Bridging The Divide: Integrating Arbitration into India’s Insolvency Framework

[Sejal Sahu is a third-year law student at Hidayatullah National Law University]

Introduction

The expanding global economy fosters greater market-business interconnections. This has led to an increase in foreign insolvency events across various jurisdictions. This upward trend highlights the necessity of studying insolvency regulations, particularly India’s Insolvency and Bankruptcy Code, 2016 (IBC), especially in light of its implementation by the National Company Law Tribunal (NCLT). The Corporate Insolvency Resolution Process (CIRP) under the IBC serves as a crucial component aimed at restoring troubled companies and facilitating timely business resolutions. However, the CIRP grapples with serious inefficiencies, having over 13,000 pending cases that take more than the average 716 days to resolve. Legal moratoriums further exacerbate delays in ongoing proceedings and compel stakeholders to incur additional financial costs.

The expanding international business network has made arbitration the preferred method of conflict resolution due to its flexibility, autonomy in decision-making, and apparent independence. The Arbitration and Conciliation Act, 1996 (The A&C Act, 1996) focuses on reconciling two important aspects - party autonomy and efficiency, in its approach towards a robust dispute resolution mechanism. Section 29A of the A&C Act, 1996 mandates the arbitrator to issue domestic awards within twelve months, with an extension of six months, ensuring a quick resolution. The growing popularity of incorporating arbitration into dispute resolution stems from its effectiveness in handling bankruptcies as well as other disputes.

The article investigates the possibilities of harmonizing arbitration under insolvency by analysing existing interaction patterns. The paper contains four distinct sections, starting with foundational elements. The second part deals with the global analysis of jurisdictional disputes.  The third part focuses on the inefficiencies of the IBC. The last part proposes reforms providing clear legal frameworks and equitable dispute resolution tools for India’s insolvency framework, and alignment with global best practices. 

Insolvency Meets Arbitration: Understanding Arbitration in The Shadow of Insolvency

Insolvency and arbitration law are two ends of a spectrum. Both have fundamentally different objectives to arrive at the right merits in a given circumstance. Insolvency law is a framework for a financially distressed entity to manage its debts and protect creditor rights, and is shaped by local jurisdictions, statutes and principles. On the other hand, arbitration ensures party autonomy and offers private, neutral and less disruptive dispute resolution. In India, the A&C Act, 1996, governs arbitration, and its rules are reinforced by the New York Convention. Therefore, it procures speed, confidentiality and the least judicial interference. More particularly, it is aimed towards commercial transactions where parties value control over the dispute resolution process.

However, conflicts arise when arbitration agreements cross with insolvency proceedings. The difference causes insolvency law to override the arbitration, particularly, the moratorium under Section 14 of the IBC bars all legal actions, including arbitral proceedings. The overriding impact is strengthened by Section 238 of the IBC. Indian courts have added to this conundrum by ruling in favour of insolvency over arbitration, which has been supported in the case of M/s. Innoventive Industries Ltd vs ICICI Bank. In Alchemist Asset Reconstruction Company v. Hotel Gudavan, the Supreme Court (SC) held that the imposed moratorium under Section 14 of the IBC overrides arbitration proceedings. Contrary to this, the Apex court, in Indus Biotech Private Limited vs Kotak India Venture (Offshore) Fund, conclusively permitted arbitration to continue in cases where insolvency proceedings were initiated.  This stance, taken after nearly two decades, reflects the prolonged uncertainty in such matters. These evolving judicial interpretations highlight the necessity for a balanced legal framework that balances creditor protection with respect for arbitration agreements. However, this legal overlap requires a well-defined mechanism to navigate through it, for example, a resolution mechanism of justice, certainty, and efficiency in resolving such disputes which fall within the insolvency and arbitration landscapes.

From Conflict to Confluence: Aligning Arbitration with Insolvency Law

In Indian jurisprudence, Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd. and subsequent rulings can be seen as carving out insolvency matters as non-arbitrable due to their in rem nature. Conversely, in the decision of K. Kishan v. Vijay Nirman Company Pvt. Ltd., it was ruled that insolvency proceedings cannot frivolously bypass arbitration proceedings.

This dialogue is concerned with public policy as arbitration, notwithstanding its absence from a fixed intrinsically public interest component, has been acknowledged as an established means to resolve cross-border insolvency disputes where foreign laws may hinder litigation. This integration is supported by international frameworks, including Article V (1) and V(2)(a) of the New York Convention and UNIDROIT Principles in favor of recognition of arbitral awards and in promoting cooperative resolution mechanisms.

