Reconciling Conflicts - The Evolving Validity And Enforceability Of Arbitration

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Category: Arbitration & ADR

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RECONCILING CONFLICTS: THE EVOLVING VALIDITY

AND ENFORCEABILITY OF ARBITRATION Saksham Yadav, BA.LL.B., Batch (2020-2025), Fairfield Institute of Management and Technology affiliated to Guru Gobind Singh Indraprastha University, New Delhi

ABSTRACT

This article delves into the complex interaction between the Insolvency and Bankruptcy Code, 2016 (IBC) and the Arbitration and Conciliation Act,

1996. It concentrates on how insolvency proceedings impact arbitration

agreements and arbitral awards. While the main objective of IBC is to protect the interests of creditors through a collective debt resolution process. This Act imposes a moratorium under Section 14 that suspends all legal actions, including arbitration, against the corporate debtor, which often leads to conflicts with the Arbitration Act, which upholds party autonomy and contractual dispute resolution mechanisms. This article examines key judicial decisions addressing whether arbitration proceedings and the enforcement of arbitral awards can continue during the moratorium period. It discusses circumstances where mutual claims exist and examines how the Indian Courts have attempted to balance the objectives of both statutes.

The article also highlights unresolved legal questions and proposes improvements such as clarifying Section 14 of the IBC and encouraging detailed arbitration clauses to address the possibility of insolvency. Ultimately, the article argues for a more harmonized approach to ensure that neither the insolvency process nor the contractual rights of parties are unfairly compromised.

Introduction

The Insolvency & Bankruptcy Code, 2016 defends the interest of the creditors, by providing a comprehensive, and well-structured debt resolution process known as Corporate Insolvency Resolution Process (CIRP). It imposes a moratorium which prevents any additional recovery actions against the Debtor, thereby protecting the assets of the Corporate Debtor for the equitable distribution among the financial creditors. In contrast Arbitration & Conciliation Act,

1996 grants the parties the autonomy to resolve their commercial disputes without getting

burdened by tedious traditional litigation procedures. Parties are free to agree on an expeditious process to amicably settle disputes, which is not only flexible & cost-effective but also ensures minimal court intervention. While IBC focuses on collective debt recovery by restructuring debtor’s financial assets to secure the creditor’s interest, it often overrides the key contractual rights of the parties, such as Arbitration. Moratorium Vs. Arbitration Proceedings A Moratorium is a suspension or bar on any legal action taken against the Corporate Debtor for recovery once the Corporate Insolvency Resolution Process (CIRP) commences. After receiving an application u/s 7,9 or 11 of IBC the National Company Law Tribunal declares a moratorium under section 14 of IBC.

Moratorium bars the any fresh civil suit, arbitration proceedings, or execution of any judgment or decree or order in any court of law against the Corporate Debtor. The Moratorium remains effective until the Corporate Insolvency Resolution process ends. Moratorium specifically bars the initiation any arbitration proceedings for debt recovery. In Alchemist Assets Reconstruction Company Ltd. Vs M/s Hotel Gaudavan Pvt. Ltd. & Ors. [(2018) 16 SCC 94] the Hon’ble Supreme Court held that any arbitration initiated after the declaration of Moratorium under Section 14 of the IBC becomes legally non-est. However, the arbitral tribunal, relying on Section 14, ruled that adjudicating authorities are required to enforce a moratorium on all proceedings, including arbitration, against the corporate debtor.

As a result, the arbitration proceedings were immediately suspended upon the commencement of insolvency resolution. Effect of Insolvency proceedings on Arbitral Award If a company enters insolvency before an award is made, Section 14 of the Insolvency and Bankruptcy Code (IBC) comes into action, which prevents the continuance of arbitration by imposing a moratorium. If the arbitration is solely about claims against the Corporate Debtor, Section 14 imposes a prohibition on initiation and continuation of such proceedings. The main idea behind this is to give the company some breathing room to facilitate the resolution process efficiently without any external legal pressure. If an award is made in favor of the claimant, it can hamper the debt resolution process and compromise the authority of IBC by allowing the recovery of debt through an external process.

So, the moratorium acts like a barricade protecting the interest of creditors by preventing any external claim to intervene. There are cases where both the corporate debtor and the opposite party have claims against each other, the adjudication of these disputes requires a comprehensive approach. The NCLAT, in Jharkhand Bijli Vitran Nigam Limited v. IVRCL Ltd. 2018 SCC OnLine NCLT 18197, held that a claim against the corporate debtor cannot be decided independently but must be assessed in accordance with the corporate debtor’s counterclaims. This means that while arbitration proceedings may continue, any counterclaims diminishing the corporate debtor’s asset value would be restricted by the moratorium.

