Impact of an IBC Moratorium on Arbitral Proceedings

This guest post is authored by Aniesh S. Jadhav.

Aniesh is an advocate practicing at the Bombay High Court. He can be reached at anieshjadhav@gmail.com.

Impact of an IBC Moratorium on Arbitral Proceedings

On admission of an insolvency application, Section 14[1] of the Insolvency and Bankruptcy Code 2016 (IBC) requires the National Company Law Tribunal (NCLT) to declare a ‘moratorium’. The moratorium imposed under Section 14 puts an embargo on the institution of suits or continuation of pending suits or proceedings against a corporate debtor undergoing Corporate Insolvency Resolution Process (CIRP) under the IBC.

In this post, the author has discussed the impact of a moratorium on the working and subsistence of arbitration proceedings.

Fresh and pending arbitration proceedings

On a plain reading of Section 14, it would appear that arbitration proceedings cannot be instituted or continued against the corporate debtor upon declaration of a moratorium. The Supreme Court reinforced this principle in Alchemist Asset Reconstruction Company Limited v M/s Hotel Gaudavan Private Limited and Others[1] (Alchemist). The Supreme Court held that the moratorium expressly interdicts the institution or continuation of any pending proceedings against corporate debtors. It was also observed that an arbitration instituted after declaration of a moratorium is non-est in law.

In K.S. Oils Ltd. vs State Trade Corporation of India (KS Oils).[2], the National Company Law Appellate Tribunal (NCLAT) relied on Alchemist to observe that arbitral proceedings pending at the date of commencement of CIRP cannot proceed during the moratorium. It was clarified that Section 238 of the IBC will prevail over the Arbitration and Conciliation Act 1996 (Arbitration Act). The NCLAT further observed that once CIRP has commenced, the party (i.e. an operational creditor) to the arbitration is required to file its claim before the interim resolution professional (IRP) appointed by the NCLT. The IRP must collate the claims of all creditors.

Section 34 proceedings

In Power Grid Corporation of India Ltd v. Jyoti Structures[3] (Power Grid), the Delhi High Court was required to determine if a moratorium would have the effect of staying an application under Section 34 of the Arbitration for setting aside an arbitral award passed in favour of a corporate debtor. The Court applied purposive rules of statutory interpretation to hold that the moratorium would not apply to the proceedings which are inherently for the benefit of the corporate debtor.

The Court also held that Section 34 proceedings in the present case are not in the nature of a ‘debt recovery action’. Granting a stay against an award in favour of the Corporate Debtor would stall the debtor’s efforts to recover its money and, as such would not be hit by the embargo in Section 14(1)(a) of the IBC. It was also clarified that ‘proceedings against the Corporate Debtor’, within the meaning of Section 14, do not mean ‘all proceedings’; and include only those proceedings which endanger, diminish, dissipate the assets of the corporate debtor. Consequently, the Court held that the Section 34 proceedings though filed ‘against the Corporate Debtor’ are not prohibited under Section 14 (1) (a) of the IBC.

Counterclaims against a corporate debtor

The 2015 Amendments to the Arbitration Act specifically enabled the filing of counterclaims in arbitration. In Power Grid, the arbitral tribunal had rejected a counterclaim filed against the corporate debtor much before the moratorium was declared. However, the Delhi High Court did observe – albeit in obiter – that if any counterclaims against the corporate debtor were allowed, Section 14 (1)(a) would immediately come into play and the award would not be executable against the corporate debtor.

In Jharkhand Bijli Vitran Nigam Limited v IVRCL[4] (Jharkhand Bijli), the NCLAT needed to determine whether a counter-claim arbitration can proceed during the moratorium period. The corporate debtor’s claims in arbitration had been previously allowed to proceed by the NCLT. This order was challenged before the NCLAT. In appeal, the NCLAT decided that the counterclaim filed by the creditor would prima facie be a proceeding against the Corporate Debtor within the meaning of Section 14. However, the resolution professional expressed its no-objection for the counterclaim to proceed before the arbitral tribunal even during the moratorium.

In the circumstances, since there is no express bar against such no-objection, the NCLAT held that both the claim and counter claim should be heard and decided by the arbitral tribunal despite declaration of a moratorium. It was clarified that Section 14 of the IBC would retain its effect if the corporate debtor was directed to pay damages or any other amounts in arbitration. There could be no recovery during the moratorium.

The NCLAT’s decision in Jharkhand Bijli was relied upon by the Delhi High Court in SSMP Industries v Perkan Food Processors[5] (SSMP Industries). In the context of a counterclaim filed in a suit, it was observed that though the corporate debtor undergoing insolvency proceedings can continue to pursue its claims, the counter claim would become barred under Section 14(1)(a). The test was to ascertain whether the purpose and intent behind the imposition of moratorium is being satisfied or defeated. Even though a counterclaim is a proceeding against the corporate debtor, its continuation per se is not a threat to the assets of the corporate debtor. Only on adjudication of the counterclaim, when the amount to be paid/recovered is determined, Section 14 will be triggered.

The foregoing judgments present an obscure scenario.  In KS Oils, the NLCAT held that arbitration proceedings against the corporate debtor cannot be continued; the party will be required to approach the Resolution Professional. On the contrary, in Jharkhand Bijli, the NCLAT observed that a counterclaim can be filed or proceeded against the Corporate debtor before the arbitral tribunal; but no recovery can be made pursuant thereto. Interestingly, the latter judgment makes no reference to the NCLAT’s earlier view K.S. Oils – even though both judgments were passed by a bench comprising the same bench!

Conclusion

The fate of arbitration proceedings under the new IBC regime is far from sealed. Several issues remain unsettled, such as the applicability and enforcement of the moratorium to foreign-seated arbitrations involving an Indian corporate debtor. Settlement of this issue may also end up opening up a pandora’s box. The applicability of the moratorium to conciliation proceedings under Part III of the Act is on a similar footing.

The contravention of a moratorium under Section 14 of the IBC is punishable with imprisonment which may extend to five years or a fine which may extend to three lakh rupees in case of a corporate debtor (three years and one crore rupees in case of creditor)[6]. Uncertainties regarding arbitrations under the Insolvency Regime will lead to severe hardships. It is debatable whether some judicial pronouncements have added to or resolved them. Legislative or judicial clarifications will be the key to resolve these uncertainties.

 

[1] Section 14 (1) (a) of the IBC

  1. Moratorium

(1) Subject to provisions of sub-sections (2) and (3) on the insolvency commencement date, the Adjudicating authority shall by order declare moratorium for prohibiting all of the following, namely:-

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;…..” (emphasis supplied)

[1] [2018] 16 SCC 94

[2] Company Appeal (AT) (Insolvency) No. 284 of 2017

[3] 2018 246 DLT 485

[4] Company Appeal (AT) Insolvency No. 285 of 2018

[5] CS (COMM) 470/2016

[6] Section 74 of the IBC

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