NATIONAL LAW UNIVERSITY ODISHA

INSOLVENCY AND BANKRUPTCY CODE

INVOKING OF ARBITRATION VERSUS IBC, 2016

SUBMITTED TO

KAUSHIKI BRAHMA

(Assistant Professor of Law)

SUBMITTED BY-

PRIYESH VERMA (16/BA/081)

RAJVANSH SINGH (16/BA/111)

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 TABLE OF CONTENT

ABSTRACT....................................................................................................................................3
CHAPTER 1: INTRODUCTION...............................................................................................4
RESEARCH METHODOLOGY.................................................................................................6
CHAPTER 2: IBC & ARBITRATION – A TALE OF TWO MUTUALLY EXCLUSIVE
REALMS?......................................................................................................................................8
CHAPTER 3: IMPACT OF IBC ON ARBITRATION PROCEEDINGS.............................11
CHAPTER 4: COMPARATIVE STUDY OF INSOLVENCY AND ARBITRATION
LAWS OF SELECT JURISDICTIONS....................................................................................21
CHAPTER 5: CONCLUSION AND THE WAY FORWARD...............................................25

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 ABSTRACT

The arenas of insolvency law and arbitration law continue to be at loggerheads in the absence of
any internationally recognised instrument dealing with their interaction. With the jurisprudence
of the insolvency law in India evolving after the enactment of the IBC in 2016, the authors seek
to discuss the impact of the IBC on India seated arbitrations and suggest changes in the present
system to harmonise the two fields. The first chapter attempts to lay bare the basic different
governing philosophies of the two diverse areas of law, to elucidate the imbrication. The second
chapter deals with the issues which arise before the arbitral tribunals at the preliminary stage
while dealing with the question of interaction of the two diverse fields and discusses the various
treatments meted out by the courts of law. The third chapter provides a comprehensive study of
the impact of Indian cases and insolvency laws on the India seated arbitration proceedings. The
fourth chapter compares the laws of the UK and the US which have a more developed
jurisprudence on this matter with that of the Indian. In the last chapter the authors have included
suggestions with the intention to ease the interaction of the two fields in India. In conclusion, the
authors promote acceptance of a modified version of universalism in insolvency law and call
upon the concerned international authorities to enact Model Laws and Legislative Guides to
particularly regulate the interaction of the two fields.

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 CHAPTER 1: INTRODUCTION

The Indian legislature enacted the Insolvency and Bankruptcy Code, 2016 (“Code”) in order to
consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate
persons, partnership firms and individuals in a time-bound manner for maximisation of value of
assets of such persons, to promote entrepreneurship, availability of credit and balance the
interests of all stakeholders.1 The Code was enacted on the basis of recommendations made in
the November 2015 report of the Bankruptcy Law Reforms Committee (“BLRC Report”).2

According to the BLRC Report, the reason for such a need on part of the legislature was to
ensure, “Financial sector reforms which had given a transformation of the equity, currency and
commodity markets. However, despite considerable policy efforts, the credit markets continue to
malfunction. One key factor that holds back the credit market is the mechanism for resolving
insolvency, or the failure of a borrower (debtor) to make good on repayment promises to the
lender (creditor). The existing laws have several problems and are enforced poorly.”

Thus, the aim of the Code so enacted in 2016 was to bring all the existing insolvency laws under
one umbrella and strait-jacket the recovery process for the creditor to the extent possible.
Insolvency and Arbitration proceedings are usually seen to not coexist easily due to the opposing
policy objectives of the procedures.3 Insolvency proceedings envisage a transparent and
accountable process to rescue the insolvent party while centralising the claims and treating the
creditors equally for a coordinated distribution of assets under the authority of a statute. 4
However, in arbitration the focus is on the resolution of the dispute privately and confidentially,
and the authority is derived from a contractual relationship of the party and thereby the rights
associated in such a proceeding are rights in personam as opposed to Insolvency wherein the

1
Preamble to the Insolvency and Bankruptcy Code, 2016 [Act no. 31 of 2016].
2
Bankruptcy Law Reforms Committee, The report of the Bankruptcy Law Reforms Committee (Vol. I Rationale and
Design) para 3.1.
3
Josè Rosell and Harvey Prager, ‘International Arbitration and Bankruptcy: United States, France and the ICC’
(2001) 18 J. INT’L ARB. 412, 417.
4
Vesna Lazić, ‘Arbitration and Insolvency Proceedings: Claims of Ordinary Bankruptcy Creditors’ (1999) 3(3)
EUR. J. COMP. L. & GOVERNANCE 2,4.

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rights are rights in rem.5 The existence of such contradictory interests creates numerous issues for
the parties, the arbitrators, and the authorities under the Insolvency laws and the courts.

Talking about India in specific, the number of insolvency cases in India has been steadily
increasing with the introduction of the Code in the year 2016. In the calendar year of 2019, the
number of cases filed has increased by a whopping 123%. 6 With the gradual increase in foreign
investments, it would be natural to assume an increase in the number of insolvency cases with
implications across the border.

Insolvency laws and arbitration laws around the world are two sets of different procedures, each
having its own purpose, objectives and underlying philosophy and policy. Apart from the
difference in the procedure, the distinct nature of the two laws is probably the reason why the
relationship between them is seldom scrutinised in the legal writings and often reduced to the
mere statement that the bankruptcy issues are not arbitrable but there are certain points of
interaction between the two laws. The aforementioned statement can be substantiated by the
recent judgment where the court has upheld an arbitral tribunal’s decision to substitute a
disputing party with another entity following a corporate restructuring carried out mid-dispute.7

5
Ibid [6].
6
Nevin John, ‘Number of insolvency cases surged 30.29 per cent between October-December, 2019’ (Business
Today Feb.18, 2020)<https://www.businesstoday.in/current/corporate/insolvency-cases-rose-between-october-
december-2019-ibc- insolvency-and-bankruptcy-code- liquidation/story/396381.html#:~:text=According%20to
%20the%20latest%20data%20of%20Insolvency%20and %20Bankruptcy%20Board,soared%20by%20123%20per
%20cent.> accessed 22 Oct 2020.
7
A v B (2017) 1 WLR 2030.

