Navigating the overlap between IBC and arbitration vis-à-vis moratorium: A judicial overview of the evolving framework

The Insolvency and Bankruptcy Code (“IBC”) was enacted in order to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals within a specific time frame in order to ensure maximum utilization of the value of assets, for the purpose of promoting entrepreneurship, availability of credit and above all, ensuring the interest of all the stakeholders.  

IBC vis-à-vis Arbitration is a persistent issue of contention considering the dynamic aspect of the two laws, as the former aims for securing the maximisation of the value of the assets of the corporate debtor, while the latter prioritizes party autonomy. Some parties opt for arbitration in terms of its contractual clauses, while others opt for proceedings under IBC. This eventually creates conflict as NCLT's admission of an insolvency petition triggers moratorium, effectively suspending all parallel proceedings under other statutes including arbitration.

This conundrum was taken up by the Supreme Court in, Alchemist Asset Reconstruction Co. Ltd. v. Hotel Gaudavan Pvt. Ltd. & Ors. (2017) SCC OnLine SC 1179 (“Alchemist”), wherein, it was held that once a Moratorium has been imposed under section 14(1)(a) of the IBC, no arbitration proceedings can be initiated thereafter and the same will be treated as non-est in law. It was also clarified that once an insolvency petition is admitted, the arbitration proceedings cannot operate in parallel, as this would defeat the entire objective behind the enactment of IBC, which is to preserve the corporate debtor’s assets, maintain the status quo, and enable a collective resolution mechanism under the IBC framework. Thus, it was held that in case of a conflict between IBC and Arbitration, the former would prevail over the latter and exercise supremacy over the other.

The position of law which was laid down in Alchemist was reiterated in the report of Delhi High Court in Millennium Education Foundation Vs Educomp Infrastructure and School Management, (2022 SCC OnLine Del 1442), wherein, it was held that insolvency proceedings under IBC will take precedence over the arbitral proceedings and any moratorium imposed would automatically bind the proceedings under the Arbitration Act. In addition, the Delhi High Court also held that till the time the insolvency petition is still pending before the NCLT and the same has not been admitted, there is no embargo on initiation of proceedings under the Arbitration Act seeking quick dispute resolution.

The High Court of Bombay, Nagpur Bench in Sunflag Iron & Steel Co. Ltd. v. M/s J. Poonamchand & Sons (Misc. Civil Application No. 374/2020) vide Judgement dated 05.06.2023, further clarified on the fact that filing of an insolvency proceeding, which is yet to be admitted will attract overriding effect in terms of Section 238 of IBC; by virtue of which, the provisions of IBC shall prevail and have over-riding effect in case of inconsistency with any other law for the time being in force. It was held by the Hon’ble Court that mere filing of an insolvency petition under IBC doesn’t imply cognisance of the matter by the concerned Adjudicating Authority. Rather it’s only after the admission of such an insolvency petition that the bar imposed by Section 238 of the IBC would come into play, and not before passing of such an order of admission. In other words, the arbitration proceedings in respect of a dispute can continue until and unless the insolvency petition in respect of the same is admitted by the adjudicating authority.

Moving forward, there are certain extraordinary circumstances under which the arbitration proceedings can run parallel along with the insolvency proceedings. The said position was clarified by the High Court of Delhi in Power Grid Corporation of India Ltd. vs Jyoti Structures Ld. (2017 SCC OnLine Del 12189) wherein, it was held that the bar of moratorium does not apply to proceedings which are in favor/benefit of the corporate debtor per se unless such proceedings are in the nature of debt recovery action or would result in diminishing/ dissipating or have an adverse impact on the assets of the corporate debtor, thereby aligning with the overall objective of moratorium i.e to preserve the corporate debtor’s assets, maintain the status quo, and enable a collective resolution mechanism under the IBC framework. The Court also opined that although it is a settle position of law that once moratorium is imposed, all proceedings against the corporate debtor comes to a standstill, yet, there are times, when the nature of such pending proceedings also needs to be taken into consideration, so as to ascertain, whether such proceedings are in favor or against the corporate debtor. Be that as it may, unnecessary stay on proceedings that are in favor of the corporate debtor would amount to impeding the debtor’s effort to recover its money, and as such, would not fall within the embargo imposed under Section 14 of IBC.

