Impediments to the Enforcement of Arbitral Awards under IBC

[Anuj Dubey and Amay Bahri are 4th year students at National Law University, Delhi]

The jurisprudence on the interplay between the Insolvency and Bankruptcy Code 2016 (IBC) and the Arbitration and Conciliation Act 1996 (Arbitration Act) is in nascent stages. While friction arises during multiple stages of the proceedings under both laws, the conflict arising out of enforcement of arbitral awards and impediments created by IBC are significant to the award-holders, creditors and the corporate debtor. Once an award is obtained, the award-holder desires to enforce it as soon as possible; however, the award by itself would not constitute ‘debt’ or ‘default’ under IBC and the recovery would be subject to its provisions. 

This post explores the two prominent stages where the interplay between IBC and Arbitration Act is the most contentious: firstly, initiating insolvency proceedings based on claim arising from an arbitral award and, secondly, impediments created by moratorium under IBC in claiming the arbitral award.

Arbitral Award as ‘Debt’ under IBC

Insolvency proceedings can be initiated under the IBC by financial creditors, operational creditors, and the corporate debtor itself. The trigger to initiate insolvency proceedings is a default. Hence, without the corporate debtor making a default, no insolvency proceedings can be initiated. In the context of IBC, the award-holders are creditors. It is immaterial if the award holder is financial creditor or operational creditor as, in order to initiate insolvency proceedings, the IBC requires a debt that has been defaulted. A joint reading of sections 3(11) and 3(12) of the code would show that insolvency can be initiated only when a corporate debtor fails to pay on a crystallised obligation or liability. Thus, crystallised debt is an essential feature for the IBC. The framework for claiming an arbitral award as debt under the IBC operates differently for domestic and foreign arbitral awards.

Domestic Arbitral Awards

According to section 36 of the Arbitration Act, a domestic arbitration award is the same as a decree of a court under the Code of Civil Procedure, 1908 (CPC). However, this award does not become payable on the award debtor unless the same attains finality. An award is not final until all appeals and challenges against the same are disposed-off, or the period of filing the same has lapsed. In K. Kishan v. Vijay Nirman Company Pvt. Ltd (K Kishan), the Supreme Court held that if a challenge under section 34 of Arbitration Act is filed, then the award will fall under the scope of a “pre-existing dispute” under the IBC, thereby not constituting a ‘debt’ as required for initiating insolvency proceedings. Even with this decision being rendered with reference to section 9 of IBC, the principle applies to section 7 applications as well because section 7(5) provides that the adjudicating authority has to satisfy itself that there is a debt. 

Since in K Kishan the section 34 challenge was filed before moving the insolvency application, the decision would only apply to similar situations where the challenge is filed before insolvency application. However, the question of whether an insolvency application will be admitted where the challenge to award is filed after insolvency application still remains open. In the authors’ view, the insolvency proceedings would not be instituted because, unless an award attains finality, the same cannot be a ‘debt’ for the purposes of the IBC. If a challenge to the award is filed within the statutory period, or if the court allows the challenge beyond the limitation period, then the insolvency application would be premature as the amount based on which an insolvency application is filed, is itself not binding on the corporate debtor. Hence, for a domestic award in itself to be used to initiate insolvency proceedings, it must first attain finality. 

Foreign Arbitral Awards

The analysis of a foreign award is not so straightforward. Unlike a domestic award, a foreign award has another stage of enforcement to be considered binding on the award debtor in India. The Mumbai bench of National Company Law Tribunal (NCLT) in Agrocorp International Pvt. (PTE) Ltd v. National Steel and Agro Industries Ltd was dealing with an issue where a foreign award holder had filed an insolvency application based on foreign award. However, the NCLT allowed the foreign award holder to initiate insolvency without an enforcement decree. This decision is widely criticised and has not been followed in subsequent decisions such as Adityaa Energy Resource Pte Ltd. v. Simhapuri Energy Ltd, where the NCLT rejected a section 9 application on account of the foreign award not being supported by an enforcement decree. The NCLT here noted that a foreign award without enforcement decree is not an obligation or liability to pay which is defaulted. 

The court in Government of India v. Vedanta Limited has reiterated that a foreign award is not a decree in itself. It is deemed to be a decree that is enforceable on parties only after the court decides that the award is enforceable under Part II of the Arbitration Act. Allowing insolvency applications merely based on a foreign award will frustrate the procedure of the Arbitration Act, and give legal sanctity to awards that might violate public policy of India. This will consequently turn the IBC to a debt recovery mechanism for foreign award holders, which was never the intent of the legislation.