The arbitrator holds the authority to hear the matter, but if the final award imposes any financial burden on the corporate debtor, its execution will be banned during the insolvency resolution process due to the moratorium. Arbitration can, in some situations, continue despite insolvency proceedings, but the enforcement of an arbitral award made after its culmination depends on whether it is in accordance with the objectives of the IBC. The primary concern is to make sure that the Corporate Debtor’s assets are well-preserved for recovery by creditors. When an award has been passed but is challenged under Section 34 or Section 36 of the Arbitration and Conciliation Act, 1996. This situation typically arises when an arbitral award is delivered before the declaration of insolvency, and the opposing party challenges it after the insolvency process is initiated.

A significant question in such cases is, whether the moratorium imposed under section 14 of IBC blocks a challenge under section 34 of the Arbitration Act, especially when the award is passed in favor of the corporate debtor. Section 14 aims to protect the value of the assets of the Corporate Debtor. If the award imposes additional financial charges on Corporate Debtor, the moratorium applies, suspending the recovery action. However, if the award does not hamper the debtor’s financial position, or the value of his assets the challenge to the award may proceed.

One more question that courts have addressed is whether a final arbitral award automatically constitutes proof of debt. In Annapurna Infrastructure (P) Ltd. v. SORIL Infra Resources Ltd. 2017 SCC OnLine NCLAT 380 the NCLAT ruled that an arbitral award against a Corporate Debtor can be considered a default under the IBC. Similarly, in K. Kishan v. Vijay Nirman Co. (P) Ltd (2018)17 SCC 662 the Supreme Court held that while arbitral awards can serve as evidence of a debt, they must be undisputed for an operational creditor to initiate the Corporate Insolvency Resolution Process (CIRP). Additionally, there is a division between Section 34, which allows for objections to an arbitral award, and Section 36, which deals with its enforcement. Section 34 challenges the validity of an award, whereas Section 36 determines whether the award can be executed.

Courts have overtly stated that when an award is in favor of the Corporate Debtor, the moratorium does not prevent its enforcement. However, if enforcing the award would create financial obligations for the Corporate Debtor, its execution is barred under Section 14 of the IBC. Conclusion It is an undisputed fact that both the laws are imparting justice in their own arenas and fulfilling their own objectives by ensuring fairness to the party suffering losses. This however, leads to a great struggle when these laws are applied together as they protect the interest of opposing parties. It cannot be said that one law overrides the other, they are applied on a similar level and none can prevail over the other. Taking advantage of a company going through the tedious process of liquidation by burdening them with an arbitral or any other proceedings, is unfair in terms of the insolvency code.

However, on the other hand, not enforcing a contract based on trust of the parties because of the mere reason that one party has been declared insolvent, is again a breach of trust of the other party and deprives them of their right to protection by law. The court has however struck a middle ground by stating that debt recovery proceedings shall be barred, but the arbitral proceedings that are not aiming at debt recovery can be proceeded with. This position, though is the best possible situation, but is still not fair to the other party of the arbitration agreement. Therefore, in the opinion of the researcher, the following suggestions may be incorporated by the courts in order to bring about a little more fairness in such sort of cases The legislature should take an initiative to simplify and further clarify the language of Section

14 of the Insolvency and Bankruptcy Code (IBC) to outline the types of legal proceedings that

are barred under the section and the specific nature of cases to which the provision applies. This will help the distressed parties to seek some clarity through uniform judicial interpretations. Additionally, Arbitration agreements should include a well-defined clause, emphasizing the impact of initiation of insolvency proceedings against either party on the enforceability of the arbitration agreement. This clause should highlight the alternatives available to the non-insolvent party for the redressal of its grievances. Furthermore, in cases where a non-insolvent party has suffered a significant loss by relying on the arbitration agreement, a special consideration should be given, ensuring the partial debt recovery in appropriate circumstances.

This would help in striking a balance between the objectives of the insolvency and bankruptcy code and the rights of the parties who have been adversely affected by insolvency of their counterparts.

References

1. Arbitration

& Conciliation Act 1996, http://www.scconline.com/DocumentLink/QWdt5a4f

2. Insolvency

& Bankruptcy Code http://www.scconline.com/DocumentLink/86F742km

3. Alchemist Assets Reconstruction Co. v. Hotel Gaudavan Pvt. Ltd., (2018) 16 SCC 94

(India).

4. Jharkhand Bijli Vitran Nigam Ltd. v. IVRCL Ltd., 2018 SCC OnLine NCLT 18197

(India).

5. Annapurna Infrastructure (P) Ltd. v. SORIL Infra Res. Ltd., 2017 SCC OnLine NCLAT

380 (India).

6. K. Kishan v. Vijay Nirman Co. (P) Ltd., (2018) 17 SCC 662 (India)