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Arbitrations initiated before moratorium periods coming into effect: Should or should not be stayed?

The arbitrations initiated before the moratorium comes into effect as per Section 14(1)(a) of the Insolvency and Bankruptcy Code. However, it has been laid down by the Hon'ble Supreme Court in the matter of Alchemist Asset Reconstruction Company Ltd v. Hotel Gaudavan Pvt. Ltd [1] that, “The mandate of the new Insolvency Code is that the moment an insolvency petition is admitted, the moratorium that comes into effect under Section 14(1)(a) expressly interdicts institution or continuation of pending suits or proceedings against the Corporate Debtors.”


A party to the consolidated arbitrations, against whom the insolvency petition, has to be filed and admitted by the National Company Law Tribunal. As has been laid down in the aforementioned matter, irrespective of the fact that the initiation and consolidation of the arbitrations took place before the moratorium came into effect, the same procedure cannot be continued for as long as the moratorium is in effect.


The same position has been reinforced by the National Company Law Appellate Tribunal in the matter of KS Oils Ltd v. The State Trade Corporation of Indian Ltd. & Ors [2] applied the aforementioned principle to pending arbitral proceedings and laid down that despite the fact that the arbitral proceedings were initiated before the moratorium kicked into effect, they cannot be continued during the same period. The operative part of the order of the tribunal in the aforementioned matter stated that “Considering the arrangements as alluded to the abovementioned and the choice of the Hon'ble Supreme Court in "Alchemist Asset Reconstruction Company Ltd. v. M/s. Lodging Gaudavan Pvt. Ltd. and Ors." we hold that the arbitral continuing pending between 'M/s K.S. Oil Ltd.' (Corporate Debtor) and 'The State Trade Corporation of India Ltd.' (Financial Creditor) before the Indian Council of Arbitration can't continue during the ban time frame….


The reasoning laid down by the Tribunal for adopting this position stems from Section 238 of the Code, which provides the Code with an overriding effect over the Arbitration and Conciliation Act, 1996. Further, in the matter of Haravtar Singh Arora v. Punjab National Bank & Ors,[3] the NCLAT has reinforced the position that all proceedings pending before any court or tribunal come to an immediate and automatic halt and the same cannot be decided. In the matter of Power Grid Corporation of India Ltd v. Jyoti Structures Ltd. [4] a petition under Section 34 of the Arbitration and Conciliation Act, 1996 was filed before the NCLT wherein it was held by the tribunal that the term ‘proceedings’ does not cover all kinds of legal proceedings and is restricted to debt recovery actions against the assets of the corporate debtor. The tribunal laid down the interpretation that any action that might harm the assets of the corporate debtor cannot be initiated or continued once the moratorium period under section 14 of the Code comes into effect.


Although the arbitration proceedings may be initiated before the insolvency petition was filed, the same is very likely to impair or affect the assets of the corporate debtor and hence, in order to protect the rights of the other creditors, the arbitration proceedings cannot be continued.


It was further laid down by the NCLAT in the matter of Jharkhand Bijli Vitran Nigam Limited v. IVRCL Ltd. & Anr.,[5] that as the case of the Corporate Debtor can be resolved simply after assurance of counter case made by the Appellant in the equivalent arbitral procedures and if a counter case or some portion of it is set off with the case made by the Corporate Debtor, was of the view that both the case and the counter case of gatherings ought to be heard together by the Arbitral Tribunal without any bar under Insolvency and Bankruptcy Code, 2016.


The intent of the Code is to ensure that there is the smooth execution of the Corporate Insolvency Resolution Process. The Report of the Insolvency Law Committee states that “the ban on commencement and continuation of legitimate procedures, including obligation implementation activity guarantees a stand-still period during which lenders can't fall back on singular requirement activity which may disappoint the object of the corporate insolvency goals process.” [6]


In cases of non-filing of counterclaims, a continuation of the arbitration proceedings is likely to result in the impairment of the assets of the corporate debtor and this would defeat the entire purpose of the Code, which is to ensure that the corporate debtor continues to run as a going concern and the claims of the all the creditors are satisfied, either in totality or partially.

REFERENCES:


  1. Alchemist Asset Reconstruction Company Ltd v. Hotel Gaudavan Pvt. Ltd, AIR 2017 SC 5124

  2. KS Oils Ltd v. The State Trade Corporation of Indian Ltd. & Ors, [2018] 146 SCL 588.

  3. Haravtar Singh Arora v. Punjab National Bank & Ors., Company Appeal (AT) (Insolvency) No 567 of 2018.

  4. Power Grid Corporation of India Ltd v. Jyoti Structures Ltd., 246 (2018) DLT 485.

  5. Jharkhand Bijli Vitran Nigam Limited v. IVRCL Ltd. & Anr, Company Appeal (AT) (Insolvency) No. 285 of 2018.

  6. Report of the Insolvency Law Committee, Marc 2018, p. 31.

ABOUT THE AUTHOR:

Tejas Sateesha Hinder, is a 2nd-year student of Law, currently pursuing Law from National Law Institute University, Bhopal.

You can contact him at https://www.linkedin.com/in/tejas-hinder-9668a5191/

Edited by Rudra Prasad

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