"OVERRIDING EFFECT OF ARBITRATION ACT OVER

INSOLVENCY AND BANKRUPTCY CODE "

SUBMITTED BY: SUBMITTED TO:

NAME: ADITI BHAWSAR MS. PRIYA VIJAY
ROLL NO.: 728
SEMESTER: VII
SECTION: A

NATIONAL UNIVERSITY OF STUDY AND RESEARCH IN LAW, RANCHI

 TABLE OF CONTENTS

INTRODUCTION .....................................................................................................3

OUTLINING THE ARBITRABILITY OF INSOLVENCY DISPUTES ................4

THE AD - HOC APPROACH ON PENDING ARBITRATIONS & ARBITRAL

AWARDS ..................................................................................................................8

CONCLUDING REMARKS..................................................................................10

BIBLIOGRAPHY ....................................................................................................11

2
 INTRODUCTION

The enforcement of the Insolvency and Bankruptcy Code, 2016, marked the commencement of a
new era of insolvency regulation in India. Insolvency resolution regimes, globally, function as an
exception to otherwise accepted norms of commercial law. The Code brought in a paradigm shift
from the ‘debtor-in-possession’ regime to a ‘creditor-in-control’ regime. Before the introduction
of IBC, the law of insolvency and bankruptcy was spread across several statutes, which rendered
the process, time-consuming and largely ineffective due to the dissipation of value of assets. The
IBC consolidated the law related to insolvency by amending 11 laws, including the Companies
Act, 2013, Recovery of Debts and Bankruptcy Act, 1993 (DRT Act), and Securitization and
Reconstruction of the Financial Assets and Enforcement of the Securitization Act, 2002
(SARFAESI Act).

The Courts have been swift to limit the boundaries of operation of the Insolvency and
Bankruptcy Code. Such as in the matter of B. K. Educational Services, the Apex Court observed
that construing Section 238 of the Code to override provisions of the Limitation Act, 1963 would
lead to ''baby [being thrown] out with the bathwater''1. The Apex Court concluded that the
Limitation Act would extend to IBC proceedings in light of Section 238-A. Section 238 of IBC
gives it an overriding effect over other laws. Section 245-255 of the IBC deal with Amendments
to various other statutes to facilitate the afore-stated overriding effect. With various other statutes
already having ''overriding'' clauses, the three years of IBC in operation and the lacunas in the
Code left a lot of room for judicial interpretation.

The Arbitration and Conciliation Act, 1996 was enacted to consolidate the law concerning
arbitration and defining the law relating to Conciliation. Insolvency disputes are disputes chiefly
arising out of contractual obligations and the existence of arbitration agreements further
encourages the settlement of disputes through arbitration. When we discuss the lex fori
concursus, conflict of law is a settled matter considering the immunity provided to provisions of
the Code in effect under Section 238 which states the overriding and supplant impact of IBC
provisions over other laws. Reliance on Section 238 can only be made in the case of a
conspicuous inconsistency between the Code and the Arbitration and Conciliation Act 1996. The

1
B. K. Educational Services Pvt Ltd v. Parag Gupta And Associates, AIR 2018 SC 5601.

3
aforementioned construction was pointed out by Justice R.F. Nariman in K. Kishan v. Vijay
Nirman Company Pvt. Ltd.2. The scope of Section 238 was again dealt with by the 2018
NCLAT Order while drawing concerns to the Arbitration Act in, K.S. Oils Ltd. v. The State
Trade Corporation of India Ltd. & Anr.3. The NCLAT settled the impugned matter while
upholding the prevailing effect of the Code over the Arbitration Act. This position will survive
up until plausible reconsideration by the Hon’ble Supreme Court.

