Introduction
The intricate relationship between insolvency and arbitration proceedings has attracted significant attention. Arbitration law is deeply rooted in the principle of party autonomy, granting the disputing parties the liberty to determine the procedural and substantive aspects of their disputes. On the other hand, insolvency law operates as a collective and welfare-driven framework, aimed at efficiently resolving the distressed assets of a corporate debtor and maximizing value for all stakeholders. These two frameworks, though distinct, often intersect in ways that present complex legal challenges. A critical area of intersection lies in understanding how initiation of insolvency proceedings and moratoriums influence ongoing or fresh applications for interim relief under the Arbitration and Conciliation Act,1996. ("A&C Act")
Under the Insolvency and Bankruptcy Code,2016 ("IBC"), the Corporate Insolvency Resolution Process ("CIRP") can be initiated by financial creditors, operational creditors, or even the defaulting corporate debtor itself. This process is initiated by filing an application before the adjudicating authority, typically the National Company Law Tribunal ("NCLT"). However, Indian courts have consistently clarified that the mere filing of a CIRP petition does not amount to the commencement of the insolvency process. Until such a petition is formally admitted, the rights and remedies available to the parties remain intact, allowing arbitration proceedings to continue without hindrance.1
Interim Relief before admission of Insolvency Petition
The stage at which interim relief is sought by a party plays a crucial role in determining its legal feasibility. Much has been discussed about this by way of judicial pronouncements and the settled position now is that before the initiation of CIRP, i.e., after the filing of an insolvency petition but before its admission, interim relief under arbitration law may still be pursued. The legal position on this matter has been shaped by various judgements.
The Supreme Court inIndus Biotech Pvt. Ltd. v. Kotak India Venture2 addressed the question of whether the mere filing of a petition under Section 7 of the IBC before admission could be construed as the initiation of a proceeding in rem. In the said case the Corporate Debtor failed to redeem the Optionally Convertible Redeemable Preference Shares , the Financial Creditor filed an application under Section 7 of the IBC before the NCLT, Mumbai Bench to initiate the corporate insolvency process against the Corporate Debtor. Consequently, the Corporate Debtor invoked the arbitration clause and filed an Interlocutory Application before the NCLT under Section 8 of the Arbitration and Conciliation Act, 1996 ("the Act"). The NCLT dismissed the Section 7 IBC application stating that the dispute must be resolved via arbitration. Aggrieved by the decision, the Financial Creditor approached the Hon'ble Supreme Court.The apex court based on the case of Innovative Industries Vs ICICI Bank3 addressed the question and held that a proceeding in rem is only triggered once the adjudicating authority has applied its mind, found the corporate debtor to be in default, and admitted the petition. Until such admission, third-party rights are not created, and the insolvency process does not commence. This principle ensures that arbitration proceedings are not prematurely disrupted.
Similarly, the Delhi High Court relying on the above principle allowed a Section 9 Petition for interim relief in Brilltech Engineers (P) Ltd. v. Shapoorji Pallonji & Co. (P) Ltd.4 In this case, the Petitionerhad filed an application under Section 9 of IBC before NCLT, Mumbai, seeking to initiate CIRP against the Respondent. Subsequently, via the Petition in the case, the creditor claimed recovery of Rs. 2,58,03,143/- under Clause 13 of the Work Order. Accordingly, petitions were filed under Section 11 for appointing an arbitrator and Section 9 for attaching funds held by AWHO, a debtor of the Respondent, to facilitate payment.
The court reinforced the above position of law by clarifying that mere pendency of a CIRP petition does not equate to an admitted liability. The Court further emphasized that the scope of arbitration and insolvency proceedings is distinct, and the pursuit of parallel remedies does not necessarily amount to forum shopping. The decision highlights that parties are free to approach multiple forums, provided the relief sought falls within the distinct jurisdiction of each forum. The relevant paragraph of the judgement is reproduced below:
"31. Merely because the Petitionerhas approached different forums for redressal of its claims, cannot be said to be a ground to hold that this is a case of forum shopping. Each of the provision invoked by the Petitionerhas its own individual scope and it cannot be said that resort to one has the effect of ousting the other forums or that it is a case of forum shopping."
Now that the legal position on the maintainability of an interim relief petition is clear, it is essential to examine its practical feasibility. Section 9(2) of the Act, as amended by the Arbitration and Conciliation (Amendment) Act, 2015, stipulates that arbitration proceedings must commence within 90 days of the court granting interim relief. This provision underscores the importance of timely initiation of arbitration, discourages undue delays after obtaining interim measures, and aligns with the Act's overarching objective of fostering prompt and efficient dispute resolution.
Once interim relief under Section 9 of the Act is granted, arbitration proceedings must commence within 90 days of the passing of the interim order by the Court. Failure to do so may render the interim relief otiose, as seen in cases such as Subhash Projects & Marketing Ltd. v. State of H.P.5. The Himachal Pradesh High Court noted that any delay in initiating arbitration proceedings would vacate the interim relief granted earlier.
This becomes particularly significant in the context of insolvency, as the admission of a CIRP petition triggers a moratorium under Section 14 of the IBC, barring the continuation or initiation of any proceedings against the corporate debtor.
Interim Relief After Admission of Insolvency Petition
The admission of a CIRP Petition fundamentally alters the admissibility of application for interim relief. Once CIRP is admitted, a moratorium under Section 14 of the IBC takes effect, prohibiting the continuation or initiation of legal proceedings against the corporate debtor. This includes arbitration proceedings. In the case of P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd.6, the Court ruled that once a moratorium is imposed under Section 14 of the IBC, all proceedings against the corporate debtor, including arbitration, must cease automatically.
