Introduction
In a world where legal actions frequently span multiple jurisdictions, there is a significant absence of efficient mechanisms for settling disputes between the companies especially considering the restricted applicability of provisions within the United Nations Commission on International Trade Law Insolvency model law (“UNCITRAL”) to corporate groups.
Arbitration presents clear advantages compared to conventional litigation under the UNCITRAL Insolvency Model Law, rendering it a preferable recourse for discerning parties. Adopting Arbitration in place of Court proceedings will protect concerns of parties involved as in arbitration there will be no third party involved. Moreover, privacy concerns of the parties can be well protected.[i] Arbitration gives an opportunity to address some particular categories of insolvency proceedings that have been traditionally difficult to deal with in cross-border contexts; i.e. the first in resolving disputes between affiliated debtors in different jurisdictions and the second in aiding financially distressed entities lacking effective reorganization laws.[ii]
Hence, the article undertakes a thorough examination of these complexities. Part I which meticulously dissects the imperative for arbitration in cross-border insolvency disputes. Part II delves into the jurisprudential nexus between arbitration and insolvency legislations, elucidating the genesis and rationale behind their discord. Part III scrutinizing the arbitrability of distinct insolvency matters amidst divergent jurisdictional paradigms particularly U.S. Subsequently, Part IV offers prospective pathways forward.
The Intersection of Arbitration and Insolvency: The Origin and Emergence of the Conflict
An effective insolvency law framework aims to create the best outcome for everyone involved and the economy as a whole. Insolvency proceedings across diverse legal systems invariably prioritize the twin principles of preserving and maximizing value for various stakeholders. This aim finds its most direct expression within the context of rehabilitation/restructuring proceedings, where maximizing value is achieved through continued operation of a viable business entity.
Insolvency processes in different parts of the world are always targeted at ensuring that creditors get as high as possible compensation for their claims. This is evidenced by numerous and repeated efforts in rehabilitation or restructuring cases with the aim to sustain viable enterprises in order to obtain the maximum worth possible.
In order to accomplish this objective, UNCITRAL has integrated into the structure of cross-border bankruptcy regulations the ability to immediately block specific acts from taking effect after foreign insolvency cases have been recognized. Article 20 of the UNCITRAL Model Law on Cross-Border Insolvency specifies regulations that deal with the automatic stay, which may “temporarily stay arbitration proceedings” involving the debtor’s assets, but it “does not necessitate that dispute relating to arbitration cannot be arbitrated.” the automatic stay puts an injunction that stops lawsuits, foreclosures, garnishment, and all recovery actions against the debtor the moment a bankruptcy is filed. The automatic stay in bankruptcy operates as a legal shield, rendering any post-petition lawsuits, judgments, or enforcement actions against the debtor null and void. However, the effect of an automatic stay, generally and particularly so in insolvency proceedings, can be moderated due to the existence of stand-alone national arbitration laws. Cross-border insolvency and arbitration demonstrate the challenge of determining whether arbitrators can handle cases of this nature.
India’s Labyrinth: Cross-Border Insolvency and Arbitration
What occurs when an enterprise goes bankrupt and those contracts turn sour in the context of this thriving Indian international business environment? This is the point where it becomes essential to navigate such an intricate road crossing both cross-border insolvency (CBI) and international arbitration (IA).
Exploring the Legislative Framework
India’s legal framework for dealing with insolvency and arbitration rests on two pillars: the Insolvency and Bankruptcy Code (IBC, 2016) and the Arbitration and Conciliation Act (AC Act, 1996). However, both statutes have limitations when it comes to CBI.
Section 234 & 235 of IBC
A strictly domestic-oriented stand taken by the IBC presents only brief provisions for dealing with CBI (Sections 234 & 235), but these are not functional and need to be operationalized. It is empowered in Section 234 to make international agreements so that the reach of the IBC can extend beyond India’s borders. Section 235 allows insolvency professionals to seek assistance from foreign courts regarding assets located overseas. While these sections hold promise, their lack of implementation renders them ineffective. In the case of SBI v. Jet Airways,[iii] the NCLT declared the Dutch proceedings null and void due to the lack of provisions in the Indian Insolvency and Bankruptcy Code for recognizing foreign court decisions, as Sections 234 and 235 were not in effect at that time. This decision was then appealed by the Bankruptcy Administrator and it was reversed by NCLAT. Afterwards, a cross-border insolvency protocol aligning with Model Law that designated India as the center for main proceedings was adopted while non-main proceedings related to Netherlands. Additionally, the IBC’s draft revisions hint at incorporating the UNCITRAL Model Law on CBI, but this too remains a future possibility.
