Liquidation and its impact on Arbitration Proceedings: A Collision between Arbitration and Insolvency Law

Harshita Sinha, Advocate
Abhishek Bhushan Singh, Advocate

Introduction

Liquidation is the final gateway of Corporate Insolvency Resolution Process (CIRP). In terms of Section 33 (1) of Insolvency Bankruptcy Code (IBC), where the adjudicating authority before the expiry of the insolvency process period or before the expiry of the maximum period permitted for completion of corporate insolvency resolution process, does not receive a resolution plan or rejects the resolution plan, it shall pass an order requiring the corporate debtor to be liquidated. Further in terms of Section 33(2) and Section 33(3) of IBC, where resolution professional before confirmation of resolution plan, intimates the Adjudicating Authority of the decision of the company of creditors (approved by not less than 60% of the voting share) to liquidate the corporate debtor or where the resolution plan approved by the Adjudicating Authority is contravened by the concerned corporate debtor, any person other than the corporate debtor, whose interest has been prejudiced may make an application to the adjudicating authority for a liquidation. It is only after the liquidation order has been passed, the moratorium under Section 33(5) IBC shall come into light.

“33 (5) Subject to Section 52, when a liquidation order has been passed, no suit or other legal proceeding shall be instituted by or against the corporate debtor.

Provided that a suit or other legal proceeding may be instituted by the liquidator, on behalf of the corporate debtor, with the prior approval of the Adjudicating Authority.”

It is important to determine the scope of Section 33(5) of IBC and its applicability to the pending legal/arbitration proceedings. What we certainly need to distinguish is the effect of moratorium under Section 14 of the IBC and under Section 33 (5) of IBC.

Section 14 of the Code establishes a moratorium period during which no new legal action may be taken against a corporate debtor, including arbitration. Furthermore, Section 238 of the Code supersedes other statutes. Section 14 of the Insolvency and Bankruptcy Code 2016, provides for the moratorium under which reads as under: 

“14. (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date the Adjudicating Authority shall by order declare a moratorium for prohibiting all of the following, namely: —

(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree, or order in any court of law, tribunal, arbitration panel, or other authority[1]“

Moratorium whether under Section 14 or Section 33(5) of IBC affects not only legal proceedings but arbitration proceedings as well.

On the other side, to our surprise, Arbitration has emerged as one of the most widely accepted modes of resolving commercial disputes across the world. The judiciary has played a crucial role in interpreting and clarifying various aspects of arbitration law in India through a plethora of landmark judgments.

However, the statutory provisions governing arbitration cannot be read in isolation. Several other laws, both substantive and procedural, come into play when resolving disputes through arbitration. Therefore, it becomes imperative to apply the doctrine of harmonious construction to ensure that all the relevant legal provisions are interpreted in a manner that leads to a mutually acceptable solution.

The doctrine of harmonious construction is aimed at reconciling and harmonizing conflicting provisions of different statutes in a way that upholds the spirit of the law without diluting the provisions of any individual statute. In the context of arbitration, it requires the courts to interpret the relevant laws in a manner that promotes the fundamental principles of arbitration, such as party autonomy, minimal judicial intervention, and speedy resolution of disputes.

In addition, courts have also recognized that the role of the judiciary in the arbitration process should be supportive and facilitative, rather than adversarial. The courts should intervene only in cases where it is absolutely necessary to ensure that the arbitral process is fair and just.

Therefore, while arbitration has gained immense popularity as an effective means of resolving disputes, it is essential to take into account the interplay between various laws and apply the doctrine of harmonious construction to achieve a harmonious and satisfactory resolution of the dispute. Here, we shall discuss various interplays between Insolvency and Bankruptcy Code (IBC) and Arbitration and Conciliation Act and specially the effect of moratorium under Section 33(5) of IBC.

Whether an arbitration agreement or an ongoing arbitration proceeding precludes the filing of an insolvency petition under the Code?

The Court and Tribunals have attempted to address this question in a few instances. In the case of Reliance Commercial Credit Limited v. Ved Cellulose Ltd. ,[2] the Hon’ble National Company Law Tribunal (Mumbai) held that the pendency of arbitration proceedings does not preclude the initiation of the Corporate Insolvency Resolution Process under section 7 of the Code. In the case of Dinesh Chand Jain and Ors v. Fabulous Buildcon (P) Ltd. and Ors[3]., the Hon’ble National Company Law Tribunal (Delhi) concluded that the inclusion of an arbitration clause in an agreement does not prevent the initiation of insolvency proceedings under Section 7 of the Code.