OUTLINING THE ARBITRABILITY OF INSOLVENCY DISPUTES

Notwithstanding the aforementioned, upholding arbitration agreements considering the

appreciable degree of certainty regarding commercial contracts in light of defaults held against
corporate debtors or claims made against corporate creditors with or without counterclaims made
inter se under the Code should not be shunned on account of the moratorium. IBC is not a
recovery mechanism. Therefore, if there is a ''pre-existing dispute'' in relation to an ''operational
debt'', an application to initiate CIRP is not admitted. A ''dispute'' as defined under Section 5(6)
of the IBC, includes an ''arbitration proceeding''. An application filed by an operational creditor
under section 9 of the IBC during the pendency of arbitration proceedings with the respect that
operational debt, will be rejected. The Hon’ble Apex Court has also held in K Kishan v. Vijay
Nirman Company Pvt. Ltd.4, that a challenge to an arbitration award under Section 34 of the
Arbitration & Conciliation Act, 1996, amounts of the existence of a dispute under IBC.
Therefore, CIRP cannot be initiated even after the conclusion of arbitration proceedings with
respect to the operational debt, unless the challenge to the award has been concluded or the
period for filing such a challenge is over and the award has become final.

However, due to the overriding effect of the IBC, an arbitration clause by itself will not
automatically oust the jurisdiction of the NCLT under the IBC, if other conditions for the
admission of application are fulfilled.

2
K. Kishan v. Vijay Nirman Company Pvt. Ltd., I (2019) BC 3(SC).
3
K.S. Oils Ltd. v. The State Trade Corporation of India Ltd. & Anr., 2018 SCC OnLine NCLAT 352.
4
Id at 2.

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There is no defense of ''pre-existing dispute'' available under section 7 of IBC in an application
by a financial creditor. A financial creditor is only required to prove ''default ''. It flows from the
same that an application filed under section 7 of the IBC is not barred by the ongoing arbitration
proceedings. Moreover once an application under section 7 of the IBC is admitted the other
proceedings pending before any courts or tribunals including the arbitral tribunals are stayed by
coming of moratorium into effect from the date of admission of the application by the NCLT.
NCLT in Reliance Commercial Finance Limited vs. Ved Cellulose Limited5, observed that:-
“Under Section 7 of the IBC there is no bar to initiate CIRP even if the arbitration proceeding is
pending, such a bar exists in respect of a claim made by the Operational Creditor under Section
9 of the IBC.”

As per the framework of an insolvency or bankruptcy arbitration, the odds are in favour of
arbitrating such disputes under section 14(1)(a) of IBC which primarily focuses on precluding
the institution of any lawsuit or continuation of pending lawsuits and does not ex facie interdict
the arbitration proceeding. The IBC Ordinance strictly deals with shielding corporate debtors by
prohibiting the institution of CIRPs for 6 months or throughout its extended duration. Hence, the
institution and operation of arbitration proceedings can be seamlessly and amicably conducted in
the absence of an insolvency resolution process. In the event of disputes arising out of claims
made by the corporate debtor without the existence of any counterclaim, the same can justly lend
itself to arbitration.

The non-existence of a mandated prohibition for initiating CIRP during the pendency of
arbitration according to section 7 of IBC which was stated by the NCLT in Reliance
Commercial Finance Limited v. Ved Cellulose Limited6 faces a contradiction under the IBC
Ordinance. The appointment of a resolution professional by the Committee of Creditors under
section 22, followed by the application made by the resolution professional to the Arbitrator with
the intent to initiate CIRP would yet again be nipped in the bud by invoking the amended
provision section 66(3) introduced by the IBC Ordinance. Hence, a scenario where claims
brought against a corporate debtor without the existence of any counterclaim cannot be
arbitrated. Furthermore, in reference to the Supreme Court’s Observations in the case, Alchemist

5
Reliance Commercial Finance Limited v. Ved Cellulose Limited, MANU/NC/0856/2017.
6
Ibid.

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Asset Reconstruction Company Ltd. v. M/S. Hotel Gaudavan Pvt. Ltd. & Ors.7, it can be rightly
asserted that arbitration can be effectuated by the adjudicating authority in accordance with the
Code in effect if the dispute does not concern the institution of a CIRP.