Section 14 of IBC
The only chapter in IBC dealing with arbitration is Section 14, which has to address moratorium. A moratorium period under the IBC is a temporary suspension that is put on actions, initiated or pending, against the debtor. It is a calming period for an ailing or stressed debtor. Section 14 underlines a stay on arbitration proceedings during this period of moratorium[iv] and the application of this provision has been observed to take place on a very case-to-case basis instead of a uniform manner, depending on what stage the insolvency process is on. However, section 1 of IBC states that IBC provisions have applicability to the extent of the whole of India. This means that these provisions, including the moratorium, do not have extra-territorial enforceability. The Supreme Court in Alchemist Asset Reconstruction Co. Ltd. v. Hotel Gaudavan (P) Ltd.,[v] told that arbitration proceedings began after the imposition of a moratorium and further held that, “the arbitration that has been instituted after the moratorium is non est”.[vi] Further the court in K.S. Oils Ltd. v. State Trade Corpn. of India Ltd.[vii], observed that arbitral proceedings pending on the date of commencement of CIRP cannot proceed during the moratorium.
Arbitration & Conciliation Act, 1996
The AC Act has similar limitations as those found in other laws for arbitration enforcement abroad. However, the enforceability of such award in India is barred by stay of proceedings provision (moratorium) thus leading to a conflict with the autonomy vested in parties bound by an arbitration agreement. So instead of being able to claim against the debtor’s personal properties located in another country, these awards cannot be executed until after insolvency. Consequently, arbitration arrangements lose their sense of independence because they risk being overridden by court decisions or any other state intervention. To this end, appellants are only left with one alternative which involves approaching the liquidator upon meeting specified requirements. To elucidate this in M/s. Sunflag Iron & Steel Co. Ltd. v. M/s. J. Poonamchand & Sons it was held that that mere filing of an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 does not bar an application under Section 11 of the Arbitration and Conciliation Act, 1996.
Unanswered Questions, Uncharted Territory
The interplay between the IBC and A&C Act raises critical questions:
Stay of Arbitration: Does an Indian insolvency case automatically stay ongoing arbitration proceedings in a foreign jurisdiction? Can a debtor use insolvency to shield themselves from arbitration awards?
Arbitration vs. Insolvency Petition: Can a foreign-seated arbitration agreement overrule a domestic insolvency petition, especially considering the “non-obstante” clause[viii] (a clause that overrides conflicting provisions)?
In a landmark case, Elektrim v Vivendi, exposed a critical conflict between Polish and English legal systems regarding the impact of insolvency on arbitration agreements. The author delves into this dispute and its implications for international commercial arbitration.
The Dispute
A rather puzzling turn of events arose when it emerged that two separate arbitration proceedings ran concurrently- one at the International Chamber of Commerce in Geneva (ICC) and also another one at London’s LCIA. Nevertheless, Elektrim’s insolvency in the country made it impossible for execution to take place.
Polish Law and the Elektrim Ratio
Polish insolvency law stepped in, this time under the explicit provision of Article 142 of the Polish Insolvency Act implying that once insolvency proceedings commence, the arbitration clause would become inoperative. Reason being that Elektrim, as a debtor, lost ownership of the corporation and the right to lawfully represent itself at a trial proceeding through arbitration under the Swiss Supreme Court’s decision in Geneva by virtue of applying its law which originally emanated from Poland. Elektrim wanted to cancel the arbitral award. However, the London Tribunal disagreed. This case was governed by English law.
English Law’s Stance
The English Arbitration Act 1996 played a crucial role. The court in London ruled that insolvency proceedings could not be used to derail arbitration. Such a move would contradict the Act’s intention to promote arbitration. This stance was further solidified by the English Court of Appeal.
