The Arbitration Practitioner’s Series by MKBAC: Initiating fresh arbitral proceedings after IBC - perspective on limitation

In the recent case of M/s HPCL Bio-Fuels Ltd. v. M/s Shahaji Bhanudas Bhad 2024 INSC 851, the Supreme Court of India addressed a critical issue at the intersection of arbitration and insolvency laws: whether a party pursuing fresh proceedings under the Arbitration & Conciliation Act, 1996 (the "Arbitration Act"), after being rejected under the Insolvency and Bankruptcy Code, 2016 (the "IBC"), could avail the benefit of Section 14 of the Limitation Act, 1963. The Court, after a detailed analysis of the objectives and remedies under both statutes, denied the benefit of Section 14 to the Respondent, as the Apex Court observed the distinct nature of reliefs sought under arbitration and insolvency proceedings.

The Supreme Court’s recent judgment in HPCL Bio-Fuels Ltd. has provided much-needed clarity on the scope and applicability of Section 14 of the Limitation Act, particularly in the context of arbitration and insolvency proceedings before different forums. Many creditors favor remedies under the IBC over arbitration, as the IBC offers a swift, time-bound mechanism for resolving financial distress.

This preference often stems from the inherent challenges of arbitration, which is susceptible to prolonged litigation cycles, whether through interim relief applications, challenges to arbitral awards, or delays in execution. In contrast, IBC proceedings grant creditors direct access and influence over the corporate debtor’s financial rehabilitation, minimizing procedural setbacks. However, this advantage should not lead to forum shopping, where creditors selectively and conveniently switch forums to circumvent procedural hurdles.

The judgment underscores the importance of strategic decision-making when advising clients on initiating or withdrawing proceedings across different legal frameworks. It also highlights the need for a nuanced understanding of the interplay between the Arbitration Act and the IBC to ensure an informed and effective approach to dispute resolution.

The dispute between the Appellant, M/s HPCL Bio-Fuels Ltd., and the Respondent, M/s Shahaji Bhanudas Bhad, arose from a contractual relationship spanning 2012 to 2014. The Respondent was awarded tenders for enhancing the capacity of process stations and boiling houses at Lauriya (West Champaran) and Sugauli (East Champaran). The Appellant issued purchase orders for equipment and work, paying INR 19.02 crore out of the total INR 38.18 crore owed. However, the appellant withheld the remaining INR 18.12 crore, citing unsatisfactory performance and breach of contractual obligations by the Respondent.

In 2016, the Respondent issued a legal notice to the Appellant, invoking arbitration under the Arbitration Act. Simultaneously, in 2017, the Respondent initiated insolvency proceedings under Section 8 of the IBC. Receiving no response to either notice, the Respondent filed an arbitration petition under Section 11(6) of the Arbitration Act before the Bombay High Court in 2018.

However, the Respondent decided to withdraw the petition under Section 11 in order to pursue initiation of the Corporate Insolvency Resolution Process [‘CIRP’] against the Appellant before the National Company Law Tribunal [‘NCLT’], Kolkata.

Interestingly, despite the Appellant raising the issue of pre-existing dispute, the NCLT proceeded to admit the Appellant in CIRP. The NCLT remarked that although there was a pre-existing dispute between the parties however, the dispute seems to have been resolved in view of the fact that further new work orders had been placed with the Respondent by the Appellant.

On appeal, the National Company Law Appellate Tribunal, New Delhi [‘NCLAT’] overturned the NCLT’s decision, applying the precedent set in Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd. (2018) 1 SCC 353. The NCLAT held that the existence of a dispute between the operational creditor and the corporate debtor precluded the initiation of insolvency proceedings.

Following the dismissal of the insolvency proceedings, the Respondent re-initiated arbitration proceedings by filing a fresh petition under Section 11(6) of the Arbitration Act. The Bombay High Court allowed the petition, ruling that the time spent pursuing before the wrong forum (insolvency) should be excluded under Section 14 of the Limitation Act. Consequently, the High Court held the petition to be within the limitation period and appointed an arbitral tribunal.