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 RESEARCH METHODOLOGY
The present study is essentially doctrinal study; research undertaken is descriptive in nature with
an analytical bent. Both primary and secondary data has been used and examine in the holistic
manner for the purpose of the research.

OBJECTIVES

 To examine the mutual exclusivity and imbrication of the legal system of Arbitration
laws and Insolvency laws.
 To examine the treatment of overlap of Arbitration and Insolvency laws in Indian
Jurisprudence and outside
 To examine the associated lacunas in the present treatment of the overlap of Arbitration
and Insolvency laws.

STATEMENT OF PROBLEM

 The legal domain of Arbitration laws and Insolvency laws are fundamentally quite
different from one another. The question under investigation in this paper pertains to the
circumstances wherein they overlap and the legal positions taken by courts of law in such
a scenario.
 The another aspect under scrutiny is the comparison of the position of law in Indian legal
system and others, in case of such overlap of Arbitration and Insolvency laws.
 The third aspect of research pertains to bring the associated lacunas to the fore and will
analyze the probable solutions.

RESEARCH QUESTIONS

 What are the scenarios under which the legal system of Arbitration law and Insolvency
law has their interaction?
 How is the treatment of overlap of Arbitration and Insolvency laws in Indian
Jurisprudence different from that of the legal system in other countries?

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  What are the associated lacunas in the present treatment of the overlap of Arbitration and
Insolvency laws and the scope of improvements?

HYPOTHESIS

A preliminary understanding of the legal systems of Arbitration Law and Insolvency laws on the
on the first look might seem to be mutually exclusive to one another, yet a closer look shall
elucidate the overlapping arenas of the two diverse areas of law.

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 CHAPTER 2: IBC & ARBITRATION – A TALE OF TWO MUTUALLY EXCLUSIVE
REALMS?

The Preliminary Issues Affecting the Conduct of Arbitration Proceedings

There is unanimity in jurisprudence that insolvency law, unlike arbitration law, is dominated by
the local law of the respective jurisdictional court. 8 Therefore, when a particular corporate entity
is brought under the purview of insolvency law of more than one jurisdiction, there arises a
possibility of conflict between the laws of the two regions. Thus, giving rise to cross-border
insolvency and conflict of laws issues. Now, if an element of international commercial
arbitration is also added to this, wherein the Corporate Debtor is involved in an arbitration
agreement or an arbitral proceeding with a foreign entity, the matters get complicated further. 9
These complications cannot be resolved without clearing certain aspects related to specific
preliminary issues. 

Arbitrability of Insolvency Matters

Arbitrability has been given numerous definitions, and there cannot be an internationally
accepted definition of arbitrable matters.10 This is because different countries have different
policies on the matters that they consider must be resolved by the state courts rather than private
dispute resolution.11 Arbitrability of a dispute is an essential prerequisite for a valid arbitration
agreement and therefore, a condition precedent for an arbitral tribunal to exercise jurisdiction. 12
The concept of arbitrability can be further divided into objective arbitrability and subjective
arbitrability.13 Objective arbitrability deals with the question of the kind of issues that can be and
cannot be submitted to arbitration. Subjective arbitrability concerns itself with the types of
persons or entities that are considered to be capable of submitting disputes to arbitration because
of the functions they perform or the status that they hold.
8
Simon Vorburger, International Arbitration and Cross-border Insolvency: Comparative Perspectives (Kluwer Law
International, 2014), 6.
9
Wolfgang Kühn, ‘Arbitration and Insolvency’  (2011) 5 DISP. RESOL. INT’L 199, 203.
10
Andrew Tweeddale and Keren Tweeddale, Arbitration of Commercial Disputes (Oxford Union Press, 2007), 107.
11
Sir Mustill, Michael J. and Stewart C. Boyd, Law and Practice of Commercial Arbitration in England (4th Lexis
Publication 2001) 71.
12
Bernard Hanotiau, ‘What law Governs the Issue of Arbitrability?’  (1996) 12(4) ARB. INT. 292, 391.
13
Eric A. Schwartz, ‘The Domain of Arbitration and Issues of Arbitrability: The View from the ICC’ (1994) 9(1)
ICSID Rev.17.

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The question of arbitrability depends on the various national laws. This emphasizes the question
of applicable law. The determination of the law governing the arbitration is of utmost importance
as the subject-matter could be arbitrable under the laws of one country but not under the other.
The question of applicable law has been already dealt above. In India, insolvency proceedings
would fall under those categories of matters which are non- arbitrable. 14 The case was a landmark
in that it was the first and arguably the only decision expounding the concept of arbitrability. In
this decision, the Indian Supreme Court gives a generic test and states:

“Generally and traditionally all disputes relating to rights in personam are considered to be
amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated
by courts and public tribunals, being unsuited for private arbitration.”

The Court clarifies that a right in personam is a right against an individual, as opposed to a right
in rem i.e. a right which attaches to a particular ‘thing’ rather than a person, or creates a legal
status such as citizenship, and which is therefore exercised against the world at large. Thus the
test which it has sought to lay down is in the form of classification of rights as rights in rem, as
those not arbitrable, and rights in personam as those which are arbitrable. It should be noted,
however, that immediately succeeding this observation the court notes that “[t]his is not […] a
rigid or inflexible rule. Disputes relating to sub-ordinate rights in personam arising from rights
in rem have always been considered to be arbitrable”.15 Thus although insolvency claims may
not be arbitrable, the consequent breach in a contract by virtue of insolvency is  arbitrable. To
summarise, the test focuses on whether the action brought is in the nature of an action in rem or
an action in personam. It focuses upon the question of whether a dispute is ‘inherently’ arbitrable
due to the rights relied on in a dispute. 

Staying of Arbitral Proceedings due to Initiation of Insolvency

A study of various local insolvency laws would show that these legislations have clauses which
suspend on-going litigation or other proceedings and restrict new claims after the
commencement of insolvency proceedings. This stay can either be imposed by the courts or by
the arbitrators themselves based on factors like forum non-conveniens, lis pendens, or

14
Booz Allen & Hamilton Inc. v SBI Home Finance Ltd. (2011) 5 SCC 532. [“Booz Allen”]
15
Ibid [8]

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international public policy. Once a stay order is passed, the arbitral proceedings stand still. Thus,
the arbitral tribunals are suggested to exercise their jurisdiction cautiously because the parallel
insolvency court proceedings would most likely not allow any arbitral proceeding after initiation
of insolvency proceedings.

