[Manav and Shourya are students at NALSAR University of Law and Jindal Global Law School, respectively.]
“Arbitrating disputes involving parallel insolvency proceedings is an intricate task that requires tribunals to be sensitive to both the conflicting interests that underpin arbitration as a private method of international dispute settlement and the public interests and priorities of state-centric insolvency proceedings.” - Fernando Mantilla Serrano
The move towards globalization has led to an unparalleled increase in the number of cross-border disputes in recent years. These comprise an amalgamation of diverse legal questions arising out of varied factual matrices. A common thread that weaves these disputes is their subsequent resolution by arbitration. When analyzed in isolation, the benefits associated with the recognition of arbitration as a means of dispute resolution are manifold. However, the problem arises when recourse to arbitration is taken in matters pertaining to insolvency proceedings. This is due to the inherent conflict between the rationales underlying arbitration and insolvency claims. Arbitration is driven by party autonomy and a decentralized approach, focusing on resolving disputes based on mutual consent through private agreements, as opposed to insolvency proceedings, which aim to centralize all claims against a corporate debtor to maximize asset value and ensure equitable distribution among creditors. This conflict deepens when claims arising out of Section 14 of the Insolvency and Bankruptcy Code 2016 (IBC) are referred to arbitration. Section 14(1)(a) prescribes that a moratorium can be imposed to prohibit the institution or continuation of suits or arbitral proceedings against the corporate debtor. The Supreme Court of India in Alchemist Asset Reconstruction Limited v. Hotel Gaudavan explained Section 14 and stated that an arbitral proceeding initiated after the imposition of moratorium is non est in law. It differentiated Section 14 from Section 33(5) by stating that the former prevents both continuance and institution whereas the latter only prohibits institution. This was followed by the National Company Law Appellate Tribunal (NCLAT) in KS Oils Limited v. State Trade Corporation of India Limited, wherein it held that pending arbitral proceedings cannot continue after the imposition of a moratorium. The rationale behind this is to ensure operational continuity and protect the rights of creditors against potential decisions of legal forums, the binding nature of which could prejudice creditors from realizing their due claims. As explained in Larsen Oil and Gas Limited v. Petropod Limited and the Re United States Lines Inc. case, this conflicts with the fundamental principles of arbitration (expounded in Insigma Technology Limited v. Alstom Technology Limited) by halting ongoing disputes and overriding consensual arbitration agreements.
To resolve such potential discrepancies in legal interpretation, Section 238 of the IBC provides that in conflicting scenarios, the provisions of the IBC will take precedence over the conflicting provisions in other laws or legal instruments. However, the conflict in this scenario is not with respect to specific provisions stated under the Arbitration and Conciliation Act 1996 but with the primary tenets of arbitration as a discipline. In this event, the applicability of Section 238 becomes questionable. In such cases, the purposive rule of interpretation should be correctly applied. This rule analyses the objective of a particular enactment and aims to give effect to it. The rationale behind the introduction of Section 238, which is a non-obstante clause was that since the IBC is a specialised enactment with provisions tailored towards streamlining the insolvency resolution process for corporate entities in India with the objective of ensuring timely and efficient resolution to maximize the value of assets and balance the interests of creditors and stakeholders, it should take precedence over the general principles of arbitration. Having established the precedence of the IBC, this article seeks to examine the void that exists in the applicability of Section 14 to foreign-seated arbitrations, alongside providing reasons and corresponding suggestions to fill this void.
Scope and Limitations of Section 14 in Foreign-Seated Arbitrations
Section 1(2) of the IBC, while setting out the scope of the code, provides that the provisions of the IBC extend to the territory of India. However, Section 234 enshrines an exception by providing that the Central Government may enter into reciprocal agreements with the Government of any country outside India to enforce the provisions of the IBC. When Section 14 is read in light of these two provisions, the unambiguous interpretation is that the applicability of this Section will extend to foreign-seated arbitrations only in the event of the existence of a reciprocal agreement between the governments of the two countries. The absence of such an agreement restricts the scope of Section 14 to only domestically seated arbitrations, which vitiates the very purpose of the concept of moratorium, especially in light of the increasing number of cross-border insolvency disputes. This means that in the absence of a reciprocal agreement, the tribunal can proceed with the arbitration and enforce the award without considering the moratorium. The rationale behind this is that the applicable law in the case of a foreign-seated arbitration is the lex arbitri, as decided by the parties, and so subjecting the arbitral proceedings to Indian law will be unjust and inefficient.
In this regard, another consideration is the nexus of arbitral awards with Indian law. If the foreign arbitral award has a nexus with Indian law, such as enforcement proceedings in India or the involvement of Indian assets, Section 14 can be invoked to stay the execution of the award during the insolvency process, even in the absence of a reciprocal agreement. This was held in the Vitol SA v. Asian Natural Resources case. On the contrary, if the award and its enforcement have no connection to Indian law or assets, Section 14 of the IBC is not applicable, and the foreign award remains enforceable independent of the Indian insolvency proceedings. This has been further upheld in the Videocon Industries Limited v. Union of India case.
