Demystifying The Effect Of Insolvency Proceedings In India On Arbitrations

Developments in both arbitration and insolvency, when analysed individually have been described as game-changing trends that facilitate the emergence of commercial justice in India.^[3] However, their interplay has been best defined as a 'conflict of almost polar extremes'.^[4]

The Conflict

Arbitrations are proceedings in personam that find their validity in consent-based arbitration agreements between parties.^[5] The essence of the arbitration lies in its consensual nature, and thus it promotes party autonomy and a decentralized approach to dispute resolution.

Au contraire, insolvency proceedings are proceedings in rem that try to centralize and consolidate claims against the corporate debtor in one jurisdiction^[6] with the aim to maximize the value of its assets. The assets are then distributed among creditors through a centralized process. To facilitate this process, a bar (moratorium) is imposed on other legal proceedings against the debtor.^[7]

What happens to arbitrations in a situation where one of the parties is undergoing insolvency proceedings?

Moratorium Versus Arbitrations

A moratorium is a temporary prohibition of an activity.^[8] Section 14 IBC imposes a moratorium on the initiation/continuation of legal proceedings when the corporate insolvency resolution process ["CIRP"] or the subsequent liquidation proceedings commence. As IBC overrides the Arbitration and Conciliation Act 1996 ["Arbitration Act"],^[9] the moratorium extends to arbitrations as well.

Interpreting Section 14 IBC

The moratorium aims to suspend all debt collection action against the corporate debtor.^[10] The intention is to provide a breathing space to the troubled corporate debtor and shift the focus from debt collection proceedings to reviving the core business.^[11] Therefore, section 14 is a legal wall protecting the corporate debtor from all claims brought against it.

However, the scope and ambit are not specified in the section, thus leaving room for judicial interpretation. On a reading of section 14- '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',^[12] it can be argued that the language is broad. However, the Courts have clarified that 'proceedings against the corporate debtor', within the meaning of section 14, does not mean 'all proceedings' and are subject to exceptions.^[13]

The ambit of section 14 has been defined in the light of its purpose, which is to ensure that there is no negative impact on the assets of the corporate debtor.^[14] The test used to decide if certain proceedings are covered by section 14 requires the judiciary to analyze whether the purpose behind the moratorium is being satisfied or defeated.^[15] Therefore, on applying the purposive rule of interpretation, it was held that the moratorium doesn't apply until and unless the proceeding has the effect of endangering, diminishing, dissipating or adversely impacting the assets of the corporate debtor.^[16]

Effect Of Moratorium On Domestic Arbitrations

This part focuses on the effect of the moratorium on different stages of domestic arbitrations covered by Part I of the Arbitration Act.

Arbitrations commenced post-moratorium

The general principle is that arbitrations instituted after the commencement of the moratorium are non-est in law ie not valid.^[17] However, the moratorium will apply only to claims brought against the debtor and not to claims that the debtor invokes against other parties.

Arbitrations in the pre-award stage

The 'pre-award stage' is when arbitration proceedings have been initiated before the moratorium starts but the award is pending. This stage can induce the following situations: -

First, when claims are brought against the corporate debtor, a stay on the arbitration proceedings, as per section 14 IBC will apply;

Second, when claims are made by the corporate debtor, the moratorium will not apply as any recovery action by a corporate debtor can lead to asset maximization that will facilitate the CIRP; and

Lastly, in a situation where counterclaims are filed against the corporate debtor, the proceedings shall not be barred because the continuation of the proceedings per se is not a threat to the assets of the corporate debtor, but a favorable adjudication of the counterclaim will trigger section 14 IBC.^[18] In other words, the moratorium will bar the execution of the order only if the award is pronounced against the corporate debtor.

Arbitrations in the post-award stage

This stage is when an arbitral award pronounced before the imposition of the moratorium is challenged under the Arbitration Act^[19] after the moratorium is imposed.

Section 34 of the Arbitration Act provides recourse to the aggrieved party for setting aside a domestic arbitral award and section 36 deals with the enforcement of the award. It was held in Power Grid^[20] that the stay on section 34 petitions will depend on whether the claims are beneficial or detrimental to the corporate debtor. Similarly, enforcement proceedings under section 36 will also be looked at through the lenses of its impact on the corporate debtor.