Though with respect to applications for interim relief it was held in the case of Chennai Metro Rail Ltd. v. Lanco Infratech Ltd.7, by the Hon'ble Madras High Court that interim orders under Section 9 of the A&C Act cannot interfere with or contradict the rulings of the Arbitral Tribunal, particularly after the initiation of CIRP. Section 33(5) of the Insolvency and Bankruptcy Code (IBC) must be interpreted strictly as written and prevails in case of no inconsistency with other laws. Pending proceedings do not require special leave to continue. Section 9 of the A&C Act allows courts to grant interim measures for preserving goods, securing disputed amounts, inspecting properties, issuing injunctions, or appointing receivers, as deemed just and convenient. However, such interim orders should not override tribunal decisions, as this would infringe on the tribunal's jurisdiction. Challenges to tribunal rulings on jurisdiction must be made under Section 34 when contesting an arbitral award. Courts have limited authority to intervene in arbitral proceedings, as outlined in Section 5 of the A&C Act.
Similarly, Section 17 applications for interim relief may become redundant post-CIRP admission. This is because the control over the corporate debtor's assets shifts to the Insolvency Resolution Professional (IRP) appointed under the IBC, rendering any interim relief under arbitration law subordinate to the collective insolvency resolution process.
Exceptions to complete prohibition under Section 14 of IBC
Several judgements8 have highlighted that the purpose of a moratorium is to ensure:
- a calm period for the corporate debtor to manage and negotiate their contracts,
- orderly completion of the process,
- ensure that the company continues as a going concern, and
- maximize value for all stakeholders.
Further, the Bankruptcy Law Reforms Committee Report (BLRC) report in 2018 stated that "a proceeding to assess or determine liability, and a proceeding to recover the assessed or determined liability stand at a different footing." Similarly, the Allahabad High Court in Trading Engineers International Ltd. v. U.P. Power Transmission Corpn. Ltd.,9 emphasized that the principle established in Mohanraj should be interpreted within the specific context of the case and not regarded as a universal prohibition on all proceedings. Thus, it can be inferred that any application for interim relief that does not result in endangering, diminishing, dissipating or adversely impacting the assets of corporate debtor are not prohibited under Section 14(1)(a) of the Code.10As held by the Hon'ble Supreme Court in Arvind Constructions Co. (P) Ltd. v. M/S Kalinga Mining Corporation & Ors 11 "The primary purpose of granting interim relief under Order XXXIX is to evolve a workable formulae by keeping in mind the pros and cons of the matter by striking a delicate balance between two conflicting interests, i.e., injury and prejudice, likely to be caused to the plaintiff if the relief is refused; and injury and prejudice likely to be caused to the defendant if the relief is granted."
Thus, a petition that can maintain the delicate balance without affecting the assets of the corporate debtor can be entertained by the courts.
International Perspectives
The interplay between arbitration and insolvency is not unique to India. Singaporean courts, for instance, have held that disputes arising during insolvency are non-arbitrable due to the statutory nature of the insolvency regime. In Larsen Oil and Gas Pte Ltd. v. Petroprod Ltd., the Court of 12Appeal ruled that arbitration agreements cannot override statutory insolvency processes, particularly when they affect the substantive rights of creditors.
In contrast, UK courts have displayed greater flexibility. In Riverrock Securities Ltd. v. International Bank of St. Petersburg (JSC)13, the English High Court allowed arbitration in cases where the dispute did not directly engage the interests of third parties. The Court emphasized that public policy considerations supporting arbitration agreements often outweigh the statutory nature of insolvency proceedings, provided the arbitration does not prejudice creditor rights.
Analysis and Conclusion
The intersection of insolvency and arbitration underscores a delicate balance between the collective resolution of distressed assets and the autonomy of dispute resolution. While Indian jurisprudence tends to favor insolvency proceedings once CIRP is admitted, the door remains open for arbitration at earlier stages. International practices offer contrasting approaches, with some jurisdictions emphasizing statutory insolvency processes and others prioritizing arbitration agreements. As legal frameworks evolve, the need for harmonizing these two regimes will become increasingly significant.
Footnotes
1 Vidya Drolia v. Durga Trading Corpn., (2021) 2 SCC 1; Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund, (2021) 6 SCC 436; [1] Sunflag Iron & Steel Co. Ltd. v. J. Poonamchand, 2023 SCC OnLine Bom 1214.
2 2021 SCC OnLine SC 268.
3 2018 1 SCC 407.
4 2022 SCC OnLine Del 4422.
5 2024 SCC OnLine HP 724.
6 (2021) 6 SCC 258.
7 2020 SCC OnLine Mad 26397
8 Swiss Ribbons Pvt. Ltd. vs Union Of India, 2019 (4) SCC 17.
9 2022 SCC OnLine All 564.
10 Arunoday Rai, Advancing the Objectives of IBC: Why Arbitration Should Persist During, Moratorium Periodshttps://indiacorplaw.in/2024/05/advancing-the-objectives-of-ibc-why-arbitration-should-persist-during-moratorium-periods.html.
11 (2007) 6 SCC 798.
12 [2011] SGCA 21.
13 ([2020] EWHC 2483)
Disclaimer: This article was first published in the S&A Law Offices - 'Indian Legal Impetus' newsletter in December 2024.
