The dynamics of admission of an Insolvency Petition amidst the pendency of Arbitration Proceedings and vice versa
Tazeen Ahmed
4th year B.A. LL.B.(Hons) student at Faculty of Law, Jamia Millia Islamia
Introduction
In recent years, Arbitration as a means of alternative dispute resolution has gained prominence in cases involving ‘default’ or breach of contract, especially when the default in question relates to arrangements between debtors and creditors in insolvency matters. However, with the Insolvency and Bankruptcy Code, 2016 (“IBC”) as a special Code for dealing with the subject matter of insolvency, the scope of Arbitration has been reasonably curtailed. The IBC itself is endowed with a similar objective as Arbitration, viz., to make every attempt to revive the corporate debtor and to prevent the ‘corporate death’ of a company, which, in a way, is akin to ensuring amicable resolution of ‘disputes’, while considering the interests of both the parties, i.e., the debtors and the creditors and other stakeholders. Even though there are no inconsistencies in the realm of arbitration and insolvency laws, the scope for grey areas in procedure and practice in the budding fields cannot be ruled out. Due to the technicalities in the convergence and interplay of parallel proceedings under the Arbitration & Conciliation Act, 1996 (“the Act”) and the IBC, new issues have emerged.
This article is an attempt to examine the issue of admission of an insolvency petition where arbitration proceedings are pending/ongoing and the vice versa appointment of an Arbitrator (or the initiation of Arbitration proceedings) during the stage of pendency of an Insolvency Petition, in the light of the analysis of recent judgments and Orders. Here, ‘pendency’ refers to the stage where the Insolvency petition is filed and the Adjudicating Authority or National Company Law Tribunal (as the case may be) is yet to review the merits of the petition and decide upon admission or rejection; or, where the Arbitration is ongoing.
Arbitrability of Disputes following the filing of an Insolvency Petition
At the outset, it is important to ascertain the circumstances under which arbitration can be ordered in insolvency disputes. In a recent judgment titled Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund (formerly Kotak India Venture Limited) & Ors.[1] , the Hon’ble Supreme Court of India has resolved the controversy surrounding the arbitrability of disputes following the filing of a Section 7 petition under the IBC.[2] The court’s decision clarified that the pivotal factor in determining the ‘arbitrability’ of a dispute is not the mere filing date of the Section 7 petition but rather the point of admission of the petition under the IBC.
The court recognized that matters in rem, which relate to actions affecting the rights of a group or the general public, fall beyond the scope of arbitration and the authority of arbitral tribunals. However, the court highlighted that the specific stage at which such a reference is sought before the adjudicating authority plays a significant role.
The court drew upon its previous ruling in Vidya Drolia & Ors. v. Durga Trading Corporation[3] to outline the criteria for ascertaining the non-arbitrability of disputes. By applying these criteria, the court established that a dispute becomes non-arbitrable when it transforms into a proceeding in rem, which occurs under the IBC only after the Adjudicating Authority has admitted it.
Based on its earlier interpretations of the IBC’s scope and provisions, the Supreme Court emphasized that for a Section 7 petition to trigger proceedings in rem, the Adjudicating Authority must thoroughly examine the matter, confirm a ‘default’, and officially admit the petition. This admission generates third-party rights for all creditors of the insolvent entity. Hence, the mere filing and pending status of a petition prior to admission do not categorize the case as a proceeding in rem. Consequently, the court determined that the admission of the petition for the Corporate Insolvency Resolution Process (CIRP) is the pivotal juncture that defines the nature and status of the proceedings.
Power of the NCLT to refer parties to Arbitration in an in rem Insolvency proceeding
When we say that a dispute is ‘arbitrable’ during the pendency of an insolvency petition, whether the NCLT has the power to refer parties to such arbitration is a substantial question of law. The Supreme Court addressed this issue in the case of Indus Biotech Pvt. Ltd. vs. Kotak India Venture (Offshore) Fund[4].
In this context, it’s crucial to note the proceedings before the NCLT, Mumbai[5]. The facts in the case were that Kotak India Venture filed an insolvency application under Section 7 of the Code against Indus Biotech for defaulting on redeeming preference shares. While this application was pending, Indus Biotech filed an application under Section 8 of the Arbitration Act, seeking arbitration directions.
The NCLT’s judgment[6] created controversy by allowing the Section 8 application despite the ongoing insolvency proceeding. The legality of this decision was debated, particularly regarding the power of NCLT to refer parties to arbitration in an in rem insolvency proceeding.
The Supreme Court’s subsequent analysis and judgment in this case provided clarity. It was determined that insolvency proceedings only become in rem after the Adjudicating Authority has admitted the insolvency petition, triggering third-party rights and creating a proceeding with erga omnes effect. Hence, the reference to arbitration before the admission of insolvency proceedings is justified. Furthermore, the Supreme Court clarified that the NCLT’s assessment of the insolvency application should precede its consideration of the Section 8 application. The outcome of the insolvency application directly affects the Section 8 application. If a default is established, insolvency proceedings prevail, and arbitration is not applicable. If no default is found, the parties are free to seek arbitration.
