Arbitration of Insolvency-Related Contract Claims: Identifying the Tensions Between the Parties’ Freedom of Choice and the Insolvency Settlement Mechanism

Introduction : Any business contract normally contains some form of dispute resolution mechanism. Supply contracts have it. Shareholders' contracts have it too. So do guarantees, joint ventures, and license agreements, meaning that a firm facing CIRP may already be embroiled in various arbitrations or enter into contracts with a potential to trigger disputes leading to arbitration.

The situation is rather straightforward in theory, but not quite so in practice: the IBC is essentially a code of collective and time-limited resolution of the insolvency-related problems of a corporation, while arbitration is a matter of party autonomy and bilateral adjudication, so once the corporation is admitted to CIRP, the two codes inevitably start to tug in opposite directions.

Legal Provisions

Section 14, IBC : The Moratorium

Section 14(1)(a) of the IBC requires the adjudicating authority to issue a moratorium against the corporate debtor in case the application filed under Section 7, 9, or 10 has been admitted.

It is a rather wide clause, prohibiting initiation or continuation of any legal actions against the debtor, including enforcement of any judicial or arbitration award against the corporate debtor before any court, tribunal, arbitration or other authority. Arbitration is specifically mentioned, so there is no doubt regarding whether arbitral proceedings would constitute prohibited actions against the debtor. Once the moratorium starts, all actions against the corporate debtor are put on hold.

Section 238, IBC : Overriding Effect

Section 238 gives the IBC an overriding effect. Its non-obstante clause establishes that the Code prevails if there is an inconsistency between it and any other law, including the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). This is generally how the statutory reason behind the priority of IBC in case of any inconsistency between it and the Arbitration Act is established. While the arbitration agreement remains operative, its execution can be temporarily interrupted by the insolvency process.

Sections 18, 25 and Regulation 12 of the CIRP Regulations

Resolution Professional (“RP”) has a statutory obligation to compile and verify the creditors’ claims against the debtor pursuant to Section 18 and Section 25 of the IBC.

It has to include all claims, including those which are disputed or pending before an arbitration tribunal. In turn, Regulation 12 of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 also requires creditors to submit proofs of their claims in accordance with the procedure laid down within a specific timeframe after the publication. It means that a claimant cannot assume that a pending arbitral dispute would somehow fall out of CIRP process because the arbitral tribunal has not yet determined the amount of the debtor’s liability. It has to be submitted to the RP anyway. That point will be important later.

Section 31, IBC: Binding Nature of the Resolution Plan

Section 31 regulates the effects of an approved resolution plan. After it has been approved by the NCLT, it has a binding effect on the corporate debtor, its employees, members, creditors, guarantors and other stakeholders. Amendment of 2019 to Section 31 has been recently recognized by the Supreme Court as clarificatory. The practical effect is severe for those claims left out of the plan.

Once the plan is approved, the claims cannot be revived afterwards as the claimant considers them still alive due to some reasons.

Claim Submission and the Fate of Pending Arbitral Claims

Pending arbitration cannot make a claim sit outside the insolvency process. It has to be submitted. A creditor with a disputed or contingent claim arising out of the arbitration has to submit proofs of his claims to the Resolution Professional within the deadline according to the CIRP process along with the supporting material, such as arbitration agreement, claim statements, pleadings, and any previous award that may have been rendered. The RP has to consider the claim as part of the process of compiling and verifying all claims. This is the moment when the claimant's position may become problematic.

The amount of the debtor’s liability may not have been determined yet, but the insolvency process cannot just pause until it is determined. Resolution applicants need to know what liabilities may exist in order to formulate their plans. So, the claim becomes a part of the insolvency process even if arbitration cannot continue anymore. Missing the deadline of submission has a rather serious consequence.

Enforceability of Awards After Resolution Plan Approval

The hardest questions emerge once the resolution plan is approved. The decision of the Supreme Court in Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta established the significance of the principle of the “clean slate”. Successful resolution applicants cannot be faced with any claims not decided before the approval of the plan which could increase the debtor’s liabilities after plan approval.

The Supreme Court used this principle to describe the problem through the famous metaphor of “hydra head popping up”. The point is rather clear. Resolution applicants need finality.

