Enforcement of Arbitration Award via Insolvency Proceedings: Analysis of Indian Scenario

Author : – Vishal Vaibhav Singh, Associate, All India Legal Forum

In India, a bankruptcy situation is not regarded as arbitrable since it involves the rights of other parties. Numerous judicial decisions, such as Swiss Ribbons Private Limited v. Union of India,

P. Anand Gajapati Raju v. PVG Raju, and Booz Allen and Hamilton v. SBI Home Finance Limited, have influenced the development of this stance. The courts found that insolvency issues are not susceptible to arbitration in these instances by making a distinction between the right in rem and the right in personam. Simply put, once bankruptcy procedures have been commenced against a person, all other legal proceedings commenced against that person, including any pending arbitration proceedings, will be stayed pending the outcome of the insolvency procedures.

The processes of bankruptcy and arbitration have become more and more entwined in recent years. The new Insolvency & Bankruptcy Code (IBC), which was adopted in 2016 and fundamentally changed the legal structure governing bankruptcy disputes in India, is largely to blame for this. It is obvious that India is still in the early stages of implementing this new insolvency code with this amendment to the law regulating insolvency. The statute does not contain any provisions that address how bankruptcy procedures influence arbitrations, except than the imposition of a moratorium. There are no provisions addressing how the Corporate Insolvency Resolution Process (CIRP) may impact arbitrations under the 1996 Arbitration and Conciliation Act.

It’s also important to note that both the IBC, 2016, and the Arbitration Act of 1996 have a number of overriding clauses. It is now necessary to determine which of these two special statutes, which is special legislation, will take precedence over the other. The supreme court addressed each of these concerns in its most recent decision, Indus Biotech Private Limited v. Kotak India Venture Fund.

The conflict between the parties was caused by the pricing of Optionally Convertible Redeemable Preference Shares (OCPRS) at the time they were converted into equity shares. Kotak triggered the IBC regulations by submitting an application to begin a Corporate Insolvency Resolution Process after Indus Biotech missed the deadline to recover OCRPS. Indus Biotech responded to the aforementioned procedures by submitting an application under Section 8 of the Arbitration and Conciliation Act, 1996, claiming that a petition under Section 7 of the IBC is inadmissible since the contract contains an arbitration clause. This application was turned in before the CIRP officially launched.

As there was no default, the NCLT Mumbai dismissed Kotak’s Section 7 application of the IBC in 2020 and permitted arbitration to resolve the CIRP Proceeding. The Supreme Court received a Special Leave Petition in this case. Kotak’s main argument was that since the disagreement was the result of a right in rem, it could not be arbitrated. Indus countered that the NCLT had made the right choice and that arbitration should be used instead because the IBC did not impose a default.

After examining the Indus Biotech decision, the question of whether a different tactic could be employed to meet the requirements of both pieces of law emerges. The Bombay High Court addressed this matter in the case of Rakesh Malhotra, where oppression and mismanagement claims were included within the scope of arbitration if the claim was found to be false, frivolous, and “dressed up” or manufactured with a view to circumventing an arbitration clause. The SC in Indus Biotech may have established a framework that would stop claims from being “dressed up” in bankruptcy proceedings by finding that an insolvency claim becomes a right in rem upon admission. After filing an insolvency application, a financial creditor won’t be able to avoid or get out of the arbitration agreement.

The IBC is not intended to replace a recovery suit; rather, it is meant to help the insolvent corporation get back on its feet. The first question is thus whether the appeal is only “dressed up” or if it seeks to replace the IBC as a reparations act. The second was whether arbitration would go against the objectives of the IBC.

The number of high-profile bankruptcy cases in the Indian economy has drastically expanded over the last several years. The Insolvency and Bankruptcy Code, 2016 (the “Code”) is intended to regulate and introduce a structured procedure for the resolution of insolvencies with the objective of prioritising a delicate balance for all stakeholders in a timely way.

While court interpretations have never agreed on how arbitration and insolvency should be handled, the code has strengthened the use of due diligence in the insolvency process. When corporate debtors are the focus of the Corporate Insolvency Resolution Process (‘CIRP’), award holders and arbitrators may have difficulties enforcing judgements.

According to the Insolvency and Bankruptcy Code of 2016, arbitration awards are regarded as debts.

Part I of the Act contains a thorough examination of domestic rewards. An award normally cannot be enforced until it has been declared final and binding on the parties, i.e., has overcome the hurdles posed by section 34 of the Act. In compliance with Section 35 of the Act, the award is now executed out in the same manner as though it were a court order.

The Insolvency Resolution Process (or “IRP”) under Section 14 of the Code must first begin before a Moratorium may begin, according to the Code. Section 14(1)(a) of the IBC explicitly prohibits the initiation or continuation of any action or proceeding against the corporate debtor (including the execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority). The primary objective of the moratorium is to “create a system which shields the corporate debtor from pecuniary attacks against it in the moratorium period so that the corporate debtor obtains breathing space to continue as a going concern in order to eventually rehabilitate itself,” according to the Report of the Insolvency Law Committee from February 2022.