The Shift and the Elektrim Ratio Overturned
After revisiting the issue, a landmark turn was made by the Swiss Supreme Court itself. Consistent with this shift in perspective, they reversed their earlier ruling by holding that bankruptcy proceedings against a party should not render the arbitration agreement ineffective. This adjustment brought about a clearer legal position from the Swiss law-that when a company goes, into bankruptcy, the owner does not automatically lose control over it but it goes to a receiver thus promoting arbitration.
Hence, India’s legal framework for CBI and IA, while possessing potential, remains underdeveloped. Addressing the limitations discussed above and drawing inspiration from international best practices are crucial steps towards building a more robust and efficient system for resolving cross-border insolvency disputes involving arbitration.
The Tug of War Globally
It is important to note that the USA has a well-established legal system for Bankruptcy laws largely because of the strong legislation on the one hand, while on the other, there are numerous cases discussing the same. Also, the US has a strong institutional basis for both International Arbitration (IA) and internal arbitration. As a result, it would be helpful to consider this issue.
It can be undoubtedly said that US acts as a front runner in the field of international arbitration[ix] which was given cognizance in US as back in 1794[x]. The arbitrability of statutory rights as a mechanism was initially not preferred by the US courts which was subsequently overturned and thus the court in the case Mitsubishi Motors Corp allowed arbitration on statutory rights[xi]. Hence, the courts permitted the use of international arbitration in order to resolve bankruptcy cases because bankruptcy claims are statutory claims.[xii] This opened the door for the application of international arbitration in resolving disputes related to insolvency and bankruptcy[xiii].
The United States uses a specific viewpoint in its Bankruptcy Code under which it lists out some ‘core’ matters but leaves out others for arbitration while reserving all others for arbitration as non-core matters. However, they don’t all necessarily create conflicts with, or defeat core principles behind bankruptcy law meaning that some might well benefit from an arbitration process than litigation in court.
In the case of Eros International v. Telemax Links India Pvt. Ltd, it was held that traditionally, insolvency reigns supreme. These proceedings, affecting the debtor’s entire estate, are considered “in rem” – against everyone. Arbitration, on the other hand, is typically “in personam” – focused on the specific parties to the contract. This creates a natural tension.
Insolvency proceedings were favoured over arbitration by courts in the past however this trend appears to be changing with recent judgements in KK Ropeways and Mobilox case. A significantly different situation is created in favour of arbitration which currently states that Arbitration and IBC proceedings cannot be conducted simultaneously and held that if the appeal against the arbitral award is not spurious, imaginary, or hypothetical then a petition can be dismissed in favour of arbitral proceedings, therefore establishing that arbitral proceedings can subsume primacy over IBC proceedings in a specific set of conditions, therefore, reducing the magnitude of sec 238 and increasing the possibility of using arbitration to settle CBI disputes.
However, there are cracks in this dominance. Exceptions emerge for disputes arising from the very insolvency itself. Imagine a creditor claiming a debt the debtor disputes. If their contract included an arbitration clause, the debtor could challenge the debt in arbitration, potentially putting insolvency on hold.
This balancing act is further illustrated by “winding up petitions” – a creditor’s attempt to dissolve a debtor unable to pay debts. Courts have recognized that arbitration agreements can trump a winding-up petition, allowing the dispute to proceed in arbitration first.
The fight does not end just there. What will happen if insolvency proceedings commence in one country and at the same time an arbitration is carried out in another country in the globe? This can be linked to the concept of doctrine of issue estoppel which precludes a party from raising an issue already decided in a prior litigation between the parties in a subsequent litigation between the same parties with reference to the case of Gibraltar Grand Prix Limited (In Liquidation) v. Virgin Atlantic Airways Limited, It is a notable case for the doctrine of issue estoppel. This case illustrates the cross-border application of the doctrine of issue estoppel, where decisions made in insolvency proceedings in one jurisdiction can have binding effects on arbitration proceedings in another jurisdiction.
In conclusion, while insolvency generally takes center stage, there’s a growing recognition of arbitration’s role in specific situations. This nuanced approach strives to find equilibrium in the complex world of cross-border commercial disputes.
