Arbitration Proceedings During the Moratorium Period Under IBC

In arbitration, a dispute is resolved by one or more arbitrators who then provide a binding decision based on the parties' agreement. Rather than going to court, parties choose arbitration as a private method of resolving disputes out of court. An arbitrator receives a dispute from the parties, he then examines the details, hears both sides, and finally makes a decision.

Arbitration clauses may be mandatory or optional, and the arbitrator's decision is binding. Disputes relating to private rights may be resolved through arbitration. It is much faster than traditional court proceedings and can be used to resolve both monetary and property disputes.

About Insolvency

Insolvency is defined as the inability of a person or business (the debtor) to repay their debts when they are due. There can be two forms of insolvency. First is cash-flow insolvency and the second is balance-sheet insolvency.

A person or business is considered to be cash-flow insolvent if they have the assets necessary to pay their debts in full but are short on an acceptable method of payment. For instance, a person has a large home and a costly vehicle but lacks the liquid assets necessary to pay off debts when they become due. Usually, negotiation is the best way to overcome the cash flow insolvency. For instance, the creditor can postpone collection efforts and wait until the car is sold and in consideration, the debtor agrees to pay the penalty.

A person or business is said to be balance-sheet insolvent if their assets are insufficient to pay off all of their debts. Bankruptcy may be filed by people or companies, but it is not always the case. Negotiations can often resolve issues without bankruptcy if all parties admit their losses. A corporation may still have enough cash on hand to pay its next obligation on time even though it appears to be insolvent on the balance sheet. Most regulations, nevertheless, forbid businesses from making this payment unless it directly benefits all creditors. For instance, an insolvent farmer might be permitted to employ workers to assist with crop harvesting because failing to harvest and sell the crop could be worse for its creditors.

The Insolvency and Bankruptcy Code, 2016 (IBC)

Insolvency and Bankruptcy Code, 2016(Code) is India's bankruptcy legislation that aims to strengthen the current structure by combining insolvency and bankruptcy under a unified body of law. The Code is in force with the intention of realizing maximum value from any suffering entity through expertise and strategy. The concept of a "moratorium" is one of the most significant aspects of the Code and is discussed under Section 14. To ensure that economically distressed debtors maximise the realisation of their assets, the moratorium offers a ‘calm period’. Additionally, the moratorium ensures a favourable outcome without the concern of disbursing additional assets in concurrent proceedings, if any.

Arbitration proceedings during the moratorium period under IBC

Bar on arbitration proceedings during the moratorium period under IBC has long been a bone of contention. The High Courts' differing opinions made the position on suspending arbitral proceedings somewhat ambiguous. The definitive resolution to this issue was finally resolved in the Supreme Court's ruling in the Alchemist Case, which stated that any arbitration proceedings begun after the imposition of the Moratorium would instantly cease to exist in law. Due to the contractual requirement, the moratorium in the current case was proclaimed in favour of the insolvent party, and arbitration was requested.  The tribunal held that in lieu of Section 14, the adjudicators must order a moratorium on any and every proceeding, including arbitrations against corporate debtors. Therefore, the arbitration proceedings in the aforementioned case were suspended as soon as the insolvency process began. The case of K.S. Oils Ltd. v. State Trade Corporation of India Ltd. & Anr. further emphasised that, while arbitration proceedings can be brought against a corporate debtor, if the result of the proceedings leads to recovery of debt, then the corporate debtor will be exempted from the same.

Conclusion

The 2016 Insolvency and Bankruptcy Code has given creditors significant financial and administrative assistance since its establishment. The coexistence of arbitration and insolvency processes has few exceptions. The purpose of the moratorium under IBC and the non-obstante clause under section 238 of IBC is to give breathing room to the distressed corporate debtor and to stop further depletion of the debtor's assets and resources. The moratorium period also enables the corporate debtor to create the most effective resolution strategy in accordance with IBC guidelines and to realise the full value of the business's assets. Keeping in mind the same reasoning courts have affirmed the supremacy of the moratorium under the IBC In numerous concurrent proceedings.

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For Arbitration cases LegalPay provides litigation funding to firms on non-recourse basis for legal burden in return for a portion of any financial recovery from the lawsuit.

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