"This issue becomes significantly more difficult in a cross-border context: Identifying the proper law to determine the effect of insolvency proceedings upon an ongoing international arbitration can be problematic one might look to the law of the contract, the law of the insolvency proceedings or the law of the seat of the arbitration."1
Based on the policy of "asset value maximization", insolvency law has the propensity to interfere with different fields of law, both domestically and internationally. This contribution analyzes the efficiency of creditor protection with respect to the adjudication of claims via arbitration with an insolvent entity.
While insolvency has domestic pull and single jurisdiction (except in cases of cross-border insolvency), international arbitration which is based on the policy of "party autonomy" and "privity of contract" has international pull and multiple jurisdictions.
This contribution asserts that the arbitration agreement during such intersections must be held as invalid only when it is necessarily jeopardized by the insolvency proceedings.
INTERNATIONAL PERSPECTIVE
The jurisdiction and maintainability of claims in front arbitral tribunal, rests, primarily upon the issue of temporal primacy, i.e., whether insolvency pre-dated arbitration or vice-versa.
Scenario 1: When the insolvency proceedings commenced during the pendency of the arbitration proceedings:
The issue under consideration: Whether the arbitration proceedings can be continued?
A perusal of the economic policy of different states shows that in such a scenario, the arbitral proceedings get suspended and the arbitration agreement becomes invalid. However, there has been a shift in the national laws of some national legal systems in this regard (Poland and Latvia).
The new Law of Restructuring in Poland (Act of 5 May 2015) has rendered the earlier provision under the Polish Bankruptcy Code, which disallowed the continuation of arbitral proceedings ineffective.
Before the amendment, pursuant to Articles 142 and 147 of the Bankruptcy and Reorganization Law, in case of declaration of bankruptcy of a party to an arbitration agreement, the arbitration agreement expired on the date on which the bankruptcy was declared. Also, all arbitration proceedings were discontinued.
After the amendment, upon the declaration of bankruptcy, arbitration proceedings have to be held up as ex officio, that is, until the trustee of the bankrupt estate is established. Afterward, the tribunal continues the proceedings, reinstating them also ex officio. In such a scenario, the arbitration proceedings are affected by the requirement that the creditor must first exhaust the proceedings for the inclusion of its claim on the list of claims prepared by the trustee in bankruptcy. If the claim is not included in the list of claims of the trustee in bankruptcy, the creditor may proceed with the arbitration.
Scenario 2: When the arbitration proceedings commenced during the pendency of the insolvency proceedings.
The issue under consideration: Whether the arbitration proceedings can be initiated?
The jurisdiction of the arbitral tribunal lies in the arbitration agreement. Public policy concerns come into play when international arbitration proceedings begin for a party that is undergoing insolvency. In domestic arbitrations, such situations don't arise usually by virtue of the fact that all proceedings, generally, come to a standstill at the initiation of insolvency in most national systems. In systems wherein arbitration precedes insolvency, the tribunal has a broader scope of adjudicating the claim placed before it. In such instances, the role and interdependence of the tribunal and the trustee/administrator are crucial.
The Elektrim/Vivendi saga2 is germane to this scenario. In the said case, although, a Swiss Tribunal refused to continue with arbitration proceedings against Elektrim, which was then undergoing insolvency proceedings in Poland, an LCIA Tribunal proceeded in arbitration against Elektrim at the same time. Both awards were also upheld. The Swiss Supreme Court, which had upheld the Swiss tribunal's award, however, later revisited its views in another case.3
INDIAN PERSPECTIVE
The Insolvency and Bankruptcy Code, 2016 does not differentiate between the arbitration proceedings which are pending and the ones which commence after the initiation of insolvency proceedings. The courts have however, in an attempt to provide clarity have opined that, if it can be demonstrated that arbitration is initiated for the benefit of the corporate debtor, to maximize the debtor's assets or that the arbitration proceedings will not adversely affect the corporate debtor's assets, an arbitrating party may be able to successfully plead the continuation of arbitration proceedings.
