Though at first glance insolvency and arbitration appear opposed, there are some circumstances when the two intersect sufficiently to warrant either legislative action or, failing that, judicial reflection. The Bankruptcy and Bankruptcy Code 2016 (Code) in India marked a significant change in the way insolvency proceedings were governed, and its provisions have been granted pre-emptive effect over all previous legislation by Section 238. However, our goal is to first acknowledge that the widely-publicized and often-cumbersome Code-envisaged corporate insolvency resolution process (CIRP) may not be the optimal approach or deliver the most suitable conclusion in all cases. As a second point, the principle of party autonomy may be used as a complement to CIRP in the tried-and-true arena of arbitration. Therefore, the goal is to provide a unified structure that incorporates the best features of both systems.
The stringent dicta of the Supreme Court of India on the subject of arbitrability are likely what presents the greatest obstacle in the way of an insolvency procedure that is conducted through arbitration. Arbitrability may be broken down into two categories: procedural and substantive. The concept of substantive arbitrability refers to whether or not the subject matter of the dispute is capable of being resolved through arbitration by public policy, whereas the concept of procedural arbitrability refers to whether or not an arbitration agreement includes arbitration of the dispute within its scope of coverage. In the case of Vidya Drolia and Others v. Durga Trading Corporation, the Supreme Court of India developed a four-pronged test to address this question. The first prong of this test states that the subject matter of a dispute is not amenable to arbitration when the “cause of action and subject matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personal that arise from rights in rem.” In any further investigation of the arbitrating of insolvency procedures, this fact will continue to be an essential marker. The court did, however, take into consideration the fact that statutory frameworks exist in several different countries that make it possible for parties to engage in inter parties arbitration regarding rem rights. After that, it gave some thought to whether or not it would be possible in India to give arbitration some momentum.
As a result, it’s important to consider the various intersections between arbitration and bankruptcy. The first possible scenario is when a corporate debtor is a party in an ongoing arbitration action against which an insolvency application is lodged under the Code. After the National Company Law Tribunal (NCLT) issues a moratorium, any further procedures in any “arbitration panel” are halted and cannot resume until the CIRP is finished. In addition, the NCLT has made it abundantly apparent that the existence of any such arbitral procedures does not preclude filing a CIRP under the Code while such processes are ongoing.
A second substantial overlap occurs when parties may seek arbitration remedies after the fact that an application has been made under the Code, which is prohibited by the aforementioned article. While the insolvency start date is specified in the statute, the precise timing and point of no return have been clarified by several judgments. It was not just Section 7 of the Code that was used to refer the parties to arbitration in ‘Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund (formerly Kotak India Venture Limited) and Others (Indus Biotech)’, but also Section 8 of the Arbitration and Conciliation Act 1996 (Arbitration Act). Taking a look at the overlap, the Supreme Court has made it clear that applying the Code does not automatically transform insolvency proceedings into a non-arbitrable one in rem. To be clear, the erga omnes impact only manifests itself if the application is granted, which creates third-party rights against all creditors. However, the court also made clear that parties are permitted to approach the authority within the inherent powers granted to it under Rule 11 of the NCLT Rules 2016 for matters of withdrawal or settlement in the time after a petition has been admitted but before a Committee of Creditors (CoC) has been created. After a CoC has been established, the personal procedures become fully in rem, and the moratorium and prohibition on arbitration take effect. In an application filed under Section 8 of the Arbitration Act, the court did not examine NCLT’s authority. Instead, it concluded that the outcome of an insolvency application under Section 7 of the Code would determine how such an application would be handled, without conducting its evaluation of the situation.
Particularly in conflicts involving mixed problems of law, such as those arising out of contracts and matters of bankruptcy, where a rigid categorization of the proceedings as those in rem does not remain a realistic option, a system that supports party autonomy is necessary. As a result, we believe it necessary to implement a system where the NCLT has the authority to refer the parties to arbitration upon request, subject to the necessary legislative amendments to allow the arbitration proceedings to commence and conclude within the auspices of the insolvency regime under the Code. Such a scenario has led to the quantification of a suggested insolvency arbitration system in which the arbitral tribunal monitors the insolvency procedure.
The Supreme Court’s Indus Biotech ruling failed to address the Code’s and Section 8 of the Arbitration Act’s complementary operation. If an action is filed in court that concerns the same subject matter as an existing arbitration agreement, the court may send the parties to arbitration under Section 8. Although the Arbitration Act does not define “judicial power,” it would not be unreasonable to include the NCLT within this description. An effective entrance point for an insolvency arbitration system is lacking in the absence of direct participation via judicial interpretation, hence it is believed that a legislative modification would fill the void. Accordingly, the following Section 8(4) should be added to the Arbitration Act: “Judicial authority, for this section, includes the National Company Law Tribunal established under Section 408 of the Companies Act, 2013.”
To this aim, a proviso should be included in Section 6 of the Code, reading as follows: “Provided that, NCLT is entitled to order the parties to an arbitration where there exists an agreement to arbitrate and an application is submitted under Section 8 of the Arbitration and Conciliation Act, 1996.”
As outlined in the proposed framework, a party seeking to commence CIRP must first file an insolvency application with the NCLT under Section 7 or 8 of the Code, as well as an application for referral to arbitration under Section 8 of the Arbitration Act and a copy of the agreement to arbitrate. The NCLT would send the parties to arbitration after reviewing the arbitration agreement, which we suggest must include the Code as one of the relevant laws. This would prevent the NCLT from deciding the merits of the insolvency case. Procedural non-arbitrability would occur if there was no relevant legislation, such as the Code, or if the agreement to arbitrate did not cover a sufficiently broad subject matter.
