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Enforcement Of Arbitral Awards In Insolvency Proceedings-An Analysis – Insolvency/Bankruptcy

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Introduction

Over the years, the Indian Economy has seen a rapid increase in
the number of high-profile insolvency cases. The Insolvency and
Bankruptcy Code, 2016 (‘the Code’) was brought in to
regulate and bring a set mechanism for the resolution of
insolvencies with the intent to prioritise a delicate balance for
all stakeholders in a time-bound manner.

While the Code has enhanced the due diligence which is followed
in the process of insolvency, the intersection of Arbitration and
Insolvency has always been at loggerheads in the judicial
interpretations. When the Corporate debtor is the subject of the
Corporate Insolvency Resolution Process (‘CIRP’), there may
arise issues regarding the arbitrability of disputes and
enforcement of awards by the AwardHolder.

This article aims to analyse the jurisprudence which has been
set over time when an award is passed in an arbitration proceeding
and the award-debtor is declared insolvent before the award could
be enforced.

Arbitration Award as a ‘Debt’ under Insolvency and
Bankruptcy Code, 2016

Domestic Awards have been discussed at length under Part I of
the Act. It is a settled position that an award can be enforced
only when it has become final and binding on the parties, i.e.,
when it has overcome the challenges posed by S. 34 of the Act. The
award, henceforth, becomes final under S. 35 of the Act and
executed in the same manner as if it were a decree of the
court.1

However, the Code provides for a Moratorium to be triggered upon
the initiation of the Insolvency Resolution Process (‘IRP’)
under section 14 of the Code. Section 14(1)(a) of the IBC
specifically bars the institution of any suit or the continuation
of pending suits or proceedings against the corporate debtor
(including the execution of any judgment, decree or order in any
court of law, tribunal, arbitration panel or other authority). The
Report of Insolvency Law Committee of February 20202
specified the objective of the moratorium which is to
“form a scheme which shields the corporate debtor from
pecuniary attacks against it in the moratorium period so that the
corporate debtor gets breathing space to continue as a going
concern in order to ultimately rehabilitate itself.”

The conundrum arises, however, when the award has been passed by
the Hon’ble Arbitral Tribunal and the award holder goes
insolvent, what remedy lies with the award holder in respect of
their claims?

It is a settled position that an arbitral award is considered a
valid claim under the Code.3 Even the unenforced foreign
awards have also been considered as a claim under IBC.4
The definition of a claim under Section 326 of the Code makes it
amply clear that it intends to include all the possible claims that
may affect the financial condition of a Corporate Debtor.

However, the aforementioned award shall be filed as a
‘claim’ with the Resolution Professional within time, i.e.,
during CIRP. In this regard, Regulation 38 of the Insolvency and
Bankruptcy Board of India (Insolvency Resolution Process for
Corporate Person) Regulations, 2016 (“CIRP Regulations”)
provides that a Resolution Plan should mandatorily contain the
amount payable under it including the amount payable to the
operational and financial creditors.

Whether a proceeding going on under Section 34 of the
Arbitration and Conciliation Act, 1996 (hereinafter referred to as
“the Act”) needs to be stayed, when moratorium has been
imposed under Section 14(1)(a) of the Code, was examined in
Power Grid Corporation of India Ltd. v. Jyoti
Structures Ltd.
5 wherein the Hon’ble
Delhi High Court deliberated upon the term ‘proceeding’,
observing that Section 14(1)(a) of the Code, is not preceded by the
word ‘all’ to connote that the moratorium provisions would
apply to all the proceedings against the corporate debtor. Since
the aforementioned award was passed in the favour of the Respondent
(who was the corporate debtor), the Hon’ble Court observed that
in the light of the object of the code to keep the Corporate Debtor
as a going concern, extending the unexecutability of the award
would further prevent the Respondent (i.e. the corporate debtor)
from recovering money due to it, adding further to the misery of
the Respondent. Therefore, Section 14 of the Code would not apply
to the proceedings which are for the benefit of the corporate
debtor as these proceedings are not a ‘debt recovery
action’. The Hon’ble Court further observed that in the
execution of the award, if the objections are settled against the
Respondent (i.e., corporate debtor), then its enforceability under
Section 36 of the Act shall be within the ambit of moratorium of
Section 14(1)(a) of the Code.