However, generally, the impact of stay orders on on-going and upcoming proceedings is not
binding on foreign seated arbitral tribunals due to the territorial nature of the insolvency
proceedings.16 Therefore, the general approach of the tribunals has been to continue with the on-
going arbitral proceeding unless it violates the applicable mandatory laws.

The authors believe that the arbitrators should take due consideration of the possible outcome of
the insolvency court’s decision. If it is likely that the insolvency court will have jurisdiction, the
arbitral tribunal should not assume jurisdiction and consequently stay the proceedings. This is in
line with the arbitrator’s duty to render an enforceable award, as discussed below. 

Duty of the Arbitrator to Render an Enforceable Award

Arbitration emerged as an alternative form of dispute resolution mechanism due to the perceived
enforceability of the award and the reason for its preference over litigation. 17 The enforceability
of the awards can be stated to be the raison d’etre of an arbitration process.18 This ultimately
translates to the fact that an arbitral tribunal’s purpose is to render an enforceable award. 19 The
failure to render an enforceable award would mean that the arbitrator would have failed in the
primary responsibility vested in him.20 Hence, the very enforceability of the award post the
proceedings become an issue which must be considered when insolvency proceedings are
initiated against the company in the process of arbitration.

16
Gary B. Born, International Commercial Arbitration (Kluwer Law International, 2014) 1006.
17
Marcus Wang, ‘Dancing With the Dragon: What U.S. Parties Should Know About Chinese Law When Drafting a
Contractual Dispute Resolution Clause’ (2009) NW. J. INT’L L. & BUS. 329.
18
Yves Derains and Eric A. Schwartz, A Guide to the ICC Rules of Arbitration (2nd Kluwer Law International,
1998) 353
19
Bank Mellat v GAA Development Construction Co. [1988] 2 Lloyd’s Rep. 44 (Eng.)
20
Julian D. M. Lew, Applicable Law in International Commercial Arbitration: A Study in Commercial Arbitration
Awards (3rd Kluwer Law International, 1997) 537.

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 CHAPTER 3: IMPACT OF IBC ON ARBITRATION PROCEEDINGS

Overview of the Regime for Insolvency Resolution in India

The Code provides for the Corporate Insolvency Resolution Process (“CIRP”) for corporate
debtors when an application is made before the National Company Law Tribunal (“NCLT”) by
two kinds of creditors – financial creditors and operational creditors.

The Code provides for the minimum threshold on default of which insolvency proceedings can
be initiated.21 When the Code came into force, this threshold was as low as INR 1,00,000/- which
approximates to USD 1,318. Companies worth millions of turnover would face CIRP
proceedings for 1/100th of the value of their turnovers. With COVID-19 the situation would have
become worse given that parties would find it difficult to fulfill their contractual obligations. In
order to address this problem the Central Government issued a notification on March 24, 2020
which increased the threshold for initiating CIRP to INR 1crore or approximately USD 131,800/-
which is 100 times the initial value. This was done to ensure that small and medium enterprises
do not face the brunt of CIRP for non-performance of contractual obligations due to COVID-
19.22

A financial creditor may initiate CIRP against a corporate debtor when a default occurs in the
payment of the financial debt under Section 7 of the Code. A financial creditor has been defined
as a creditor to whom a “financial debt” is owed. For the purpose of admitting an application for
CIRP filed by a financial creditor, the NCLT has to only consider three aspects - existence of a
financial debt, a financial creditor and a default in payment of the debt. The situation is different
when an application is filed by an operational creditor to whom an operational debt is owed. An
operational debt means a claim for providing goods or services including employment or a debt
for repayment of legal dues.23 Before an application is filed by an operational creditor to whom
an operational debt is owed, a demand notice for the payment of the default amount is required to
be sent by the operational creditor. If the operational creditor does not receive a reply to the
21
Insolvency and Bankruptcy Code, 2016, s 4
22
Vikrant Rana and Anuj Jhawar, IBC Threshold-Whether Prospective In Nature? (Lexology September 25
2020)<https://www.lexology.com/library/detail.aspx?g=f250f35b-515d-4bdf-b0c1-5460039448b> accessed 22 Oct
2020.
23
Insolvency and Bankruptcy Code, 2016, s 5(21).

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demand notice raising the existence of a dispute or payment of the debt within 10 days, an
application under Section 9 for initiating CIRP may be filed before the NCLT.

It is important to note that for admitting an application for CIRP filed by an operational creditor,
there must not only be a debt and a default, but there should also be non-existence of a dispute
between the operational creditor and the corporate debtor. For instance, let us consider a contract
for supply of goods. The operational creditor supplies the goods to the corporate debtor for a sum
of USD 150,000/- and raises invoices. The corporate debtor receives the goods but does not clear
the invoices because the goods supplied were defective or did not meet the specifications of the
corporate debtor. The operational creditor then sends a demand notice under Section 8 of the
Code. In reply to the demand notice, the corporate debtor raises the defense that the goods were
not of the correct specification. In this scenario, if the operational creditor were to proceed under
Section 9 of the Code, its application for CIRP would most likely get rejected because the
corporate debtor had already made a case for a pre-existing dispute, i.e. the goods were not
according to specifications.