Legal Analysis

A. Arbitration Against the Corporate Debtor During Moratorium

The Supreme Court has taken a view of Section 14. In Alchemist Asset Reconstruction Co. Ltd. V. Hotel Gaudavan Pvt. Ltd. the Court held that arbitration against the debtor falls squarely within the moratorium and must be stopped once CIRP starts. The Delhi High Court had suggested a reading in Power Grid Corporation of India Ltd. V. Jyoti Structures Ltd.,. The Supreme Court rejected that in P. Mohanraj v. Shah Brothers Ispat Ltd. The Court said that even a Section 34 application to set aside an award is a proceeding against the debtor, so it is covered by the moratorium. The result is that any arbitration already pending at the time of admission is stayed; no new arbitration can be started against the debtor and related proceedings such as challenges to an award are frozen for the duration of the moratorium. The Court and the Bankruptcy Law Reforms Committee explain that this creates a period that protects the debtor’s assets and stops a race of creditors that would undermine the resolution.

B. Distinguishing the Corporate Debtor from Separate Entities

A point of Section 14 is that the moratorium applies to the corporate debtor and its assets. It does not reach parties simply because they are connected to the debtor. In State Bank of India v. V. Ramakrishnan, the Supreme Court ruled that the moratorium does not extend to guarantors. Therefore, a financial creditor can still use arbitration or enforcement against a guarantor, a guarantor that is a separate company or a co-obligor group company even while the main corporate debtor is in CIRP as long as no separate insolvency proceeding is started against that guarantor under Part III of the Code.

C. Claim Submission and the Fate of Pending Arbitral Claims

Creditors, whether financial or operational, who have claims that’re still in arbitration or have already been decided are not exempt from the IBC’s claim-submission process. Regulation 12 requires them to submit their claims, including contingent and disputed claims from arbitration to the Resolution Professional within the given period backed by the arbitration agreement, pleadings and any award. The Resolution Professional puts these claims into the information memorandum, which resolution applicants use to build their plans. If a creditor misses the deadline the claim may be left out of the resolution plan, which has consequences later.

D. Enforceability of Awards Post-Resolution Plan Approval

The important rule here is what happens to a claim after a resolution plan is approved. In the Committee of Creditors of Essar Steel India Ltd. V. Satish Kumar Gupta, the Supreme Court said that a successful resolution applicant cannot be faced with claims after approval because that would upset the assumptions behind the plan. In Ghanashyam Mishra and Sons Pvt. Ltd. V. Edelweiss Asset Reconstruction Company Ltd., a three-judge bench ruled that on the approval date all claims not in the plan including dues are extinguished and no one can start or continue any proceeding about such a claim. In Electrosteel Steels Ltd. V. Ispat Carrier Pvt. Ltd. (2025) The Court dealt directly with awards. It held that if a resolution plan settles all claims covered by pending suits, arbitrations or other proceedings at nil any arbitral award made after the plan is approved has no jurisdiction and is therefore a nullity. The Court said that this nullity can be raised at the execution stage under Section 47 of the Code of Civil Procedure without challenging the award under Section 34. It also said that lifting the moratorium does not revive claims that were extinguished when the plan was approved.

Case Laws

Alchemist Asset Reconstruction Co. Ltd. V. Hotel Gaudavan Pvt. Ltd.: The Supreme Court held that proceedings against the corporate debtor fall within the Section 14 moratorium. Cannot be started or continued once CIRP is admitted.

P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd.: The Supreme Court ruled that even a Section 34 application to challenge an award is a proceeding against the debtor and is covered by the moratorium.

State Bank of India v. V. Ramakrishnan: The Supreme Court said that the moratorium does not extend to guarantors allowing creditors to use arbitration or enforcement against guarantors independently.

Committee of Creditors of Essar Steel India Ltd. V. Satish Kumar Gupta: The Court said that a successful resolution applicant cannot face claims after approval.

Ghanashyam. Sons Pvt. Ltd. V. Edelweiss Asset Reconstruction Company Ltd.: The Court ruled that all claims not in the approved resolution plan, including dues are extinguished and cannot be pursued.

Electrosteel Steels Ltd. V. Ispat Carrier Pvt. Ltd. (2025): The Court held that an arbitral award made after a resolution plan that settles the claim at nil is void for lack of jurisdiction and its nullity can be raised at the execution stage without a Section 34 challenge; lifting the moratorium does not revive claims.

Practical Implications

When parties make supply, shareholder, guarantee or licensing deals with companies they need to make a change.

First, they must keep an eye on whether the company’s insolvent because if the company enters a CIRP, an arbitration that was set up before can stop right away even if no court says so.

Second, if a claimant has a claim that is still pending or has already been heard or has an award the claimant must use the window given by the resolution to file the claim. Missing that window means the claim is lost, just as if the claim was filed but then not put into the resolution plan.

Third if the contract names than one obligor, for example the main debtor, a personal guarantor, a corporate guarantor or an affiliate, the claimant should try to reach each guarantor and each non-insolvent co-obligor at the same time because the moratorium does not protect them.

