Introduction:
Arbitration is a method in which a disagreement is referred to by one or more arbitrators who render a binding ruling based on the parties’ agreement. Instead of going to court, the parties choose arbitration as a private dispute settlement mechanism. It is an out-of-court technique of resolving disputes. Parties send their disagreements to an arbitrator, who examines the facts, hears both sides, and then renders a judgment.
Arbitration clauses might be required or optional, and the decision of the arbitrator can be binding or nonbinding. Arbitration can be used to resolve any matter involving private rights that cannot be handled by a civil court. Arbitration can be used to settle disputes over property or money, as well as the number of damages due for breach of contract. The good news is that arbitration takes far less time than a traditional judge-jury trial. Arbitration is when two people who are divorcing are unable to agree on terms and invite a third party to assist them in negotiating.[1]
About Insolvency
Insolvency is defined as the inability of a person or corporation (the debtor) to pay their debts at maturity; insolvent people are referred to as insolvent. There are two forms of insolvency. One is cash-flow insolvency and the other is balance-sheet insolvency.
When a person or corporation has enough assets to pay what is owed but lacks the suitable form of payment, they are said to be in cash-flow insolvent. A person may, for example, have a huge house and a valuable car but not have liquid assets to pay a debt when it is due. Negotiation is usually the best way to overcome cash-flow insolvency. The bill collector, for example, could wait until the car is sold and the debtor agrees to pay a penalty before proceeding.
When a person or a company’s assets are insufficient to cover all of their debts, this is known as balance-sheet insolvency. The person or company may file for bankruptcy, although this is not always the case. Negotiation is often able to fix the matter without bankruptcy once all parties have acknowledged a loss. Even if a corporation is insolvent on its balance sheet, it may have enough cash to pay its next bill on time. Most regulations, however, will not allow the corporation to pay that amount unless it directly benefits all of its creditors. For example, because not harvesting and selling the crop would be worse for his creditors, a bankrupt farmer may be allowed to hire people to help harvest the crop.[2]
The Insolvency and Bankruptcy Code, 2016 (IBC)
The Insolvency and Bankruptcy Code, 2016 is abbreviated as IBC. It is the bankruptcy law of India that seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
Arun Jaitley introduced the Insolvency and Bankruptcy Code, 2015 in the Lok Sabha in December 2015. The bill was published on 21st December 2015 and it was bill number 349 of 2015. The date on which the bill was passed by the conference committee was 28th April 2016 and extended to the whole of India.[3]
Arbitration In Insolvency Proceedings In India
All current suits against the corporate debtor, including arbitration, will not be pursued during the moratorium period, according to Section 14[4] of the Insolvency and Bankruptcy Code of 2016, and no new proceedings will be commenced against the Corporate Debtor. In addition, the Code, under Section 238[5], supersedes all other legislation.
‘Whether an arbitration agreement and/or a continuing arbitration action prevents the filing of an insolvency petition under the Code or not,’ the court and tribunals have tried to decide. In Reliance Commercial Finance Limited v. Ved Cellulose Ltd.[6], the Hon’ble National Company Law Tribunal (Mumbai) concluded that “pendency of arbitration proceedings is also not a hindrance under Section 7[7] of the Code for the beginning of Corporate Insolvency Resolution Process.” In Dinesh Chand Jain and Ors v. Fantastic Buildcon (P) Ltd. and Ors.[8], the Hon’ble National Company Law Tribunal (Delhi) ruled that an arbitration clause in a contract does not prevent bankruptcy proceedings under Section 7 of the Code from being initiated. The Ex-Director of Fantastic Buildcon Private Limited v. Dinesh Chand Jain, the Hon’ble NCLAT sustained the order. Independent of any existing arbitration processes or an arbitration agreement, the parties are free to launch relevant Insolvency proceedings under the Code. However, in response to the second question, “effect of ongoing arbitral proceedings and/or commencement of arbitral proceedings after imposition of moratorium period u/s 14 of the Code,” it can be said that the imposition of the moratorium will have an impact on arbitral proceedings, as Section 14 of the Code expressly states that all other ongoing proceedings and/or the initiation of new proceedings, including arbitral proceedings, will be stayed on account of the moratorium.
