Section 14 of the IBC: Discontinuance of Arbitral Proceedings

[Ashish Rana is an Advocate on Record in Supreme Court of India. The author thanks Shatakshi Singh for assistance]

The Insolvency and Bankruptcy Code, 2016 (IBC) has been enacted by the Parliament with a view to codify the existing framework of insolvency and bankruptcy which comprised of scattered provisions and mechanisms under the different legislation. Section 14 of the IBC provides for the declaration of the moratorium prohibiting coercive steps including the institutions of the suits or continuation of pending suits or proceedings against the corporate debtor, transferring or disposing off the assets of the corporate debtor, actions to foreclose or enforce security and the recovery of property in possession of the corporate debtor.

Last year, the Supreme Court, while delivering a judgment in the matter of Alchemist Asset Reconstruction Company Limited v. M/s Hotel Gaudavan Private Limited, has held that arbitration proceedings cannot be instituted or continued against the corporate debtor during the period of moratorium declared under section 14 of the IBC. Section 14 (1)(a) provides:

“(1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by 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;”

However, we argue that section 14(1)(a), when read holistically keeping in the view the scheme of Code, suggests that the word ‘proceedings’ does not include ‘arbitration proceedings’. Therefore, arbitration proceedings can be instituted and continued during the period of moratorium. However, the award passed in such arbitration proceedings cannot be executed.

The meaning of a word is to be judged by the company it keeps. Hence the term ‘’proceedings’ under section 14(1)(a) should be read in context, i.e., in conjunction with the term “suits”. We argue that the term ‘proceedings’ should be taken only in the context of proceedings in relation to a suit (governed by the Code of Civil Procedure, 1908). As the post proceeds, we will examine the way the term ‘proceedings’ have been referred and used in different contexts:

(a) Section 5(6) of the IBC, while defining the term “dispute,” includes a suit or “arbitration proceedings”. The use of the word “arbitration proceedings” signifies the fact that the legislature is conscious that ‘arbitration proceedings’ have to be considered separately than proceedings in relation to a suit.

(b) Section 8(2) of the IBC uses the word “arbitration proceedings” and ‘suit’ together, thereby acknowledging the distinction between the two.

(c) Section 25(2), while referring to the powers and duties of resolution professional, states that the resolution professional can represent and protect the interests of the corporate debtor before “judicial, quasi-judicial or arbitration proceedings”. Therefore, wherever the legislature wanted to refer to arbitration it has referred the same by name of “arbitration proceedings” and thus when proceedings are referred in section 14, the legislature was conscious of the fact that it was not for the purpose of arbitration; otherwise, it would have mentioned “arbitration proceedings” as against “proceedings”. Interestingly, here too, instead of using a general word “proceedings”, the legislature has used the words “judicial, quasi-judicial or arbitration proceedings”. Pertinently, the fact that the resolution professional is supposed to protect the interests of the corporate debtor during arbitration proceedings evidences the fact that arbitration proceedings can indeed be initiated against the corporate debtor irrespective of the moratorium under section 14. Also, it is interesting to note that the word “suit” has been omitted here as there is a specific prohibition against the continuation of suits and proceedings there under section 14 of the Code. Therefore, there was no need for any representation during the resolution process. Had it not been the case, the resolution professional would have been given the duty to represent in suit as well.

(d) Section 26 refers to “proceedings”of the corporate insolvency resolution process” which are against the corporate debtor. If the term ‘proceedings’ under section 14(1)(a) is accepted to include all type of proceedings against the corporate debtor, then even the proceedings envisaged under section 26 of the Code will fall within the ambit of section 14 and which will then create an anomalous and paradoxical situation. Section 33(5) provides that when a liquidation order has been passed, no suit or other legal proceedings shall be instituted against the corporate debtor.Here again the legislature has used the word “other” to distinguish between the two i.e. suit and other legal proceedings and whereas in section 14 the word ‘other’ has not been used and the word proceedings has been used in continuance and in relation to suits or continuation of pending suits only.

(e) Section 35(k) provides that the liquidator has the power and duty to institute or defend “any suit, prosecution or other legal proceedings, civil or criminal” in the name of the corporate debtor. The use of the word “other” defines that the legislature was always conscious of the distinction between suit and other proceedings.

