Arbitration of Disputes relating to Insolvency law u/s 8 of Arbitration Act – By Deepanshi Gupta

Arbitration of Disputes relating to Insolvency law u/s 8 of Arbitration Act

– By Deepanshi Gupta, CS Professional and LL.B. student.

Convergence and overlap of provisions of laws are prevalent in every jurisdiction system. Arbitration and Insolvency proceedings are such sub-sets of convergence having their own purpose and objective. However, it gives rise to a legal issue over the prevalence status of one over the other. This article treads over the same via landmark judgments.

An important question of law is whether an application filed under Section 8 of the Act can be said to be maintainable in a proceeding initiated under the Insolvency and Bankruptcy Code, 2016 (“IBC”) is no longer res integra. Applying the four-fold test propounded in Vidya Drolia v. Durga Trading Corporation 2020 SCC Online SC 1018, the Supreme court in Indus Biotech Pvt. Ltd. v. Kotak India Venture (Offshore) Fund & Ors.[1] held that an application filed under Section 8 of the Act is not at all maintainable in an insolvency proceeding initiated under Section 7 of IBC. It explained that matters relating to insolvency, grant of patent and trademark, intra-company, criminal, matrimonial disputes, probate and testamentary, etc. are non-arbitrable disputes.

Though the Court was silent on the question of similar dispute when it comes to Section 9 of IBC, considering that Section 9 is based on similar principles as of Section 7, it can be safely concluded herein that the position of law will remain the same when it comes to section 9 of IBC and thus an application filed under Section 8 of the Act is not maintainable in an insolvency proceeding initiated under Section 7 of IBC.[2]

It is pertinent to note that IBC was enacted after the Arbitration & Conciliation Act and thus the legislature was duly informed of the existence of the latter. In this light, it can be concluded that when the legislature added a non-obstante clause under Section 238 of IBC using the words “…this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law…” it had an intention to give an overriding effect over the Arbitration & Conciliation Act as well. Further, the main objective of the IBC to provide timely relief to the creditors gets defeated due to unnecessary delays in the Corporate Insolvency Resolution Process (CIRP) due to the institution of Arbitration proceedings. Consequently, admitting an application under the Act over IBC is not only an ultra vires exercise of jurisdiction but also against the public interest.

In this light, this judgment would discourage corporate debtor from making frivolous attempts to delay the IBC proceedings by resorting to an arbitration clause despite there being no dispute on the liability owed by it and is a defaulter in terms of IBC.

Another question on the dais was with respect to the fate of arbitral award in case of approval of resolution plan under IBC 2016. This question was dealt with in the Sirpur Paper Mills Limited v. I.K. Merchants Pvt. Ltd.[3], wherein the Calcutta High Court held that Arbitral Award-Holder’s Claim will be extinguished upon approval of Award-Debtor’s Resolution Plan under Section 31, IBC 2016. Hence, even if an arbitral award has already been announced, IBC 2016 overrides it.

Furthermore, a question arises as to the commencement of insolvency proceedings during the pending arbitration proceedings. If an arbitration proceeding is pending in an arbitral tribunal, that lands us to two outcomes:

• If the debt is operational debt: A pending suit in arbitration tribunal indicates that there is a pre-existing dispute between CD and Operational Creditor. In this case, application u/s 9, IBC cannot be made.
• If the debt is financial debt: It is to be noted that a pre-existing dispute cannot be a subject matter of Sec. 7, though it may be relevant u/s 9.[4]

In essence, financial creditors can file an application to initiate CIRP against CD under IBC even if the arbitration proceeding is pending in Arbitral Tribunal, however, the operational creditors cannot do the same.

Reference:

[1] (2021) ibclaw.in 52 SC

[2] Abhishek Kumar and Siddharth Pandey, Maintainability of Application Under Section 8 Of Arbitration & Conciliation Act, 1996 In An Insolvency Proceeding, LEXOLOGY, (Jun. 21, 2021) <https://www.lexology.com/library/detail.aspx?g=4b7850d3-0b30-41a2-a343-ff7de7260c0a> accessed Oct. 29, 2021.

[3] [2020] ibclaw.in 15 HC

[4] Karan Goel v. Pashupati Jewellers, [2019] ibclaw.in 163 NCLAT