The issue as to whether insolvency or arbitration proceedings should be first initiated also depends on the nature of the dispute, as the former are proceedings in rem, while the later, are proceedings in personam.

Be that as it may, cases can be referred to arbitration where the dispute is contractual and bona fide in nature and the insolvency petition has been filed but is yet to be admitted. The said position of law was echoed in the judgment of the Supreme Court in Indus Biotech Pvt. Ltd. v. Kotak India Venture Fund (2021) 6 SCC 436), wherein, it was clarified that generally, it’s the insolvency proceedings that exercises supremacy, yet in certain circumstances, proceedings under the Arbitration Act can be commenced. Albeit, the proceedings ought to commence prior to the admission of the petition before NCLT. Furthermore, in Transmission Corporation of Andhra Pradesh Limited Vs. Equipment Conductors and Cables Limited ( 2019 12 SCC 697) the Supreme Court has held that the debts which are not legally enforceable due to limitation or arbitral rejection do not qualify under IBC for CIRP initiation.

Besides, in K Kishan vs Vijay Nirman Company Pvt Ltd. (2018 17 SCC 662), the Supreme Court has further emphasized that once any kind of dispute or legal issue is raised between the parties and in case the same is still pending adjudication, be it before the Arbitration Tribunal or before any forum per se, no CIRP can be initiated, as this would amount to employing alternate options for debt recovery. In other words, the Apex Court opined that IBC cannot be used as a tool for coercive recovery of disputed debts, when the debt is already pending adjudication before any forum as the same would be nothing but a futile measure. The same view was again reiterated by the Supreme Court in Mobilox Innovations Pvt Ltd vs Kirusa Software Pvt Ltd. (2018 1 SCC 353).

The period of moratorium commences on the date of admission of the insolvency petition by the Adjudicating Authority, which automatically freezes all the proceedings under Section 14 of IBC. In addition, the Clean Slate Principle has been derived from Section 31 of IBC, and the same expounds the “binding nature” of a resolution plan. As per Section 31 of IBC, once the resolution plan is passed by the NCLT, it becomes binding on all the concerned entities including the government authorities, whereby no additional claims can arise once the resolution plan has been passed. As per this principle, the corporate debtor will be free from all the past dues, liabilities, penalties, etc, that are not covered under the passed Resolution Plan.

Both IBC and the Arbitration Act aim at expeditious dispute resolution. However, there is fundamental differences in their underlying philosophies. While IBC is driven by a collective, time-bound, and creditor-centric insolvency framework, the spirit of arbitration is deep-rooted in party autonomy, decentralised adjudication, and consensual dispute resolution. Therefore, in case of any conflict between the two statutes, it is the IBC that prevails, owing to its overriding effect under Section 238 of IBC, accompanied with moratorium under Section 14 of IBC. Thus, as evident through various judicial precedents, Arbitration and Insolvency proceedings can co-exist, i.e., they can certainly run in parallel up to the stage of admission of the insolvency petition before the adjudicating authority. However, once the IBC framework is triggered, implying declaring of moratorium, then it’s the insolvency regime that assumes dominating supremacy over any other prevalent laws by virtue of section 238 of IBC.  Besides, the judiciary has now made it crystal clear that, the moment an insolvency petition is admitted by the adjudicating authority, all individual remedies must yield to the collective insolvency process so as to preserve the value of the assets and to uphold the supremacy of IBC unless such proceedings are to the benefit of the corporate debtor and aids the recovery of money.      

About the authors: Rohit Jolly is a Partner, Sidharth Sharma is a Senior Associate and Bushra Alam is an Associate at Hammurabi & Solomon Partners.

Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.

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