Insolvency and Bankruptcy Code 2016 | Arbitral Proceedings- The Contrast

In the year 2016, Insolvency and Bankruptcy Code was introduced to consolidate all the laws associated with the Insolvency resolution of the corporate personalities with aim to realise the maximum value of assets for such corporate persons in a time-bound manner and to promote entrepreneurship, available of credit and to protect the interest of the stakeholders. With the development of Insolvency Laws in India, conflict between the Insolvency proceedings and Arbitral Proceedings has arisen as a grey area resulting in stalling the purpose with which both the regimes have been introduced in the corporate world.

Many jurisdictions around the world have settled the position of law in this regard however India is a new entrant to the list and limited guidance is available by the judiciary as well as the legislature. there is no provision in the IBC which prescribes di impact of CIRP on an arbitration. It only stipulates imposition of moratorium. similarly, the Indian arbitration and conciliation act does not provide for the impact of CIRP or liquidation on the arbitral proceedings. Consequently, parties involved with arbitral proceedings and insolvency proceedings simultaneously are facing diverse issues.

Recently, in the Indus Biotech Case[1], the Supreme Court of India has pronounced a judgment in which they have discussed the scope of arbitrability of the insolvency disputes. With the advancement of the new insolvency regime in India the intersection of arbitration and insolvency is of immense significance. While both the process of arbitration as well as insolvency are there to lighten be burden on the judiciary their relationship is quite contrasting as insolvency aims at centralising all the proceedings giving in rem effect against the debtor and thereby creating authored party right to the same, but the arbitration focuses on decentralisation and aims at promoting party autonomy resulting in in personam. Since, both the processes are at an empirical stage, many arbitral proceedings are being hindered because of the insolvency proceedings.

In the Indus biotech Case, wherein Kotak India had filed an application before the NCLT seeking commencement of corporate insolvency resolution process against the Indus biotech for its default in redeeming the preference shares subscribed by Kotak India under the agreement, the court noted this conflict between the laws. It is a settled law that insolvency proceedings create third party rights, thereby once the insolvency proceedings commence, the subject matter becomes non arbitrable. However, the issue which often comes before the Court is to determine the “in personam” aspect of the proceeding in sync with “in rem proceeding”.

As per the Indian Insolvency Regime, once a CIRP application is filed in NCL, a public announcement along with a moratorium, declaring the prohibition the institution or continuation of suits or other proceedings against the corporate debtor. Thus, after the initiation of Insolvency proceedings, all the suits/ disputes or arbitral proceedings become non-est in law. With this regard, the Court have allowed the continuation of Arbitral Proceedings in certain cases erecting judicial precedents against the rule. The Courts have allowed continuance of such proceedings if it increases the asset value of the corporate debtor, if proceedings are in favour of the corporate debtor i.e., do not affect the value of assets adversely, if no recovery is being affected during the moratorium period, etc.

The court referred the case of Vidya Drolia and Others v. Durga Trading Corporation [2] and stated that it is only after the admission of the CIRP application to the tribunal that the third-party rights are created in the favour of creditors, only then proceedings have erga omni’s effect and not before that stage. Before that stage, the tribunal, NCLT is required to investigate the default and after that third party rights can be created in lieu of CIRP application.

In Indus Biotech Case, the court resolved the dispute regarding the interpretation clause and observed that the said dispute does not constitute a valid debt under IBC, 2016 and hold substance. Thus, the dispute could be settled through Arbitration. The ruling of court resolved the conflict to an extent for cases when insolvency proceedings take a complete in rem effect. But they conflict remains the same with regard to continuation of Arbitral Proceedings while Insolvency Proceedings are ongoing.

In the Indian Insolvency as well as Arbitration regime, there is a need to strike balance and provide clarification upon completion of CIRP, and eradication of legal rights of parties associated with pending legal proceedings who were held disentitled to pursue the suit due to the moratorium order.

Author: Navya Sharma – a third year law student at CLS-GIBS, in case of any queries please contact/write back to us via email vidushi@khuranaandkhurana.com or contact us at Khurana & Khurana, Advocates and IP Attorney.

References:

[1] Indus Biotech Private Limited v. Kotak India Venture Fund, 2021 SCC OnLine SC 268

[2] Vidya Drolia and Others v. Durga Trading Corporation, 2019 SCC Online SC 358

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