Introduction
In this article, Shreyas Jayasimha, Punthi Shah and Tushar Tyagi analyze how Alternative Modes of Dispute Resolution have been gaining traction across the world as an apt alternative to litigation, including with particular reference to India. Insolvency proceedings in recent times have clashed with such alternative modes of dispute resolution, especially arbitration. In this regard, it becomes pertinent to shed light on the Insolvency and Bankruptcy Code, 2016 which has been one of the most significant national legislations on insolvency and liquidation that has yielded some outstanding results in its nascent stages. However, there exist certain grey areas within the legislation, one of which this article aims to address – the clash between imposition of a moratorium and that of an initiation/continuation of an arbitration proceeding. The article is divided in the
following order –
Part I
1. Indian Perspective
1.1. Arbitration as a tool for dispute resolution
1.2. The Code
1.3. Intersection between CIRP and Arbitration
2. International Perspective
2.1. United Kingdom
2.2. Australia
2.3. United States of America
3. The Road Ahead
4. Conclusion
Part II
1. Indian Perspective
1.1. Benefits of Mediation
1.2. Objectives
2. International Perspective
2.1. Singapore
2.2. USA
3. Way forward
PART I: ARBITRATION AND INSOLVENCY
The Insolvency and Bankruptcy Code, 2016 (‘Code’) was enacted with the objective of being an umbrella legislation for the insolvency resolution of all types of entities such as individuals, corporate persons or partnership firms. The enactment of this Code was a watershed moment in the history of insolvency and bankruptcy in India. The Code sought to regulate and ensure a time-bound manner of insolvency processes with the aim of maximization of value of assets among other aspects.
Considering that the ‘maximization of value of assets’ is one of the most prominent aims of the Code, it has the tendency to affect other areas of law, including arbitration. Only the imposition of a moratorium under Section 14 of the Code is where the problem arises with respect to arbitration proceedings. Due to a lack of judicial precedents in this regard, the entire conflict between arbitration and Corporate Insolvency Resolution Process (‘CIRP’) or liquidation remains a grey area. Albeit there is a complete stay on arbitration proceedings among other proceedings under Section 14 (1)(a), there are multiple interpretations of the same by the Indian Courts which have resulted in more confusion which needs to be
addressed.
1.1. Arbitration as a tool for Dispute Resolution
Arbitration is an alternative mode of dispute resolution wherein the parties submit their dispute to one or more arbitrators who is/are a neutral third party, who passes an arbitral award which is binding on both parties. It is crucial to note that arbitration can only happen upon the consent of both parties and they also appoint their arbitrators. Usually, the parties who submit their dispute to arbitration have a pre-existing agreement which has an arbitration clause in case of future disputes or a binding arbitration agreement.
1.2. The Code
The Insolvency and Bankruptcy Code, 2016 seeks to revive distressed companies and protecting the interests of creditors by preventing credit/lending and financial risks. It classifies creditors into two categories namely, operational creditors[1] and financial creditors[2], who can both initiate CIRP[3] against the corporate debtor who has at least 1 Crore[4] of outstanding dues. Further, the corporate debtor can initiate a CIRP on their own in case of a default being committed as a corporate applicant.[5] An application under either of these categories shall be made to the Adjudicating Authority, i.e., the NCLT, which shall either accept or reject the application upon being satisfied of the existence of debt. In case it is accepted, the Adjudicating Authority will initiate a CIRP over the corporate debtor by appointing an Interim Resolution Professional who shall have full control to manage the affairs of the corporate debtor over the course of CIRP.[6] Post this, a public announcement will be made regarding the initiation of CIRP against the corporate debtor along with a call for claims of various creditors to whom the corporate debtor owes debt to. A moratorium is then imposed for the continuation of or institution of suits/arbitration proceedings among other actions.[7] It is important to note that once the CIRP begins, the order of moratorium so declared by the Adjudicating Authority shall exist till the completion of the CIRP process.