Contrasting opinions in cases where the disputants argue claims and counterclaims inter se
would bank on the finality based on thorough explication of the entire legal proceeding. In Re
Jharkhand Bijli Vitran Nigam Ltd. v. IVRCL Limited & Anr.8, the claim made by the corporate
debtor which was not encompassed under the moratorium order for CIRP was upheld by the
arbitral tribunal while declaring the submission made by the Resolution Professional to be
erroneous. The sub-mission suggested the continuation of arbitral proceedings with respect to
counterclaims and was set-aside because of subjecting the proceeding to a moratorium order
eventually. The NCLT wound up its decision by administering discretionary powers in the
arbitral tribunal to resolve or not to resolve the dispute while maintaining the claim made by the
corporate debtor. However, this case was appealed before the National Company Law Appellate
Tribunal. Contrary to the NCLT Order, the NCLAT in its Order observed that claims made by
the corporate debtor could only be ascertained upon hearing and examining counterclaims.
Hence, appropriating the principle laid down in the NCLAT Order to the contemporary legal
situation, the question to 'determine whether or not to invoke the CIRP moratorium order' would
arise after the arbitral tribunal hearing all claims and counterclaims made by the disputants.
Concomitantly, in the event of deducing the liability of the corporate debtor to pay out a certain
amount, recovering such amounts would be prohibited throughout the moratorium period under
the IBC Ordinance.

Recently, in the decision of the Mumbai Bench of the National Company Law Tribunal (NCLT)
in Indus Biotech Private Limited v. Kotak India Venture Fund-I9 has recently made the
headlines for allowing the Arbitration and Conciliation Act, 1996, to prevail over the Insolvency
and Bankruptcy Code, 2016. The NCLT had refused to admit an application under section 7 of
the IBC on grounds that there existed an arbitration agreement between the parties. To file an
application for initiation of CIRP under section 7 of the IBC, the applicant must be a 'financial
creditor'. The term 'financial creditor' is defined in section 5(7) as ''any person to whom a

7
Alchemist Asset Reconstruction Company Ltd. v. M/S. Hotel Gaudavan Pvt. Ltd. & Ors., AIR 2017 SC 5124.
8
Jharkhand Bijli Vitran Nigam Limited v IVRCL Ltd. & Anr., CP (IB) No. 294/7/HDB/2017.
9
Indus Biotech Private Limited v. Kotak India Venture Fund-I, MANU/NC/6604/2020.

6
financial debt is owed''. Furthermore, the term 'financial debt' is defined in section 5(8) as ''a debt
along with interest, if any, which is disbursed against the consideration for the time value of
money''. The conclusion derived from these two definitions is that a person does not become
entitled to make an application under section 7 of the IBC unless a financial debt is owed to him.

In this case, the NCLT did not examine whether Kotak had become a financial creditor to Indus
by virtue of subscribing to the OCRPS. Had such an inquiry been undertaken, the NCLT would
have concluded that, Kotak was not a financial creditor. This argument is bolstered by the
decision of the Bombay High Court in Aditya Prakash Entertainment Pvt. Ltd. v. Magikwand
Media Pvt. Ltd.10. In this case, Bombay High Court rejected the petition and observed that:

The shareholders of redeemable preference shares of the company do not become

creditors of the company in case their shares are not redeemed by the company at the
appropriate time. If they do not become the creditors of the company, they cannot
apply for winding up of the company under Section 433(e) of the Companies Act,
1956.

The NCLAT in Mrs. Nandhitha Vedam v. M/s. Udhyaman Investments Pvt. Ltd. & Anr. 11 was
of the view that the existence of arbitration agreement cannot be a ground to reject an application
filed u/s 7 of the IBC, though it can be considered if the application would have been filed u/s 9
of the IBC. Whereas NCLAT in the case of Achenbach Buschhutten CmbH & Co v. Arcotech
Ltd.12, held that a mere clause of arbitration in an agreement cannot be used as a ground to reject
an application filed u/s 9 of the IBC.

In the case of Union of India v. Parmar Construction13, the SC observed that, ''This Court has
put emphasis to act on the agreed terms and to first resort to the procedure as prescribed and
open for the parties to the agreement to settle difference/disputes arising under the terms of the
contract through appointment of a designated arbitrator''. Thus, contractual obligations and
rights of parties under a contract need to be taken into account. Therefore, there is no settled
view as of now in the Indian Courts.