The Supreme Court, however, overturned the High Court’s decision, holding that the Respondent was ineligible for the benefit of Section 14 of the Limitation Act. The Supreme Court held that the High Court had fallen in error by allowing the benefit of Section 14 to the Respondent.

The Apex Court proceeded to delineate the requirements under Section 14(1) and Section 14(2), emphasizing a key distinction: Section 14(1) applies to suits involving the same matter in issue, while Section 14(2) applies to civil proceedings involving the same relief.

The Court observed that the Respondent could not avail the benefit of Section 14(1) because arbitration proceedings do not qualify as a "suit." On the other hand, Section 14(2) was inapplicable because the reliefs sought under the Arbitration Act and the IBC were fundamentally different. While arbitration proceedings under Section 11 of the Arbitration Act aimed to resolve private disputes through the appointment of an arbitral tribunal, the insolvency proceedings under Section 9 of the IBC are in rem actions aimed at corporate rehabilitation, and cannot be reduced to mere debt recovery proceedings.

The Supreme Court’s decision in this case stands in contrast to its earlier liberal interpretation of Section 14 in established via judicial precedents. For instance, in Kalpraj Dharamshi v. Kotak Investment Advisors Ltd. (2021) 10 SCC 401, a three-judge bench of the Court had granted the benefit of Section 14 for filing an appeal before the NCLAT after the dismissal of a writ petition before the High Court.

Similarly, in M.P. Steel Corporation v. Commissioner of Central Excise (2015) 7 SCR 291, the Court extended the principles of Section 14 to grant relief to a bona fide litigant, even where the provision was held to be inapplicable 

The Court’s liberal approach was further underscored in Roshan Kuthalia & Ors. v. R.B. Mohan Singh Oberoi (1975) 4 SCC 628, where it held that any circumstance legal or factual, which inhibits entertainment or consideration by the Court of the dispute on the merits, comes within the scope of Section 14 and a liberal touch must inform the interpretation of the Limitation Act which deprives the remedy of one who has a right.

In the present case, however, the Supreme Court adopted a narrow interpretation of Section 14, deviating from its established jurisprudence. The Respondent’s pursuit of remedies under both the IBC and the Arbitration Act was aimed at enforcing the same substantive right: payment for goods and services rendered. While the means under the two legislations, i.e. arbitration and insolvency differed, the ultimate object — the right to payment — remained the same. By denying the benefit of Section 14, the Court effectively foreclosed the Respondent’s right to seek redress against the Appellant.

It is well established through a series of judgments that the IBC is not merely a debt recovery mechanism for creditors. The Supreme Court has reiterated that the IBC was introduced to facilitate the financial rehabilitation of corporate debtors, ensuring their survival as going concerns rather than compelling liquidation due to mounting debts. Its core objective is to resolve financial distress, allowing the debtor to continue contributing to the economy post-resolution.

In contrast, the Arbitration Act does not provide a framework for financial rehabilitation; rather, it serves as an alternative forum for resolving commercial disputes between parties. Recognizing this fundamental distinction, the Hon’ble Supreme Court has held that the benefit of Section 14 of the Limitation Act cannot be extended across two entirely different legal frameworks that serve distinct purposes and offer separate reliefs.

The Supreme Court’s decision in M/s HPCL Bio-Fuels Ltd. v. M/s Shahaji Bhanudas Bhad highlights the complexities and challenges in reconciling the interplay between arbitration and insolvency laws. While the Court’s emphasis on the distinct nature of these proceedings is understandable, its restrictive interpretation of Section 14 of the Limitation Act appears inconsistent with its earlier liberal approach. This decision underscores the need for clarity and consistency in judicial interpretation, particularly in cases involving overlapping of different legal frameworks under distinct legislations. By adopting a pedantic view, the Court may have inadvertently curtailed the rights of bona fide litigants, raising concerns about access to justice and the equitable application of limitation laws.

This is the first article in the Arbitration Practitioner’s Series by Milon K. Banerji Arbitration Centre (MKBAC).

Malak Bhatt and Neeha Nagpal are Founding Partners and Samridhi is an Associate at NM Law Chambers.