Need For Harmonizing The Conflict Between Moratorium Under IBC And Arbitration Proceedings

Introduction 

The moratorium under section 14 of Insolvency and Bankruptcy Code, 2016 (“IBC”) and its impact on arbitration proceedings have been a subject of debate and scrutiny over the years. On one hand, the object of IBC is “maximization of the assets” of the Corporate Debtor. In furtherance of the same, when a Corporate Debtor (“CD”) is considered a going concern and an insolvency petition is admitted against the CD, there is automatic imposition of moratorium on all proceedings against the CD.  However, the issue arises where there is a blanket ban imposed on all the proceedings including arbitration that maybe or may not be central to the ongoing proceedings under Corporate Insolvency Resolution Process (“CIRP”). This results into a conflict between two special and instrumental Acts i.e. Arbitration and Conciliation Act, 1996 (“A&C Act”) and IBC wherein many bona fide claimants are left devoid of proper recourse to their grievances and legitimate claims against the CD and results in further undermining of the arbitration proceedings.  In view of the same, the author in this piece will analyze the conflict and anomaly that results between imposition of moratorium in IBC and sanctity of the arbitration proceedings and explore possible solutions for the same.   

Law of Moratorium under IBC 

The provisions of moratorium under IBC are twofold: 

1. under section 14, the moratorium is imposed for all suits “against the corporate debtor” during the CIRP;  
2. while under section 33 all suits “by or against the corporate debtor” are barred during the Liquidation Process.  

Therefore, when moratorium is imposed under section 14, proceedings initiated by the corporate debtor is not barred by law and the CD has free will to participate in proceedings that are in its favor. This results into an anomaly wherein the CD is given a freehand to pursue its claims arising out of arbitration proceedings and reap the benefits of the arbitral award while the other party is left with a minimal recourse to submit their claims before the Resolution Professional (“RP”).   

Moratorium in Respect of Arbitration Proceedings  

The impact of moratorium on arbitration proceedings was considered extensively for the first time in the case of Alchemist Asset Reconstruction vs. Hotel Gaudavan¹. In this case, the appeal in the form of petition under section 37 of the A&C Act was set aside as it was initiated after imposition of moratorium under section 14 of IBC. The court ventured into a simple interpretation of the statute and opined that the purpose of IBC is to bar all proceedings against the CD and hence the law would apply squarely on arbitration proceedings as well.  

The set position of law got further nuanced and complicated when a single judge bench of the Hon’ble Delhi High Court in the case of Power Grid Corporation vs. Jyoti Structures² laid the test of “proceedings in benefit of the corporate debtor”. As per this test any proceedings that are in benefit of the corporate debtor can continue despite imposition of moratorium. Hence in this case challenge to an award in favor of the CD under section 34 of the A&C Act was allowed only to the extent that after adjudication of the application under section 34, the award would be upheld in favor of the CD. Hence as long as award was in favor of CD, moratorium would not come into play.  The said reasoning was further followed by a recent 2024 decision of the Hon’ble Delhi High Court in the case of Godavari Projects vs. Union of India³ wherein a section 11 application under the A&C Act was allowed as it was in favor of the CD.  

Analysis 

The aforementioned position of law leads to a prima facie anomaly wherein two parties who consented to arbitration agreement mutually are left at an unequitable footing when the CD is allowed to pursue claim unabated that are in its own benefit while the other party is left remediless. The further extension of such an anomaly is often parties having counter claims against the CD have to submit their claims or counter claims before the RP as an operational debt.  A classic example of such an anomaly is the case of Indian Oil Corporation vs. Arcellor Mittal⁴ wherein a counter claim amounting to INR 3762,58,74,503 was reduced to a notional value of INR 1 by the RP. The aggrieved party was successful in getting their counter-claims reinstated by the NCLT and NCLAT however the said decisions were set-aside by the Hon’ble Supreme Court in Committee of Creditors of Essar Steel India vs. Satish Kumar Gupta relying on the clean slate doctrine. Since in this case the resolution plan had already been approved, the court did not reinstate the counter claims as prayed for by the aggrieved party.   

