Proceedings Under Section 34 Of Arbitration Act Also Covered By Moratorium Under Section 14 IBC: Supreme Court

The Supreme Court observed that an application under Section 34 of the Arbitration and Conciliation Act to set aside an award is covered by moratorium under Section 14 of the Insolvency and Bankruptcy Code.

Section 34 proceeding is a proceeding against the corporate debtor in a court of law pertaining to a challenge to an arbitral award and would be covered just as an appellate proceeding in a decree from a suit would be covered, the bench headed by Justice RF Nariman observed in the judgment titled P Mohanraj and others v M/s Shah Brothers Ispat Ltd.

The court observed thus while addressing a contention relying on a Delhi High Court judgment in Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd. (2018) 246 DLT 485, in which it was held that a Section 34 application to set aside an award would not be covered by Section 14 of the IBC.

Section 14(1)(a) empowers the Adjudicating Authority to 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.

According to the High Court, the following are the reasons for holding that the Section 34 application is not covered under Section 14 IBC:

(a) "proceedings‟ do not mean "all proceedings‟;

(b) moratorium under section 14(1)(a) of the code is intended to prohibit debt recovery actions against the assets of corporate debtor;

(c) continuation of proceedings under section 34 of the Arbitration Act which do not result in endangering, diminishing, dissipating or adversely impacting the assets of corporate debtor are not prohibited under section 14(1)(a) of the code;

(d) term "including‟ is clarificatory of the scope and ambit of the term "proceedings‟;

(e) the term "proceeding‟ would be restricted to the nature of action that follows it i.e. debt recovery action against assets of the corporate debtor;

(f) the use of narrower term "against the corporate debtor" in section 14(1)(a) as opposed to the wider phase "by or against the corporate debtor" used in section 33(5) of the code further makes it evident that section 14(1)(a) is intended to have restrictive meaning and applicability;

(g) the Arbitration Act draws a distinction between proceedings under section 34( i.e. objections to the award) and under section 36(i.e. the enforceability and execution of the award). The proceedings under section 34 are a step prior to the execution of an award. Only after determination of objections under section 34, the party may move a step forward to execute such award and in case the objections are settled against the corporate debtor, its enforceability against the corporate debtor then certainly shall be covered by moratorium of section 14(1)(a).

(h) the continuation of these proceedings shall cause no harm to either party's rights to seek determination of issues under section 34 of the Act and object of the code shall be preserved rather than defeated.

Disagreeing with the High Court judgment, the Supreme Court observed :

"This judgment does not state the law correctly as it is clear that a Section 34 proceeding is certainly a proceeding against the corporate debtor which may result in an arbitral award against the corporate debtor being upheld, as a result of which, monies would then be payable by the corporate debtor. A Section 34 proceeding is a proceeding against the corporate debtor in a court of law pertaining to a challenge to an arbitral award and would be covered just as an appellate proceeding in a decree from a suit would be covered. This judgment does not, therefore, state the law correctly.", the bench observed.

The Court made this observation while holding that Section 138 NI Act proceedings for cheque dishonour will be barred against the corporate debtor during the moratorium period declared under the Insolvency and Bankruptcy Code. The Court observed that Section 138 NI Act was a 'quasi-criminal' proceeding to enforce a civil remedy.