1.3. The Intersection Between CIRP and Arbitration
This section aims to identify the exact point of overlap between the Code and the process of arbitration, i.e., the imposition of a moratorium upon the admission of an application for CIRP by the Adjudicating Authority.
1.3.1. Moratorium
A moratorium is a suspension or stay on any legal action against a corporate debtor, giving them a chance to pay off their debts. This provision awards the debtor an opportunity to assess the risks, liabilities and profits without the imposition of any legal debt recovery mechanisms by the creditor. The moratorium period begins from the date of initiation of CIRP and ends upon the completion of the CIRP process, barring all proceedings during this period.
However, the Code is silent on what types/classes of proceedings that shall not be barred, leaving it to judicial interpretation. While Courts have attempted to interpret the scope of Section 14, there is neither a conclusive order which can be followed nor has the Code been amended to remove the ambiguity.
1.3.2. Outcome of Moratorium on Arbitration Proceedings
To discuss what the outcome of an order of moratorium on arbitration proceedings, it can be classified further into the following:
1.3.2.1. Filing an application for CIRP when Parallel Arbitration Proceedings are underway.
In the case of Fourth Dimension Solution Ltd. v. Ricoh India Ltd[8]., the Court gave an order for the operational creditor of the corporate debtor to go ahead with arbitration proceedings
despite approval of the resolution plan by the CoC and the Apex Court. Moreover, in K. Kishan v. M/s. Vijay Nirman Company[9], the Supreme Court held that an arbitral award falls under the ambit of a valid evidence of operational debt so long as it is undisputed.
Therefore, it is evident that there is no express bar against filing an application for CIRP when parallel arbitration proceedings are going on because a claim under an arbitration agreement does not fall under the definition of debt under the Code; However, if the claim independently falls under the scope of financial or operational debt, an application for CIRP may be made.
1.3.2.2. Foreign Seated Arbitration in which One of the Parties is an Indian Corporate Debtor Undergoing CIRP
In a situation where there is an ongoing foreign seated arbitration proceeding and one of the parties happens to have a CIRP case ongoing in India, then such a party may request for
a stay on the arbitration proceeding; However, where an award has already been passed foreign arbitration tribunal against foreign assets, then such an award shall have no prejudice against it having an effect on the Indian assets.
1.3.3. Judicial Precedents
Coming to judicial precedents, it is imperative to distinguish the views of courts. It is noticeable that there are 2 issues that courts have dealt with previously:
(a) Continuation/Initiation of Arbitration Proceedings when CIRP is admitted; and
(b) Arbitrability of Insolvency Proceedings.
In the case of Alchemist Asset Reconstruction Co. Ltd. v. Moser Baer India Ltd., the Court held that any proceeding initiated post the initiation of CIRP including those of arbitration, are considered ‘non-est’ in law. This landmark case resolved the question of whether arbitration clauses can be invoked after the initiation of CIRP. However, in this case, the question of invoking the arbitration clause arose at the stage of debt recovery. This was perhaps the rationale behind the judgement being made. However, this may not be the case for all stages of arbitration.
Further, in the case of Power Grid Corporation[10], the Court held has that so long as a proceeding is beneficial to the corporate debtor and has no adverse impact on the assets of the corporate debtor, then such proceeding shall not be barred under Section 14 of the Code, extending to even arbitration proceedings. An opposing view was held in the recent case of Indus Biotech Private Limited v. Kotak India
Venture Fund[11] wherein the Court relied on two principles to decide
the arbitrability of insolvency proceedings.
1.3.3.1. Firstly, the aspect of the Code having an overriding effect. As per Section 238 of the Code, the provisions of the Code have an overriding effect over any other law or statute for the time being in force, which essentially takes after the maxim generalia specialibus non derogant. Therefore, if two special statutes have clauses which are in conflict, the clauses of the statute enacted later will have an overriding effect over the former.