It is important to note that an arbitration proceeding is an informal civil trial wherein parties submit detail statement of claim, there is leading of evidence, cross examination and detailed adjudication of claims. However, claims by parties against CD don’t get the due adjudication they deserve when decided by RP or NCLT. It is to be noted that RP is merely an administrative authority tasked with managing the affairs of the company as a going concern and the admission of claims brought forward by various creditors and cannot act as a substitute for an arbitral tribunal. The same concern was also highlighted by a single judge bench of the Delhi High Court in the case of SSMP Industries vs. Perkan Food Processors (“SSMP Industries”)⁵ wherein the court opined that “the proceedings before NCLT are summary in nature and the RP does not conduct a trial. The RP merely determines what payment can be made towards the claims raised, subject to availability of funds. The NCLT/RP cannot be burdened with the task of entertaining claims of the Defendant which are completely uncertain, undetermined and unknown”.  Here, contrary to the position taken by the courts in Power Grid Corporation, the court sent the counter claims to trial and were not stayed by moratorium under section 14 of the IBC.  

Reconciling the Conflict between IBC and A&C Act 

The position of law at present stands at a conflicted footing as parties having genuine claims against a CD admitted into insolvency are left remediless and without an appropriate forum for due adjudication of their claims. The observations by the hon’ble high courts especially in the case of SSMP Industries highlight that courts are well aware of the unequal footing the present position of law with respect to moratorium leaves the parties concerned. In fact in a controversial order by the Hon’ble Supreme Court in  the case of Fourth Dimension Solutions vs. Ricoh India⁶ had caused much uproar when contrary to the established position of law, the court in an appeal post approval of the resolution plan by Committee of Creditors held that “It is stated that some arbitration proceedings were pending between the parties. If so, all contentions available to both sides be decided in the said proceedings on its own merits in accordance with law.”   

The present insolvency regime in India is ill equipped to deal with such a controversy primarily because of the clean slate doctrine and further exacerbated by the presence of section 238 of IBC under which IBC holds supremacy being a special laws and override the inconsistent provisions in other laws.  

McMahon Test  

One possible solution to the aforementioned anomaly can be to take recourse to the McMahon test⁷ followed by the insolvency regime in USA. Under the bankruptcy regime of USA, the insolvency issues are divided into core and non-core issues. Core issues are those that arise directly under the bankruptcy statue and bankruptcy court has the constitutional authority to issue final judgments on them. For example, confirming a reorganization plan, administering estate assets, determining claims allowances, or enforcing/modifying the automatic stay. On the other hand non-core issues, are traditional state law or civil claims that happen to involve the debtor, but could theoretically exist outside of bankruptcy. Under the McMahon test, parties are left free to arbitrate as long as the arbitration proceedings do not have a direct interference with the corporate insolvency resolution process.⁸ 

Conclusion 

The reconciling of the conflict of imposition of moratorium with arbitration proceedings will require more than just creative thinking but more of a legislative overhaul of the insolvency regime. The above discussion identifies the inherent friction that exists between the two regimes and at the same time exposes the unequal footing that a genuine claimant that duly signed an arbitration agreement with a CD is put into. In order to address the issue, the insolvency regime will need a much-required correction, but when will it happen is something that only time can tell.  

Footnotes

1. Alchemist Asset Reconstruction Co. Ltd. v. Hotel Gaudavan (P) Ltd., (2018) 1 Comp Cas-OL 405.

2. Power Grid Corpn. v. Jyoti Structures Ltd., (2019) 6 Comp Cas-OL 76.

3. Godavari Projects (J.V) v. Union of India, 2024 SCC OnLine Del 1526.

4. Indian Oil Corpn. Ltd. v. Arcelor Mittal Nippon Steel India Ltd., (2023) 5 HCC (Del) 440.

5. SSMP Industries Ltd. v. Perkan Food Processors (P) Ltd., 2019 SCC OnLine Del 9339.

6. Fourth Dimension Solutions Ltd. v. Ricoh India Ltd., (2023) 22 Comp Cas-OL 299.

7. Shearson/American Express v. McMahon, 482 U.S. 220 (1987).

8. Vijayvergia, C., and P. Belmannu. "Understanding the Intersection of Insolvency and Arbitration Laws in the Indian Context." Transnational Dispute Management (TDM) 19.1 (2022).

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