Judicial Decisions on the Difference between Section 7 and 9 of the Code

It is important to note the difference between operational creditors and financial creditors under
the Code. Financial creditors would usually include banks which give loans to the corporate
debtor against security or collateral which has to be repaid according to a payment schedule. The
corporate debtor would either pay as per the schedule or would default in making payments.
There is less likelihood of there being a dispute with such financial creditors to be resolved
through arbitration. On the other hand, an operational creditor could be someone who has a
contract with the corporate debtor for supply of goods and services. The non-payment to an
operational creditor could be because of a dispute with respect to the quality of goods or services
which needs to be adjudicated by a tribunal. Therefore, in most of the cases, the corporate debtor
would seek enforcement of an arbitral award in its favour against the operational creditor. A
challenge to the execution or enforcement of the award under Section 34 or Section 48 of the
Arbitration Act is also likely to be filed by operational creditors. On the other hand, financial
creditors would find it easier to resort to proceedings under the Code. The scheme of the Code

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and the difference between Section 7 and 9 was explained the Supreme Court of India in
Innoventive Industries Ltd. v. ICICI Bank24 as follows:

“The scheme of the Code is to ensure that when a default takes place, in the sense that a debt
becomes due and is not paid, the insolvency resolution process begins. Default is defined in
Section 3(12) in very wide terms as meaning non-payment of a debt once it becomes due and and
payable, which includes non-payment of even part thereof or an instalment amount. For the
meaning of ‘debt’, we have to go to Section 3(11), which in turn tells us that a debt means a
liability of obligation in respect of a ‘claim’ and for the meaning of ‘claim’, we have to go back
to Section 3(6) which defines ‘claim’ to mean a right to payment even if it is disputed. The Code
gets triggered the moment default is of rupees one lakh or more (Section 4). The corporate
insolvency resolution process may be triggered by the corporate debtor itself or a financial
creditor or operational creditor. A distinction is made by the Code between debts owed to
financial creditors and operational creditors.”

“...The scheme of Section 7 stands in contrast with the scheme under Section 8 where an
operational creditor is, on the occurrence of a default, to first deliver a demand notice of the 
unpaid debt to the operational debtor in the manner provided in Section 8(1) of the Code. Under
Section 8(2), the corporate debtor can, within a period of 10 days of receipt of the demand
notice or copy of the invoice mentioned in sub-section (1), bring to the notice of the operational
creditor the existence of a dispute or the record of the pendency of a suit or arbitration
proceedings, which is pre-existing—i.e. before such notice or invoice was received by the
corporate debtor. The moment there is existence of such a dispute, the operational creditor gets
out of the clutches of the Code.”

Given the overall scheme of the Code, the existence of a dispute is relevant only in the case of an
operational creditor. In the case of a corporate debtor who commits a default of a financial debt,
the adjudicating authority has to only see the records of the information utility or other evidence
produced by the financial creditor to satisfy itself that there was a debt and that a default has
occurred.

24
Innoventive Industries Ltd. v ICICI Bank, (2018) 1 SCC 407.

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The threshold of inquiry for a pre-existing dispute for operational creditors is a limited one. All
that the NCLT is required to note is whether there is a plausible contention which requires
further investigation and that the “dispute” is not a patently feeble legal argument or an assertion
of fact unsupported by evidence. The NCLT does not at this stage examine the merits of the
dispute except to this extent. So long as a dispute truly exists in fact and is not spurious,
hypothetical or illusory, the NCLT has to reject the application.25

In Swiss Ribbons26 the differential treatment between financial creditors and operational creditors
had been challenged before the Supreme Court of India and the differential treatment was held to
be justified. It was held that the primary focus of the Code was to ensure revival and continuation
of the corporate debtor by protecting the corporate debtor from its own management and from a
corporate death by liquidation. While operational creditors are concerned with the recovery of
amounts for goods and services and are typically unable to assess the viability and feasibility of
business, financial creditors being in the business of money-lending are best equipped to assess
the viability and feasibility of the business.

The Moratorium

Once an application for CIRP is admitted, whether in the case of a financial or an operational
creditor, a moratorium is declared. 27 The effect of the moratorium is that it stops all legal
proceedings against the corporate debtor. Thus, if a corporate debtor is involved in an arbitration,
the moratorium mandates that the tribunal cannot proceed to hear the matter. Judicial decisions
have interpreted the imposition of moratorium to be restricted only to legal proceedings that are
‘against’ a corporate debtor. This means that a corporate debtor may still enforce or execute an
award in its favour even if an application for CIRP is admitted and the moratorium is declared.

The objective for the moratorium as discussed in the BLRC Report was to ensure the suspension
of debt collection actions by creditors and provide time for the debtors to renegotiate their
contract. This required a moratorium period in which no action for recovery or any other action
is initiated by the creditors against the debtors. Section 14 of the Code provides for a moratorium
period where institution of suits or continuation of pending suits or proceedings against the

25
Mobilox Innovations Private Limited v Kirusa Software Private Ltd. (2018) 1 SCC 353.
26
Swiss Ribbons Private Limited v Union of India (2019) 4 SCC 17.
27
Insolvency and Bankruptcy Code, 2016, s 13.

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corporate debtor is prohibited. This includes execution of any judgment, decree or order in any
court of law, tribunal, arbitration panel or other authority. The imposition of a moratorium means
that no arbitration proceedings can be carried out against the corporate debtor. It also means that
if there is an arbitral award against the corporate debtor, the award cannot be executed or
enforced against the corporate debtor.

Courts have taken the view that the embargo of Section 14(1)(a) of the Code would not apply in
all circumstances. The moratorium under Section 14(1)(a) of the code is intended to prohibit debt
recovery actions against the assets of corporate debtor. There is no prohibition on continuation of
proceedings which do not result in endangering, diminishing, dissipating or adversely impacting
the assets of corporate debtor.28 These decisions will provide guidance on the treatment to the
Three Scenarios which form the subject matter of this article and will be analysed in detail later
on in the third part of this article.

Overlap between Insolvency and Arbitration Proceedings

In India, insolvency proceedings would fall under those categories of matters which are non-
arbitrable.29 However, pendency of an arbitration proceeding between a corporate debtor and an
operational creditor would amount to the existence of a ‘dispute’ and if an operational creditor
were to proceed under the Code during pendency of arbitration proceedings, its application for
CIRP is likely to be dismissed. The Supreme Court of India had the occasion to consider the
overlap between the Code and arbitration proceedings governed by the Arbitration Act in K.
Kishan v. Vijay Nirman.30 In this case, an award had been issued against the corporate debtor
which had been challenged under Section 34 of the Arbitration Act . The operational creditor
was the successful party in the arbitration proceedings and sought to recover the award amount
by filing an application for CIRP under the Code. The “debt” in this case was the amount
awarded by the arbitral tribunal against the corporate debtor. The Court held that the scope of
inquiry for admitting an application for CIRP filed by an operational creditor was very limited. If
the debt owed to the operational creditor is disputed, the application for CIRP had to be rejected.

