Decoding arbitration for the moratorium season under IBC Ordinance, 2020
The recent introduction of the Insolvency and Bankruptcy (Amendment) Ordinance, 2020, [“IBC Ordinance”] promulgated on the 5th of June 2020 has faced its fair share of appreciation and criticism. The prevailing uncertainty by reason of financial debilitation owing to the nation-wide lockdown and severe economic unrest has sought recourse to the IBC Ordinance. Coupling the ordinance with the RBI’s EMI moratorium on term loans has instilled a glimmer of hope predominately among the self-employed and MSMEs. The institution of the IBC Ordinance has assisted corporate debtors by subserving an augmented duration which shields them from creditors instituting Corporate Insolvency Resolution Processes (CIRP). The IBC Ordinance is strengthened by the already established laws administering powers in the adjudicating authority to declare a moratorium. The laws serve as a measure to safeguard corporate debtors under §13 and §14 as well as partnership firms or individuals under § 101 of Insolvency and Bankruptcy Code, 2016 [“The Code”].
The prospectively effectuated 2020 amendment ordinance further provides a separate CIRP moratorium with a strict emphasis on corporate debtors under the newly inserted § 10A which declares a suspension on instituting all corporate insolvency resolution process for a period of 6 months with further extension if necessary, not surpassing 1 year, starting from the 25th of March, 2020. The confusion, however, is with construing the proviso of § 10A which seems to propose that despite the occurrence of a default on the part of the corporate debtor during the aforementioned period of 6 months or throughout its extended duration, no corporate insolvency resolution process (CIRP) application shall ever be filed. The proviso to § 10A creates uncertainty and distorts the intention behind the IBC Ordinance. Regardless, the hasty establishment of a moratorium through the IBC Ordinance has resulted in a lack of clarity for arbitrating these issues. The IBC Ordinance read along with the Code fails to clearly address the status of an arbitration proceeding during the CIRP moratorium period. Hence, in this article, the author will attempt to comprehensively deal with the contemporary legal lacuna in the wake of the Insolvency and Bankruptcy Code in effect.
Interface Between Insolvency & Arbitration
Insolvency disputes are disputes chiefly arising out of contractual obligations and the existence of arbitration agreements further encourages the settlement of disputes through arbitration. When we discuss the lex fori concursus, conflict of law is a settled matter considering the immunity provided to provisions of the Code in effect under § 238 which states the overriding and supplant impact of IBC provisions over other laws. Reliance on § 238 can only be made in the case of a conspicuous inconsistency between the Code and the Arbitration and Conciliation Act 1996 [“Arbitration Act”]. The aforementioned construction was pointed out by Justice R.F. Nariman in K. Kishan v. Vijay Nirman Company Pvt. Ltd. [Civil Appeal No. 21825 Of 2017]. The scope of § 238 was again dealt with by the 2018 NCLAT Order while drawing concerns to the Arbitration Act in, K.S. Oils Ltd. v. The State Trade Corporation of India Ltd. & Anr. The NCLAT settled the impugned matter while upholding the prevailing effect of the Code over the Arbitration Act. This position will survive up until plausible reconsideration by the Hon’ble Supreme Court.
Outlining the Arbitrability of Insolvency Disputes
Notwithstanding the aforementioned, upholding arbitration agreements considering the appreciable degree of certainty regarding commercial contracts in light of defaults held against corporate debtors or claims made against corporate creditors with or without counterclaims made inter se under the Code should not be shunned on account of the moratorium. With regards to certain parts of the aforementioned framework of an insolvency or bankruptcy arbitration, the odds are in favour of arbitrating such disputes under § 14(1)(a) of IBC which primarily focuses on precluding the institution of any lawsuit or continuation of pending lawsuits and does not ex facie interdict the arbitration proceeding. The IBC Ordinance strictly deals with shielding corporate debtors by prohibiting the institution of CIRPs during the period of 6 months or throughout its extended duration. Hence, the institution and operation of arbitration proceedings can be seamlessly and amicably conducted in the absence of an insolvency resolution process. In the event of disputes arising out of claims made by the corporate debtor without the existence of any counterclaim, the same can justly lend itself to arbitration.