Therefore, the effect of the moratorium on domestic arbitrations flows from the purposive Interpretation Of Section 14 IBC Adopted By The Courts.

Effect Of Moratorium On Indian Seated International Commercial Arbitrations

International Commercial Arbitrations ["ICA"] are proceedings related to commercial disputes where either party is based outside India.^[21] Owing to its contractual nature, arbitrations allow wide discretion to the parties to determine the different layers of laws that will apply to the proceedings, including substantive and procedural laws. The seat of the arbitration defines the curial law (also called the 'procedural law' or 'lex arbitri')^[22] governing the arbitration and determines which courts will exercise supervisory jurisdiction over the proceedings.^[23] Based on the seat of arbitration chosen by the parties, ICAs can be of two kinds:

1. Indian seated ICAs where the curial law is Indian law; or
2. Foreign seated ICAs where the curial law is the law of another country.

An arbitration with an Indian seat involving a foreign party is considered to be an ICA in India. However, their conduct is governed by the same laws that apply to domestic arbitrations.^[24] Therefore, the effect of the moratorium over Indian seated ICAs will be governed by the aforementioned principles of moratorium applicable to domestic arbitrations. The following arguments support this proposition: firstly, the parties have chosen India as the seat and therefore the applicable curial law is Indian law; secondly, it is settled that the moratorium will apply to Part I proceedings under the Arbitration Act; and finally, the moratorium can be imposed without conflict as Indian courts will have supervisory jurisdiction.

Extending Section 14 To Foreign Arbitrations: Debate

It has been clarified that the moratorium extends to arbitrations governed by Part I of the Arbitration Act, but will it apply to foreign seated arbitrations in which one of the parties is undergoing insolvency in India?

Section 1(2) IBC states that the Code extends to the territory of India. Experts have argued that section 14 IBC must be interpreted on the lines of the moratorium provision under the erstwhile Sick Industries Companies (Special Provisions) Act, 1985 ["SICA"].^[25] It was held that the moratorium under SICA will not extend to foreign proceedings as the extent of the application of SICA was restricted to India.^[26] Consequently, the adjudicating authority under SICA had no jurisdiction even with respect to the execution of foreign awards in India.^[27] Though arguments that draw a parallel between IBC and its predecessor SICA are compelling, an analysis of section 14 IBC must be done independently in light of its purpose.

Purpose vis-à-vis Section 1(2) IBC

The intent of the legislature to extend the moratorium to foreign arbitrations depends on two aspects: first, does the legislature intend section 1(2) IBC to apply strictly without exceptions; and second, if section 14 is extended to foreign arbitrations, will it satisfy the purpose of the moratorium?

Section 234 IBC empowers the Central Government to enter into reciprocal agreements with other countries for the effective enforcement of the provision of IBC beyond the territory of India. Furthermore, the code has carved out exceptions to section 1(2) to achieve its objectives. For example, the term "property" under the code treats property situated in India and abroad alike^[28] and the Interim Resolution Professional is empowered to assume control and custody of the corporate debtors' assets located in a foreign country.^[29] Therefore, it is safe to conclude that the legislature intends for the code to apply beyond India.

To answer whether the application of section 14 to foreign arbitrations will satisfy the purpose of the moratorium, the same must be analysed through the lens of the test devised in Power Grid.^[30] The moratorium intends to bar all debt collection action detrimental to the assets of the debtor. For the sake of argument, if the legislature did not intend section 14 to apply extraterritorially, foreign seated arbitrations that negatively impact the assets (situated within India and abroad) of the corporate debtor will fail the purpose test. Also, section 234 IBC will be rendered meaningless.

In conclusion, the balance of convenience lies towards the legislative intent to extend the moratorium to foreign seated arbitrations rather than the SICA interpretation.

Moratorium On Foreign Arbitrations: Implementation

Section 234 IBC is the only tool that can manifest the intention of the legislature to implement the Code beyond India, into reality. The section empowers the Central Government to enter into reciprocal agreements with foreign countries. However, India has not notified any reciprocating territories yet.^[31] In this scenario, will the IBC bind tribunals in foreign seated arbitrations to adhere to the moratorium when section 234 is dormant? The Code is silent to this effect.