28
Power Grid Corporation of India v Jyoti Structures Ltd. (2018) 246 DLT 485; SSMP Industries Ltd. v Perkan
Food Processors Pvt. Ltd., 2019 SCC OnLine Del 9339.
29
Booz Allen [7].
30
K. Kishan v Vijay Nirman, (2018) 17 SCC 662.

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Initiation of proceedings by the corporate debtor for setting aside an arbitral award against it
would be sufficient evidence of a pre-existing dispute.

Next comes the problem of using the Code to execute or enforce arbitral awards in favour of a
creditor. The National Company Law Appellate Tribunal (“NCLAT”), the appellate body for
adjudicating disputes under the Code, considered this issue in HDFC Bank Ltd. v. Bhagwan Das
Auto Finance Ltd.31

 A financial creditor had initiated proceedings under the Code against a corporate debtor on the
basis of an arbitral award in its favour. The NCLAT relied on Section 65 of the Code and held
that the application for CIRP had been filed with a malicious intent to execute or enforce the
award, and not for the purpose of resolution of insolvency. Similarly, an application for CIRP
filed by a creditor for executing a decree during pendency of the execution proceedings was held
to be malicious.32

The Supreme Court has held that an arbitration proceeding against the corporate debtor which is
initiated after the moratorium is non-est in law. The decision in Alchemist Asset Reconstruction
Company Ltd. v. Hotel Gaudavan Pvt. Ltd.33 held as follows:

“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 sits or proceedings
against Corporate Debtors.”

This decision only considers arbitration proceedings filed against a corporate debtor after the
moratorium has been imposed under the Code. However, the same logic has been extended to
arbitration proceedings which are pending as on the date of declaration of moratorium. It has
been held that an arbitral tribunal and the parties cannot proceed with an arbitration after
initiation of CIRP and declaration of moratorium. 34There are three Three Scenarios  discussed on
the basis of the abovementioned legal principles.
31
HDFC Bank Ltd. v Bhagwan Das Auto Finance Ltd. Judgment dated 9th December, 2019 in Company Appeal
(AT)(Insolvency) No. 1329/2019.
32
International Asset Reconstruction Co. Pvt. Ltd. v Jayant Vitamins Ltd. Judgment dated 17th December, 2019 in
Company Appeal (AT)(Insolvency) No. 1472/2019.
33
Alchemist Asset Reconstruction Company Ltd. v Hotel Gaudavan Pvt. Ltd. (2018) 16 SCC 94.
34
K.S. Oils Ltd. v The State Trade Corporation of India Ltd. & Ors. Judgment dated 30th January, 2018 in Company
Appeal (AT)(Insolvency) No. 284/2017.

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Scenario 1: The Insolvency Application is Admitted before Commencement of Arbitration

The Suspension Ordinance which aims at giving relief to medium and small enterprises has not
yet been notified. New petitions under the Code are being filed online before the NCLT, which
has restricted its functioning to urgent matters and online hearings due to the COVID lockdown.
Since very few fresh cases for admission of CIRP are being heard, the possibility of an
application for CIRP getting admitted is still there even though such chances are very slim.

The first scenario may be further categorised into two the following two sub-categories:

(i) where the corporate debtor is the claimant; and

If the corporate debtor is the claimant, then the arbitral tribunal can proceed with determining the
issues irrespective of the moratorium because the arbitral proceedings would not be “against” the
corporate debtor. This is because of the dicta in Alchemist Asset Reconstruction Company Ltd.
v. Hotel Gaudavan Pvt. Ltd.35 However, in case the corporate debtor is the respondent, the
tribunal may proceed if the corporate debtor also has some counter-claims in the arbitration. This
is subject to no recovery being made against the corporate debtor if the corporate debtor is found
liable by the arbitral tribunal.36

Scenario 2: The Insolvency Application is Admitted During Pendency of the Arbitral

As is the case with first scenario, if an application for CIRP is admitted and moratorium declared
during pendency of the arbitral proceedings, the corporate debtor cannot be proceeded against.
Again, this would only apply where the corporate debtor is the respondent in the proceedings. If
the corporate debtor is the claimant in the arbitration, the moratorium would not affect the
ongoing arbitral proceedings. Similarly, if the corporate debtor makes a counter-claim which
cannot be adjudicated without hearing the claims, the arbitral tribunal can proceed to determine
the claim and the counter-claim subject to no recoveries being made from the corporate debtor.

35
Alchemist Asset Reconstruction Company Ltd. v Hotel Gaudavan Pvt. Ltd. (2018) 16 SCC 94.
36
Jharkhand Bijli Vitran Nigam Ltd. v IVRCL Limited & Anr. Judgment dated 3rd August 2018 in Company Appeal
(AT)(Insolvency) No. 285/2018.

17 | P a g e
There is still lack of clarity on whether the tribunal can be restrained from conducting hearings.
According to the decision in SSMP Industries Ltd. v. Perkan Food Processors Pvt. Ltd., 37 the
moratorium under Section 14 becomes relevant at the stage of execution, only after the claims
and counter-claims are adjudicated. By using this analogy one could argue that the declaration of
a moratorium would not bar the arbitral tribunal from hearing the case. The moratorium would
operate only if the respondent corporate debtor loses in the arbitration and is held liable to make
payments to the successful claimant.

The practical scenario and ground realities are much different. Once CIRP is commenced against
the corporate debtor, most arbitration proceedings end up being in a limbo because the control
and management of the corporate debtor is transferred to the resolution professional or the
interim resolution professional (“RP”). In most cases, the RP is a chartered account or a
company secretary, who are experts at handling financial issues and corporate debt restructuring
but are not lawyers or legal experts. Being invested in pending arbitral proceedings of the
corporate debtor would be of least priority for them when they have to play a larger role in
keeping the corporate debtor afloat, and handling the entire process of insolvency resolution. 

