section 34 has expired, the Award must be enforced in accordance with the Code of Civil Procedure, 1908. This means that, once the period for challenging the arbitral Award has lapsed, the Award is treated as if it were a decree of the Court and can be enforced accordingly.
(i) Domestic Award
In Dena Bank Vs. C. Shivakumar Reddy and Anr.32, the Supreme Court held that a final judgment or decree from any Court, Tribunal, or arbitral Award, if unpaid, constitutes a financial debt under the IBC. This status enables the creditor to initiate insolvency proceedings under Section 7 of the IBC. The Supreme Court held that once a claim is converted into a final judgment or decree, and a Recovery Certificate is issued authorising the creditor to collect the dues, the creditor acquires a renewed right to recover the amounts specified in the judgment, decree, or Recovery Certificate.
The Supreme Court further held that a judgment or decree for money in favor of a Financial Creditor, whether passed by the Debt Recovery Tribunal (DRT) or any other Court or Tribunal, or the issuance of a Recovery Certificate, provides a fresh cause of action for the creditor. This fresh cause of action allows the creditor to commence insolvency proceedings under Section 7 of the IBC within three years from the date of the judgment, decree, or Recovery Certificate if the debt remains unpaid.
In Kotak Mahindra Bank Ltd.33 the Supreme Court upheld Dena Bank34. In K. Kishan35 the Supreme Court decision focused on scenarios where a challenge under Section 34 of the Arbitration Act was filed before the insolvency application. The decision held that a pending challenge to an arbitral Award precludes the initiation of insolvency proceedings.
In Cholamandalam Investment and Finance Company Ltd. v. Navrang Roadlines Pvt. Ltd.36, the Madras High Court held that the classification of a debt as either financial or operational under the IBC depends on the nature of the underlying claim that has been adjudicated. The High Court held that the type of debt, whether financial or operational, is determined by the nature of the original claim that has been resolved through an arbitral Award or a Court decree. Therefore, the liability arising from such Awards or decrees must be categorised according to the nature of the claim that was addressed in the adjudicative process.
In Viom Infra Ventures Limited v. Bahula Infotech Private Limited37, the NCLT Kolkata held that a CIRP can be initiated based on an arbitral Award, provided that the Award has not been challenged. The Tribunal referred to the decision in K. Kishan38 and held that a CIRP cannot be initiated basis an arbitral Award in two specific circumstances – (i) if the arbitral tribunal's rejection of a counterclaim exceeding the claim Awarded is under challenge in the Courts, and (ii) if a challenge to the arbitral Award itself has been filed.
In M/s. Annapurna Infrastructure Pvt. Ltd. and Anr. v. M/s. SORIL Infra Resources Ltd.39, the NCLAT clarified that under Section 8(2)(a) of the IBC, the pendency of arbitration proceedings constitutes an "existence of dispute" rather than the pendency of an application under Sections 34 or 37 of the Arbitration Act. The Tribunal noted that under Section 36 of the Arbitration Act, an arbitral Award is enforceable as a decree, but its enforceability is contingent upon the expiry of the time for filing a Section 34 application or the rejection of such an application. Thus, an arbitral Award attains finality only after the expiration of the time period for filing a Section 34 application, or if such an application has been filed and subsequently rejected.
(ii) Foreign Award
The treatment of foreign Awards in insolvency proceedings presents a complex issue. Unlike domestic awards, a foreign award must undergo an additional stage of enforcement to be considered binding on the award-debtor in India.
In Agrocorp International Pvt. (PTE) Ltd v. National Steel and Agro Industries Ltd.40, the NCLT Mumbai permitted a foreign Award holder to initiate insolvency proceedings based on the foreign Award alone, without an enforcement decree. The Tribunal applied Section 44-A of the Civil Procedure Code, 1908, which deals with the enforcement of foreign decrees in India. The Mumbai NCLT reasoned that a foreign Award was executable in India simply because it originated from a "reciprocating territory" as referenced in Section 44-A of the Cod of Civil Procedure, 1908. This decision has faced significant criticism and has not been followed in subsequent cases, such as Adityaa Energy Resource Pte Ltd. v. Simhapuri Energy Ltd.41, where the NCLT rejected a Section 9 application (IBC) on the grounds that the foreign Award lacked an enforcement decree.
The NCLT in Adityaa Energy Resource42 observed that a foreign Award, in the absence of an enforcement decree, does not constitute an obligation or liability to pay that has been defaulted.
