[Udai Yashvir Singh and Aditi Gupta are 5th year students at National Law University Delhi]
The principle of clean slate was propounded by the Supreme Court in the seminal case of CoC of Essar Steel India Limited v. Satish Gupta. The principle essentially entails that any claim which is pending before a court or arbitral tribunal or any claim which has not been filed before the resolution professional (i.e. an undecided claim) shall be extinguished after passing of the resolution plan.
The clear objective behind the principle is to provide a cushion for successful resolution applicants (‘SRA’) who must not be faced with uncertain claims arising after acquisition of the corporate debtor (‘CD’). This prevents any inflation in the cost of acquisition of the CD following the corporate insolvency resolution process (‘CIRP’), thus promoting the primary objective of Insolvency and Bankruptcy Code, 2016 (‘IBC’), i.e., resolution of the CD.
However, an interesting scenario arises at this juncture. Let us assume company A has an arbitration claim against company B. The CIRP of company B has already been completed with approval of the resolution plan of an SRA. Here, company A files an application (or already has a pending application) under section 11 of the Arbitration & Conciliation Act, 2016 (‘A&C Act’) for the appointment of an arbitrator. The pertinent question arising here whether, once a resolution plan has been approved, should the court appoint an arbitrator and let the arbitral tribunal decide upon the arbitrability of the dispute. Or whether the court should deem the dispute to be non-arbitrable at that stage itself and dismiss the application under section 11.
The present post aims to highlight the conflicting views taken by different High Courts in answering this specific question and thus aims to shed light on the appropriate position which needs to be adopted.
Analyzing Diverse Opinions of Various High Courts
The aforesaid question initially arose before the Delhi High Court in Indian Oil Corporation Limited v. Arcelor Mittal Nippon Steel Limited. Indian Oil Corporation Limited (‘IOCL’) and Essar Steel India Limited (‘ESIL’) were parties to a Gas Supply Agreement (‘GSA’). CIRP was initiated against ESIL and the claims of IOCL were admitted at a notional value of Rs. 1. The resolution plan of Arcelor Mittal (‘AM’) was approved and AM acquired 100% stake in ESIL. However, even after the approval of the resolution plan, IOCL called upon AM to pay the amounts under the GSA and filed a section 11 application for appointment of an arbitrator.
Placing reliance on the principle of clean slate, the Delhi High Court clearly propounded that an SRA cannot be left open to defend claims not part of the resolution plan or actions related to unadmitted claims of the CD. The Court referred to NTPC Ltd. v. SPML Infra Ltd wherein the Supreme Court, while propounding the eye of the needle test,clearly held the referral court only needs to decide a two-pronged test under section 11; first, examining the existence and validity of the arbitration agreement and, second, leaving all question of non-arbitrability to the arbitral tribunal after rejecting claims which are ex-facie non-arbitrable. Based on the above, the Delhi High Court concluded that all claims of IOCL were extinguished after approval of the resolution plan and the dispute cannot be permitted to be reagitated before the arbitral tribunal as it was non-arbitrable in light of the eye of the needle test.
The aforesaid decision was influential in the jurisprudence of the IBC as the stance adopted by the Court leaned more in favour of the objectives of IBC than the A&C Act. It promoted the effective resolution of a CD by holding an extinguished undecided claim to be ex facie non-arbitrable after approval of the resolution plan and thus such claims should not be rejected by the referral court itself. However, the flip side of the coin is equally relevant to analyse.
The Rajasthan High Court in PME Power Solutions (India) Ltd v. Airen Metals Pvt. Ltd has taken a completely opposing view. In this case, a section 11 application was filed for resolution of a dispute under a purchase agreement; however, CIRP was initiated against the CD during the pendency of the application. A resolution plan was approved and, in light of the same, it was argued before the court that all claims of the applicant stood extinguished.
The Rajasthan High Court however placed reliance on section 11(6A) of the A&C Act to state that the scope of a section 11 application is only limited to the existence of the arbitration agreement. The Court relied on the Supreme Court decisions Duro Felguera, S.A. v. Gangavaram Port Limited and Mayavati Trading Private Limited v. Pradyuat Deb Burman wherein the Supreme Court has confined the scope of reference under section 11(6A) to an examination of existence of an arbitration agreement. Based on the above, the Court allowed the section 11 application.