The non-existence of a mandated prohibition for initiating CIRP during the pendency of arbitration according to § 7 of IBC which was stated by the NCLT in Reliance Commercial Finance Limited v. Ved Cellulose Limited [2017 Indlaw NCLT 432] faces a contradiction under the IBC Ordinance. The appointment of a resolution professional by the Committee of Creditors under § 22 followed by the application made by the resolution professional to the Arbitrator with the intent to initiate CIRP would yet again be nipped in the bud by invoking the amended provision § 66(3) introduced by the IBC Ordinance. Hence, a scenario where claims brought against a corporate debtor without the existence of any counterclaim cannot be arbitrated. Furthermore, in reference to the Supreme Court’s Observations in the case, Alchemist Asset Reconstruction Company Ltd. v. M/S. Hotel Gaudavan Pvt. Ltd. & Ors. [AIR 2017 SC 5124], it can be rightly asserted that arbitration can be effectuated by the adjudicating authority in accordance with the Code in effect if the dispute does not concern the institution of a CIRP.
Contrasting opinions in cases where the disputants argue claims and counterclaims inter se would bank on the finality based on thorough explication of the entire legal proceeding. In Re Jharkhand Bijli Viltran Nigam Ltd. v. IVRCL Limited & Anr. [CP (IB) No. 294/7/HDB/2017]; the claim made by the corporate debtor which was not encompassed under the moratorium order for CIRP was upheld by the arbitral tribunal while declaring the submission made by the Resolution Professional to be erroneous. The submission suggested the continuation of arbitral proceedings with respect to counterclaims and was set-aside by reason of subjecting the proceeding to a moratorium order eventually. The NCLT wound up its decision by administering discretionary powers in the arbitral tribunal to resolve or not to resolve the dispute while maintaining the claim made by the corporate debtor. However, this case was appealed before the National Company Law Appellate Tribunal. Contrary to the NCLT Order, the NCLAT in its Order observed that claims made by the corporate debtor could only be ascertained upon hearing and examining counterclaims. Hence, appropriating the principle laid down in the NCLAT Order to the contemporary legal situation, the question to ‘determine whether or not to invoke the CIRP moratorium order’ would arise subsequent to the arbitral tribunal hearing all claims and counterclaims made by the disputants. Concomitantly, in the event of deducing the liability of the corporate debtor to pay out a certain amount, recovering such amounts would be prohibited throughout the moratorium period under the IBC Ordinance.
The Ad - hoc Approach on Pending Arbitrations & Arbitral Awards
In view of the explanation provided under the newly inserted § 10A by the IBC Ordinance, the explanation expressly attempts to clarify the prospective effect of the Code’s moratorium on CIRP against corporate debtors starting from the 25th of March, 2020. The explanation to § 10A conclusively declares the exclusion of all defaults committed prior to the said period. Contrary to the explanation provided under § 10A by the IBC Ordinance, in K.S. Oils Ltd. v. The State Trade Corporation of India Ltd. & Anr. the NCLAT in its Order upheld and adopted the principle explicated in re Alchemist Asset case [AIR 2017 SC 5124]. As a result, the NCLAT held, “the arbitral proceeding pending between ‘M/s K.S. Oil Ltd.’ (Corporate Debtor) and ‘The State Trade Corporation of India Ltd.’ (Financial Creditor) before the Indian Council of Arbitration cannot proceed during the moratorium period.”