Hence, in the authors’ opinion, a foreign award cannot directly constitute debt under IBC. Without an enforcement decree for international arbitration award, the award has no legal sanctity against assets of the award debtor, and therefore cannot constitute debt for the purpose of initiating insolvency proceedings.

The Impact of Moratorium

It is a settled position that on the admission of an application under section 7 or section 9 of the IBC, a moratorium period commences during which enforcement of awards under section 36 of Arbitration Act is barred. However, the scope of section 34 Arbitration Act (application to set aside an award) in obstructing the enforcement of an arbitral award is contentious and is dependent on the nature of the dispute itself. 

In Power Grid Corporation of India v. Jyoti Structures Ltd., the Delhi High Court held that a section 34 application for setting aside an award in favour of the corporate debtor would not be barred by moratorium. The Court reasoned that the stay of such proceedings would impede corporate debtor’s efforts to recover its money and hence the proceeding was in its benefit. Therefore, instead of a blanket ban on all proceedings, if the proceedings benefit the corporate debtor they must be allowed, including proceedings initiated by the corporate debtor. 

Disagreeing with this position, the Supreme Court recently held in P Mohanraj v. Shah Brothers Ispat Pvt. Ltd. that a section 34 proceeding against the corporate debtor may result in the award being upheld against the corporate debtor and, hence, such proceedings would be barred under section 14. In the authors’ opinion, this interpretation is not in consonance with the IBC’s objective of value maximization of corporate debtor’s assets.

A section 34 proceeding against an award passed in favour of corporate debtor, at worst, would result in the award being set aside and the parties being relegated to their original positions. Under section 34(4), the court may also remit the award back to the tribunal to cure the defects to eliminate grounds for challenge in the application and avoid setting aside the award altogether. However, setting aside the award would not result in any decree payable by the corporate debtor . On the flip side, the application may be rejected which would not threaten the assets of corporate debtor. Instead, the corporate debtor will be one step closer to the enforcement of the award and the recovery of its money. Hence, as held in Power Grid, the possible benefits to the corporate debtor from such proceedings outweigh the risks involved.

Such an approach would also achieve the IBC’s objective of value maximization of corporate debtor’s assets. Further, proceedings against the corporate debtor have been allowed when they were for its benefit. In SSMP Industries Ltd. v. Perkan Food Processors Pvt. Ltd., the corporate debtor filed claims but faced counterclaims. The Court held that while counterclaims against the corporate debtor are covered under moratorium, it may be purposive and efficacious if their adjudication is allowed as they are integral to the asset maximization of corporate debtor and, hence, may benefit the corporate debtor . The Court also held: “Until and unless the pending proceeding has the effect of endangering, diminishing, dissipating or adversely impacting the assets of the corporate debtor, it would not be prohibited under Sec. 14(1)(a) of the Code.” A section 34 proceeding against the corporate debtor would not result in this situation. Lastly, as held in Jharkhand Bijli Vitran Nigam Ltd. v. IVRCL Ltd., if the proceeding resulted in a judgement-debt against the corporate debtor, the execution of the same would be barred under moratorium.

In the authors’ opinion, a section 34 proceeding against the corporate debtor should be allowed. While section 14 explicitly bars proceedings against the corporate debtor, a section 34 proceeding against the corporate debtor is different as clear from the reasoning in Power Grid. It may benefit the corporate debtor and achieve the objective of the IBC of asset maximization. Hence, relying on purposive interpretation of section 14 and considering the fact that, at worst, the award will only be set aside without threatening the assets of the corporate debtor, a section 34 proceeding may be allowed.

Conclusion

The conflict between enforcement of arbitral awards and the IBC revolves around the understanding of ‘default’ and ‘debt’ under the IBC. An award can be used to initiate insolvency proceedings, the only requirement is that it shall be final and enforceable so that it is a binding obligation on the award debtor. 

With respect to moratorium, in case of conflict, the IBC prevails over other statutes. Thus, the conflict is resolved in favour of moratorium. However, even in favouring moratorium, the courts have not taken a uniform approach which has led to confusion on whether arbitration proceedings would continue or not. Due to the multiplicity of factors involved in each dispute, a balanced approach has to be taken which would account for the timelines in the IBC, and the value maximization intent of the legislation. 

Anuj Dubey & Amay Bahri

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