In Alchemist Asset Reconstruction Company Ltd. v. Hotel Gaudavan Pvt. Ltd.[9], the Hon’ble Supreme Court stated that no further procedures against the corporate debtor can be launched or pursued if a moratorium is imposed under Section 14 of the Code. In K.S. Oils Ltd v. The State Trade Corporation of India Ltd. & Anr.[10], the Hon’ble National Company Law Appellate Tribunal (New Delhi) (NCLAT) concluded that an arbitration action between the parties could not continue under the Code’s provisions. The NCLAT, on the other hand, allowed the parties to present their claims and counterclaims to the Resolution Professional. In the case Indus Biotech Private Limited v. Kotak India Venture Fund[11], the Hon’ble Supreme Court held that if a proceeding under Section 7 of the IBC is pending before the Adjudicating Authority and such a petition is admitted, any subsequent application seeking reference to arbitration under Section 8[12] of the Act will not be enforceable. Arbitral procedures are effectively suspended as long as the moratorium is in effect. However, what happens to the insolvency proceedings when an arbitration award has been challenged under Section 34[13] of the Act.
Because the respondent/award-holder could not have filed a claim before the NCLT, the Hon’ble Calcutta High Court failed to recognize that a challenge to an award cannot be heard because of IBC proceedings. After all, the Section 34 procedures had not been settled in the respondent’s favour, therefore there was no final or adjudicated claim as of that date. “The petitioner, as Corporate Debtor/Award Debtor, cannot be allowed to take sanctuary behind the IBC provisions for relegating the respondent award-claim holders to limbo for an indefinite period on the fallacious pretext that the respondent has not appeared before the NCLT,” the court added.
“In Power Grid Corporation Of India v. Jyoti Structures Ltd.[14], the Hon’ble Delhi High Court considered whether actions under Section 34 of the Act should be stopped under Section 14 (1)(a) of the Code. Following a thorough examination of the Code’s provisions as well as the facts, the Court determined that debt recovery action is prohibited under Section 14 of the Code. The court found that the continuation of the procedures under Section 34 does not diminish or influence the corporate debtor’s assets and that the parties will not be damaged by the continuation of the proceedings. If the arbitral ruling against the operational debtor who produced the debt is being challenged under Section 34, in K. Kishan v. M/s Vijay Nirman Company Pvt. Ltd.[15], the Hon’ble Supreme Court evaluated whether insolvency processes for an operational debt can be launched under the Code. The Hon’ble Supreme Court stated that the mere fact that a petition under Section 34 of the Act is pending indicates that there is a pre-existing conflict, and so it will fall under the Code’s definition of “dispute.” As a result, the Code’s procedures cannot be used.
Some exceptions to the earlier interpretations are:
- Just because the applicant has not sought the NCLT, the Corporate Debtor cannot use the provisions of the Code to place the applicant’s claim in limbo for an indefinite period.
- A challenge to an award indicates that there is a disagreement between the debtors, and so the IBC proceedings are unavailable.
- Section 14 of the Code does not apply to procedures brought on behalf of a corporate debtor.
Conclusion
The Insolvency and Bankruptcy Code, 2016, has provided significant financial and operational aid to creditors since its inception. The coexistence of arbitration and insolvency processes has few exceptions. The existence of an arbitral procedure filed by the Creditor does not impede the filing of an insolvency case; however, arbitral proceedings initiated by the Debtor may be regarded as a dispute, preventing creditor actions. If the NCLT has issued a moratorium in an insolvency proceeding, an arbitral proceeding cannot continue. Furthermore, the provisions of Section 14 of the Code do not apply to the Corporate Debtor in proceedings brought for its benefit.[16]
References:
[1] World Intellectual Property Organization, What is Arbitration? Wipo.int (2019), https://www.wipo.int/amc/en/arbitration/what-is-arb.html.
[2] Wikipedia Contributors, Insolvency Wikipedia (2019), https://en.wikipedia.org/wiki/Insolvency.