The Supreme Court in Government of India v. Vedanta Limited43 reinforced this view and held that a foreign Award is not automatically a decree. It only attains the status of a decree after the Court determines its enforceability under Part II of the Arbitration Act. It held that allowing insolvency applications based solely on a foreign Award without this enforcement decree would undermine the procedural framework of the Arbitration Act and could confer legal validity on Awards that might contravene India's public policy.
In Jaldhi Overseas Pte. Ltd. Vs. Steer Overseas Pvt. Ltd.44, the NCLT Cuttack Bench held that a foreign Award cannot be directly used as a basis for initiating insolvency proceedings under the IBC. The Tribunal held that a foreign Award is not considered a decree by itself. Merely presenting a foreign Award is insufficient to constitute a debt for insolvency purposes.
The NCLT held that the High Court alone has the exclusive jurisdiction to handle and give effect to foreign Awards. It held that the Tribunal cannot presume an undisputed debt amount and act upon the foreign Award without adhering to the procedural requirements established in the Arbitration Act.
The NCLAT in Usha Holding LLC v. Francorp Advisors (Private) Limited45 held that an Adjudicating Authority cannot determine the legality or validity of a foreign decree that creates a debt.
V. COMMENCEMENT OF CIRP: MORATORIUM AND ARBITRATION PROCEEDINGS
10. Can arbitration be invoked after the commencement of CIRP or during the CIRP process?
Section 14(1)(a) of the IBC establishes that on the insolvency commencement date, the Adjudicating Authority must declare a moratorium. This moratorium serves to prohibit the institution or continuation of suits or proceedings against the Corporate Debtor, which includes the execution of any judgment, decree, or order in any Court, Tribunal, Arbitration Panel, or other authority. Essentially, once the moratorium under Section 14 is in effect, any arbitration proceedings — whether they are being initiated or are ongoing — cannot proceed against the Corporate Debtor.
In Alchemist Asset Reconstruction Company Ltd. Vs. M/S. Hotel Gaudavan Pvt. Ltd. & Ors.46, the Supreme Court held that once a moratorium is in place, no new suits or arbitration proceedings can be initiated against the Corporate Debtor. Moreover, the continuation of any existing suits or legal proceedings is also strictly prohibited. The Supreme Court held that the arbitration proceedings in question was non est in law. The rationale behind this decision was to uphold the purpose of the moratorium which is to create a period of calm during which creditors cannot take individual enforcement actions that could potentially undermine the objectives of the CIRP. The Court highlighted that prohibiting the disposal of the Corporate Debtor's assets ensures that the Debtor or its management cannot deplete the value of the company by transferring assets during the Resolution Process.
In New Delhi Municipal Council v. Minosha India Ltd., the Supreme Court clarified the scope of the moratorium under the IBC. The Supreme Court held that when an application under Sections 7, 9, or 10 of the IBC is admitted, and a moratorium is imposed as per Section 14, it prohibits certain proceedings against the Corporate Debtor.47 However, this moratorium does not extend to proceedings initiated by the Corporate Debtor itself, including applications under Section 11(6) of the Arbitration Act or any other legal proceedings initiated by the Corporate Debtor against another party. The Supreme Court held that there is no express exclusion of the jurisdiction of Courts or authorities to entertain proceedings initiated by the Corporate Debtor during the moratorium period. While it is generally expected that the Resolution Professional would handle such proceedings on behalf of the Corporate Debtor, the Supreme Court acknowledged that there may be circumstances where the Resolution Professional does not adequately discharge their duties. The Supreme Court held that the restrictions do not impede the Corporate Debtor from initiating or continuing legal actions against others during the moratorium period.
The Delhi High Court in Indian Oil Corporation Ltd v. Arcelor Mittal Nippon Steel India Ltd48 held that after the approval of a Resolution Plan, no disputes can be referred to an Arbitral Tribunal. The Court held that any attempt to bring matters before the Arbitral Tribunal after the approval of the Resolution Plan would undermine the "clean slate" established by the Resolution Plan. The approval of the Resolution Plan effectively puts an end to all claims against the Corporate Debtor which means that any claims or liabilities that were considered during the CIRP are resolved, and no new claims can be brought against the successful applicant post-approval.
