Effect of Moratorium Period on Arbitration: Discontinuation or Not?
The declaration of a moratorium under Section 14 of the Insolvency and Bankruptcy Code (“IBC”) implies that the institution or continuation of any other proceedings/suits against the Corporate Debtor (“CD”) before any forum including arbitration panel shall be precluded. The IBC specifies the bar on the proceedings but does not specify the course of action to be taken in cases where the arbitration proceedings were initiated before the moratorium was declared and thus, the same has evolved through various case laws. The position was first settled by the Supreme Court in Alchemist Asset Reconstruction Company Ltd v. Hotel Gaudavan Pvt. Ltd. & Ors. and has been further reaffirmed by various courts and tribunals.
This article analyses the aforementioned course of action developed by the courts and tribunals in cases where the suits/proceedings are already initiated.
I. Cases where arbitration has commenced before the declaration of moratorium under IBC
The IBC does not provide any course of action in cases where the arbitration has commenced before the declaration of a moratorium. To clear the ambiguity, the courts and tribunals have taken various approaches which are based on the claims made by the parties to determine whether the suit shall be discontinued or not.
a). Claims are made by the CD with no counterclaims against the CD.
In cases where the claims are made by the CD and no counterclaims are filed by the opposing party, there is no ex facie bar on the continuance of such arbitration proceedings. The Delhi High Court in the case of Power Grid Corporation of India Ltd v. Jyoti Structures Ltd. held that Section 14 of the IBC would not apply to the proceedings which are in the benefit of the CD and any proceeding which would not diminish the assets of the CD.
b). Claims are only made against the CD with no counterclaims by the CD.
In cases where the claims are made against the CD and no counterclaim has been filed by the CD, the effect of Section 14 (1) (a) of the IBC is such that the arbitration proceeding is considered to be non-est in law and the claims can be filed by the creditor with Insolvency Resolution Professional (“IRP”) to maintain the principle of “equality of creditors.” This position was further settled in the case of K. S. Oils v. The State Trade Corporation of India.
c. Claims are made by both parties.
The NCLAT in its judgment in the case of Jharkhand Bijli Vitran Nigam Limited v. IVRCL Ltd. by reversing NCLT’s order held that claims and counterclaims can be arbitrated by the arbitrator but if on the determination of the aforementioned claims it is decided that the CD is liable to pay a certain amount, in such case, no recovery can be made during the period of moratorium.
Thus, arbitration involving claims filed by both parties cannot be barred by virtue of Section 14 (1) (a) of the IBC during a pre-award stage. Thus, the application of a moratorium may come into effect depending on the award in the arbitration proceedings. This position was further settled in SSMP Industries Ltd. v Perkan Food Processors Pvt. Ltd.
II. Cases initiated under Section 34 and 36 of the Arbitration and Conciliation Act, 1996 (“Act”).
There may be cases where a suit has been filed under Section 34 or 36 of the Act before the declaration of moratorium under Section 14 of the IBC. Thus, this part shall analyze the effect of the moratorium on suits filed under Sections 34 and 36 of the IBC.
a). Cases filed under Section 34 of the Act.
A suit filed under Section 34 of the Act is an application of setting aside of the award. In the case of Power Grid Corporation of India Ltd v. Jyoti Structures Ltd, the Delhi High Court settled the position on whether there is a bar on proceedings under Section 34 held that: “the Arbitration Act distinguishes proceedings under section 34(i.e., objections to the award) and section 36(i.e., the enforceability and execution of the award). The proceedings under section 34 are a step prior to the execution of an award. Only after determination of objections under section 34, the party may move a step forward to execute such award and in case the objections are settled against the corporate debtor, its enforceability against the corporate debtor then certainly shall be covered by a moratorium of section 14(1)(a).”
The High Court concluded that the main purpose of moratorium is not to diminish the assets of the CD and continuation of proceedings under section 34 of the Act does not result in diminishing the assets of the CD. It can be deduced from the above conclusions that a suit filed under section 34 of the Act can stand independently from the insolvency proceedings even after the commencement of the moratorium period.
b). Cases filed under Section 36 of the Act.
A suit filed under Section 36 of the Act is a suit for the enforcement of an arbitration award. An arbitration award may not necessarily be a debt recovery action. However, as a reasonable conclusion from the “Power Grid” judgment, it is clear that any award like debt recovery against the CD shall be ex facie discontinued.
III. Cases filed before the High Court and the Supreme Court.
The next issue that came across courts was whether Section 14 of the IBC bars the jurisdiction of the Supreme Court and High Courts. There were also contentions that a money suit filed before the High Court can be filed and adjudicated after the declaration of a moratorium.
However, the NCLAT in Canara Bank v. Deccan Chronicle Holdings answered this issue by noting that moratorium under the IBC will not affect any case pending before the Supreme Court under Article 32 or Article 136 of the Constitution of India. The tribunal also held that the moratorium will also not affect the power of the High Court granted under Article 226 of the Constitution. However, a suit filed under the original jurisdiction of the High Court which is like a money suit or recovery suit against the CD shall not proceed after the declaration of moratorium under the IBC.
Thus, it is clear that the cases before the High Court or Supreme Court under their writ jurisdiction can only be initiated or continued, otherwise there is a bar on all other proceedings, subject to the already discussed.
Insolvency and arbitration are different in nature, so when they meet a variety of issues do arise. However, practice shows that reconciliation between the two regimes is possible. In the Indian regime, there lies an ambiguity in the interpretation of Section 14 prima facie and the same has been resolved by various courts. The main aim of declaring a moratorium is that there shall be no reduction or deduction in the value of assets of the CD and the assets are distributed equally among the pool of creditors and the principle of equality of creditors is preserved. The interpretation adopted by various courts and tribunals, including the Supreme Court of India, definitely establishes that the objective of the moratorium period is to limit any further liability of corporate debtor and to consolidate all the available claims before the resolution professional.
About the Authors:
Mr. Daksh Mehta: The author is a 4th year law student currently pursuing B.A LLB(H) from Amity Law School, Delhi and has an avid interest in international commercial arbitration. He can be reached at firstname.lastname@example.org .
Ms. Khyati Tuli: The author is a 4th year law student currently pursuing B.A LLB(H) from Amity Law School, Delhi. Her keen areas of interest include insolvency and securitization laws. She can be reached at email@example.com.
 Jharkhand Bijli Vitran Nigam Limited v. IVRCL Ltd, C.A. (AT) (Insolvency) No. 285/2018.
Disclaimer: The Opinions expressed in this article are that of the author(s). The facts and opinions expressed here do not reflect the views of IBC Laws (http://www.ibclaw.in). The entire contents of this document have been prepared on the basis of the information existing at the time of the preparation. The author(s) and IBC Laws (http://www.ibclaw.in) do not take responsibility of the same. Postings on this blog are for informational purposes only. Nothing herein shall be deemed or construed to constitute legal or investment advice. Discussions on, or arising out of this, blog between contributors and other persons shall not create any attorney-client relationship.