Interestingly, the Indian Government has not yet entered into a reciprocal agreement with any other state. This creates a void wherein Section 14 is rendered inapplicable to foreign-seated arbitrations with awards not having any nexus to Indian law. The impact of this has been that the Indian debtor is at the mercy of the lex arbitri and is rendered remediless without being enabled to take recourse to the provisions of Section 14 of the IBC. This vitiates the very purpose of Section 14 (as explained in the Power Grid Corporation of India v. Jyoti Structures Limited case, wherein the court held that since the objective of Section 14 is to prevent the depletion of debtor’s assets, the moratorium will not be applicable for suits which do not prejudice the corporate debtor), which is to effectively effectuate the insolvency proceedings by safeguarding the debtor's assets while simultaneously protecting the creditor's rights.
The Legal Void and its Implications
In this regard, the restriction on the applicability of Section 14 to foreign-seated arbitrations without reciprocal agreements creates significant legal and practical challenges. For instance, the ongoing corporate insolvency resolution process of Go First, an Indian airline founded by the Wadia Group, initiated by the company itself, highlights the complexities faced by Indian companies in protecting their assets and fulfilling obligations, as international lessors like SMBC Aviation Capital and GY Aviation sought to reclaim aircrafts despite the moratorium imposed by the National Company Law Tribunal. This specific example hints towards several challenges posed by the restriction. Without the applicability of Section 14, Indian corporate debtors are exposed to enforcement actions abroad, leading to a depletion of their assets outside India, which undermines the moratorium's objectives to maintain the debtor's estate. This absence of reciprocal agreements results in inconsistent enforcement, as domestic creditors are subject to the moratorium under Section 14, while foreign creditors in jurisdictions without such agreements can proceed with their claims, leading to unequal treatment of creditors. The restriction also adds a layer of complexity and uncertainty for companies operating internationally, as they must navigate different legal regimes, leaving their assets abroad vulnerable and complicating the insolvency resolution process. Moreover, creditors may strategically choose arbitration seats in jurisdictions where Indian insolvency proceedings are not recognised, leading to forum shopping, which further complicates and prolongs the insolvency resolution process. This restriction weakens the negotiating position of Indian corporate debtors during insolvency proceedings, as creditors holding foreign arbitral awards can leverage their ability to enforce these awards outside India, pressuring the debtor into unfavorable settlements. Additionally, the lack of reciprocal agreements hinders effective cross-border insolvency cooperation, complicating the coordination between jurisdictions essential for managing the insolvency of multinational corporations efficiently. This undermines the comprehensive framework of the IBC, which aims for timely and efficient resolution of insolvency cases, protecting the debtor’s estate, and ensuring equitable treatment of all creditors. The lack of clarity and protection under the IBC for international arbitration can also deter foreign investors and creditors from engaging with Indian companies, as they may perceive higher risks and uncertainties in recovering their investments during insolvency proceedings. It is due to these adversities that the existing void has to be filled in order to ensure a more robust and equitable insolvency resolution process.
Potential Gap-Filling Solutions
Several gap-filling solutions can be considered to address the challenges posed by this restriction. Firstly, the Indian government should prioritize entering into reciprocal agreements with key trading partners and jurisdictions with significant cross-border insolvency interactions. This would ensure the mutual recognition and enforcement of insolvency proceedings, providing better protection for Indian corporate debtors. Second, legislative amendments could be introduced to expand the scope of Section 14, explicitly including provisions for its applicability to foreign-seated arbitrations in the absence of reciprocal agreements, especially when Indian assets or interests are involved. However, it must be recognised that such amendments alone may not suffice, as the enforcement of Indian insolvency laws, including the moratorium, on foreign assets would still be subject to the laws and jurisdictional boundaries of the respective foreign countries. Therefore, the practical effectiveness of extending a moratorium to assets registered under foreign laws would depend on the cooperation and recognition of Indian insolvency proceedings by foreign courts and authorities. This necessitates a balanced approach, combining legislative efforts with diplomatic and legal frameworks to ensure reciprocal recognition and enforcement of insolvency-related orders internationally. Thirdly, creating a centralized framework for cross-border insolvency within the IBC could streamline processes and provide clear guidelines for dealing with foreign-seated arbitrations. Additionally, encouraging international arbitration institutions to adopt rules that consider the impact of insolvency proceedings can help harmonize the treatment of such cases globally. Lastly, promoting greater international cooperation and dialogue on insolvency and arbitration issues through forums like UNCITRAL can lead to more standardized approaches and mutual understanding, which would ultimately reduce the legal uncertainties and inconsistencies currently faced by multinational corporations.
Conclusion
In Canara Bank v. Deccan Chronicle Holdings Limited, the NCLAT, with the aim of preserving the basic structure of the Constitution of India, held that the moratorium does not apply to petitions under Articles 32, 136, and 226 of the Constitution. Such decisions restore faith in the judiciary and indicate the increased possibility of an optimistic future in relation to Section 14, too. Moreover, with the increase in cross-border arbitration in the 21st century, it is imperative for this void to be resolved. The selective applicability of the provisions of Section 14 to only domestic-seated arbitrations results in several complexities that deviate from the very purpose of the enactment of this provision. The current restriction exposes Indian corporate debtors to significant risks and undermines the objectives of the moratorium intended to protect their assets and ensure equitable treatment of creditors. To overcome these issues and strengthen the insolvency resolution process, solutions such as amending legislative provisions, entering into reciprocal agreements, creating a centralized framework for cross-border insolvency, and promoting international cooperation should be inevitably implemented. These measures will not only protect Indian debtors but also enhance the confidence of foreign investors and creditors, fostering a more stable and predictable legal environment for cross-border business activities.
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