Scenario 3: The Insolvency Application is Admitted after the Award is Rendered and During
Pendency of Execution of the Award

The admission of an application for CIRP and the moratorium would bar execution proceedings
against the corporate debtor. Under the IAA, an arbitral award becomes automatically
enforceable as a decree of the court and either of the parties may proceed to get the award
executed. Even if the award is challenged by one of the parties, it does not stay the execution of
the award.38 The challenge to the arbitral award and the execution proceedings may go on
simultaneously, and is often heard together by the same court.

Ideally, if the corporate debtor were to file an application for executing the award in his favour,
the execution proceedings would remain unaffected by the subsequent admission of an
application for CIRP and imposition of moratorium. However, as discussed through the case
study, the ground realities may be very different. As discussed earlier, execution proceedings and
37
SSMP Industries Ltd. v Perkan Food Processors Pvt. Ltd. 2019 SCC OnLine Del 9339.
38
Hindustan Construction Co. Ltd. & Anr. v Union of India and Ors. Judgment of the Supreme Court of India dated
25th November 2019 in Writ Petition No. 1074/2019.

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a challenge to an arbitral award are to be disposed of expeditiously but many a times these
proceedings take more than a year to attain finality. On the other hand, proceedings under the
Code are considerably faster because the NCLT functions in a manner that is akin to summary
proceedings, its scope of inquiry being limited to the existence of a ‘debt’ that is ‘due’ to a
‘creditor’ without any ‘dispute’. There is a requirement to consider alternatives to save a
corporate debtor from the rigours of insolvency if the corporate debtor can execute the award in
his favour and take care of its debts.

One possible solution could be for the NCLT to refuse admission of an application for CIRP if
the corporate debtor can show that the challenge to the arbitral award in its favour does not meet
any of the grounds enumerated in Section 34 of the IAA, and most likely would be executed by
the court. As has been discussed earlier, the grounds for challenging an award under Section 34
or refusing to enforce an award under Section 48 of the IAA are limited and very narrow. If a
challenge to the award does not succeed, the award would be executed in favour of the corporate
debtor because execution proceedings and proceedings for challenging an award are heard
together. Once an award is rendered by a tribunal and is not set aside, it becomes automatically
executable like a decree of the court. Similarly, once the court refuses not to enforce a foreign
award, the award gets executed as a decree of the court.

Applications for challenging an award in India are filed routinely to delay the execution of the
award. In most situations, a legal expert would be able to take a good assessment if there is any
merit in the application which challenges the arbitral award. When a corporate debtor prays that
it has an award pending execution which will take care of its financial position, the NCLT should
consider appointing independent legal experts such as a senior lawyer or a retired judge to make
a legal assessment on the merits of the challenge to the award. If according to the legal expert,
the challenge to the award is meritless and does not meet the requirements of the grounds
specified in Section 34 or Section 48 of the IAA, the NCLT should dismiss the application for
CIRP with liberty to the creditor to file again if the corporate debtor fails in getting the award
executed.

These measures may seem extreme given that the scope of inquiry before the NCLT is limited
while adjudicating applications for CIRP. As an alternative, a mechanism for negotiation could

19 | P a g e
be incorporated within the Code only for those situations where the corporate debtor claims that
it can pay off the debts once the arbitral award in its favour is executed. Faced with an
application for CIRP, the corporate debtor should have the option of filing an application for
negotiating with its creditors before the NCLT. The negotiation proceedings should be decided in
a time-bound manner between 3 to 4 weeks and may not be limited to the creditor who moves
the application for CIRP.

The objective of the negotiation proceedings would be to allow the corporate debtor a chance to
convince its creditors that it has a good case in getting the award executed in its favour and pay
off its debts. A public announcement for the negotiation proceedings should be made and
interested creditors of the corporate debtor should be allowed to become a party to the
negotiation proceedings within ten days. If the creditor(s) fails to join the proceedings within ten
days, the proceedings should go ahead without such creditor(s) who should be deemed to have
waived their right to participate in the negotiation proceedings. In the negotiation proceedings,
the corporate debtor should provide a feasibility report on the chances of its success in executing
the award. Based on the report, a decision could be taken by the creditors to allow the corporate
debtor some more time to execute the award or to reject the debtor’s plea and proceed with the
application for CIRP. This decision should be through a simple majority where voting rights are
proportionate to the value of debts owed to each creditor who participates in the proceedings.
The decision taken in the mediation proceedings should not be amenable to a challenge before
the NCLT and all creditors should be bound by the decision. If the creditors are satisfied that the
corporate debtor has a good chance in succeeding at the execution of the award, the application
for CIRP should be withdrawn with liberty to file again if the execution of the award fails.

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 CHAPTER 4: COMPARATIVE STUDY OF INSOLVENCY AND ARBITRATION
LAWS OF SELECT JURISDICTIONS

This chapter of the project aims to study the intersection of insolvency and arbitration laws in the
UK and the USA with a view to inform future development of Indian law on the matter by
learning from the more developed legal regimes.

The UK: A Territorial Approach

In the United Kingdom, the provisions of Insolvency Act 1986 its allied rules, UNCITRAL
Model Law and EU Regulation on Insolvency Proceedings govern the insolvency proceedings. If
a company enters into administration, the stay applies from either (i) the filing of an application
for an administration order; (ii) filing of a notice intention to appoint an administrator; or (iii) the
appointment of the administrator, whichever is the earliest. 39 The initiation of the continuation of
proceedings against the company is stayed unless with the permission of the court or if
appointed, the consent of the administrator.40

Once an entity enters into compulsory liquidation, an automatic stay, i.e., moratoria applies
against all the existing proceedings and commencement of new proceedings against the
company, unless they are permitted to proceed by the court. In A Straume (UK) Ltd v. Bradlor
Developments,41 the English Court has categorically held that the arbitration proceedings would
be included in the moratoria. As a result, any pending or future arbitrations in London are
automatically stayed when the entity enters either form of the insolvency procedure. In cases of
voluntary liquidation, there is no automatic stay. An application has to be made to the court for a
stay.42

However, if the corporate is subjected to insolvency proceedings in a foreign jurisdiction, the

39
Yves Derains and Eric A. Schwartz, A Guide to the ICC Rules of Arbitration (2nd Kluwer Law International,
1998) 353
40
Insolvency Act 1986, s. 130(2), (UK).
41
A Straume (UK) Ltd v Bradlor Developments (1999) CILL 1520.
42
Insolvency Act 1986, s 112 & s.126, (UK).