10
Aditya Prakash Entertainment Pvt. Ltd. v. Magikwand Media Pvt. Ltd., 2018(5) ABR 395.
11
Mrs. Nandhitha Vedam v. M/s. Udhyaman Investments Pvt. Ltd. & Anr., Company Appeal (AT) (Insolvency) No.
166 of 2018
12
Achenbach Buschhutten CmbH & Co v. Arcotech Ltd., [2019] 212 CompCas 176.
13
Union of India v. Parmar Construction, AIR 2019 SC 5522.

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Although, the NCLT had directed the parties to resolve their disputes through arbitration, it is
important to note that the NCLT did not hold that the Arbitration Act would prevail over the
IBC. While the IBC was introduced to ''consolidate and amend the laws relating to reorganisation
and insolvency resolution of corporate persons'', the Arbitration Act was promulgated to
''consolidate and amend the law relating to domestic arbitration''. Thus, both the statutes are
special statutes which operate in different fields of law. Section 238 of the IBC gives an
overriding effect to it over all other statues. It reads as follows: ''The provisions of this Code
shall have effect, notwithstanding anything inconsistent therewith contained in any other law for
the time being in force or any instrument having effect by virtue of any such law''.

From the foregoing discussion, it is clear that once the NCLT is satisfied as to the existence of
'default' according to section 7 of the IBC, the existence of an arbitration agreement between the
parties would not restrict the NCLT from initiating CIRP against the corporate debtor. Therefore,
section 8 of the Arbitration Act would not prevail over section 7 of the IBC.

THE AD - HOC APPROACH ON PENDING ARBITRATIONS &

ARBITRAL AWARDS

In view of the explanation provided under the newly inserted section 10A by the IBC Ordinance,
the explanation expressly attempts to clarify the prospective effect of the Code’s moratorium on
CIRP against corporate debtors starting from the 25th of March, 2020. The explanation to section
10A conclusively declares the exclusion of all defaults committed prior to the period. Contrary
to the explanation provided under 10A by the IBC Ordinance, in K.S. Oils Ltd. v. The State
Trade Corporation of India Ltd. & Anr.14, the NCLAT in its Order upheld and adopted the
principle explicated In Re Alchemist Asset Case15. As a result, the NCLAT held, “the arbitral
proceeding pending between 'M/s K.S. Oil Ltd.' (Corporate Debtor) and 'The State Trade
Corporation of India Ltd.' (Financial Creditor) before the Indian Council of Arbitration cannot
proceed during the moratorium period.''

14
Id at 3.
15
Id at 7.

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A thorough comprehension of the above case serves to analyze and develop the degree of
enforceability for plausible scenarios of a pending arbitration proceeding or an award through an
Ad-hoc approach. A case where the arbitral award is in favor of the corporate debtor neither calls
for the implementation of amendments introduced by the IBC Ordinance nor the provisions of
the Code concerning moratorium. Hence, an arbitration award dealing with receivables owed to
the corporate debtor can be enforced under section 35 and section 36 of the Arbitration Act.
Conversely, in a case where the arbitral award is declared against the corporate debtor, the
provisions of the IBC Ordinance would have an immediate effect on the execution of said award
throughout the CIRP moratorium period.

In a double negative approach taken by our legal systems in Power Grid Corporation of India
Limited v. Jyoti Structures Limited16, an arbitral award was pronounced against the disputant
and in favor of the corporate debtor. When an attempt was made by the aggrieved party to
challenge this award under section 34 of the Arbitration Act, the Hon’ble Delhi High Court
emphasized on the redundancy behind performing such an act, as a moratorium under section 13
and section 14 of the Code would immediately ensue in light of any reconsideration by the
judiciary. While establishing the legislative intent behind the Code, the court maintained the
significance of safeguarding the corporate debtor’s assets from diminution, dissipation, or other
such adverse consequences during the course of proceedings. Besides, the attempt to subserve
the likelihood of progression and strengthening of the corporate debtor as a going concern was
strongly explicated in this case.

After discussing the scope and enforceability of a domestic arbitral award with reference to the
IBC Ordinance, the same would necessitate a more intricate procedure for the execution of
foreign arbitral awards under section 48 and section 49 of the Arbitration Act. In Vitol S.A. v.
Asian Natural Resources (India) Ltd. & Ors.17 the question was whether the London Arbitral
Award could be enforced against the property of the corporate debtor in accordance with the
conditions for enforceability laid down under section 48 of the Arbitration Act. The matter
received a reply in the negative when the Ahmadabad Bench highlighted the moratorium under
section 14 of the Code to the pending execution of arbitral award against the corporate debtor.