1.3.3.2. Secondly, the principle of Right in Rem v. Right in Personam. In order to examine the issue of arbitrability, the court took heed of the precedent laid down in the Vidya Drolia[12] case which stipulated that insolvency/CIRP proceedings become a right in rem only after they are admitted. Seeing as post the admission all creditors to whom the corporate debtor owes a debt to become interested third parties, the admission or acceptance of the CIRP application thereof results in an ‘erga omnes’ effect.
Insolvency proceedings being erga omnes is essentially true because a corporate debtor seated in one jurisdiction may have transactions with multiple jurisdictions, who will all be affected if the corporate debtor goes into liquidation or undergoes an insolvency. Therefore,
even in the Swiss Ribbons Case[13], the Court held that as soon as the CIRP initiated, they become in rem cases.
In order to understand why post-admission insolvency case becomes right in rem, it is crucial to examine the case of Indus Biotech Case wherein the Court made a distinction between the in rem and in personam stages of an insolvency proceeding. Before the application is admitted, the proceedings are only between the debtor and creditor, hence it is in personam. The NCLT only needs to establish the existence of default. Once the application is admitted, it becomes in rem. Additionally, this case addressed the arbitrability of insolvency proceedings in detail, wherein the Supreme Court allowed the case to be settled via arbitration as the dispute does not constitute a valid ‘debt’ under the Code.
In spite of the previously settled precedents, there is a lack of clarity regarding which insolvency proceedings can be settled through arbitration and the initiation or continuation of arbitration proceedings.
2. International Perspective
India is not the only country which imposes a stay on arbitration proceedings during an ongoing insolvency/liquidation. This is to ensure that all the creditors to whom the corporate debtor may owe a debt are treated justly. While it may be possible to settle certain insolvency issues through arbitration, there are some core insolvency issues which cannot be arbitrated (for example verification of claims of creditors, initiation of insolvency, winding up, etc.). A clear distinction between arbitrable and non-arbitrable insolvency issues has been brought about due to the sheer volume of international insolvency laws. In the Canadian case, Petrowest Corp. v. Peace River Hydro Partners[14], the court-appointed receiver set aside the competence-competence principle of arbitration (one that gives precedence to arbitration) and concluded that the arbitration agreements of this case were ineffective because several arbitral proceedings would conflict with the Bankruptcy and Insolvency Act’s goals of an orderly and effective resolution of the receivership.
2.1. United Kingdom
Relying on the various precedents laid down by English courts, it can be ascertained that so long as third-party rights or public policies are not infringed, parties involved in insolvency disputes may settle their dispute through arbitration.[15] In a case where the creditors are not satisfied with the method of resolution of debts by the appointed liquidator they may mutually agree upon settling the issue through arbitration as opposed to approaching a court of law. Post liquidation, the effect of moratorium equates to automatically suspending or staying all actions against the corporate debtor unless otherwise expressly approved by the courts.
2.2. Australia
As such there are no divisions pertaining to core and non-core issues in the Australian set-up. The adjudicating authorities generally refuse to grant a stay order if they are of the opinion that the rights of the parties do not stem from the statute but arise from a contract.
Additionally, the arbitrability of insolvency matters depends heavily on public policy considerations.
2.3. USA
Unlike many nations, the jurisprudence surrounding this conflict in the US is a little more cemented and substantial in nature. There have been a few cases wherein the courts have upheld that it is not possible to subscribe to concerns which places bankruptcy laws in a superior position to that of the Federal Arbitration Act superiority between bankruptcy laws and the Federal Arbitration Act was therefore clarified in this case. In the McMahan case, the Court laid down the test: “the party challenging the arbitral award must show/establish the Congress’s intention to make an exception to the FAA’s mandate either by establishing the (i) text of the Statute, (ii) legislative history of the Statute or (iii) inherent conflict between arbitration and the statute’s underlying purposes.”[16] In non-core matters, US bankruptcy courts lack jurisdiction, hence arbitration must be required in such circumstances. Even while the majority of essential insolvency concerns should be decided by the courts, some issues may not necessarily contradict or undermine the core purpose of the bankruptcy code and can be resolved through arbitration.