The Position vis-a-vis Appointment of an Arbitrator during the pendency of Insolvency Plea
In a recent ruling, a single bench of the Bombay High Court in the case of Sunflag Iron & Steel Co. Ltd. v. M/s Poonamchand & Sons[7] has clarified the stance on the appointment of arbitrators during the pendency of insolvency proceedings. The court affirmed that the initiation of proceedings under Section 7 of the IBC does not preclude the appointment of an arbitrator under Section 11(6) of the Act. The Applicant argued that the conditions for the appointment of an arbitrator, specifically the existence and validity of the arbitration agreement, were met without dispute. The Respondent, however, countered by the initiation of proceedings under Section 7 of the IBC before the National Company Law Tribunal (“NCLT”). They contended that the application under Section 11 of the Arbitration Act was not maintainable due to the overriding effect of IBC’s Section 238.
The Bombay High Court based on its analysis, notably observed that the bar under Section 238 of IBC comes into play only after the NCLT admits the Section 7 application. In other words, the mere filing of a Section 7 application does not automatically invoke the bar under Section 238 of IBC. Moreover, an application under Section 11(6) of the Arbitration Act remains maintainable until the NCLT decides on the occurrence of default under Section 7(4) and Section 7(5) of IBC. The decision in Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund & Ors.[8] was referenced to emphasize that the NCLT must apply its mind to the application and record findings on default to consider it a proceeding in rem.
Thus, based on these considerations, the Bombay High Court granted the Section 11(6) Arbitration Act application, appointing a sole arbitrator to resolve the disputes between the parties. This judgment solidifies the stance on appointing arbitrators and initiating arbitration proceedings under Section 11(6) of the Arbitration Act during an ongoing Section 7 IBC application. It aligns with the previous judgment in Millennium Education Foundation v. Educomp Infrastructure and School Management Limited[9] which emphasized the independence of arbitration proceedings despite pending NCLT applications.
In the case of Millennium Education Foundation (supra)[10], it has been held that the mere pendency of an insolvency petition under Section 9 of the IBC is not a bar for the appointment of an arbitrator[11] under Section 8 of the Act. It has been reiterated that merely because an insolvency petition is pending, it cannot be an embargo on the power of the court to decide arbitration applications. It is only when the insolvency petition is admitted and the moratorium is declared that the proceedings under the Act will be non-maintainable. The facts of this case were that in 2014, the Millennium Education Foundation (the petitioner) and Educomp Infrastructure and School Management Limited (the respondent) signed an agreement. Later, disputes arose about payment terms. In December 2021, the respondent demanded dues, countered by the petitioner’s dispute notice in January 2021, asking for Rs. 1,97,70,192/-.[12] The petitioner invoked Section 11 of the Act for an arbitrator. Concurrently, the respondent filed an IBC Section 9 petition with the NCLT.
These judgments have settled the issue as to whether an arbitrator can be appointed during the pendency of an insolvency petition; however, it has left unanswered and unresolved questions as to the implications of the initiation of arbitration proceedings post-admission of insolvency petitions.
Commencing CIRP amidst ongoing Arbitration
Whether the presence of an arbitration agreement or an ongoing arbitration proceeding prohibits the submission of an insolvency petition under the Code has been a subject of examination by the courts and tribunals on several occasions. In the matter of Reliance Commercial Credit Limited v. Ved Cellulose Ltd.[13], the Hon’ble NCLT (Mumbai) determined that the ongoing arbitration procedures do not prevent the commencement of the Corporate Insolvency Resolution Process as per Section 7 of the Code. In the case of Dinesh Chand Jain and Others v. Fabulous Buildcon (P) Ltd. and Others[14], the Honourable National Company Law Tribunal (Delhi) arrived at the conclusion that the insertion of an arbitration clause within an agreement does not bar the initiation of insolvency proceedings under Section 7 of the Code.
More so, recently, the Hon’ble NCLT, New Delhi Court V, in the case of M/s.Educomp Infrastructure & School Management Ltd. v. M/s. Millennium Education Foundation[15], admitted the insolvency petition during the pendency of the arbitration proceeding, appointed an interim resolution professional (IRP), and declared a moratorium under Section 14 of the Code on the ground that the corporate debtor is in default of payment of the outstanding operational debt owed to the applicant and the mandatory requirements as prescribed under Section 9(5)(i) of the Code, 2016 are satisfied. This order is a classic example of the court admitting an insolvency petition during the pendency of arbitration, which comes to an automatic end as a result of the prohibition imposed by Section 14 (1) (a).
Hence, it is evident that the mere existence of an arbitration agreement or the continuation of arbitration procedures does not automatically bar the commencement of insolvency proceedings under the IBC. The Courts have adopted a practical standpoint towards these issues and have underscored the significance of striking a balance between the interests of the corporate debtor and the creditors.