The above paragraph clearly indicates that the legislature was always aware that there can be various proceedings, which can be instituted by and against corporate debtor and the legislature as per the need of the Act and the section has used and referred to different proceedings, which primarily could be referred as below:

(a) Arbitration proceedings;

(b) Judicial and quasi-judicial proceedings;

(c) Suits and proceedings thereunder;

(d) Suits and other legal proceeding.

(e) Insolvency Proceedings.

The references to the different kinds of proceedings at different places indicate that the legislature is conscious that the general word “proceedings” is of very wide import and thus cannot be used without qualifications and it is for this purpose the word “proceedings” in section 14 of the Act has to be read in accordance with principles of noscitur a sociss.

Applying the principle of nositur a sociss, it emerges that in the current provision the word ‘proceedings’ is provided as a natural extension of the words, ‘institution of suits or continuation of pending suits’. Therefore, the meaning which is to be attached to the word ‘proceedings’ is the proceedings related to suits and not all kind of proceedings. As stated earlier, the legislature could have stated the kind of proceeding which are covered in section 14; however, the intent was only to impose a moratorium on suits and proceedings thereunder, and therefore the words like ‘other’, ‘judicial’, ‘quasi judicial’, ‘arbitration’ have not been used. At this juncture, it may be mentioned that the words “institution of suit”, “continuation of pending suits” will cover pleadings, evidence and arguments, whereas the word proceedings covers all the applications for various purposes which are moved by the parties in the suit.

It is further interesting to note that the word ‘proceedings’ has been further restricted by the use of the word of  ‘including’ execution of any judgement, decree or order”. The word ‘include’ may, in certain contexts, be a word of limitation. The Privy Council in Dilworth v. Commissioner of Stamps, (1899) AC 99, pp. 105, 106, has held that “the word ‘include’ is very generally used in interpretation clauses in order to enlarge the meaning of words or phrases must be construed as comprehending , not only such things, as they signify accordingly to their natural import, but also those things which the interpretation clause declares that they shall include. But the word, ‘include’ is susceptible of another construction, which may become imperative, if the context of the Act is sufficient to show that it was not merely employed for the purpose of adding to the natural significance of the words or expressions used. It may be equivalent to “mean and include” and in that case it may afford an exhaustive explanation of the meaning which for the purpose of the Act must invariably be attached to those words or expressions”. Thus, the word include may, in certain contexts, be a word of limitation. The setting, context and object of an enactment may provide sufficient guidance for interpretation of the word “includes” for the purposes of such enactment.

In Godfrey Philips India Limited v. State of Uttar Pradesh2005 (2) SCC 515, the Supreme Court observed:

“70. Where two or more words are susceptible of analogous meaning are clubbed together, they are understood to be used in their cognate sense. They take, as it were, their colour from and are qualified by each other, the meaning of the general word being restricted to a sense analogous to that of the less general. As said in Maxwell on the interpretation of Statues 12 th Edn. P.289. “Words, and particularly general words, cannot be read in isolation; their colour and their content are derived from their context, A-G v Prince Ernest Augustus of Hanover (1957) AC 436, per Viscount Simonds, at 461.” The court further observed

“75. We are aware that the maxim of noscitur a sociis may be a treacherous one unless the ‘societas’ to which the ‘socii’ belong, are known. The risk may be present when there is no other factor except contiguity to suggest the ‘societas’. But where there is, as here, a term of wide denotation which is not free from ambiguity, the addition of the words such as ‘including’ is sufficiently indicative of the societas. As we have said the word ‘includes’ in the present context indicates a commonality or shared features or attributes of the including word with the included.

Had it been the intention of the legislature to include all kinds of proceedings, there was no need to further use the word including and specify the execution proceedings.

Another indication to the above referred intent can be gathered from section 60(6)of the Code  which provides that where an order of moratorium has been made, while computing the period of limitation for any suit or application, such period moratorium shall be excluded. A bare reading of this clause makes it clear that period of limitation is saved for only a suit or application and not any other proceeding, meaning thereby all other proceedings (given the prevalent interpretation by the courts) would stand lapsed. With respect, that cannot be the intention of the legislature to deprive a remedy of recourse to law under the garb of moratorium. The intention of the legislature has always been to place the institution of suits, continuation of pending suits and the proceedings under the  moratorium and it not all possible proceedings without defining the same.

Therefore, applying the principle of noscitur a sociis, it should be interpreted that the reference to the word “proceedings” is only limited to suit and proceedings thereunder.

Ashish Rana

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