Foreign Arbitrations having no nexus with Indian law

Take the example of a foreign seated arbitration in which one of the parties is undergoing CIRP in India. In the absence of a reciprocal agreement with the country in which the seat of the arbitration is situated, the tribunal will not be bound to recognise the insolvency proceedings under the IBC. Furthermore, there will be no real prejudice, as the award can be enforced against foreign assets and have no nexus with Indian law. In such situations, the application of moratorium will depend on the position that the law of the seat of arbitration ie curial law or lex arbitri takes on the impact of insolvency proceedings on arbitrations.

This issue can be best illustrated by the Elektrim SA^[32] case. In this case, two different arbitration tribunals seated in two different jurisdictions (England and Switzerland) came to opposite conclusions as to whether arbitration could continue following the opening of insolvency proceedings for one of the parties in Poland. Even though a moratorium was imposed under Polish law, the English Courts ruled in favour of the continuation of arbitral proceedings according to English law, which was the curial law governing the arbitration. Therefore, in the absence of reciprocal agreements, Indian courts and IBC lack jurisdiction over the arbitration proceedings and the law governing the seat of the arbitration becomes the focal point.

Enforcement of Foreign Arbitral Awards in India

In the current scenario, it is settled that Indian law lacks jurisdiction over foreign seated arbitrations that have no nexus to India. However, when the foreign arbitral award has nexus to Indian law ie the award needs to be implemented in India, the courts have paved the way for certain remedies in favour of the corporate debtor undergoing CIRP.

Unlike domestic awards, a foreign award is not immediately enforceable in India. It attains the status of a decree^[33] when the party furnishes proof that the conditions for enforcement have been met.^[34]

In the case of Vitol SA,^[35] the National Company Law Tribunal ["NCLT"] applied section 14 IBC to stay the execution proceedings of a foreign award passed by the London Arbitral Tribunal. However, the decision was given after the objections challenging the enforcement of the foreign award^[36] were rejected. A similar view was taken by the NCLT in the case of Videocon Industries Limited.^[37] The issue before the bench was whether the award pronounced by the foreign tribunal to recover petroleum from the corporate debtor was enforceable during the pendency of insolvency proceedings. It was held that enforcement proceedings are covered by section 14 IBC according to the general rules of moratorium.

Therefore, in case of foreign seated ICAs, in the absence of reciprocal agreements the moratorium extends only to the execution of the foreign award in India. Where the foreign award has no nexus to India, section 14 in the absence of reciprocal agreements is a toothless tiger.

Analysis And Way Forward

The IBC overrides the Arbitration Act and the application of moratorium under section 14 IBC to domestic and Indian seated ICAs is settled. However, its effect on foreign seated arbitrations is highly debated in the absence of judicial clarifications.

According to the authors' analysis, the effect of section 14 on foreign seated arbitrations, has been beautifully encapsulated by the draftsmen in the form of section 234 IBC. The legislature has given the government an opening to make IBC effective beyond the territories of India in this globalized world where cross-border interactions are the new normal. When the interpretation of section 14 by the judiciary is read alongside section 234, the stance is clear- the moratorium will extend to foreign seated arbitrations in the same way as domestic arbitrations when the following two conditions are met: first, when there is a reciprocal agreement with the country in which the seat of arbitration is and second, when the general purpose of the moratorium is fulfilled.

However, as no reciprocal agreements have been notified under section 234, there is a tug of war between what the IBC intends to do and its inability to do it. This has created a situation where the debtor undergoing insolvency in India is at the mercy of the lex arbitri ie the procedural law applicable to the proceedings rather than the IBC. In the current scenario, the only recourse available to the debtor is to invoke section 14 at the stage of enforcement of the foreign award in India and in case the foreign award has no nexus to India, the debtor is left remediless. Furthermore, the stance of different countries on the effect that insolvency has on arbitrations differs and the lack of uniformity makes reciprocal agreements more relevant. Though it's not easy to reconcile the aims of international arbitration and insolvency, notifying reciprocal agreements under section 234 IBC is the solution to the issue in contention.

The author is an Advocate & Views are personal