INTRIGUING INTERPLAY BETWEEN A MORATORIUM UNDER THE IBC AND ARBITRATION PROCEEDINGS

The introduction of the Insolvency and Bankruptcy Code, 2016, (“Code”) has proved to be a trailblazing phenomenon over the past few years. However, the nascency and novelty of the Code has created a labyrinth of complex questions, the answers to which are still grey. In particular, the dominancy bestowed upon the Code to address potential overlaps with existing statutes has resulted in fascinating legal quagmires. One such example, is the clash between insolvency proceedings of a Corporate Debtor and arbitration proceedings that the Corporate Debtor may be a party to, which gives rise to the following question:

Does a moratorium imposed under Section 14 of the Code prohibit continuation of arbitration proceedings initiated by or against a Corporate Debtor against whom insolvency proceedings have been initiated?

As law developed by courts of law in this regard is still fluid, to answer this question, a clarificatory analysis to decipher the scope and intent of a moratorium vis-à-vis the objective and purpose behind the Code is required. In essence, the idea of a moratorium has been conceptualized by the legislature to ensure that the assets of a Corporate Debtor are not diminished/ adversely impacted, and this was sought to be achieved by imposing a blanket prohibition on institution or continuation of any proceedings against a Corporate Debtor, i.e., any proceedings which are adversarial to the Corporate Debtor is only hit by the moratorium.

However, this prohibition does not apply to the initiation or continuation of any suits or proceedings (including arbitration proceedings) initiated by the Corporate Debtor, as is evident from the wordings of Section 14. The same can also be gathered from the objects and reasons of the Code, which includes maximisation of the assets of the corporate debtor. Thus, the statutory scheme of the Code aims to enable a Corporate Debtor to benefit through recovery of dues owed to it, consolidation of the Corporate Debtor’s assets and prevention of dissipation of assets of the Corporate Debtor. In this context, the judgment of Hon’ble Delhi High Court in the case of Power Grid Corporation of India Ltd. vs Jyoti Structures Ltd (OMP (COMM.) 397 of 2016) is relevant which while laying down that the continuation of proceedings under Section 34 of the Arbitration and Conciliation Act, 2015 which do not result in endangering, diminishing, dissipating or adversely impacting the assets of the corporate debtor are not prohibited under Section 14(1)(a) of the Code held that:

“In the light of above purpose or object behind the moratorium, Section 14 of the Code would not apply to the proceedings which are in the benefit of the corporate debtor, like the one before this Court in as much these proceedings are not a “debt recovery action” and its conclusion would not endanger, diminish, dissipate or impact the assets of the corporate debtor in any manner whatsoever and hence shall be in sync with the purpose of moratorium which includes keeping the corporate debtor’s assets together during the insolvency resolution process and facilitating orderly completion of the process envisaged during the insolvency resolution process and ensuring the company may continue as a going concern”

Therefore, it is settled position of law that the right of a Corporate Debtor to initiate or continue any proceedings, including arbitration proceedings, in the capacity of a claimant, is not curtailed or prohibited by Section 14. If a Corporate Debtor is prevented from pursing legal remedies for recovery of dues when under a moratorium, that same would defeat the very purpose of the Code.

In this context, it is necessary to address and take into consideration a situation where a Corporate Debtor against whom insolvency proceedings have been initiated, is allowed to initiate arbitration proceedings, during which, counter claims are raised against the Corporate Debtor and there is real potential for such counter claims to be awarded against the Corporate Debtor, thus adversely impacting the assets of the Corporate Debtor. Then, should such arbitration proceedings be allowed to continue?

This quandary has gained notable significance in the recent past with an increase in commercial arbitration proceedings as well as an increase in commencement of corporate insolvency proceedings. It was dealt with by the Hon’ble Delhi High Court in SSMP Industries Ltd. vs. Perkan Food Processors Pvt. Ltd., 2019 SCC Online Del 9339 wherein it was held that arbitration proceedings can continue and once the counter claims are adjudicated and the amount to be paid/recovered is determined, at that stage, depending upon the prevalent situation, Section 14 could be triggered. Thus, a moratorium under Section 14 would selectively be imposed only on such counter claims at the stage of execution/ enforcement of the award. (Ref. Jharkhand Bijli Vitran Nigam Ltd. v. IVRCL Ltd., 2018 SCC Online NCLAT 891, Trading Engineers International Ltd. v. U.P. Power Transmission Corp. Ltd. 2022 SCC Online All 564 and Subodh Kumar Aggarwal v. EIH Ltd. decided on 24.10.2019 by NCLAT).

Therefore, in case an arbitral award is passed in favour of a Corporate Debtor, the same will give impetus to the purpose of “maximisation of assets” as envisaged by the Code. In case an arbitral award is passed against a Corporate Debtor, the moratorium under Section 14 would then come into effect to protect the assets and interests of a Corporate Debtor.

The key takeaway here is that, the provisions of the Code have to always be interpreted and analysed in a manner which guarantees protection of interests and value maximisation of assets of a Corporate Debtor as the same are paramount in the Indian insolvency regime. Since arbitration has rapidly emerged as the new norm owing to the fact that it promises speedy resolution (in comparison to traditional recovery proceedings) of disputes without the burden of elaborate formal procedures that one has to adhere to before civil courts, Corporate Debtors undergoing insolvency should be encouraged to pursue arbitration proceedings, in order to recover dues and maximise assets, as commencement of insolvency and imposition of a moratorium is not a deterrent.

– Vikram Pooserla, Senior advocate, CVLAW Chambers and Suadat Ahmad Kirmani, Manager at Tatva Legal