3. Road Ahead
The clash between insolvency laws and arbitral laws in India require some clarity when it comes to their application based on each case. The ultimate goal of creditors/adjudicating authorities/courts is to ensure that there is an effective debt recovery that happens, because if not, over a period of time, it will eventually affect the economy of the country. Creditors need to consider the bundle of rights each corporate debtor has, which includes that of issues pertaining to insolvency likely to be resolved through arbitration.
This comparative study of different countries gives the criteria that must be taken into account when deciding the arbitrability of insolvency issues; certain countries have adopted a severe stance, while others are more tolerant. While some nations make decisions on a case-by-case basis, some have advanced legislative frameworks with clear structures, to some extent.
Therefore, it is up to the Indian courts to arrive at a possible solution which clears the mist surrounding this grey area that exists. Until such time, debates over the superiority of the Code over arbitration agreements or clauses will persist.
4. Conclusion
Different spheres of laws often intersect and overlap. However, each law only ensures justice for the party which suffers losses by fulfilling the aim behind which it was enacted for. Often times, multiple legislations need to be applied, resulting in the conflicts between these laws. During liquidation or insolvency proceedings, the corporate debtor is already facing hurdles to pay off their debt, therefore imposing additional proceedings/suits through arbitration or in a court will only aggravate their existing burden. On the other hand, an agreement entered into by two parties based on trust will be breached when one party does not honour it merely because of undergoing insolvency/liquidation. The judiciary must take a very neutral stance on the issue of insolvency/liquidation and the initiation /continuation of
proceedings in other forums of law. In this light, many cases have seen the courts applying the following neutral rule: so long as the arbitration proceedings, which may run parallel, are not aimed at debt recovery, they can continue with the same as this has no effect on the pool of assets of the corporate debtor. While this is the most neutral solution which the Courts have come up with, it is still not entirely cohesive. This can be rectified through an amendment to Section 14 of the Code which clearly lays down which categories of proceedings are barred or not. Additionally, arbitration agreements can have clauses which deal with situations in the case either of the parties goes into insolvency. Such steps can be taken for the better implementation of the provisions of the Code as clauses contained within arbitration agreements.
PART II: MEDIATION AND INSOLVENCY
Mediation is another mode of Alternative Dispute Resolution which is informal in nature wherein a mediator (a neutral third-party) assists, oversees and facilitates the two parties who have agreed to mediate their dispute to reach an amicable solution. Unlike in arbitration, the mediator does not have any adjudicative powers. Invariably, any agreement reached upon will not be binding upon either of the parties. Mediation is at a very nascent stage in India, especially when it comes to insolvency related disputes.
The Code was enacted to deal with the rising Non- Performing Assets in a timely manner. While the Code is more successful than its predecessors, it is heavily reliant on the traditional courts for its functioning. This inevitably leads to inordinate delays due to litigation between different parties during the CIRP process. Despite multiple amendments to the Code, there are inefficiencies in the time bound resolution of disputes. Inevitably, the purpose of the preamble of the Code stands defeated. This part of the article aims to explore the aspect of using mediation as an effective tool to combat this issue. Additionally, the article shall also analyze the Indian position along with a cross-jurisdictional comparison of the effective use of mediation in insolvency issues. Finally, the article shall suggest a few approaches which may assist the creditors as well as the corporate debtor in resolving disputes through mediation including amicably framing strategies for payment of debt, restructuring among others.