From a policy view the clash between IBC’s goal to solve problems for everyone and arbitration’s goal to decide cases by agreement is still only partly solved. Courts have kept giving the IBC the hand under Section 238. This has caused criticism because good arbitration claims – especially those that were being worked on in faith when the plan was approved – can be killed without the chance to see how much money is owed. A careful safety measure, like a required notice to claimants who still have pending claims before a plan is sent for approval could cut the “hydra head” problem while still keeping the decision firm.

Procedural Decision Tree

Step 1: Identify the respondent

Is the person or company that the claim is against the debtor or is it a party such as a personal guarantor, a corporate guarantor or a group company? If it is a party the Section 14 moratorium does not cover that party. Arbitration can then go ahead. Only if that party is not itself insolvent.

Step 2: Find out at what point the arbitration is in for the debtor

If arbitration has not yet started it cannot start while the moratorium is in force. If arbitration is already in progress it is put on hold. That includes any Section 34 challenge or any effort to enforce the award.

Step 3: Send the claim to the resolution professional

No matter what the arbitration status is the claimant must file proof of claim as required by Regulation 12. The filing must be done on time. The claimant must attach the arbitration agreement, the pleadings and any award that has been given.

Step 4: Watch whether the claim is included in the resolution plan

If the claim or a value that has been agreed on is put into the plan that gets approved the claimant will be bound by the plan’s rules. If the claim is left out the claim is cancelled once the plan is approved according to Section 31 and the rule, from Ghanashyam Mishra.

Step 5: Check the enforcement after the plan is approved

If an arbitral award tries to decide a claim that has already been cancelled by the resolution plan that award is void because the award does not have jurisdiction. The award can be challenged even if the court is trying to enforce it under Section 47 of the CPC as seen in the Electrosteel case.

Conclusion

Arbitration of contract disputes that involve bankruptcy is caught between two systems. One system wants to finish everything for everyone. The other wants to let the parties decide the case by agreement. Indian courts, following Section 238 have always put arbitration under the IBC’s rules when the main debtor is the one being sued. Arbitration stays available for guarantors, corporate guarantors and other separate parties that are not insolvent. The key to keeping a claim alive is the claim-submission under Regulation 12.

If that claim is not put into the approved plan, it is dead. Any award that ignores that death is void. For people working on these cases the main point is to stay alert about procedure. Keep an eye on whether the debtor’s insolvent. Make sure you know the difference between the debtor and the guarantors or affiliates. Use the resolution professional’s claim window as the place where an arbitral claim will be decided. If the law or rules were clearer, about sending a notice to claimants who still have pending claims before a plan is approved it would cut down on repeated court fights over “hydra head” claims. While still keeping the decision that the IBC wants for those who apply for resolution.

Author: Yatharth Chakravarty in case of any queries please contact/write back to us via email to content@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney

References

1. Insolvency and Bankruptcy Code, 2016, s. 14 (India).

2. Insolvency and Bankruptcy Code, 2016, s. 238 (India).

3. Insolvency and Bankruptcy Code, 2016, ss. 18, 25, 31 (India).

4. IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, reg. 12.

5. Arbitration and Conciliation Act, 1996, ss. 34, 36 (India).

6. Code of Civil Procedure, 1908, s. 47 (India).

7. Alchemist Asset Reconstruction Co. Ltd. v. Hotel Gaudavan Pvt. Ltd., (2018) 16 SCC 94 (India).

8. P. Mohanraj v. Shah Brothers Ispat Pvt. Ltd., (2021) 6 SCC 258 (India).

9. Power Grid Corpn. of India Ltd. v. Jyoti Structures Ltd., (2018) 246 DLT 485 (Delhi HC).

10. State Bank of India v. V. Ramakrishnan, (2018) 17 SCC 394 (India).

11. Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) 4 SCC 17 (India).

12. Committee of Creditors of Essar Steel India Ltd. v. Satish Kumar Gupta, (2020) 8 SCC 531 (India).

13. Ghanashyam Mishra and Sons Pvt. Ltd. v. Edelweiss Asset Reconstruction Company Ltd., (2021) 9 SCC 657 (India).

14. Ajay Kumar Radheshyam Goenka v. Tourism Finance Corporation of India Ltd., (2023) 10 SCC 545 (India).

15. Electrosteel Steels Ltd. v. Ispat Carrier Pvt. Ltd., Civil Appeal No. 2896 of 2024, decided 21 April 2025 (India).

16. Bankruptcy Law Reforms Committee, Report of the Bankruptcy Law Reforms Committee, Vol. I (Nov. 2015).