Moratorium and its impact on Arbitration proceedings

Briefs of cases dealing with Moratorium and its impact on

arbitration proceedings.

The Hon'ble Supreme Court in Alchemist Asset Reconstruction Company Ltd. v

Hotel Gaudavan Pvt. Ltd. AIR 2017 SC 5124 ("Alchemist") has held that,

"4. The mandate of the new Insolvency Code is that the moment an
insolvency petition is admitted, the moratorium that comes into effect under
s. 14(1)(a) expressly interdicts institution or continuation of pending sits or
proceedings against Corporate Debtors."

5. This being the case, we are surprised that an arbitration proceeding has been
purported to be started after the imposition of the said moratorium and appeals
under Section 37 of the Arbitration Act are being entertained. Therefore, we set
aside the order of the District Judge dated 06.07.2017 and further state the
effect of Section 14(1)(a) is that the arbitration that has been instituted after
the aforesaid moratorium is non est in law."

The NCLAT in K.S. Oils Ltd. v The State Trade Corporation of India Ltd. &
Ors. [2018] 146 SCL 588 followed the principle laid down in “Alchemist” case by
the Supreme Court and applied this principle to the pending arbitration
proceedings i.e. arbitral proceeding which had commenced before the imposition
of moratorium under IBC as well. According to the NCLAT, this position also
obtained from s. 238 of the IBC which provided overriding effect to the IBC over
the Arbitration and Conciliation Act, 1996 ("Arbitration Act").

The NCLT, Hyderabad Bench in Jharkhand Bijli Vitran Nigam Limited v IVRCL
Ltd. (Corporate Debtor) & Anr. CP (IB) No. 294/7/HDB/2017 held that in the
arbitration proceedings in question, the claim made by the corporate debtor could
proceed but the counter claim filed against the corporate debtor could not be
allowed to proceed. The NCLT however recognized the difficulties involved in
segregating a lis in such a manner and left it upon the arbitral tribunal to take an
independent view whether the claim of the corporate debtor and counter claim
against the corporate debtor could be separately proceeded or not.
The NCLAT reversed the aforesaid decision of the NCLT vide it's order dated
03.08.2018 passed in Jharkhand Bijli Vitran Nigam Limited v IVRCL Ltd.
(Corporate Debtor) & Anr. [Company Appeal (AT)(Insolvency) No. 285 of 2018].
The NCLAT allowed the arbitration proceedings to continue and held

"3. As the claim of the Corporate Debtor can be determined only after
determination of counter claim made by the Appellant in the same very arbitral
proceedings and if counter claim or part of it is set off with the claim made by the
Corporate Debtor, were of the view that both the claim and the counter claim of
parties should be heard together by the Arbitral Tribunal in absence of any bar
under Insolvency and Bankruptcy Code, 2016.

4.However, on determination, if it is found that the Corporate Debtor is liable to

pay certain amount, in such case, no recovery can be made during the period of
moratorium." (emphasis supplied)

A question arose as to whether a s. 34 proceeding would lie against the

award in favor of the CD. This was answered by the Hon'ble Delhi High Court in
it's judgment dated 11.12.2017 in Power Grid Corporation of India Ltd. v. Jyoti
Structures Ltd. 246 (2018) DLT 485 ("Power Grid"), while construing the scope
of s. 14(1)(a) of the IBC, has held,

"8. The object of the Code is to provide relief to the corporate debtor through
"standstill" period during which its assets are protected from dissipation or
diminishment, and as a corollary, during which it can strengthen its financial
position, .......... To determine the true meaning of the statute, the provision would
have to be construed in the context of the statute as a whole, for which purpose
interpretative criteria may have to be applied even when the statutory language is
apparently free from any semantic ambiguity......

10. In the light of above purpose or object behind the moratorium, Section 14 of
the Code would not apply to the proceedings which are in the benefit of the
corporate debtor, like the one before this court in as much these proceedings are
not a 'debt recovery action' and its conclusion would not endanger, diminish,
dissipate or impact the assets of the corporate debtor in any manner whatsoever
and hence shall be in sync with the purpose of moratorium which includes keeping
the corporate debtor's assets together during the insolvency resolution process
and facilitating orderly completion of the process envisaged during the insolvency
resolution process and ensuring the company may continue as a going concern.