Therefore, it is evident that the existence of an arbitration agreement or an ongoing arbitration proceeding does not necessarily preclude the initiation of insolvency proceedings under the IBC. The courts and tribunals have taken a pragmatic approach to these matters and have emphasized the need to strike a balance between the interests of the corporate debtor and the creditors. The harmonious construction of the IBC and other statutes is crucial in resolving such disputes.

Whether moratorium under Section 33(5) of IBC applies to pending legal/arbitration proceedings?

The moratorium imposed under the Insolvency and Bankruptcy Code prohibits the initiation of legal suits or the continuation of ongoing proceedings against the corporate debtor. This includes the execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority.[4]

In the case of Alchemist Asset Reconstruction Company Ltd vs. Hotel Gaudayan Pvt Ltd[5]., the Hon’ble Supreme Court held that arbitrations or related proceedings started after the CIRP was initiated are regarded as non-est in law. Despite the fact that there are no statutory exclusions, numerous exceptions to the general rule have been established by judicial precedents. The arbitration process may continue, subject to the following conditions:

(i) If the proceedings increase the value of the corporate debtors’ assets, 

(ii) the proceedings benefit the corporate debtor and have no negative effects on its assets, or 

(iii) even if the proceedings are allowed to proceed, no recovery can be made from the corporate debtor while the moratorium is in effect.

Additionally, where it was determined that a corporate debtor did not experience any difficulties prior to the claims or counterclaims being decided, courts have declined to order a stay of the claims or counterclaims. In the midway after the successful conclusion of the CIRP and the start of liquidation proceedings, any ongoing legal actions that was stayed as a result of the moratorium shall be resumed.

In the event when liquidation process starts, the legal position changes slightly. A corporate debtor is prohibited from filing a lawsuit or taking other legal action while the liquidation process is ongoing and once liquidator has been appointed. However, with prior approval of NCLT, the liquidator may start a lawsuit or other legal actions on behalf of the corporate debtor. Therefore, in the case of the corporate debtor’s liquidation, ongoing legal actions (which would include arbitration proceedings) are technically not barred.

When an arbitral proceeding whether a petition under Section 11 of the 1996, Act for appointment of an Arbitrator or petition under Section 34 of the Arbitration & Conciliation Act, 1996 (1996 Act) for setting aside an award or any other proceeding is pending and the company i.e., one of the parties to the arbitration proceedings slips into liquidation. It is where Section 33 (5) of the Insolvency & Bankruptcy Code, 2016 (IBC Code) comes into the picture. 

Thus, as the company slips into liquidation, a moratorium activates and no fresh legal proceedings by or against the corporate debtor can be instituted. However, any fresh legal proceeding shall be instituted only after prior approval of the Adjudicating Authority. The sole purpose for preventing the initiation of legal proceedings is to prevent multiplicity of proceedings and power is given to adjudicating authority to permit the institution of proceedings so that all proceedings are within the same umbrella. It is pertinent to note that though the section clarifies the position of law on the initiation of any fresh legal proceeding against the corporate debtor, it is silent on the status of proceedings that are pending by or against the corporate debtor.

Herein, we shall focus on a petition under Section 34 of the 1996 Act pending in the courts for setting aside an arbitral award against a corporate debtor who slipped in liquidation. The question that arises herein is whether the pending proceedings against the corporate debtor would get affected and respectively fall under the arena of the moratorium. The answer to the question can be sought by analyzing the scope and purpose of Section 33(5) of IBC and the view taken by the Hon’ble Courts in this regard. 

The moratorium under Section 14 of the IBC Code ceases to have effect from the date when the Adjudicating Authority approves the resolution plan under Section 31 of the IBC Code or passes an order of liquidation of the corporate debtor under Section 33 of the IBC Code. Thus, where one moratorium under Section 14 diminishes, the other moratorium under Section 33(5) comes into light. 

Accordingly, in pursuance to the power under Section 35(1)(k) of the IBC code, the liquidator can pursue and proceed to continue with a pending proceeding. It is also pertinent to note that for exercising the power granted under the code, the liquidator may not seek permission from the adjudicating authority. The Hon’ble Courts have interpreted Section 33(5) of the IBC Code in several noted judgments. 

In the case of Urban Infrastructure Trustees Ltd. vs. Bhavik Bhimjiyani & Others[6], , the Hon’ble High Court of Bombay held that since Section 33(5) does not say anything about the pending proceedings already instituted against the corporate debtor, the same cannot be considered by the Hon’ble Court. The Hon’ble Court further interpreted Section 33(5) of the IBC Code and stated that the moratorium under Section 33(5) does not embargo proceedings pending against the corporate debtor. It is only the institution of proceedings that falls under the umbrella of moratorium.