In Brilltech Engineers Private Limited v. Shapoorji Pallonji and Company Private Limited49, the Delhi High Court held that the initiation of proceedings under the IBC to seek the commencement of the CIRP against an entity does not automatically render the dispute non-arbitrable. The Court held that simply because a petitioner initiates proceedings before the NCLT asserting the existence of an admitted debt, it does not necessarily transform the debt into an admitted liability specially when the respondent has consistently denied the claim in various forums. The High Court held that the existence of a dispute, especially when contested by the Respondent, does not eliminate the possibility of arbitration, as long as the dispute is within the scope of the arbitration agreement.
In Parsoli Motors Works Pvt. Ltd. v. BMW India Pvt. Ltd50, the Delhi High Court held that mere fact that the petitioner had approached the Competition Commission of India or was involved as a Corporate Debtor in proceedings before the NCLT does not create a bar against raising disputes for adjudication through arbitration. The Court held that arbitration remains a viable mechanism for dispute resolution, even when other proceedings are concurrently underway before different forums.
In Subodh Kumar Agarwal, RP of Hindustan Controls and Equipment Pvt. Ltd. vs. Steel Authority of India51, the NCLT Kolkata Bench addressed the issue of jurisdiction regarding the setting aside of an arbitral Award issued after the initiation of the CIRP and during the moratorium period under Section 14 of the IBC. The Tribunal held that the Adjudicating Authority, i.e., the NCLT, does not have the jurisdiction to set aside an arbitral Award, even if the Award was issued during the moratorium period. The Tribunal referred to Section 430 of the Companies Act, 2013, which explicitly limits the jurisdiction of the NCLT in certain matters. While the NCLT can issue injunctions prior to arbitration, refer parties to arbitration, or enforce arbitral Awards, the bench held that it is not empowered to annul or set aside an arbitral Award.
11. Can arbitration proceedings that were initiated before the admission of CIRP be continued once CIRP is admitted?
Under the IBC, the duties of a Resolution Professional who takes over the management of the company during the CIRP are outlined in Section 25 of the IBC. Section 25(2)(b) provides that the Resolution Professional is responsible for representing and acting on behalf of the Corporate Debtor in dealings with third parties. This includes exercising the rights of the Corporate Debtor for its benefit in various legal proceedings, whether judicial, quasi-judicial, or arbitration.
The issue of whether a counterclaim can proceed against a Corporate Debtor during the moratorium period under the IBC was addressed by the NCLAT in Jharkhand Bijli Vitran Nigam Ltd. v. IVRCL Ltd.52. The NCLAT held that both the claim and the counterclaim should be allowed to proceed before the Arbitral Tribunal. The Tribunal's reasoning was based on the principle that the claim of the Corporate Debtor could only be adequately determined after the counterclaim had been adjudicated. In such situations, where the determination of the Corporate Debtor's claim is inextricably linked with the resolution of the counterclaim, the NCLAT held that it is appropriate for both proceedings to continue simultaneously.
In SSMP Industries Ltd. v. Perkan Food53, the Delhi High Court held that counterclaims should not be automatically stayed if they are integral to the recovery sought by the plaintiff and arise out of the same transaction. In such cases, it would be unjust to stay the counterclaims outrightly. However, the High Court held that while counterclaims might proceed, the provisions of Section 14 of the IBC could be invoked by the Corporate Debtor once the counterclaims are adjudicated and the amounts to be paid or recovered are determined. At that point or during the execution proceedings, Section 14's moratorium provisions could be triggered to protect the Corporate Debtor's assets and interests.
In Sobodh Kumar Agrawal v. EIH Ltd.54, the issue was whether a counter-claim filed by a Corporate Debtor could proceed during the moratorium period imposed under Section 14 of the IBC when parallel arbitral proceedings initiated by the claimant were ongoing. The Resolution Professional argued that the 'Claim' and the 'Counter-claim' should be treated equally and could not be distinguished in terms of their handling during insolvency proceedings.
The NCLAT agreed with this perspective to a degree acknowledging that the counter-claim made by the Corporate Debtor was part of the same arbitration process as the claimant's claim. However, the Tribunal held that both the claim and counter-claim could not proceed simultaneously during the moratorium period. The rationale was that since the moratorium prohibits the continuation of suits and proceedings against the Corporate Debtor, it logically extends to include the counter-claim as well. As the Arbitral Tribunal could not determine the claim of the respondent during the moratorium, the NCLAT held that the counter-claim filed by the Corporate Debtor also could not proceed.