However, in an interesting turn of events6 , the
Hon’ble Calcutta High Court in the year 2021 dealt with an
issue when the award had been passed by the Arbitral Tribunal and
upon the filing of the application under Section 34 of the 1996
Act, the Respondent failed to lodge the claim with the IRP under
the presumption that the award was automatically stayed. Therefore,
the respondent could not approach the NCLT for lodging its claim.
The Hon’ble Court, hence, adjudicated on the premise whether
the claim of an Award-holder can be frustrated on the approval of a
Resolution Plan under Section 31 of the Insolvency and Bankruptcy
Code, 2016. The Hon’ble Court observed that from the date of
the admission of the application of initiation of the CIRP against
the petitioner until approval of the resolution plan, the
respondent, as an Award-holder had sufficient opportunity to
approach the NCLT for appropriate relief. Unless the Award is
stayed by an order of the Court in the manner provided under
Section 36(3), filing of an application for setting aside of an
Award under Section 34 shall not by itself make the Award
unenforceable.

Hence, despite the claim being valid even in this case, it was
the non-filing to the Resolution Professional at the apportioned
time i.e., during CIRP that led to the extinguishment of the claim.
However, the same is pending before the Hon’ble Supreme Court
for final adjudication.

Under Foreign Awards, to enforce the award, the award-holder may
resort to the New York Convention or Geneva Convention, as
applicable. However, foreign awards in India have to pass a
two-fold test of recognition and enforcement as provided for under
Part II of the Arbitration Act. When enforcement proceedings
against the Corporate Debtor with respect to a foreign award are
pending before any commercial court of India, the conundrum arises
whether a proceeding under recognition of the award will lie to
enforce such an award against the Corporate Debtor.

In this regard, in Fuerst Day Lawson Ltd. v. Jindal
Export
7 , it was observed by the
Hon’ble Supreme Court that separate proceedings for deciding
the enforceability of the award and the execution thereafter are
not required and that both the reliefs could be sought for in the
same proceedings. Allegedly, the proceedings till the stage of
deciding upon the question of enforceability of the award may not
be covered under the moratorium and only if the Corporate Debtor
fails on this account, the moratorium shall apply to the subsequent
proceedings executing the award against the Corporate Debtor.

Conclusion

The economic turmoil caused by the ongoing pandemic has shown
many corporations the door to insolvency while also showing a spark
increase in the number of commercial disputes. Jurisprudence has
shown that reconciliation is possible between the two statues,
despite the different characteristics the arbitration act and
insolvency code possess.

The key to enforcing an arbitral award under IBC lies in
decoding the terms ‘default’ and ‘debt’ under the
IBC. The jurisprudence has settled clearly that once an arbitral
award is final and enforceable, it may be treated as an
‘Operational debt’, thereby preventing the corporate debtor
to make frivolous attempts in dodging the liability. However, the
Courts have, often, shown their reluctance in the institution or
constitution of enforcement proceedings, domestic or foreign,
against the Corporate Debtor. This in turn tends to jeopardise the
interest of the award holder whose legitimate claims are kept in
the parking lot during the moratorium period.

The final order in Sirpur
mills
8 case is awaited. If the order of
the Calcutta High Court is upheld, it may offer some respite to the
Award-Holder since the need of the hour calls for a proper balance
to be drawn between the interest of the insolvent company
(Corporate Debtor), which has to be revived and the award holder,
who has suffered at the cost of the Corporate Debtor.

Footnotes

1 Section 36, Arbitration and Conciliation Act, 1996 (No.
3 of 2021).

2 Report of the Insolvency Law Committee, Ministry of
Corporate Affairs (February 2020)
https://www.mca.gov.in/Ministry/pdf/ICLReport_05032020.pdf

3 K. Kishan v. M/s Vijay Nirman Company P. Ltd, 2019
(193) AIC 88

4 Agrocorp International Private (PTE) Limited v.
National Steel and Agro Industries Limited,
MANU/NC/7624/2020

5 2018 IIAD(Delhi)569.

6 Sirpur Paper Mills Limited v. I.K. Merchants Pvt. Ltd.,
2021(223)AIC 917.

7 2011 (4) UJ 2350.

8 Supra note 6.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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