Bridging the Gap: Policy Recommendations for India
In the Indian legal landscape, a complex interplay of arbitration and cross-border insolvency (CBI) is what this analysis has examined. Despite the fact that there is no existing body of case law in India that specifically addresses these two issues joint together; valuable lessons may be drawn from other countries such as: – the European Union; the United States of America etcetera. Concerning this comparison of different countries’ judicial systems, the following are some recommendations aimed at enhancing India’s juridical basis as well as ensuring efficient conflict resolution in cases involving CBI:
Firstly, India should think about starting similar procedures to what is in the US where the domestic bankruptcy court must formally recognize it before an arbitral tribunal treats a CBI proceeding as a material fact. Hence, NCLT will assume an identical function as NCLAT could, thereby avoiding meritless insolvency orders against disputes being arbitrated within or outside India.
Secondly, the topic has been touched in section 41(2) again about the invalidation of arbitration by post-bankrupt agreement. For example, this becomes applicable more, especially in cases where an external court declares it bankrupt internationally; otherwise, an alternative would be to prefer arbitrage to proceeding through CBI interrogations.
Thirdly, a general moratorium pursuant to Insolvency and Bankruptcy Code (IBC) Section 14 may obstruct ongoing arbitration. Therefore, during this time of moratorium, some exceptions need to be implemented or enabled in order to allow arbitration to proceed. These involve measures that protect stakeholder interests against potential abuse and misuse without allowing them to be abused.
Fourthly, if a restraining order in bankruptcy would endanger creditors’ entitlement to claim their debts, combining arbitration and bankruptcy procedures on a temporary basis may serve as a remedial measure. Party autonomy must be respected, and creditors’ rights should not be jeopardized during arbitration. Each counterpart to arbitration and bankruptcy procedures should get equal chances of redress aiming at their situations.
Conclusion
By implementing these changes, India will be able to create a more robust legal structure to address CBI disputes. This implies that access to justice will be facilitated and there will be more predictability in the legal system. This would then help raise investor trust when it comes to insolvency matters regarding this nation thereby making its economy stronger globally even amid such pressures from international markets.
This forward-looking strategy puts India on the cusp of leading in the international insolvency scene, so that solving CBI disputes can happen more quickly and revive the economy. To solve conflicts effectively in the future, scholars, politicians, as well as ordinary people must continue talking and sharing their thoughts. By embracing these recommendations, India can unlock the full potential of arbitration as a catalyst for cross-border cooperation and economic prosperity.
References
[i] Sam Luttrell, Opportunities for Australian Arbitration Practitioners in the “Global Financial Crisis”, Kluwer Law International – Document (openathens.net)
[ii] Gropper, Allan. (2012). The Arbitration of Cross-Border Insolvencies. American Bankruptcy Law Journal, The. 86. 201-242,
[iii] Jet Airways (India) Ltd. v. SBI, 2019 SCC OnLine NCLAT 385.
[iv] Insolvency and Bankruptcy Code 2016, s 14
[v] Alchemist Asset Reconstruction Co. Ltd. v. Hotel Gaudavan (P) Ltd., (2018) 16 SCC 94.
[vi] Alchemist Asset Reconstruction Co. Ltd. v. Hotel Gaudavan (P) Ltd., (2018) 16 SCC 94, para 5.
[vii] K.S. Oils Ltd. v. State Trade Corpn. of India Ltd., 2018 SCC OnLine NCLAT 352, para 14.
[viii] Definition given in Union of India v. G.M. Kokil 1984 Supp SCC 196, para 11
[ix] Reed L and Sutcliffe J, ‘The “Americanization” of International Arbitration?’ (2001) 16 Mealey’s Int’l Arb. Rep.
[x] Jay treaty of 1794 between the United States of America and Great Britain
[xi] Mitsubishi Motors Corp. v. Soler Chrysler-Plymouth Inc (1985)473 U.S. 614
[xii] See Scherk v. Alberto-Culver Co. (1974),417 U.S. 506
[xiii] Culhane MB and White MM, ‘Enforcing (or Not) Arbitration Clauses in Bankruptcy’ (2003) Vol.2 Consumer Financial Services Litigation pp.39
Author(s)
Bhavika Verma
Student at NLU, Jodhpur
Ujjwal Meena
Graduate from NLU, Jodhpur