By Rajas Salpekar
Insolvency and bankruptcy code, enacted in 2016 to ensure a streamlined, faster and transparent method of insolvency resolution, is one India’s youngest legislations. It contains several provisions which seek to maximize the asset value of a firm underway insolvency and one such provision, contained in section 14 is that of the ‘moratorium’. Section 14(1)(a) of the Insolvency and Bankruptcy Code, 2016 [IBC] states that once a company is declared bankrupt, a moratorium is imposed i.e. 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 is prohibited till the Corporate Insolvency Resolution Plan [CIRP] is completed.
A primary reading tells us that moratorium bars not only a pending suit but also an arbitration proceeding. However, section 5(6) of IBC defines a dispute as a suit or arbitration proceeding and thereby clearly strikes a distinction between a legal claim filed in a court of law and an arbitration proceeding. Similarly, section 25(2)(b) of IBC again strikes a distinction in judicial, quasi-judicial and arbitration proceedings. Thus, it is safe for one to conclude that whenever reference is made to an arbitration proceeding, the word ‘arbitration proceedings’ is explicitly used and thus the terms ‘suit’ or ‘pending proceeding’ present in Section 14(1)(a) do not include arbitral proceedings. Also, the judgment rendered by Hon’ble Delhi High Court in Power Grid Corporation of India Ltd. v Jyoti Structures Ltd. elucidated that the word ‘proceedings’ in Section 14 of IBC does not mean all the proceedings and those proceedings which are beneficial to the corporate debtor are saved from a moratorium. Therefore, a harmonious reading of the text of the statute and the Power Grid judgment helps us ascertain that Section 14 of IBC is not applicable to all proceedings and arbitration proceedings should thus be allowed to proceed notwithstanding a moratorium. But, the judicial precedents tell a different tale. At times, the courts have favored the continuance of arbitral proceedings and at times they have thwarted it. So, are the arbitral proceedings affected by a moratorium or not? And if they are not affected then what is the significance of a moratorium? This write-up provides solutions to the afore-mentioned questions and traces the change in jurisprudence surrounding the admissibility of arbitration proceedings while a moratorium is imposed.
ANALYZING THE PRECEDENTS
The question of a moratorium and arbitration proceedings being at loggerheads was first discussed in the case of Alchemist Asset Reconstrution Company Ltd. v M/S. Hotel Gaudavan Pvt. Ltd. & Ors. wherein the Supreme Court of India opined that in case of a moratorium being imposed, arbitration proceedings shall not take place and declared that the staus of an arbitration proceeding instituted after the imposition of a moratorium is non est in law. A similar question was dealt by the National Company Law Appellate Tribunal [NCLAT] in the case of K. S. Oils Ltd. v The State Trade Corporation of India Ltd. & Anr. in which the judgment of Alchemist Asset Reconstrution Company Ltd. v M/S. Hotel Gaudavan Pvt. Ltd. & Ors was affirmed and in pursuance of the same, it was held that a moratorium supersedes arbitration proceedings and thus arbitration can not take place while a moratorium is in place.
Subsequently, the case of Jharkhand Bijli Vitran Nigam Ltd. v IVRCL Ltd. (Corporate Debtor) & Anr. acted as a climacteric and widened the scope of admissibility of arbitral proceedings. In this case, the NCLAT , allowed the hearing of counter-claims of both the parties before an arbitral tribunal notwithstanding a moratorium and held that because the claims of a corporate debtor can only be determined after hearing the counter-claims, the filing of the same is permitted. It also observed that even though the proceedings are allowed, an award, if obtained against the corporate debtor, shall not be enforceable. Another landmark judgment came in the case of Sobodh Kumar Agrawal v EIH Ltd. wherein the counsel for appellant vouched for the admission of a claim filed by a creditor against a corporate debtor by pacing reliance on the Jharkhand Bijli Vitran Nigam Ltd case (supra). However, the Honorable NCLAT rejected the plea and held that in Jharkhand Bijli Vitran Nigam Ltd case, the counter-claim was being filed against a pre-instituted claim filed by the debtor but in this case, a new claim has been filed by the respondent and thus it can not be allowed to proceed. The tribunal further held that this case was covered by the decision of K.S. Oil Ltd.
The question of effect of inter-mingling of moratorium on arbitration was first discussed in the case of Alchemist Asset Reconstrution Company Ltd (supra) and it was then held that moratorium will supersede arbitration. However, after two years, in the 2018 judgment of Jharkhand Bijli Vitran Nigam Limited (supra), a paradigm shift in the interpretative jurisprudence was observed and the filing of counter-claims before an arbitral tribunal was given assent to. The next year, 2019, also observed a landmark judgment in the Sobodh Kumar Agrawal (supra) case which barred the filing of a new claim by a respondent, while a moratorium had already been imposed. One may think that the 2018 and 2019 judgments contradict but an outright distinction was made by the tribunal.
All-in-all, it can be concluded that a moratorium only bars the continuance of arbitration proceedings which are started by the respondent and not otherwise. However, it must also be noted that if an award is obtained against the debtor, in the arbitration proceedings, it will not be executed till the moratorium persists.