The Insolvency and Bankruptcy Code (IBC), 2016, has changed the Indian economic landscape in executing insolvency and bankruptcy cases. It seeks to consolidate and amend the laws relating to reorganization as well as insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner. Conversely, arbitration under the Arbitration and Conciliation Act 1996 is a more popular alternative dispute resolution (‘ADR’) mechanism providing quicker remedies without involvement of courts. Through this article, I will analyse a more elaborate tale and heartbreak in union between IBC and Arbitration, projects where deeper pockets have played games with businesses respectively at first instance no victor error or serving may be committed The two frameworks are crafted to suit the convenience of parties desiring fast resolution of their disputes but do so with different outlook and end game in mind, giving rise to interesting legal questions.
Understanding the Frameworks: IBC and Arbitration
Saving a Stressed Asset: The Insolvency and Bankruptcy Code 2016, aims to expedite the resolution of stressed assets with emphasis on reorganization and liquidation. The focus is on class-wide proceedings, where the rights of all creditors are cared for to completion through
insolvency resolution plans or liquidation. Arbitration is a private means of resolving disputes, in which the parties sort out their
differences outside traditional courts by choosing an independent person to make a binding decision. It offers flexibility, cost-effectiveness, and specialisation in resolving disputes. IBC in its real essence, the conflict between IBC and arbitration comes from what they do inherently. While IBC intends to resolve financial distress in an end-to-end manner, arbitration focuses on resolving bilateral disputes. This creates a number of different touchpoints through which the two regimes can either come into conflict with one another or need to dovetail.
1. The Overlap of IBC and Arbitration: Key Issues
Several legal challenges arise when insolvency proceedings and arbitration overlap. These includes:
a. Moratorium under Section 14 of IBC and Arbitration
Moratorium under Section 14 of IBC is one of the areas where IBC and arbitration meet. If the corporate debtor is adjudicated for insolvency, the moratorium imposed upon the institution or continuation of suits, proceedings and recovery actions against the debtor includes the suspension of arbitration proceedings. The question then is, can arbitration be initiated or continues after IBC moratorium is
invoked. In addition, courts have ruled that after a moratorium is declared, arbitration proceedings should not be allowed to proceed. The significant instance of Alchemist Asset Reconstruction Company Ltd v. Hotel Gaudavan Pvt Ltd in case of Supreme Court of India
held that once moratorium as per Section 14 of IBC is imposed all the arbitration proceedings are to be stayed.
b. Arbitrability of Claims During Insolvency Proceedings
Another point to consider is whether arbitral tribunals have the authority to decide the arbitrability of cases upon the commencement of insolvency proceedings. Since proceedings are part of the public interest, as all creditors and stakeholders are involved, it is impossible for most disputes to be subject to arbitration. In the famous case of Swiss Ribbons Pvt. Ltd. v. Union of India, the Supreme Court said that: “IBC is a beneficial legislation which puts the corporate debtor back on its feet when it defaults in paying its dues to a financial creditor”. Arbitral disputes cannot be heard since it would tender claims which may affect the collective process impossible.
c. Claims of Operational and Financial Creditors in Arbitration
If insolvency proceedings have also been initiated, operating and financial creditors may find that their ability to enforce claims under arbitration can become problematic. The Supreme Court of India in case of Innoventive Industries Ltd. v ICICI Bank (Case) has clarified that insolvency proceedings under IBC now stand paramount over all recovery mechanisms (Pre – existing framework). Arbitration proceedings initiated by creditors are incapable of overriding IBC and cannot supplant the collective resolution process. Also, in K. Kishan Vs Vijay Nirman Company Pvt, The Supreme Court held that an arbitral award cannot be regarded as “default” for any purpose of triggering insolvency under section 9 IBC. This means that there is no question of an operational creditor using the arbitral award as conclusive proof to trigger insolvency proceedings unless such and arbitration award has become final, un-debated.
2. Harmonizing IBC and Arbitration
While conflicts between the IBC and arbitration process are evident, recent jurisprudence has attempted to harmonize the two. Indian courts have taken several steps to balance the two regimes, particularly in the following ways:
a. Arbitration for Non-Core Insolvency Matters
Even with the imposition of a moratorium under Section 14, arbitration may still proceed for matters unrelated to the corporate debtor’s core insolvency proceedings. For instance, if the dispute does not pertain to the claims of creditors or assets of the corporate debtor,
courts have allowed arbitration to continue. This allows for a flexible approach, ensuring that arbitration is not entirely sidelined during insolvency.
b. Post- Resolution Arbitration
Once a resolution plan under the IBC is approved, the corporate debtor’s liability in respect of claims is determined. In Essar Steel India Ltd. v. Satish Kumar Gupta, the Supreme Court held that all claims of creditors and stakeholders, including arbitration claims, are settled upon the approval of a resolution plan. Post-resolution, arbitration may proceed in respect of disputes arising thereafter, but pre-resolution claims are considered extinguished.
c. Insolvency Proceedings as a Public Policy Exception to Arbitration
Arbitration law provides certain exceptions to arbitrability, particularly in matters of public policy. Insolvency has been recognized as a matter of public policy, as it affects the economy and the rights of all stakeholders. Thus, courts have been reluctant to allow private arbitration in cases that involve the insolvency process, favoring collective resolution over bilateral arbitration. In A. Ayyasamy v. A. Paramasivam, the Supreme Court underscored that fraud, insolvency, and criminal offenses are matters of public policy and hence non-arbitrable. This reinforces the primacy of the IBC over arbitration in the context of insolvency disputes.
3. International Perspective: Comparing with Other Jurisdictions
The interplay between insolvency and arbitration is not unique to India. Other jurisdictions have also dealt with the tension between insolvency law and arbitration. In the United States, for example, the Bankruptcy Code imposes an automatic stay similar to the moratorium under the Indian IBC, halting arbitration proceedings against the debtor. However, U.S. courts have adopted a more case-specific approach, allowing arbitration to proceed if the dispute is not central to the bankruptcy estate’s liquidation or reorganization. The UK’s approach under its Insolvency Act also provides for a moratorium, though courts have allowed arbitration to continue if the dispute does not affect the insolvency process. In Lomas v. JFB Firth Rixson Inc., the UK Supreme Court held that arbitration could proceed if the arbitrator had jurisdiction and the outcome would not affect the insolvency estate’s collective interests. These international perspectives show that while insolvency typically trumps arbitration, there is room for arbitration to coexist where it does not interfere with the core objectives of insolvency proceedings.
4. Conclusion
The interaction between the Insolvency and Bankruptcy Code, 2016, and arbitration in India is complex and evolving. While the two frameworks serve distinct purposes, they inevitably intersect in the context of financial distress. Indian courts have largely prioritized
the collective resolution mechanism under IBC over arbitration, though there are exceptions where arbitration can continue without disrupting the insolvency process. As legal interpretations continue to develop, this dynamic will play a crucial role in shaping India’s dispute resolution landscape.
This article is authored by Avinash Verma, who was among the Top 40 performers in the ADR quiz competition organized by Lets Learn Law.