First, the arbitration structure for CIRP must be in compliance with Indian judicial dicta that states arbitral tribunals may not hear cases involving insolvency or winding-up processes since these cases include rights in rem. However, this view has been modified following the recent judgment of Indus Biotech, in which the court held that CIRP can be divided into “pre” and “post” the formation of CoC and that the only question of non-arbitrability owing to the existence of in rem rights exists in the “post” formation of CoC phase. As we celebrate this major step forward in the investigation, we must also seek clarification on the specific form and adjudication of the in-rem rights under CIRP.
We contend that only the CoC’s adjudication falls under the in-rem adjudication phase following the creation of the CoC. After the Resolution Professional has presented all plans to the CoC as part of the CIRP under the Code, the CoC must approve the plan before the plan can be submitted to the NCLT; if the plan is not approved, the insolvent firm will be liquidated by the NCLT. The NCLT is not involved in the CoC’s decision on the plan’s success, the sole point at which in rem rights are at issue. Differentiating a procedural challenge to the CoC-approved plan from a challenge to the plan’s substance in rem is essential.
Similarly, once the CoC makes its judgment, the proposed framework calls for the tribunal to use such information to either provide an award in favor of the plan or order liquidation, depending on the circumstances. An analogous amendment to Section 31 of the Code, along the lines of: “Provided further that, about arbitral referrals made under Section 6, a copy of the award passed must be submitted to the Adjudicating Authority for an order to approve or reject the repayment plan based on the award,” is necessary for enforcing the award.
Our attention now turns to the next crucial piece of the puzzle, which is the development of the insolvency petition after its referral by the NCLT. After the arbitral panel is properly formed, it must determine the petition’s admissibility. It is the competence of the tribunal to rule on its jurisdiction that is at the heart of the essential concept of Kompetenze Kompetenze, which is codified in Section 16 of the Arbitration Act. The foregoing premise would strengthen the arbitral tribunal’s jurisdiction to rule on such an insolvency petition submitted to it for due examination of its admissibility, just as the NCLT rules on the same since it is permitted legislatively under Sections 7, 8, and 10 of the Code. As the Code also permits, this opens the door to determine whether or not a default has occurred, which adds more consideration to the question of whether or not to admit the insolvency petition.
Once the petition is admitted, the next critical step is the issuance of a moratorium to protect the corporate debtor’s property. Because of the gravity of the situation, we believe it is crucial to follow this procedure by relying on the NCLT’s authority and powers to declare the same under Section 13(1)(a) of the Code to exercise its superseding power under Section 238. This will protect the debtor’s assets from being unduly threatened by challenges brought on by an arbitral tribunal’s-imposed moratorium. A successful referral to arbitration by the NCLT under the Code would result in the formation of the arbitral tribunal and a judgment by such tribunal on the admissibility of an insolvency petition by the principle of Kompetenze Kompetenze. If the arbitral tribunal determines that the petition is valid, the NCLT will issue a stay order, and the subsequent steps will be handled by the arbitral body. Finally, the NCLT’s approval under Section 31 of the Code is necessary for the award so passed including the authorized resolution plan to be given proper enforcement.
If you want a smart and nuanced approach to settling legal issues, arbitration is the way to go. Eventually, bankruptcy arbitration will carve out its own specialized space within the broader field of arbitration, enjoying all the advantages that the arbitral system provides much like a commercial, financial, marine, and sports arbitrations. Another knock-on effect of COVID-19 is that it will become the method of choice for financially troubled businesses to recover losses.
Unquestionably, the current CIRP under the Code lacks the comfort of control over the nomination of the arbitral tribunal through party-appointed arbitrators who would designate a chair arbitrator. The proceedings in arbitration can be scheduled at a time and place that both parties agree upon, thus enhancing its flexibility. Arbitration, in contrast to CIRP’s time-limited structure, allows for a range of possible outcomes. In this context, the date the award is rendered is relevant to the 330-day limit within which the CIRP must be completed under the Code, which is akin to the time-bound aspect of rendering an arbitral ruling within twelve months under Section 29A of the Arbitration Act. As a result, the framework will not drastically alter insolvency procedures in India.
The privacy of the arbitration procedure is an important principle that must be fully grasped. A privacy preference is understandable among financially troubled businesses who want to keep their market value from falling even further, but the need for public disclosure during the invitation of claims and the subsequent invitation of Expressions of Interest (EOI) appears to outweigh this preference. These competing goals could be reconciled in two stages. To begin, the bankrupt firm and its reputation can remain out of the public eye and out of the media’s focus by having the arbitration proceedings take place behind closed doors. Second, a well-known idea of redacted arbitral awards and arbitral papers would save the day concerning the documents and, most importantly, the award itself. Respondents to EOIs should be bound to tight secrecy provisions regarding the corporate debtor’s finances before being brought into arbitration.
Although it may seem that the secrecy of arbitration alone would be enough to sway companies to favor an arbitration-led CIRP over the current one under the Code, it is important to keep in mind that the framework rests on a very permissive interpretation of who decides on the in-rem rights involved in the CIRP. Many traditional assumptions about the scope of arbitrability in insolvency were shaken by the Indus Biotech case. In light of the increase in corporate insolvencies following COVID-19, the international community must realize that the CoC has exclusive jurisdiction over the determination of in rem rights, with minimal intervention by the NCLT except in extreme cases of irregularities.
Author Shubham kashyap is Student of B.B.A LL. B (HONS) penultimate year.