Status of Arbitration Proceeding and Award during Moratorium

[Jannhvi Bhasin is a commercial & corporate advocate specializing in insolvency law at Kesar Dass B. & Associates and Akshay Sharma is a final year B.A.LLB (Hons.) student at National University of Study and Research in Law, Ranchi]

The Insolvency and Bankruptcy Code, 2016 (IBC), which is a complete code in itself and provides for the initiation of a corporate insolvency resolution process (CIRP) against a corporate debtor, also contains a provision for a moratorium period which bars the institution, continuation and execution of decree or order of any court including an arbitration panel against the corporate debtor.[1] A question arises as to the status of an arbitration proceeding instituted against the corporate debtor or by the corporate debtor during the CIRP period or moratorium and also the status of the arbitral award against the corporate debtor.

Claim against Corporate Debtor

A similar question arose before the National Company Law Appellate Tribunal (NCLAT) in K. S. Oils v. The State Trade Corporation of India (2018 SCC OnLine NCLAT 352), wherein the NCLAT, relying upon various sections of the IBC, held that the arbitration proceeding pending between the parties cannot be continued. However, the tribunal gave liberty to the parties to file their claim and counter claim before the resolution professional. The tribunal also relied upon the judgement of the Supreme Court in Alchemist Asset Reconstruction Company Ltd v. Hotel Gaudavan Pvt. Ltd. & Ors. (2017 SCC OnLine SC 1362), where the Court held:

The mandate of the new Insolvency Code is that the moment an insolvency petition is admitted, the moratorium that comes into effect under Section 14(1)(a) expressly interdicts institution or continuation of pending suits or proceedings against Corporate Debtors.

….we are surprised that an arbitration proceeding has been purported to be started after the imposition of the said moratorium and appeals under Section 37 of the Arbitration Act are being entertained. Therefore, we set aside the order of the District Judge dated 06.07.2017 and further state that the effect of Section 14(1)(a) is that the arbitration that has been instituted after the aforesaid moratorium is non est in law.

[emphasis added]

The abovementioned judgments clarified the position of law with regards to the initiation and continuation of arbitration proceedings against the corporate debtor during the moratorium period and settled the debate regarding the same. However, the position has resurfaced again with a contention that section 14 of the IBC does not bar the jurisdiction of the Supreme Court and the High Courts to adjudicate the matters against the corporate debtor and, therefore, a money suit can be filed or continued before the High Court for adjudication.  The NCLAT answered the same in negative while dealing with the matter of Canara Bank v. Deccan Chronicle Holdings ([2017] 141 CLA 93) by stating:

In view of the aforesaid provision of law, we make it clear that ‘moratorium’ will not affect any suit or case pending before the Hon’ble Supreme Court under Article 32 of the Constitution of India or where an order is passed under Article 136 of Constitution of India. ‘Moratorium’ will also not affect the power of the High Court under Article 226 of Constitution of India. However, so far as suit, if filed before any High Court under original jurisdiction which is a money suit or suit for recovery, against the ‘corporate debtor’ such suit cannot proceed after declaration of ‘moratorium, under Section 14 of the I & B Code.

Therefore, the only proceedings which can be initiated against the corporate debtor will be under the writ jurisdiction of either the High Court or Supreme Court of India and proceedings cannot be initiated or continued before any other court under any jurisdiction whatsoever.

Claim by the Corporate Debtor

Similarly, a question arises regarding the status of the claims filed by the corporate debtor in an arbitration proceeding, subject to its continuity during the moratorium period. The Delhi High Court in Power Grid Corporation of India Ltd v. Jyoti Structures Ltd ((2018) 246 DLT 485) held:

10. 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.

[emphasis added]

Therefore, this was the first judgement wherein the Delhi High Court interpreted the scope of moratorium and held that application moratorium will not apply to any proceeding which will benefit the corporate debtor.

The position was further settled by the NCLAT in Jharkhand Bijli Vitran Nigam Limited v. IVRCL Ltd., wherein the NCLAT held that the claim of the corporate debtor can be determined only after the determination of the counter claim of the other party. The appellate tribunal further added that claims and counter claims of both the parties can be adjudicated by the arbitrator; however, if on determination of the claims it is understood that the corporate debtor is liable to pay a certain amount, then the same cannot be executed during the period of moratorium.

The period of moratorium will therefore, protect the corporate debtor from any further liability since every claim needs to be put altogether before the resolution professional, and if the liability of corporate debtor kept on increasing during the moratorium period, it will be impossible to complete the CIRP.

Status of Arbitral Award

In Annapurna Infrastructure Pvt. Ltd. & Anor vs. Soril Infra Resources Ltd, the NCLAT held that arbitral award against the corporate debtor will be treated as a default as stipulated under the IBC, and that the pendency of proceedings for execution of an arbitral award or a judgment and decree does not bar an operational creditor from preferring any petition under the IBC. It was further clarified by the Supreme Court in K. Krishan v. Vijay Nirma Company Pvt. Ltd., wherein the Court held that:

…there may be cases where a Section 34 petition challenging an Arbitral Award may clearly and unequivocally be barred by limitation, in that it can be demonstrated to the Court that the period of 90 days plus the discretionary period of 30 days has clearly expired, after which either no petition under Section 34 has been filed or a belated petition under Section 34 has been filed. It is only in such clear cases that the insolvency process may then be put into operation.

We may hasten to add that there may also be other cases where a Section 34 petition may have been instituted in the wrong court, as a result of which the petitioner may claim the application of Section 14 of the Limitation Act to get over the bar of limitation laid down in Section 34(3) of the Arbitration Act. In such cases also, it is obvious that the insolvency process cannot be put into operation without an adjudication on the applicability of Section 14 of the Limitation Act.

[emphasis added]

Conclusion

The contention of imposing a moratorium period on the assets of the corporate debtor is to preserve the value of the estate against diminution by the actions of various parties during the insolvency proceedings. The literal interpretation of section 14 of the IBC is to declare the proceedings involving corporate debtor sine die; however, the purposive interpretation adopted by the courts in India concludes that arbitral proceedings in favor of the corporate debtor can continue although it would depend upon the determination of facts from case to case. At this juncture, the authors hasten to add that, as held in Jharkhand Bijli, liability, if any, will not be enforced upon the parties but the claims can be adjudicated. Therefore, in a similar manner, arbitral proceedings against corporate debtor can continue, but if any liability arises the same can be executed after the completion of the CIRP.

Hence, as the law stands today, there is an ambiguity that the claims against the corporate debtor in an arbitration proceeding can neither be continued nor executed during moratorium period. However, a claim filed by the corporate debtor can be continued during the moratorium period for the purpose of adjudication. The interpretation adopted by various courts, including the Supreme Court of India, firmly establishes that the objective of the moratorium period is to limit any further liability of corporate debtor and to consolidate all the available claim before the resolution professional. Therefore, the intent behind the reasoning adopted by the courts is to promote corporate resolution to the maximum extent possible, by serving the objectives, principles and vision of the IBC. Allowing the moratorium to be lifted in certain cases shall only be in the interest of the corporate debtor and other parties in the insolvency proceedings and maximizing the value of the assets, thereby providing a square deal to the aim of IBC.

– Jannhvi Bhasin & Akshay Sharma

[1] Section 14 of the Insolvency and Bankruptcy Code, 2016.