1. Indian Perspective
1.1. Benefits of Mediation
Given that mediation is mostly based on the concept of mutually negotiating to come to an amicable solution, it would increase the likelihood of arriving at a promising solution for both parties involved. Further, the corporate debtor would have some control over their assets as opposed to an Insolvency Resolution Professional having total control over the pool of assets. Additionally, there is scope for deciding on a comprehensive resolution plan which addresses the interests of all the concerned parties. Such a resolution is more than a mere debt recovery mechanism since it also helps the debtor to effectively rehabilitate. Furthermore, despite the time period provided for completion of the CIRP process, it inevitably gets delayed. By using mediation, it is possible to reduce the burden on the courts by eliminating the long procedural complexities. Mediation also helps to protect the reputation of the corporate debtor owing to the confidentiality of the proceedings. They have an added benefit of being extremely convenient because they can be held at the ease of both parties. Finally, the relationship that exists between a creditor and debtor does not get damaged when they enter into a mediation, thereby ensuring their cooperative nature persists for future transactions.
1.2. Objectives
Mediation insolvency processes can act as a tool for alleviating corporate distress by ensuring there is a conducive environment benefitting both the parties for insolvency negotiations.
1.2.1. A significant problem that arises when it comes to insolvency proceedings is with respect to the distribution of the assets of the corporate debtor to all the creditors involved from the estate. As per the Code, a waterfall mechanism is followed but this may not be equal distribution of assets or even the entire amount of what a creditor may be entitled for. Hence, mediation could be an effective tool in this regard whereby parties themselves can come to a common conclusion as to the most efficient way of distribution of assets of the corporate debtor.[17]
1.2.2. Another pertinent issue that arises is with respect to the restructuring plan. A restructuring plan is essentially a multi-party agreement which enables the most optimal method to revive the company/solve the distress it faces for all the parties involved. What happens generally is that the corporate debtor convinces the creditors of the benefits of revival of the company as opposed to liquidation of the company. However, it is not always that creditors are satisfied with this approach because they do not trust the corporate debtor’s capabilities to manage the distress. Even in the event of an acceptance of the motion, the next major challenge is that of coming up with an apt restructuring plan, which requires a lot of capital in itself – such as hearings, expert opinions, etc. However, should mediation be used for the same, there would be a more satisfactory result. The confidentiality aspect of mediation further bolsters more open communication between the corporate debtor as well as the creditors involved. Additionally, the mediation process gives the parties the chance to develop a rescue strategy that adheres more closely to their true interests; in addition, parties can gather a variety of information to ensure performance and to monitor future behavior. That said, there is always an iota of risk involved when it comes to restructuring plans and therefore, all relevant aspects should be considered while mediating, failing which there would be adverse consequences.
1.2.3 Finally, mediation can be used to even prevent insolvency. Instead of using it as a last resort, mediation should be employed in the initial stages of the proceedings when the parties are most likely to find common ground. They may even recognize other previously unidentified issues and prevent them from occurring.
2. International Perspective
2.1. Singapore
The Committee to Strengthen Singapore as an International Centre for Debt Restructuring proposed using insolvency mediation to resolve disputes in 2018, and the Singaporean Ministry of Law accepted their recommendation. The following cases have been approved for the use of insolvency mediation for the following purposes: resolving individual creditor disputes with a debtor in a multi-creditor restructuring; managing multiple creditor disputes of the same nature; and achieving agreement between a debtor and its creditors on the restructuring plan.[18] The Insolvency law of Singapore also provides for statutory recognition under the Insolvency to arbitration and other alternate disputes resolutions. Under the Insolvency, Restructuring and Dissolution Act 2018, the Official Assignee can refer the disputes to arbitration, or compromise all debts, claims and liabilities between the bankrupt and any person who may have incurred any liability to the bankrupt.[19]
2.2. United States of America
Under Chapter XI of the Bankruptcy Code, the US has a strong mediation process.[20] Either a party requests insolvency mediation, or the court orders it. It has been utilized successfully in a number of high-profile instances, including the Lehman Brothers case, when only 4 of the 77 finalized mediation processes were discontinued.[21]
3. Way Forward
Simply suggesting the use of mediation as a tool to prevent insolvency is not substantial; it is crucial to also resolve various issues which surround the context of using mediation in insolvency such as-
(a) Whether to group creditors with their myriad of interests under different brackets, each with their own representative;
(b) Who gets to initiate the process – be it the corporate debtor, creditor, or both;
(c) Who decides upon the mediator;
(d) Enforcement of any settlement reached at in a particular mediation proceeding, etc.;
Insolvency mediation may not be ideal to resolve every insolvency matter. However, it provides a platform for prevention of disruption of corporate entity, which should ideally be the goal of any insolvency process. Further, seeing as maximization of value of assets is one of the primary motives of the Code, mediation also helps by expedited manner of solving cases. The judiciary and parliament should consider incorporating mediation into the
Code, this will promote flexible and cost-effective resolutions of insolvency matters. While all cases may not require a mandatory pre-litigation mediation, amending the Code to incorporate those cases which fall under a specific classification to undergo a pre-litigation mediation would not only expediting process but reduce burden on courts.