16
Power Grid Corporation of India Limited v. Jyoti Structures Limited, 2018 IIAD (Delhi)569
17
Vitol S.A. v. Asian Natural Resources (India) Ltd. & Ors.,2018 142 CLA 332 .

9
Hence, upon the substantial reading of several similar and related cases; the apathy signified by
the judiciary to entertain cases of insolvency against the corporate debtor during the period of
CIRP moratorium is well-established and would apply even more so to cases en-forcing the
execution of foreign arbitral awards.

CONCLUDING REMARKS

The anticipatory effect on deciding whether to uphold or set aside arbitral awards or to decide the
effect of the IBC Ordinance on pending arbitrations has been established by the judiciary through
an Ad-hoc approach. This Ad-hoc strategy greatly depends on construing the claims made by
disputants as well as the nature of the disposition of the arbitral award. As a result of the inability
on the part of the corporate debtor to furnish timely payments, adverse consequences ensue with
an indirect impact on our country’s economy.

The insolvency process is a time-bound process that endeavors to revive the distressed
companies and does not offer a recovery forum. Insolvency proceedings are proceeding in rem
impacting the public at large. Thus, if the NCLT prima facie observed that the company is
solvent and the proceeding initiated against the company is not justifiable or just a proceeding
for recovery, then the application can be rejected by upholding the objective of the code, rather
than submitting the dispute to arbitration. The NCLT has hence taken a contrasting view from
the law laid down by the Apex Court in a catena of judgments and has set a wrong precedent by
referring an insolvency dispute (which arises out of rights in rem) to the arbitration. It is hence
concluded that the judgment of the NCLT is entitled to a review before the appropriate appellate
forum i.e. NCLAT. The author concludes that, the NCLT cannot refer to the parties for
arbitration and the Arbitration Act cannot prevail over the IBC.

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 BIBLIOGRAPHY

A. BOOKS
1. Saharay Madhusudan, Textbook on Arbitration & Conciliation with Alternative Dispute
Resolution (4th ed. 2017), Universal Law Publishing.
2. Singh Avtar, Law of Arbitration and Conciliation (11th ed. 2020), EBC Explorer.

B. CASE LAWS
1. Achenbach Buschhutten CmbH & Co v. Arcotech Ltd., [2019] 212 CompCas 176.
2. Aditya Prakash Entertainment Pvt. Ltd. v. Magikwand Media Pvt. Ltd., 2018(5) ABR 395.
3. Alchemist Asset Reconstruction Company Ltd. v. M/S. Hotel Gaudavan Pvt. Ltd. & Ors.,
AIR 2017 SC 5124.
4. B. K. Educational Services Pvt Ltd v. Parag Gupta And Associates, AIR 2018 SC 5601
5. Indus Biotech Private Limited v. Kotak India Venture Fund-I, MANU/NC/6604/2020
6. Jharkhand Bijli Vitran Nigam Limited v IVRCL Ltd. & Anr., CP (IB) No. 294/7/HDB/2017.
7. K. Kishan v. Vijay Nirman Company Pvt. Ltd., I (2019) BC 3(SC).
8. K.S. Oils Ltd. v. The State Trade Corporation of India Ltd. & Anr., 2018 SCC OnLine
NCLAT 352.
9. Mrs. Nandhitha Vedam v. M/s. Udhyaman Investments Pvt. Ltd. & Anr., Company Appeal
(AT) (Insolvency) No. 166 of 2018
10. Power Grid Corporation of India Limited v. Jyoti Structures Limited, 2018 IIAD (Delhi)569.
11. Reliance Commercial Finance Limited v. Ved Cellulose Limited, MANU/NC/0856/2017.
12. Union of India v. Parmar Construction, AIR 2019 SC 5522.
13. Vitol S.A. v. Asian Natural Resources (India) Ltd. & Ors.,2018 142 CLA 332 .

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