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(CBIR). The insolvency appointees of the foreign entities can apply to the court to recognize the
insolvency proceedings as foreign main proceedings or foreign non-main proceedings. If the
debtor has the centre of main interests in that foreign jurisdiction, the proceedings will be
recognized as foreign main proceedings, and an automatic stay would apply against the
continuation of individual actions such as arbitrations. The foreign proceedings will be
recognized as foreign non-main proceedings when the debtor merely has an establishment in the
state where the insolvency proceedings are taking place. In such a case, the foreign
representative can approach the court to impose a stay on the continuation of individual actions,
including arbitration.

When the main insolvency proceedings are in the UK, the law of the seat would be applicable to
the pending arbitrations.43 This situation is complicated when the insolvent entity is subject to
insolvency proceedings initiated in another EU member country. Under this situation, if the
arbitration proceedings are underway in London before the commencement of the insolvency,
then the law of England would determine the effect of the insolvency proceedings on the pending
arbitration and not the law of the other EU member country. 44 This position of the law came to be
discussed by the Court of Appeal in the case of Syska (as administrator of Elektrim SA (in
bankruptcy)) v. Vivendi Universal SA.45 In this case, the entity entered into Polish insolvency
proceedings but there was a prior arbitration in London that the entity was involved in. The court
held that the law of England would determine the effect of the insolvency on the pending
arbitration. 

The USA: A Hybrid Approach

USA has adopted the UNCITRAL Model Law on Cross-Border Insolvency and thus recognizes
foreign insolvency proceedings. It has the Federal Arbitration Act46 [“FAA”] at the federal level,
with the individual States following the UNCITRAL Model on International Commercial
Arbitration as well. The FAA has a very categorical approach to arbitration wherein Chapter 1 of
the Act governs domestic arbitration proceedings; Chapter 2 is a tool for the enforcement of

43
Council Regulation 2015/848, art. 18, 2015 O.J. (L141) 19 (EU)
44
Council Regulation 2015/848, art. 4 & 15, 2015 O.J. (L141) 19 (EU).
45
Syska (as administrator of Elektrim SA (in bankruptcy)) v Vivendi Universal SA. [2009] All ER (D) 91 (Jul).
46
Federal Arbitration Act, 9 U.S.C. (1947).

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foreign arbitral award as per the New York Convention; and Chapter 3 implements the Panama
Convention.47

In the USA, arbitrability of insolvency matters is addressed by the US Bankruptcy Code, 48 which
differentiates between core and non-core issues. However, this distinction is not very clear as the
Code contains a non-exhaustive list of core issues, 49 and there is no express definition of non-
core issues. Thus, giving rise to uncertainty regarding the arbitrability of insolvency matters
which is dealt on a case to case basis. This uncertainty was lifted over time by the judiciary
through its decisions in the following cases:

The first in line is the landmark decision of the US Supreme Court in the case of
Shearson/American Express Inc. v. McMahon50 which presumed the arbitrability of a matter and
laid down a three-pronged test popularly known as the McMahon Test which should be
examined to restrain arbitrability of an issue:

1. Express mention in the text of the Statute to prove otherwise; or

2. Legislative history or the travaux preparatoires of the Statute; or

3. Inherent conflict between the purpose of the Statute and Arbitration.

Applying this test to insolvency matters, the earlier cases found an inherent conflict between the
FAA and the bankruptcy laws and thus considered insolvency matters as non-arbitrable. 51In light
of the 1984 Amendment52 which brought in the distinction of core and the non-core issues, this
position was overruled.

The landmark in allowing arbitral jurisdiction over the non-core issues was the decision in the
Hays Co. matter wherein the court held that a bankruptcy trustee would be bound by the
arbitration agreement entered into by the debtor. Further, it was held that a non-core insolvency
issue would be arbitrable unless proved to the contrary as per the McMahon Test. However, the

47
O.A.S.T.S. No. 42, 14 ILM 336, reprinted in 9 U.S.C. s. 301 (Supp. 1997)
48
The Bankruptcy Code, 11 U.S.C. (1978). (“US Bankruptcy Code”)
49
Judiciary and Judicial Procedure Code, 28 U.S.C. § 157(b)(2) (1966).
50
Shearson/American Express Inc. v McMahon, 482 U.S. 220 (1987).
51
Zimmerman v Continental Airlines Inc., 712 F.2d 55 (3d Cir. 1983).
52
Hays and Co. v Merrill Lynch, 885 F.2d 1149 (3d Cir. 1989).

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decision in this case and the lack of express language defining core and non- core issues has led
to conflicting decisions on the matter where certain courts have allowed for arbitration of core
issues as well.53 Therefore, arbitrability of insolvency matters is generally promoted in the USA
unless there is a presence of core issues relating to substantive law.

However, the US Bankruptcy Code puts an automatic stay on an on-going or an upcoming

53
MBNA Am. Bank, N.A. v Hill, 436 F.3d 104 (2d Cir. 2006).
54
US Bankruptcy Code, s. 362
55
US Bankruptcy Code s. 1520.

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 CHAPTER 5: CONCLUSION AND THE WAY FORWARD

India follows a territorialism dominated mixed model of insolvency which recognizes the impact
of foreign proceedings. Recently, India recognised cross border issues in the Jet Airways
case.56Further, India allows a foreign creditor to be a part of the insolvency proceedings. 57 Also,
the IBC recognizes cooperation among States to ensure proper enforcement of the Code, 58 which
is majorly territorial in nature.