The Bar on initiation of CIRP during the pendency of challenge to an Arbitral Award under Section 34
Till a ‘dispute’[16] comes into picture, an Insolvency petition under Section 9 cannot be maintained.[17] A wider interpretation of the term ‘dispute’ in the case of Kishan v. M/s Vijay Nirman Company Pvt. Ltd.[18] has led to the inclusion of ‘a challenge to an arbitral award u/Article 34 of the Act’ under its ambit. However, for it to be treated so, the ratio of Molibox Innovation Case[19] of the Apex Court must be applied, wherein it has been ruled that to determine if there is a ‘dispute’, the NCLT must be satisfied that there is “a plausible contention which requires further investigation and that the “dispute” is not a patently feeble legal argument or an assertion of fact unsupported by evidence.”[20] Therefore, the initiation of the corporate insolvency resolution process (CIRP) for an operational debt is not allowed under the IBC if an Arbitral Award against the operational debtor is pending due to a challenge under Section 34 of the Arbitration Act.
The Supreme Court’s rationale was centered on the Adjudicating Authority’s primary consideration of whether the operational debt is disputed. The court reasoned that a challenge to an arbitral award under Section 34 of the Arbitration Act indicates a “pre-existing ongoing dispute” between the parties, which persists until the final conclusion of the adjudicatory process under Sections 34 and 37 of the Arbitration Act. The court stated that since the cross-claims were being contested under Section 34 of the Arbitration Act and there was a chance of the Appellant succeeding in these claims, the operational debt could not be deemed as undisputed in this case.
The Supreme Court reiterated its stance from the Mobilox Innovations Private Limited v. Kirusa Software Private Limited case[21], emphasizing that the insolvency process, particularly concerning operational creditors, should not be used to bypass the adjudicatory and enforcement process prescribed by other statutes. This means that the Code should not be employed prematurely or for purposes beyond debt enforcement.
The court reiterated that Section 238 of the IBC comes into play when there’s a conflict between the IBC and the Arbitration Act. However, since there’s no such inconsistency between the adjudication and enforcement processes outlined in the Arbitration Act and Sections 8 & 9 of the IBC, Section 238 of the IBC is not applicable. On the contrary, the existence of an Arbitral Award along with the actions taken to challenge it demonstrate that the operational debt in this case was indeed under ‘dispute’.
Conclusion
In conclusion, it is clear that the courts recognize the importance of finding a middle ground between arbitration and insolvency proceedings, without one affecting the other. As such, the appointment of an arbitrator is allowed pre-admission of an insolvency petition, and insolvency petitions are admissible amidst ongoing Arbitration Proceedings, with the termination of the latter. However, when an arbitral award is under challenge, no insolvency proceedings can be prematurely commenced. While strong precedence is given to proceedings under IBC, which ultimately prevails being a specialized law that also contemplates the objective of preventing the corporate death of an entity, the scope of arbitration is minimally curtailed. This balanced approach ultimately leads to promoting the interests of both the creditors and the debtors.
Reference
[2] Saurabh Babulkar, “Admission Of A Section 7 Application Under The IBC A Trigger Point For Rendering The Dispute Non-Arb” Mondaq.com (Phoenix Legal, 2021) available at: https://www.mondaq.com/india/arbitration–dispute-resolution/1057974/admission-of-a-section-7-application-under-the-ibc-a-trigger-point-for-rendering-the-dispute-non-arbitrable-honble-supreme-court-of-india (last visited August 30, 2023).
[6] Ibid.
[10] Ibid.
[11] Ausaf Ayyub, “Mere Pendency Of An Insolvency Petition Is Not A Bar To The Appointment Of The Arbitrator: Delhi High…” Livelaw.in (Live Law, 2022) available at: https://www.livelaw.in/news-updates/delhi-high-court-section-11-of-the-ac-act-ibc-insolvency-petition-appointment-of-the-arbitrator-nclt-section-9-of-the-insolvency-and-bankruptcy-code-199169?infinitescroll=1 (last visited August 30, 2023).
[12] Nihit Nagpal and Devika Mehra, “Pendency of insolvency petition does not bar appointment of arbitrator- India” S.S. Rana & Co., 2022 available at: https://ssrana.in/articles/pendency-insolvency-petition-bar-appointment-arbitrator/ (last visited August 30, 2023).
[13] C.P.No- 156(PB/2017).
[14] C.P.(IB)-37/2018.
[15] (2023) ibclaw.in 326 NCLT.
[16] ‘Dispute’ includes arbitration proceedings relating to debt, quality of goods/services, or breach of a representation or warranty as under Section 5(6).
[17] See Section 9(5)(i)(d), IBC.
[20] Meghna Mishra and Ankit Rajgarhia, “The Viewpoint – Insolvency proceedings barred during the pendency of S.34 petition” Bar and Bench – Indian Legal news (Bar and Bench – Indian Legal news, 2019)available at: https://www.barandbench.com/columns/the-viewpoint-insolvency-proceedings-barred-during-the-pendency-of-s-34-petition (last visited August 30, 2023).
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