Recently, The National Company Law Tribunal (NCLT), Kolkata ruled in the case of Mahavir Industrial Corporation vs. Hindustan Controls and Equipment Private Limited that it lacks the jurisdiction to set aside an arbitral award even if it has been passed in course of moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC). The tribunal, while recognising its powers to issue interim measures related to arbitration and enforcing arbitral awards, held, that it does not have the power to set aside an arbitral award and any challenge to such award must be brought before a competent court under Section 34 of the Arbitration and Conciliation Act. This case has cast a renewed focus on the legislative vacuum in addressing the issues erupting between parallel insolvency and arbitration proceedings.
Hence, this blog first, analyses the meaning of ‘moratorium’ under Section 14 of the IBC and its objective. Second, it delves into scope of moratorium and its exceptions by discussing about landmark decisions that have consolidated the statutory position in this regard.Third, it sheds light on the lacunae of express legislative provisions providing clarity on the relationship between arbitration and insolvency proceedings especially with regard to jurisdiction of the adjudicating authority in light of the recent judgement by NCLT Kolkata.
- ‘Moratorium’ u/s 14 of IBC: Meaning and Objective
Under IBC, upon admission of a Corporate Insolvency Resolution Plan (CIRP) by the NCLT, a moratorium under Section 14 IBC is declared by the adjudicating authority. A moratorium under IBC meansa period wherein no judicial proceedings for recovery, enforcement of security interest, sale or transfer of assets, or termination of essential contracts can be instituted or continued against the Corporate Debtor. The moratorium under Section 14 specifically bars:
(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgement, decree or order in any court of law, tribunal, arbitration panel or other authority
(b)transferring, encumbering, alienating or disposing off by the corporate debtor any of its assets or any legal right or beneficial interest therein
(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the SARFAESI Act, 2002.
Thus, it can be interpreted that the section grants exclusive jurisdiction to the NCLT over all claims by/ against a corporate debtor. Additionally, Section 60 (5) of the code provides NCLT not only with the power to entertain or dispose of any application or claim made by or against the corporate debtor but also provides the residuary jurisdiction to address any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings.
Speaking on the intent behind the moratorium, the Supreme Court, in Innoventive Industries Ltd. v. ICICI Bank, (2018)held that it was supposed to provide the debtors a ‘breathing spell’ during which they can reorganise their business. This, in turn, helps fulfil the objective of the IBC to maximise the value of assets recovered from the Corporate Debtor by providing a ‘calm period’ to ensure uninterrupted functioning of business operations and realise stakeholder interests in the best way possible. The Arbitration Act, on the other hand, focuses on party autonomy which creates a collision between the objectives of arbitration and insolvency proceedings.
- Scope of Moratorium – Existing Jurisprudence
The IBC does not have an exclusive provision dealing with arbitration and only purposive interpretation in this aspect has been done through Section 14 of the code. The word ‘suits’ and ‘proceedings’, thus, includes arbitration proceedings which must be stayed by an order of moratorium which is triggered by the admission of a resolution plan by the NCLT. This was made clear by the Supreme Court in its ruling in Alchemist Asset Reconstruction Co. Ltd. v. Hotel Gaudavan (P) Ltd(2018) wherein the court remarked that, “The mandate of the new Insolvency Code is that the moment an insolvency petition is admitted, the moratorium that comes into effect under Section 14(1)(a) expressly interdicts institution or continuation of pending suits or proceedings against corporate debtors”. Further, it held arbitration proceedings instituted after the moratorium to be non-est.
However, this embargo under Section 14 is not without exceptions. The Delhi High Court, while setting aside the arbitral award in favour of the corporate debtor, held in Power Grid Corpn. of India Ltd. v. Jyoti Structures Ltd., 2017that Section 14 would not apply to proceedings which are for the benefit of the Corporate Debtor, insofar as these proceedings are not a “debt recovery action” and will not endanger, diminish, dissipate, or impact the assets of the corporate debtor.Thus, the court stressed on keeping the objective of maximising the value of the Corporate Debtor’s assets in mind and not follow the blanket approach of rejection of all claims after the imposition of moratorium. A similar line of reasoning was adopted by the court in SSMP Industries Ltd. v. Perkan Food Processors (P) Ltd (2019)wherein it held that the mere continuation of a counterclaim against the Corporate Debtor is not a threat his assets and Section 14 would only be invoked when the amount to be paid or recovered is determined i.e. there is a ‘debt recovery’ action.
