In recent years, India has embraced a pro-arbitration approach, making international arbitration the preferred method for resolving disputes between Indian corporations and global entities. Many of these arbitrations lead to foreign awards, creating a scenario where a creditor seeks to recover a foreign arbitral award from an insolvent debtor in India. This article explains how a creditor can recover such an award through insolvency proceedings in India.
Historically, the winding up of companies in India fell under the Companies Act 1956 and 2013. However, a seismic shift occurred in 2016 with the enactment of the Insolvency & Bankruptcy Code (the IBC). This new legislation introduced the Corporate Insolvency Resolution Process (CIRP) for defaulting companies to preserve their assets and ensure a time-bound resolution. The CIRP typically comprises the following stages:
Stage 1: The process begins with a creditor’s application to the National Company Law Tribunal (NCLT), marking the insolvency commencement date.
Stage 2: An Insolvency Professional is appointed as the Interim Resolution Professional (IRP), gaining control of the corporate debtor. A moratorium is declared on all legal proceedings against the corporate debtor, including the execution of arbitral awards. The IRP invites claims against the corporate debtor.
Stage 3: A Committee of Creditors (CoC) is formed, appointing a resolution professional (RP) tasked with creating a resolution plan for the corporate debtor to settle outstanding debts.
Stage 4: If the CoC approves the resolution plan, it is submitted to the NCLT for final approval. If rejected, the corporate debtor faces liquidation.
Foreign awards may be introduced into insolvency proceedings at either Stage 1 or Stage 2. In the former scenario, an award creditor can initiate insolvency proceedings based on the foreign award, identifying itself as a financial creditor. In the second scenario, the award creditor can introduce the foreign award as a claim when insolvency proceedings are initiated by a different creditor.
The classification of an award creditor as a financial or operational creditor under the IBC is crucial, as only these categories can initiate insolvency proceedings. The IBC does not explicitly define whether an award creditor falls into either category. However, a recent Supreme Court judgment clarified that an arbitral award for payment of money qualifies as a financial debt, enabling the creditor to initiate proceedings under the IBC (see Dena Bank v. C. Shivakumar Reddy, (2021) 10 SCC 330).
Recognition of Foreign Awards in India
Recognition of a foreign award in India follows the provisions of the Arbitration and Conciliation Act, 1996. The process involves three stages: an application to the relevant judicial authority, potential challenges by the judgment debtor, and execution.
The question arises whether recognising a foreign award is a prerequisite before commencing an insolvency proceeding. This matter has divided the National Company Law Tribunal (NCLT), with varying opinions. Notably, the Supreme Court has emphasized that a foreign award is not executable as such until it is recognised under the relevant provisions (see Union of India vs. Vedanta Ltd., (2020) 10 SCC 1).
Several key considerations should be kept in mind when pursuing a foreign award in insolvency proceedings.
Choice Between Arbitration Act and Insolvency Proceeding: A creditor has the option to claim the award through both the Arbitration and Conciliation Act, 1996 and insolvency proceedings. However, insolvency proceedings are only suitable when the award debtor cannot meet its liability, as initiating insolvency proceedings for any other reason incurs penalties.
Enforcement During Moratorium: The applicability of a moratorium during enforcement proceedings has been the subject of debate. While the Delhi High Court allowed set-aside proceedings for domestic awards during the moratorium[1], the Supreme Court overturned this decision, indicating that moratorium would apply to enforcement proceedings (see P. Mohan v. Shah Bros. Ispat Pvt. Ltd., (2021) 6 SCC 258).
Timing of Claim: If the corporate debtor undergoes insolvency before satisfying the award from an arbitration proceeding and a resolution plan is approved, the right to claim the award may be extinguished if it is not filed before plan approval (see Sirpur Paper Mills Limited v I.K. Merchants Pvt. Ltd A.P. No 550 of 2008 decided on 7 May 2021).
Recovering foreign award debts through insolvency proceedings is an effective tool to reclaim debts from insolvent debtors. However, recognising a foreign award before initiating insolvency proceedings is essential. This aligns with India’s pro-arbitration stance and strengthens the enforceability of foreign awards in the country. While challenges and nuances exist in navigating foreign award recovery in insolvency proceedings, the availability of this option complements India’s commitment to fostering a robust arbitration environment.
[1] Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd., 2017 SCC OnLine Del 12189
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