Parties to a contract often find themselves facing the daunting prospect of a dispute. If not approached with the right strategy, it can become an unwelcome guest, lingering indefinitely and burdening both sides. Arbitration and insolvency proceedings, though distinct in nature, can be viewed as two sides of the same coin, each offering effective means of dispute resolution within their respective domains.
In the course of a dispute, parties may encounter several crossroads between arbitration and insolvency proceedings, raising important questions regarding their applicability and the extent to which they may overlap or interfere with one another. However, the Insolvency and Bankruptcy Code, 2016 (IBC), along with the evolving jurisprudence surrounding it, lays down clear principles that help parties navigate this intersection with greater certainty. This article seeks to examine the extent to which arbitration can interplay with insolvency, focusing on two critical stages: during and after the initiation of insolvency proceedings.
When choosing the appropriate forum, it is essential to consider the nature of relief sought. Arbitration encompasses a wide range of subject matters and allows for a comprehensive assessment of claims arising from commercial transactions, including direct losses, consequential damages, and indirect losses. In contrast, initiating insolvency proceedings merely requires establishing the occurrence of a default, subject to verification by Information Utilities (IUs), without delving into the deeper merits of the underlying claims. [1]
Insolvency operates as a framework aimed at serving the collective interests of all stakeholders, whereas arbitration is limited to resolving disputes strictly between the parties to an arbitration agreement, primarily focusing on monetary recovery. While arbitration emphasizes party autonomy and consensual resolution, insolvency law stands as a self-contained, welfare-oriented legislation designed to address financial distress efficiently by maximizing the value of the corporate debtor’s assets within a defined timeframe. [2]
The Supreme Court in Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund [3] clarified that the initiation and continuation of arbitration proceedings, in the context of a pending insolvency application, lie within the domain of the Adjudicating Authority (AA) under the IBC, 2016. The Court held that it is for the AA to determine whether a default has occurred under Section 8 of the IBC to justify the commencement of Corporate Insolvency Resolution Process (CIRP). If the AA is not satisfied that a default has occurred, and consequently rejects the insolvency application, the parties may proceed with arbitration in accordance with their agreement.
In the event an arbitration is initiated or pending before an arbitral tribunal and an insolvency petition is admitted against the party, the arbitration has to be stayed. By virtue of section 14 of the IBC 2016 the Adjudicating Authority will issue moratorium on all the ongoing judicial proceedings against the party vis-à-vis the Corporate Debtor (CD). [4] The Supreme Court in Alchemist Asset Reconstruction Co. Ltd. v. Hotel Gaudavan (P) Ltd. [5] held that once the CIRP begins and a moratorium is imposed, all legal proceedings against the corporate debtor must stop. The NCLAT has consistently upheld this in cases like K.S. Oils Ltd. v. State Trade Corp. of India Ltd. [6] Therefore, this also renders any arbitration or even litigation initiated after the issuance of the moratorium as non-est in law.
However, where arbitration proceedings have concluded and an award has been passed against the corporate debtor, such an award, or an enforcement order under Section 36, may be relied upon as evidence of debt at the time of admitting a CIRP application. [7] Furthermore, the Supreme Court in K. Kishan v. Vijay Nirman Co. [8] clarified that only arbitral awards that are undisputed can form the basis for initiating CIRP by an operational creditor.
However, the Delhi High Court, in Power Grid Corporation of India Ltd. v. Jyoti Structures Ltd.,[10] clarified that the term “proceedings” under Section 14(1)(a) is not qualified by the word “all.” As such, the moratorium does not automatically extend to all proceedings against the corporate debtor—especially those that are in furtherance of its interest. In this context, the Court observed that the continuation of arbitration proceedings initiated post-moratorium would depend on the nature of the claims involved. Specifically, such proceedings may be allowed to continue if:
(a) they contribute to the value maximization of the corporate debtor’s assets, or
(b) they are not in the nature of debt recovery actions against the corporate debtor.
This principle also extends to cases where arbitral awards are challenged or stayed under Sections 34 and 36 of the Arbitration and Conciliation Act, 1996. In such cases, the determining factor is whether the award operates against the corporate debtor, thus attracting the moratorium, or is for its benefit, in which case the moratorium may not apply.
