[Sridutt Mishra is a 5th year student and Parthsarthi Srivastava is a 4th year student, both at National Law University Odisha]
The Insolvency and Bankruptcy Code, 2016 (‘IBC’) has always witnessed friction with respect to claims arising out of arbitration. In 2018, the Supreme Court settled the highly contested issue of whether an arbitral award pending challenge under section 34 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’) falls within the ambit of a pre-existing dispute. In K. Kishan v. Vijay Nirman Company Pvt. Ltd., the Court held that existence of a challenge to an arbitral award indicated that there still existed a dispute with respect to the amount claimed by the operational creditor, and that such demand could not form the basis of the corporate insolvency resolution process.
In this context, it would be relevant to note that the Mumbai Bench of the National Company Law Tribunal (‘NCLT’), in its recent order in Agrocorp International Pvt. (PTE) Ltd. v. National Steel and Agro Industries Ltd., allowed a claim by an operational creditor arising out of an unenforced foreign arbitral award. In this post, the authors analyse the NCLT’s decision on claims arising out of an unenforced foreign award and argue that the rationale behind the verdict is flawed.
In this case, the parties entered into a contract for sale and purchase of yellow peas. However, when National Steel, the corporate debtor, failed to fulfil its obligations under the contract, the parties agreed to arbitrate the dispute under the Grain and Feed Trade Association Rules. The sole arbitrator granted an award in favour of Agrocorp. National Steel failed to comply with this award which required them to pay a sum of $978,507.
Subsequently, Agrocorp proceeded under the IBC and issued a demand notice to which National Steel did not reply. As a result, Agrocorp filed an application under section 9 of the IBC to initiate the corporate insolvency resolution process against National Steel.
Issues and Judgment
The two issues of relevance addressed by the NCLT were:
Firstly,whether the foreign award was binding upon the parties in India. Secondly, whether there was a pre-existing dispute between the parties as the foreign award had not been enforced.
On the first issue, the NCLT accepted Agrocorp’s contention and held that the foreign award in the present case would be considered binding upon the parties as it was capable of execution in India. The award was passed in the United Kingdom, which is a notified reciprocating territory under section 44A of the Code of Civil Procedure (‘CPC’).
For the second issue, the NCLT relied on K. Kishan, and held that only when there is a pending challenge against the foreign award, shall it be considered a pre-existing dispute. In the present case, National Steel had not challenged the award and the tribunal opined that “it was not possible to wait indefinitely for the Corporate Debtor to challenge the Arbitral Award”.
Analysis of the NCLT’s Verdict
The authors believe that the decision of the NCLT is correct. However, the NCLT could have used a more appropriate line of reasoning to reach the same conclusion since the ratio could be subject to criticism.
Firstly, the reliance placed on section 44A of the CPC is incorrect. Section 44A allows for the execution of decrees passed by a court in a reciprocating territory. While the concept of a ‘reciprocating territory’ is applicable to the execution of judgments given by a court in a foreign territory, the section expressly excludes its application to foreign awards. This is because there is a separate mechanism under the Arbitration Act to determine the enforcement of a foreign award before it can be executed. Since the Arbitration Act is lex specialis, its procedure cannot be bypassed by the CPC.
Secondly, the NCLT’s interpretation of Agrocorp’s contention regarding section 46 of the Arbitration Act being the basis of the claim was incorrect. Under section 46 of the Arbitration Act, a foreign award can be relied upon for legal proceedings in India. However, it is important to note that the applicability of section 46 extends only to enforceable foreign awards. In the present case, the enforceability of the foreign award was yet to be affirmed by a competent court. In Noy Vallesina Engineering Spa v. Jindal Drugs Ltd., the Bombay High Court ruled that an award will not be considered binding immediately after it is made but only when it is found to be enforceable under chapters 1 or 2 of the Act. This interpretation was reinforced in Sea Stream Navigation Ltd. v. LMJ International, where the Calcutta High Court ruled that a foreign award is not binding per se and would only be binding once it passes the test under section 48 of the Arbitration Act. The NCLT erred in its interpretation as section 46 of the Arbitration Act cannot be construed to render a foreign award of a reciprocating territory binding by virtue of section 44A of the CPC.
Lastly, the NCLT overstepped its jurisdiction by going into the validity of the foreign award. The Supreme Court’s judgment in Cheran Properties Ltd. v. Kasturi and Sons Ltd. empowers the NCLT to execute an award. However, the NCLT is not vested with the power to determine the enforceability or validity of the award. This was further affirmed in Usha Holdings L.L.C.. v. Francorp Advisors Pvt. Ltd., where the National Company Law Appellate Tribunal concluded that the NCLT is not a ‘court’ and hence lacks the authority to decide the validity of a foreign decree. This rationale could be extended analogously to an arbitral award. However, the NCLT’s reasoning in Agrocorp might set a precedent that an unenforced award can be executed to bring about an action under the IBC without its enforceability being affirmed in a court. As stated previously, this is inconsistent with the Supreme Court’s judgment in K. Kishan where the court held that the IBC cannot be used as a substitute for an enforcement procedure under another statute.
In the present case, Agrocorp argued that the foreign award was passed in a convention territory as the United Kingdom is a convention territory notified by India. The concept of a convention territory, as opposed to a reciprocating territory, allows for enforcement of foreign awards. Chapters 2 & 3 of the Arbitration Act, which govern foreign awards recognize the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, 1958 (‘New York Convention’) and the Geneva Convention on the Execution of Foreign Arbitral Awards (‘Geneva Convention’). The United Kingdom is also a signatory to both the New York Convention and the Geneva Convention. A foreign award made in a convention territory is enforceable in India. If the NCLT had taken this approach to hold the foreign award enforceable, then it would be required to consider the question of the finality of the award; thereby obviating the concern of overstepping of jurisdiction. The incorrect reliance on section 44A of the CPC would have been irrelevant as the issue would be settled under the framework of the Arbitration Act itself.
It is submitted that in allowing an unenforced foreign award to be the basis of a claim, with no qualifications, the NCLT is opening the floodgates for future ‘undisputed’ claims. The present verdict focused on expediency in insolvency proceedings at the expense of the judicial process. Hence, it has larger implications, not only in the scheme of the IBC but also for the foreign award enforcement process. As demonstrated earlier, the NCLT could have reached the same conclusion by an alternative line of reasoning. It placed reliance on the concepts of reciprocating territory and expediency to decide the issue of enforceability rather than restricting itself to the precedent of finality laid down in K. Kishan. Therefore, the NCLT had functioned beyond the objective of the IBC by deciding on the finality of the foreign award. Until the Supreme Court lays down the principles which shall govern such a dispute in the future, this order should be restricted to the facts of the case, as relying on it as a general principle would set an inapt precedent.
– Sridutt Mishra & Parthsarthi Srivastava