As discussed in chapter three, Section 14 of the IBC does not have an extra-territorial effect, and
thus the moratorium would not extend to a foreign seated arbitral proceeding. Similar is the
situation with various other domestic laws around the world such as England except for certain
cases as discussed above. This leads to a situation where the domestic insolvency courts are
unable to either attach the assets of the CD in other jurisdictions or stay the on- going foreign
international arbitral proceedings involving the domestic CD. Consequently, the CD can still
appropriate his foreign located assets; thus, failing the objective of the moratorium under the
domestic insolvency proceedings.59

Though prima facie the non-application might look in favour of arbitration, one needs to answer
the questions as to what would happen when arbitration has been initiated in countries with
different insolvency law against a multi-national company undergoing insolvency in its home-
State? Which law would apply then? What would be the fate of the on-going insolvency
proceedings and the upcoming arbitral proceedings? This lacuna and its effects were highlighted
by the Elektrim v. Vivendi case. Further, the non-recognition of foreign insolvency proceedings
would render jurisdiction upon an arbitration tribunal over a foreign debtor but the award might
not be enforceable in the foreign State due to the moratorium on the assets of such debtor in that
State. Thus, there is a need for a more universalistic approach to the intersection of insolvency
and arbitration laws. At present, India does not have a well-established cross border insolvency
law regime. Two sections under the IBC viz. s. 234 and 235 are the only guiding provisions on

56
Jet Airways (India) Ltd. (Offshore Regional Hub/Offices Through its Administrator Mr. Rocco Mulder) v State
Bank of India & Anr. Company Appeal (AT) (Insolvency) No. 707 of 2019.
57
Macquarie Bank Limited v Shilpi Cable Technologies Ltd. 2017 SCC OnLine Del 9339.
58
Insolvency and Bankruptcy Code, 2016, s 234-235.
59
Jay L. Westbrook, ‘Choice of Avoidance Law in Global Insolvencies’ (1991) 17 BROOK. J. INT’L L. 499, 501.

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cross border insolvency issues in India. Section 234 empowers the Govt. of India to enter into
agreements with foreign countries to enforce the provisions of the IBC. Section 235 empowers
the AA under the IBC to request a court or an authority dealing with the relevant matters in the
country with which India has entered into an agreement under Section 234. 

Thus, there is a need to incorporate the suggestions herein made by the authors. The intention of
the authors while suggesting such changes is to make India ready for more significant changes
which are bound to be introduced to govern the intersection.

With the increasing acceptance of insolvency law as a method to satisfy the claims of the
outstanding creditors while keeping the debtor as a going concern, added with the growing
acceptance of international commercial arbitration as a mode of dispute resolution, there is an
urgent need for this matter to be taken up by international organisations for coming up with
Model Laws governing the intersection of the two fields.

Recommendations to Harmonize the Two Fields

In this Part, the authors would put forward some important amendments or requisite
clarifications required in order to better handle the situations in case of the interaction between
the two fields of law, i.e., insolvency and arbitration.

A. Making the Moratorium Extra-Territorial in Nature

It has been made abundantly clear that the moratorium under S.14 of the IBC applies once an
application has been admitted by the NCLT to commence CIRP. In this context, two clauses in
the Section become relevant for the discussion: S. 14(a) which prohibits the institution of suits or
continuation of pending suits or proceedings against the CD including the execution of any
judgement, decree or order in any court of law, tribunal, arbitration panel or other authority; and
S. 14(b) which restricts transferring, encumbering, alienating or disposing off by the CD any of
its assets or any legal right or beneficial interest therein.

B. Incorporating UNCITRAL Model Law on Cross-Border Insolvency

As discussed in Part III, there is no globally recognized uniform legal system governing the
interaction of insolvency law and arbitration law which has given rise to uncertainty. Further, as
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portrayed in Part II, India is no exception to this uncertainty. Thus, there is a need for the
introduction of uniform insolvency laws159 to govern disputes arising out of these cross- border
businesses60. The authors believe that this need could be served by incorporating the UNCITRAL
Model Law on Cross-Border Insolvenc61y mutatis mutandis into the IBC. This can be done by
adding a Schedule to the IBC which would be applicable and binding in all the matters having a
factor of cross-border insolvency involved. The Model Law has been adopted by several other
jurisdictions as well.

The result of this addition would be: firstly, easier recognition of foreign insolvency proceedings
thus doing away with the disparity in national laws of different countries and promoting
coordination among courts62; secondly, an option of attaching the assets of the debtor in foreign
States which either follow the Model Law or have a universal approach to insolvency law 63; and
thirdly, stay can be put on the international commercial arbitration proceedings involving a
foreign debtor based on the recognition of foreign proceedings, thus, evading a situation of non-
enforcement of the arbitral award in the foreign country due to violation of public policy
consideration under the New York Convention. Thus, it would mark as a step towards the bigger
goal of harmonizing insolvency and arbitration law.

C. Assistance of Foreign Courts under S.235

S.235 of the IBC can be compared to S.426 of the English Insolvency Act, 1986. Certain
countries , such as Malaysia, South Africa, etc., have been designated as countries which will
have a right under S.426 to request assistance in matters of insolvency law from the courts. India
has already experienced the requirement of cooperation from another country regarding
insolvency in the matter of Jet Airways 64. Therefore, it is crucial for the Government of India to
put in place such arrangements with as many countries as possible pursuant to S.234 of the IBC.

60
Himanshu Handa, ‘Orchestrating the UNCITRAL Model Law on Cross-Border Insolvency in India, (2018)
 1(5) INT’L J. L. MGMT. & HUMAN. 1,4.
61
United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency, G.A. Res.
52/158, UNCITRAL, 30th Sess., Supp. No. 17, U.N. Doc. A/52/17 (May 30, 1997).
62
Morshed Mannan, ‘Are Bangladesh, India and Pakistan Ready to Adopt the UNCITRAL Model Law on Cross-
Border Insolvency’  (2016) 25 Int. Insolvency Rev. 195, 197.
63
Ibid [198].
64
BusinessLine Bureau, Jet Airways case: NCLAT agrees to hear Dutch court’s plea ( The Hindu,  July 12,
2019)<https://www.thehindubusinessline.com/economy/logistics/dutch-bankruptcy-administrator-moves-nclat-on-
jet-airways-matter/article28402553.ece> accessed 17 Nov 2020.

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The standard for such assistance from the Indian courts can also be as per English law 65. The
courts certainly have the discretion in providing assistance and the form of assistance; however,
they should provide assistance unless there are compelling reasons to refuse.

65
England v Smith, [2001] Ch 419.

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