Conclusion
Following the analysis in both parts of this article, it can be concluded that the Code has a long way to go to becoming a clear and potent law. Despite the numerous challenges that have cropped up – especially during the pandemic – the Code provided the most feasible solutions to aggrieved persons. The introduction would not only dispel the mist surrounding the clash between a moratorium and arbitration, but also increase the rate of success in terms of disposal of cases and debt recovery and asset distribution.
[1] Section 5(20) of the Code
[2] Section 5(7) of the Code
[3] Sections 7 and 9 of the Code
[4] As amended by the Notification under Section 4 of the Code
[5] Section 10
[6] The interim resolution professional later gets replaced by the resolution professional
[7] Section 14 – the following are prohibited during the period of moratorium – (a) the institution of suits or continuation of pending suits or proceedings against the corporate
debtor including execution of any judgment, decree, or order in any court of law, tribunal,
arbitration panel or other authority;
(b) transferring, encumbering, alienating, or disposing of by the corporate debtor any of its
assets or any legal right or beneficial interest therein;
(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002;
(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor
[8] Civil Appeal No. 5908 of 2021.
[9] Civil Appeal No. 21824 of 2017.
[10] Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd. 246 (2018) DLT 485.
[11] 2021 SCC Online SC 268.
[12] Vidya Drolia and Ors. v. Durga Trading Corporation, MANU/SC/0939/2020.
[13] Swiss Ribbons Pvt. Ltd. v. Union of India, (2019) SCC Online SC 73
[14] Petrowest Corp. v. Peace River Hydro Partners, 2022 SCC 41.
[15] This was held in the case of Fulham Football Club v. Richards, [2010] EWHC 3111 (Ch)
[16] Shearson/American Express v. McMahon, 482 U.S. 220, 242 (1987).
[17] For instance, Bankruptcy mediation is formally part of the judicial system in Canada. In addition of being privately available, Article 105 of the Canadian Bankruptcy and Insolvency general rules (C.R.C., c. 368) prescribes mandatory mediation to resolve two type of disputes: (a) Mediation for surplus income, which can beinitiated both by the trustee, or one or more creditors, in case of disagreement with the amount of surplus income to be paid by the bankrupt, according to art. 68(8) Canadian Bankruptcy Act; (b) and mediation in case of creditors’ opposition to bankrupt’s discharge, according to art. 170.1(2) Canadian Bankruptcy Act. Canadian bankruptcy regulation is available on the Justice Laws website: http://laws-lois.justice.gc.ca/eng/acts/B3/index.html
[18] https://www.lexology.com/Commentary/insolvency-restructuring/singapore/oon-bazulllp/alternative-dispute-resolution-in-insolvency-and-restructuring-proceedings
[19] Section 387 of Insolvency, Restructuring and Dissolution Act 2018
[20] Gert-Jan Boon, Maciek Bednarski, Carlotte Dessauvagie & Milan Pastoors, The Mediator in Insolvency Law:Exploring New Terrain, leidenlawblog
[21] Kayjal Dasan & Samuel Seow, Seminar Review: Mediation in International Insolvency,
International Arbitration http://www.internationalarbitrationasia.com/mediation_in_international_insolvency_disputes