A thorough comprehension of the above case serves to analyze and develop the degree of enforceability for plausible scenarios of a pending arbitration proceeding or an award through an Ad-hoc approach. A case where the arbitral award is in favor of the corporate debtor neither calls for the implementation of amendments introduced by the IBC Ordinance nor the provisions of the Code concerning moratorium. Hence, an arbitration award dealing with receivables owed to the corporate debtor can be enforced under § 35 and § 36 of the Arbitration Act. Conversely, in a case where the arbitral award is declared against the corporate debtor, the provisions of the IBC Ordinance would have an immediate effect on the execution of said award throughout the duration of the CIRP moratorium period.
In a double negative approach taken by our legal systems in Power Grid Corporation of India Limited v. Jyoti Structures Limited [2017 Indlaw DEL 4178]; an arbitral award was pronounced against the disputant and in favor of the corporate debtor. When an attempt was made by the aggrieved party to challenge this award under § 34 of the Arbitration Act, the Hon’ble Delhi High Court emphasized on the redundancy behind performing such an act, as a moratorium under § 13 and § 14 of the Code would immediately ensue in light of any reconsideration by the judiciary. While establishing the legislative intent behind the Code, the court maintained the significance of safeguarding the corporate debtor’s assets from diminution, dissipation or other such adverse consequences during the course of proceedings. In addition, the attempt to subserve the likelihood of progression and strengthening of the corporate debtor as a going concern was strongly explicated in this case.
Subsequent to discussing the scope and enforceability of a domestic arbitral award in reference to the IBC Ordinance, the same would necessitate a more intricate procedure for the execution of foreign arbitral awards under § 48 and § 49 of the Arbitration Act. In Vitol S.A. v. Asian Natural Resources (India) Ltd. & Ors. [(2018) 142 CLA 332] the question was whether the London Arbitral Award could be enforced against the property of the corporate debtor in accordance with the conditions for enforceability laid down under § 48 of the Arbitration Act. The matter received a reply in the negative when the Ahmedabad Bench highlighted the moratorium under § 14 of the Code to the pending execution of arbitral award against the corporate debtor. Hence, upon the substantial reading of several similar and related cases; the apathy signified by the judiciary to entertain cases of insolvency against the corporate debtor during the period of CIRP moratorium is well-established and would apply even more so to cases enforcing the execution of foreign arbitral awards.
Conclusion: A Bona Fide Legislative Intent
The anticipatory effect on deciding whether to uphold or set aside arbitral awards or to decide the effect of the IBC Ordinance on pending arbitrations has been established by the judiciary through an Ad-hoc approach. This Ad-hoc strategy greatly depends on construing the claims made by disputants as well as the nature of the disposition of the arbitral award. As a result of the inability on the part of the corporate debtor to furnish timely payments, adverse consequences ensue with an indirect impact on our country’s economy. For example, defaulting on the payment of loans or EMI’s to the respective financial or operational creditors would adversely result in risking a low credit rating predominantly influenced by the concerned banks. These low credit ratings would detrimentally affect the operations of the corporate debtor which would in-turn reverberate with the economy at large.
In conclusion, the author avers that the primary legislative intent behind the 2020 IBC Ordinance, is to safeguard corporate debtors and facilitate business operations as a going concern in-turn suppressing the likelihood of corporate debtors to go out of business or shut shop. And upon in-depth scrutiny of relevant cases, an arbitration proceeding or award is maintained in accordance with the Arbitration Act in effect for as long as suspension declared on CIRPs along with the object of IBC Ordinance and the Code is upheld and preserved rather than pre-empted.
[i] Athith Pradeep is a law graduate Alliance School of Law, Bengaluru. He specializes in business law with a keen proclivity for legal research on matters of Corporate & Commercial Arbitration, Economic Policy, Intellectual Property & Technology Laws. For any discussion related to the article, he can be contacted via mail at email@example.com. Preferred Citation: Athith Pradeep, Decoding arbitration for the moratorium season under IBC Ordinance, 2020, Arbitration & Corporate Law Review, Published on 9th August, 2020.
This article was reviewed by Snehal Dhote and Yagnesh Sharma.