III. Conflicting Jurisprudence: Legislative Lacunae in governance of arbitrabilityof insolvency proceedings
Coming to the case of Mahavir Industrial Corporation vs. Hindustan Controls and Equipment Private Limited,wherein, the NCLT has cited lack of jurisdiction while refusing to set aside the arbitral award passed against the Corporate Debtor,the tribunal, while recognising its residuary jurisdiction under Section 60 of IBC held that “the NCLT cannot do what the IBC consciously did not provide the power to do.” However, judicial precedent in this matter is conflicting in nature.
In Mr. Atul Rajwadkar Vs. HDFC Bank Limited &Ors,(2021)wherein the arbitral tribunal had passed an ex parteaward in favour of the claimant after the initiation of CIRP and the Corporate Debtor having informed the claimant about the same, NCLT Mumbai, while setting aside the order, held such order to be in violation of the objective of the code and in contravention of the moratorium under Section 14 of the code. Further, in Ranjit Das &Ors. Vs. MSX Mall Pvt. Ltd (2019) The National Company Law Appellate Tribunal (NCLAT) held that even though arbitration proceedings pending after the invocation of moratorium may continue but if award is passed by the arbitral tribunal against the Corporate Debtor, it would not be given affect during the period of moratorium.
This creates a conflict as the only exceptions which bar a stay on arbitral proceedings/awards during the pendency of an insolvency proceedings involve those proceedings/awards which are in favour of the Corporate Debtor and do not adversely impact their assets and does not have any provision restricting the jurisdiction of the adjudicating authority in such matters especially when it has been provided with all encompassing powers under Section 14. Additionally, the Supreme Court, while talking about the intersection of arbitration and insolvency in Indus Biotech Pvt. Ltd v. Kotak India Venture (Offshore) Fund and Ors (2021)has held that once an insolvency application is admitted by the adjudicating authority, an arbitration proceeding is not maintainable. This is because insolvency affects rights in rem as opposed to arbitration which affects rights in personam, and rights in rem override rights in personam.
Moreover, from an international perspective, the insolvency law in the United States of America and United Kingdom provide for an immediate stay in arbitration proceedings once an application for bankruptcy has been filed after which the claimant/parties have to obtain special permission from the bankruptcy court overseeing such proceeding to further proceed against the debtor and this court has the sole power to annul, modify or terminate the stay. This framework removes jurisdictional ambiguities of arbitral proceedings which is prevalent in the Indian Insolvency Framework because of lack of legislative clarity.
- Conclusion
Section 14 of IBC provides wide ranging powers to the adjudicating authority, but, as seen above, certain exceptions have also been carved out through judicial interpretation which has given birth to ambiguities. The impact of arbitration on insolvency proceedings has largely been addressed by the judiciary as of now which has intended to fill the legislative vacuum in this regard but it has left out pertinent issues regarding jurisdiction of the adjudicating authority which need to be addressed.
An analysis of the judicial precedents above reveals that the only recourse of a claimant to arbitration exists in cases where such proceedings are for the benefit of the Corporate Debtor, leaving the claimant with no remedy. There is a need to strike a delicate balance between the needs of the Corporate Debtor and the rights of the Claimants to pursue their claim which is affected by the imposition of the moratorium.
References
- Devna Arora and Didon Mistri, ‘The Intersection between Arbitration and Insolvency Proceedings: An Indian Perspective’ (2022), SCC Online https://www.scconline.com/blog/post/2023/01/01/the-intersection-between-arbitration-and-insolvency-proceedings-an-indian-perspective/#f
- ‘All about Moratorium under IBC including judicial pronouncements’ (2020), IBC Laws https://ibclaw.in/all-about-the-moratorium-under-ibc-including-judicial-pronouncements/
This blog is authored by Tamishra Chakraborty, Ist year student, Hidayatullah National Law University, Raipur.