Building upon this jurisprudential framework, the NCLT in Jharkhand Bijli Vitran Nigam Ltd. v. IVRCL Ltd.[11] was called upon to decide whether a counterclaim in arbitration could proceed during the moratorium period. The Tribunal held that a counterclaim filed by the creditor constitutes a proceeding against the corporate debtor, and thus squarely falls within the prohibition imposed by Section 14 of the IBC. Conversely, a counterclaim initiated by the corporate debtor was held to be permissible and could continue before the arbitral tribunal even during the subsistence of the moratorium. Significantly, the NCLT emphasized that both the claim and counterclaim may be adjudicated during the moratorium period. However, the embargo under Section 14 would be triggered at the stage of enforcement, specifically where the arbitral award directs the corporate debtor to pay damages or any other monetary amount, as no recovery action can be taken while the moratorium remains in force.
In Indian Oil Corporation Ltd v. Arcelor Mittal Nippon Steel India Ltd, [12] the Delhi High Court declined to refer the dispute to arbitration, holding that the claims in question had been extinguished under an approved resolution plan and were therefore non-arbitrable. Applying the "eye of the needle" test, which limits judicial refusal to refer disputes to arbitration only where the arbitration agreement is non-existent or the claims are manifestly unenforceable in law, the Court concluded that Indian Oil’s claims failed this threshold and were inherently non-arbitrable. It observed that permitting arbitration in such a scenario would effectively “rewrite the clean slate” created through the resolution plan process.
However, this position was later revisited by the Supreme Court on 12 February 2024, wherein it set aside the High Court’s ruling. [13] The Supreme Court allowed the matter to be referred to arbitration, noting that both parties had consented to proceed with arbitration after the initiation of CIRP. Crucially, the Court clarified that such reference would be without prejudice to the parties’ rights to raise objections as to arbitrability, thereby leaving the question of enforceability open for determination by the arbitral tribunal.
Thus, while the general principle remains that approval of a resolution plan renders extinguished claims non-arbitrable, the Indian Oil case illustrates that post-CIRP consensual arbitration may be permissible, provided it does not undermine the foundational policy objectives of the IBC. In this regard, the Resolution Professional (RP) continues to play a crucial role, not as an adjudicator, but in verifying claims through due diligence. Aggrieved parties may challenge such determinations before the AA and, if necessary, pursue appellate remedies up to the Supreme Court.
While
arbitration and insolvency operate in parallel legal ecosystems, their
interplay demands a nuanced, context-specific analysis. The IBC’s moratorium
framework ensures that the collective resolution process is not derailed by
individual claims, yet courts have carved out exceptions to uphold contractual
autonomy where it aligns with the Code’s objectives. Ultimately, the law is
evolving toward a balanced approach, one that respects the sanctity of
insolvency while recognizing the enduring relevance of arbitration in
commercial disputes.
[1]
[2] Insolvency and Bankruptcy Board of India, IBBI
Handbook: The IBC – Key Jurisprudence and Practical Considerations 11
(2023).
[3] Indus Biotech Pvt. Ltd. v. Kotak India Venture (Offshore)
Fund, AIR 2021 SC 1638.
[4] Insolvency and Bankruptcy Code, § 14(a), No. 31 of
2016, Acts of Parliament, 2016 (India).
[5] Alchemist Asset Reconstruction Co. Ltd. v. Hotel
Gaudavan (P) Ltd., (2018) 16 SCC 94.
[6] K.S. Oils Ltd. v. State Trading Corp. of India Ltd.,
2018 SCC OnLine NCLAT 352, ¶ 14.
[7] Annapurna Infrastructure (P) Ltd.
v. SORIL Infra Resources Ltd., 2017 SCC OnLine NCLAT 380.
[8] K. Kishan v. Vijay Nirman Co.
(P) Ltd (2018) 17 SCC 662.
[9] Bankruptcy Law Reforms Committee, Report of the
Bankruptcy Law Reforms Committee: Volume I – Rationale and Design (Nov. 2015), https://ibbi.gov.in/BLRCReportVol1_04112015.pdf.
[10] Power Grid Corp. of India Ltd. v. Jyoti Structures
Ltd., 2017 SCC OnLine Del 12189, ¶¶ 5, 10.
[11] Jharkhand Bijli Vitran Nigam Ltd.
v. IVRCL Ltd., 2018 SCC OnLine NCLT 18197.
[12] Indian Oil Corp. Ltd. v. Arcelor
Mittal Nippon Steel India Ltd., ARB.P. 102/2022 (Del. HC).
[13] Indian Oil Corp. Ltd. v. Arcelor Mittal Nippon Steel
India Ltd., Civil Appeal No. 1661 of 2024 (SC).