VI. CONCLUSION
This guide serves to provide clarity on the interaction of arbitration and insolvency proceedings from the point of initiation of proceedings and CIRP till the time of finality of an Award made (and its bearing on insolvency proceedings). The position has been crystalised hereinbelow:
- Initiation of Proceedings:
- The mere existence of an arbitration clause does not bar the initiation of insolvency proceedings.
- Arbitration can be invoked before a Section 7 petition under the IBC is admitted, but not after.
- The presence of ongoing arbitration proceedings does not necessarily constitute a pre-existing dispute that would prevent the initiation of CIRP.
- Arbitral Awards and Insolvency:
- An arbitral Award can serve as the basis for initiating CIRP, provided it is not under challenge.
- For foreign Awards, an enforcement decree is generally required before initiating insolvency proceedings.
- Moratorium Effects:
- Once CIRP is initiated and a moratorium is in place, new arbitration proceedings against the Corporate Debtor are prohibited.
- Existing arbitration proceedings are generally stayed, but with some exceptions for counterclaims and proceedings initiated by the Corporate Debtor.
- Post-Resolution Plan:
- After approval of a resolution plan, no new disputes can be referred to arbitration against the Corporate Debtor.
- Jurisdictional Issues:
- The NCLT lacks jurisdiction to set aside arbitral Awards, even if issued during the moratorium period.
Courts are adopting a nuanced approach, attempting to balance the decentralised nature of arbitration with the centralised framework of insolvency proceedings. The trend appears to favour the overarching objectives of the IBC while respecting arbitration agreements where possible.
Footnotes
1 197 F.3d 631 (1999).
2 2021 SCC OnLine SC 268.
3 2020 SCC OnLine SC 1018.
4 2020 SCC OnLine SC 1254.
5 Gujarat UrjaVikas v. Amit Gupta, 2021 SCC OnLine SC 194.
6 2022 SCC OnLine NCLAT 2022.
7 2024 SCC OnLine NCLT 3339.
8 2018 SCC OnLine NCLAT 928.
9 (IB)-37 (PB)/ 2018
10 2017 SCC OnLine NCLAT 393.
11 (2018) 1 SCC 353
12 CA (AT)(Ins.) No. 265/2022
13 2018 SCC OnLine NCLAT 312.
14 2017 SCC OnLine NCLAT 606.
15 2019 SCC OnLine NCLAT 942.
16 2023 SCC OnLine Bom 1214
17 Section 238 states that if there is any conflict or inconsistency between the provisions of the IBC and any other law (including contracts, agreements, or any other legal instruments), the IBC will prevail.
18 Supra 3
19 2022 SCC OnLine Del 1442.
20 2024 SCC OnLine Del 3995.
21 2020 SCC OnLine Mad 26397.
22 C.P. No. (IB)-156(PB)/2017
23 2021 SCC OnLine NCLT 2764.
24 I.A. 2003/ND/2022 in C.P. (IB)-334(ND)/2018
25 2023/DHC/001214.
26 2019 SCC OnLine NCLAT 754.
27 (2018) 17 SCC 662.
28 2022 SCC OnLine SC 706.
29 2021 SCC OnLine SC 3104.
30 2019 SCC OnLine NCLAT 425.
31 2023 SCC OnLine NCLAT 271.
32 2021 SCC OnLine SC 543.
33 Supra 28
34 Supra 32.
35 Supra 27.
36 O.S.A (CAD) no. 115 of 2022.
37 C.P (IB) No. 197/KB/2021.
38 Supra 27.
39 2017 SCC OnLine NCLAT 380.
40 2020 SCC OnLine NCLT 8413.
41 2019 SCC OnLine NCLT 32473.
42 Ibid.
43 2020 SCC OnLine SC 749.
44 2019 SCC OnLine NCLT 12749.
45 2018 SCC OnLine NLCAT 792.
46 (2018) 16 SCC 94.
47 2022 SCC OnLine SC 546.
48 2023 SCC OnLine Del 6318
49 2022 SCC OnLine Del 4422.
50 2018 SCC OnLine Del 6556.
51 IA(IB) No. 1820/( KB) /2023 in CP (IB) No. 1256/KB/2019
52 2018 SCC OnLine NCLAT 891.
53 2019 SCC OnLine Del 9339
54 2019 SCC OnLine NCLAT 621.
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