Furthermore, even the Punjab & Haryana High Court in Rajiv Sharma v. Ninex Developers Limited has proceeded to appoint an arbitrator under a section 11 where a withdrawal plan had extinguished all claims of the applicant.
The stances adopted by the Punjab & Haryana High Court and the Rajasthan High Court clearly lean more towards promoting the objectives of the A&C Act than the IBC. The courts have given precedence to the principle of judicial non-interference over the objective of effective resolution under IBC. However, in light of the above contradictory positions of these High Courts, what becomes paramount is to determine which position is more desirable and thus should be prioritized.
The Way Forward: A Pro-IBC Stance
We have reached a crossroad due to the conflicting stances taken by different High Courts, where a choice needs to be made between promoting the objectives of the IBC involving effective resolution of stressed companies and promoting those of the A&C Act involving judicial non-interference by referral courts
From a legal stand point, the decisions of the Rajasthan High Court and the Punjab and Haryana High Court are more in accordance with the law laid down by the Supreme Court in a three-judge bench in SBI General Insurance Ltd. v. Krish Spinning. After relying on a seven-judge bench decision in In Re: Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act 1966 and the Indian Stamp Act 1899, the Supreme Court in SBI General Insurancerestricted the scope of section 11(6) and stated that the scope of enquiry under section 11 is only limited to examination of prima facie existence of an arbitration agreement and the observations made in NTPC in relation to the eye of the needle test and power of referral courts to weed out ex-facie non-arbitrable disputes are not valid law in light of the ruling in In Re: Interplay.
However, from a practical standpoint, the above position is extremely detrimental for rescuing corporate debtors under stress. The position adopted by the Delhi High Court is much more desirable considering that resolution of stressed companies is of utmost importance for economic growth of a nation. To promote the resolution of such companies, it is paramount that necessary safeguards are provided to protect the SRAs from unforeseen liabilities post completion of CIRP.
There may be multiple undecided claims against a CD. If all such claims are referred to an arbitral tribunal even after the approval of the resolution plan, it would burden the SRA with unnecessary costs related to payment of hefty fees of arbitrators and other costs related to the arbitration proceedings. There could even be a situation where an arbitrator determines the dispute to be arbitrable, leading to conduction of a complete arbitration proceedings and passing of an award, which would finally have to be challenged through an application under section 34 of the A&C Act. Such contingencies could significantly increase the cost of acquisition for the SRA and make resolution of the CDs more burdensome
It further opens a pandora’s box as an entity may institute a claim against the SRA at any stage after approval of the resolution plan. The SRA could thus be forced to defend arbitration claims before an arbitral tribunal at any time after approval of the resolution plan. This not only undermines the clean slate principle but also obliterates the objective of IBC as it dissuades prospective SRAs from acquiring stressed companies in apprehension of uncertain future costs.
The IBC has played a pivotal role in reduction of non-performing assets (‘NPA’) in the country. The gross amount of NPAs have reduced from Rs. 8.96 lakh crore in March 2018 to Rs. 5.77 lakh crore in December 2020 after the introduction of IBC. In fact, the gross NPAs reached a twelve year low of 2.8% in June 2024. Considering the indispensable contribution of IBC towards the economic growth, it is essential to preserve and promote the objectives of IBC.
To reconcile the abovementioned divergent objectives, there is a need to amend the A&C Act and add a proviso to section 11(6A) which provides the referral courts the power to determine ex facie non-arbitrability of a dispute if it relates to an extinguished claim after the approval of a resolution plan. This would specifically carve out an exception which would not hinder promotion of arbitration and at the same time would not undermine resolution under IBC.
An examination of insolvency regimes outside India finds that in Singapore as well it has been clearly held by the Court of Appeal in Larsen Oil and Gas Pte Ltd v Petroprod Ltd that disputes which arise due to the onset of insolvency are non-arbitrable in nature. Further, even disputes under an arbitration agreement which relate to pre-insolvency rights cannot be enforced against the liquidator where they affect the substantial rights of other creditors.
– Udai Yashvir Singh & Aditi Gupta