[3] https://en.wikipedia.org/wiki/Insolvency_and_Bankruptcy_Code,_2016
[4] I. B. C. Laws, Section 14 of Insolvency and Bankruptcy Code, 2016 (IBC): Moratorium IBC Laws (2018), https://ibclaw.in/section-14-moratorium-chapter-ii-corporate-insolvency-resolution-processcirp-part-ii-insolvency-resolution-and-liquidation-for-corporate-persons-the-insolvency-and-bankruptcy-code-2016-ibc-sec/ (last visited Nov 14, 2021).
[5] I. B. C. Laws, Section 238 of Insolvency and Bankruptcy Code, 2016 (IBC): Provisions of this Code to override other laws IBC Laws (2018), https://ibclaw.in/section-238-provisions-of-this-code-to-override-other-laws/ (last visited Nov 14, 2021).
[6] Reliance Commercial Finance Ltd. v. Ved Cellulose Ltd. | National Company Law Tribunal | Judgment | Law | CaseMine, www.casemine.com, https://www.casemine.com/judgement/in/5a6575fc4a9326024ad41334 (last visited Nov 19, 2021).
[7] I. B. C. Laws, Section 7 of Insolvency and Bankruptcy Code, 2016 (IBC): Initiation of corporate insolvency resolution process by financial creditor IBC Laws (2018), https://ibclaw.in/section-7-initiation-of-corporate-insolvency-resolution-process-by-financial-creditor-chapter-ii-corporate-insolvency-resolution-processcirp-part-ii-insolvency-resolution-and-liquidation-for-corpor/ (last visited Nov 14, 2021).
[8] Dinesh Kumar Jain & Ors. v. Fantastic Buildcon Pvt. Ltd. & Ors. | National Company Law Tribunal | Judgment | Law | CaseMine, www.casemine.com, https://www.casemine.com/judgement/in/5b2885b69eff432f35a40087 (last visited Nov 19, 2021).
[9] Alchemist Asset Reconstruction Co. Ltd. v. Hotel Gaudavan Pvt. Ltd. | National Company Law Tribunal | Judgment | Law | CaseMine, www.casemine.com, https://www.casemine.com/judgement/in/5dd156f346571b625cae8a78 (last visited Nov 19, 2021).
[10] K.S. Oils Ltd. v. The State Trade Corporation of India Ltd. & Anr. | National Company Law Appellate Tribunal | Judgment | Law | CaseMine, www.casemine.com, https://www.casemine.com/judgement/in/5af19d649eff432234845adc (last visited Nov 19, 2021).
[11] Editor, All that is not right with Indus Biotech v. Kotak | Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund: A case comment SCC Blog (2021), https://www.scconline.com/blog/post/2021/06/12/indus-biotech-v-kotak/ (last visited Nov 19, 2021).
[12] I. B. C. Laws, Section 8 of Insolvency and Bankruptcy Code, 2016 (IBC): Insolvency resolution by operational creditor IBC Laws (2018), https://ibclaw.in/section-8-insolvency-resolution-by-operational-creditor-chapter-ii-corporate-insolvency-resolution-processcirp-part-ii-insolvency-resolution-and-liquidation-for-corporate-persons-the-insolvency-and/ (last visited Nov 14, 2021).
[13] I. B. C. Laws, Section 34 of Insolvency and Bankruptcy Code, 2016 (IBC): Appointment of liquidator and fee to be paid IBC Laws (2018), https://ibclaw.in/section-34-appointment-of-liquidator-and-fee-to-be-paid/ (last visited Nov 14, 2021).
[14] Power Grid Corporation Of India Ltd. Petitioner v. Jyoti Structures Ltd. | Delhi High Court | Judgment | Law | CaseMine, www.casemine.com, https://www.casemine.com/judgement/in/5a31563fce686e68c71560ea (last visited Nov 19, 2021).
[15] K. Kishan v. Vijay Nirman Company Pvt. Ltd. | National Company Law Appellate Tribunal | Judgment | Law | CaseMine, www.casemine.com, https://www.casemine.com/judgement/in/5af199389eff432234845a4d (last visited Nov 19, 2021).
[16] Bijal Chhatrapati, Arbitration and Insolvency Proceedings A Legal Tangle BW bwlegalworld, http://bwlegalworld.businessworld.in/article/Arbitration-and-Insolvency-Proceedings-A-Legal-Tangle-/12-08-2021-400324/ (last visited Nov 14, 2021).
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