Even in the case of M/s Chennai Metro Rail Limited vs. M/s Lanco Infratech Limited & Ors.[7] the Hon’ble High Court of Madras noticed that Section 33(5) of the IBC Code specifically ignores the continuance of proceedings against the corporate debtor which clarifies the intention of the Legislature. The Hon’ble Court considered Section 446 of the Company Act, 1956 which prohibited the commencement of any suit or proceeding when a winding-up order is made. It is interesting to know that Section 446 also included pending proceedings with leave. It was further noted that although the word pendency was omitted in Section 33(5) since the legislature in its wisdom intended that cases that were already pending before another authority would be considered by the same authority and it would be imprudent to transfer the case to the file of Adjudicating Authority at a later stage and try from that stage. Even though it is clear the resolution plan of the company has failed and the company is in liquidation, there should be no further delays in procedural aspects in dealing with the cases.

Section 33(5) has also been interpreted by the Bombay High Court in a recent case wherein a suit under Admiralty Act was pending against a company that slipped into liquidation. Considering the weight of the Admiralty Act and IBC Code, the Hon’ble Court held that since Section 33(5) says nothing about pending proceedings, proceedings under Admiralty Act would not get affected due to the moratorium imposed under Section 33(5) of IBC Code. 

The Hon’ble Delhi High Court in the case of Elecon Engineering Company Limited Vs Energo Engineering Projects[8] has interpreted the language of Section 33(5) of the IBC and noted that the moratorium only applies to fresh suits or legal proceedings, and the word “continuation of pending suits or proceedings” is absent from the section. Hence, it cannot be presumed that moratorium under Section 33(5) would also apply to pending legal proceedings. The court further observed that Chapter II of the IBC deals with the Resolution Process, while Chapter III deals with the liquidation process, and the moratorium under Section 33(5) of the IBC does not apply to pending cases or judicial actions. The court also noted that Sections 63 and 231 of the IBC prohibit civil courts from entertaining new suits or issuing injunctions after the Adjudicating Authority has issued an order, but this would not apply to suits that were already pending before the commencement of liquidation proceedings. The court held that the bar under Sections 33(5), 63, and 231 of the IBC would not apply to the present suit, and therefore, the proceedings in the present suit shall continue.

Conclusion

The Insolvency and Bankruptcy Code (IBC) has been subjected to several judicial interpretations, particularly with respect to the applicability of the moratorium period on pending proceedings. Section 33(5) of the IBC explicitly states that the moratorium period shall only apply to proceedings fresh legal proceedings under the Arbitration and Conciliation Act, 1996 and nowhere states that it shall apply to pending legal proceedings.

In light of the said provision of law and several judicial precedents, it can be inferred that the moratorium period under Section 33 (5) does not apply to pending proceedings, including those pertaining to the Arbitration and Conciliation Act. The courts have consistently held that the IBC is a special legislation and does not intend to interfere with the jurisdiction of other forums.

Furthermore, it has been clarified by the Hon’ble Courts that the moratorium period under section 33 (5) only applies to proceedings initiated against the corporate debtor under the IBC, and not to proceedings initiated against the corporate debtor before the initiation of the insolvency proceedings. The rationale behind this interpretation is that the objective of the IBC is to resolve the insolvency of the corporate debtor and not to interfere with the rights of the creditors under other laws.

Therefore, it can be concluded that the moratorium period under section 33(5) does not apply to pending proceedings, including proceedings under the Arbitration and Conciliation Act.

 

Reference:

[1] Section 14 Insolvency and Bankruptcy Code, 2016

[2] Reliance Commercial Credit Limited v. Ved Cellulose Ltd (IB)-156(PB)/2017

[3] Dinesh Chand Jain and Ors v. Fabulous Buildcon (P) Ltd. and Ors (IB)-37 (PB)/ 2018

[4]  K.S. Oils Ltd v. The State Trade Corporation of India Ltd & Anr., [2018] ibclaw.in 07 NCLAT

[5] Alchemist Asset Reconstrution Company Ltd. Vs. M/S. Hotel Gaudavan Pvt. Ltd. & Ors. [2017] ibclaw.in 09 SC

[6] Urban Infrastructure Trustees Ltd. vs. Bhavik Bhimjiyani & Others 2018 SCC OnLine Bom 20447

[7] M/s Chennai Metro Rail Limited vs. M/s Lanco Infratech Limited & Ors (2020) ibclaw.in 99 HC

[8] Elecon Engineering Company Limited Vs Energo Engineering Projects (2022) ibclaw.in 221 HC

 

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