Scenario 1: Foreign seated arbitrations in which one of the arbitrating parties' is an Indian Party and is undergoing insolvency in India:
In such a scenario, the Indian party, undergoing insolvency can apply before the foreign seated arbitral tribunal and request a stay on the arbitration proceedings. There is, however, no prejudice against a foreign award which is enforced against foreign assets, as the award might not have any nexus with the law of India. This is based on the fact that no reciprocating territories have been notified by India, under section 234 of the IBC.
Scenario 2: Filing of claims in CIRP while parallel arbitral proceedings are going on:
There is no express bar against this. A claim under an arbitration agreement is not covered under the definition of debt (financial or operational) under the Code. However, if the claim on its own independently falls within the purview of financial or operational debt, the same can be filed in front of the resolution professional (or IRP as the case may be). If the IRP refuses inclusion, the creditor has the option to approach the NCLT and if the NCLT also does not include the claim, the claim shall be classified as a pending dispute in the information memorandum. The determination/treatment of such claims shall be entirely dependent upon the Resolution Applicant in such instances. Nil value is generally assigned to such claims, or the resolution plan will provide for a clause that stipulates all pending claims are to be extinguished upon the completion of an insolvency.
In this context, the Apex Court, recently, on January 21, 2022, rendered a decision in the case of Fourth Dimension Solution Solutions Ltd. v. Ricoh India Ltd.4 in which the Hon'ble Court, gave permission to an operational creditor of the corporate debtor to continue arbitration proceedings despite approval of corporate insolvency resolution plan by the Committee of Creditors and the Apex Court. The Court noted that the admitted claims of the operational creditor were indicated as 'Nil' with an appended note that stated that, "the claims pertaining to FDSL have been disputed and are pending before the arbitrators/appellate authorities. The liability is subjected to the outcome of these proceedings". Arbitral Award: A proof of debt under the 2016 code?
The Hon'ble Apex Court in the case of K. Kishan v. M/s. Vijay Nirman Company5 held that arbitral awards are valid records of operational debt. However, the credit therein must be undisputed. In this case, the court refused the initiation of CIRP because: (a) the counterclaim exceeding the claim awarded was rejected by the arbitral tribunal and was a matter of challenge before the Courts, and (b) a challenge was filed against the arbitral award. Therefore, by virtue of the fact that the award was not undisputed, the CIRP was not initiated. In the case of foreign awards, once the enforceability of the foreign award is decided (as per sections 47 and 48 of the 1996 Act), and the award is not resisted during enforcement, it may be treated as operational debt.
CONCLUSION
It is a legal truism that debt does not function as a liquid asset in an ineffective enforcement environment. For effective management of debt, domestic creditors should take the entity as they found it: with a bundle of rights and obligations, which includes the obligation to arbitrate. However, to denounce the continuation or enforcement of arbitral awards on grounds of public policy is a matter for domestic consideration.
In this context, the refusal to continue/initiate arbitration proceedings can be classified as a violation of the international law principle of pacta sunt servanda. Apart from not being arbitration friendly, this can be troublesome as it affects the validity of the arbitration agreement, which blocks not only the possibility to commence arbitration in the future but affects the pending arbitrations as well as the post-arbitration actions of recognition and the enforcement of arbitral awards rendered on the basis of invalid arbitration clauses. Given that the proceedings before the IRP are merely summary in nature, it cannot possibly replace the determination of rights of the parties as is done in arbitration proceedings. Unless the substantive validity of an arbitration agreement is in question, it is illogical to stall arbitration proceedings against an insolvent entity.
Footnotes
1. Richard Hornshaw on Proposed UNCITRAL Arbitration, Insolvency Case Coordination, 2016.
2. Insolvency and arbitration: Swiss Supreme Court revisits its Vivendi vs. Elektrim decision, Nathalie Voser (Schellenberg Wittmer Ltd, Switzerland), December 5, 2012.
3. X v. Y, case reference 4A_50/2012.
4. Fourth Dimension Solution Solutions Ltd. v. Ricoh India Ltd., Civil Appeal No. 5908 of 2021.
5. K. Kishan v. M/s. Vijay Nirman Company, Civil Appeal No. 21824 OF 2017.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.