However, after the arbitral tribunal has granted the award and the award holder files for bankruptcy, what options does the award holder have for pursuing their claims? An arbitration award is generally acknowledged to be a valid claim under the Code. Even foreign awards that have not been implemented have been considered claims under the IBC. It is plainly clear from the definition of a claim in Section 326 of the Code that it tries to cover any prospective claims that could have an effect on a corporate debtor’s financial status.

The aforementioned reward needs to be reported as a “claim” to the Resolution Professional during the allotted time frame, i.e., during CIRP. According to this, a Resolution Plan must include all amounts payable under it, including those to operational and financial creditors, according to Regulation 38 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Person) Regulations, 2016 (“CIRP Regulations”).

Does a process under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as “the Act”) need to be stopped if a moratorium has been imposed under Section 14(1)(a) of the Code? In Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd., this issue was raised. . In examining what defines a “proceeding,” the Delhi High Court noted that Section 14(1)(a) of the Code does not contain Since the aforementioned award was made in favour of the Respondent (the corporate debtor), the Honorable Court noted that, given the law’s purpose of keeping the corporate debtor operating as a going concern, extending the unexecutability of the award would make matters worse for the Respondent (the corporate debtor). These procedures would not be subject to Section 14 of the Code since they are not “debt recovery actions.” The Honorable Court said that the award’s enforceability under Section 36 of the Act would be subject to the moratorium of Section 14(1)(a) of the Code if the objections are decided against the Respondent (i.e., corporate debtor).

However, the Hon’ble Calcutta High Court dealt with a particular instance in 2021 after the Arbitral Tribunal had decided to issue its award, and the Respondent had neglected to file the claim with the IRP upon the filing of the application in accordance with Section 34 of the 1996

Act because it was assumed that the judgement had already been assumedly stayed. As a result, the respondent was unable to file a claim with the NCLT. The question of whether an Award- claim holder’s claim might be rejected following the approval of a Resolution Plan under Section 31 of the 2016 Insolvency and Bankruptcy Code was so determined by the Honourable Court. The Honorable Court said that from the date of admission of the application to begin the CIRP against the petitioner until adoption of the resolution plan, the respondent, as an Award-holder, had adequate time to request the NCLT for suitable remedies. As long as the Award is not suspended by a court order in accordance with Section 36, filing an application for the setting aside of an Award under Section 34 does not, by itself, render the Award unenforceable .

Therefore, even if the claim in this instance was valid, it would still have been lost if the Resolution Professional hadn’t received it at the designated time, which was during CIRP. However, the Hon. Supreme Court is currently debating the issue before reaching a decision.

In order to enforce the award under foreign awards, the award holder may do so in accordance with the New York Convention or Geneva Convention, as appropriate. Foreign awards in India must first satisfy a second test before being recognised and put into effect, according to Part II of the Arbitration Act. When enforcement proceedings against the corporate debtor with relation to a foreign award are underway before any commercial court of India, the question of whether a proceeding under recognition of the award will lie to enforce such an award against the corporate debtor arises.

In this regard, the Hon’ble Supreme Court emphasised that separate actions for evaluating the enforceability of the award and the execution that follows are not required and that both reliefs might be obtained in the same proceedings in Fuerst Day Lawson Ltd. v. Jindal Export7. Rumor has it that until the stage when the enforceability of the award is decided, the moratorium will not apply to the future procedures that execute the award against the Corporate Debtor. The moratorium would only be applicable to such activities if the Corporate Debtor loses this claim.

Conclusion

The ongoing pandemic’s effects on the economy have increased business conflicts and opened the door to insolvency for numerous firms. The arbitration act and insolvency legislation contain dissimilar aspects, however jurisprudence has shown that the two acts may be harmonised despite this.

Enforcing an arbitral judgement under the IBC requires a thorough understanding of what the terms “default” and “debt” imply within the framework of the IBC. The law has clearly established that once an arbitral judgement is final and enforceable, it can be recognised as a “Operational debt,” prohibiting the corporate debtor from making futile attempts to escape their responsibilities. However, the Courts have repeatedly shown a lack of excitement when establishing local or international enforcement actions against the Corporate Debtor. The award recipient’s legitimate claims are thus held up in the parking lot for the duration of the moratorium, which usually jeopardises their interests.

The Sirpur Mills case verdict is something we’re eagerly awaiting. It is crucial to find a fair balance between the interests of the award holder, who has suffered at the cost of the Corporate Debtor, and the bankrupt firm (Corporate Debtor), which must be resurrected. If the Calcutta High Court’s ruling is maintained, it may offer some comfort to the award holder.

References :-

  1. Section 36, Arbitration and Conciliation Act, 1996 (No. 3 of 2021)
  • K. Kishan v. M/s Vijay Nirman Company P. Ltd, 2019 (193) AIC 88
  • Agrocorp International Private (PTE) Limited v. National Steel and Agro Industries Limited, MANU/NC/7624/2020
  • Sirpur Paper Mills Limited v. I.K. Merchants Pvt. Ltd., 2021(223)AIC 917.

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