The instruments of the Convention on International Sale of Goods (CISG) help make arbitration viable in the context of insolvency matters, so long as the basis of the dispute lies in a contractual agreement. Indian courts, although in a nuanced way, are undertaking to allow arbitration in commercial disputes with a component of insolvency only where the public or statutory remedies are not jeopardized. This should be backed by UNCITRAL Model Law on Cross-Border Insolvency (UNMLCBI) and UNCITRAL Model Law on International Commercial Arbitration (UNMLICA), as they stand as a cornerstone for integrating arbitration into pre-insolvency dispute resolution. The increasing cross-border trade pressures call on arbitration as a useful tool in bridging the gap between the domestic legal system and international commercial realities.

The IBC Conundrum: Can Arbitration Rescue What Courts Delay?

IBC was introduced to improve the efficiency of the resolution process. However, even after multiple amendments, its practice has been strewn with various roadblocks, struggling to achieve its intended efficiency. The extensive reforms needed are clear, as the average CIRP now takes more than 716 days and creditor haircuts approach 73%. IBC is being used as a debt recovery tool due to overburdened NCLT benches and procedural delays. This results in frivolous and unmeritorious insolvency applications being filed, many of which are withdrawn before admission. The rising number of these withdrawals and dismal recovery rates point to systemic issues that adversely affect both creditor and debtor interests. Notably, over 27,500 applications involving defaults of Rs 9.74 lakh crore have been withdrawn at the pre-admission stage.

Taking away inefficiencies from these, arbitration can be an efficient pre-insolvency mechanism which is pragmatic and holistic. It is non-adversarial and contractual, allowing parties to build flexible, time-bound procedures for their disputes. Arbitration avoids unwarranted CIRPs, diminishes litigation backlog, values the debtor as a “going concern”, and preserves the value of assets and stakeholder relationship. It corresponds with the IBC’s rehabilitative goals but avoids its structural pitfalls. Landmark rulings like Essar Steel v. S.K. Gupta have shown that unregulated judicial discretion can block timely resolution, which arbitration avoids by offering speed, precision and inclusiveness of stakeholders. Such integration of arbitration in insolvency situations promotes economic stability by facilitating timely resolution, saving the costs of unnecessarily long proceedings.

Breaking The Deadlock: Legislative Pathways to Arbitration-Insolvency Harmony

Arbitration continues to be a challenge for the insolvency regime in India as there is little legislative clarity. The lack of a comprehensive legal framework and diverging stances and judgments by courts further complicate this issue. However, these gaps can be addressed through several reforms.

Firstly, an amendment to the IBC should be brought to define the scope of arbitration. This can effectively be done by amending Section 14 of the IBC to allow specific categories of ongoing arbitrations that do not affect the principle of asset pooling fundamental to insolvency. The exclusion of certain special types of arbitrations, such as claims that do not need access to the debtor’s operational assets, could provide a better approach. The recent case of HPCL Bio-Fuels Ltd. v. Shahaji Bhanudas Bhad affirms that debt disputes can be resolved through arbitration, as IBC is not a recovery mechanism. This approach would enable the IBC to follow the principle of party autonomy in arbitration while fulfilling its objective of providing for an orderly resolution process.

Secondly, courts can allow arbitration proceedings aimed at quantifying debts due from corporate debtors, as long as these proceedings do not impugn the moratorium over operating or financial assets. Furthermore, India can adopt best practices from global frameworks such as the Singapore International Arbitration Centre Arbitration Rules and Hong Kong International Arbitration Centre, recognised for offering an effective system for resolving disputes arising in insolvency through arbitration, and becoming an increasingly preferred seat of the parties. The United Kingdom-based decision of Sian Participation Corp (In Liquidation) v. Halimeda International Ltd. reflects the growing acceptance of arbitration where genuine commercial disputes arise in insolvency cases. Additionally, India can create a mechanism by learning from the United States (US) model to distinguish core and non-core matters. Chapter 15 of the US Code allows for arbitration in cross-border insolvency while maintaining a balance with the judiciary.

Lastly, the creation of specialized arbitration panels with insolvency expertise should be facilitated, as this would play an important role in preventing the dispute from continuing for long. A traditional panel of arbitrators often lacks the relevant expertise to handle issues of insolvency that involve debt restructuring, creditors’ rights, and distribution of assets. Specialised panels could establish acceptable boundaries of arbitrability that would divide the sort of controversies suitable for arbitration or those that remained cognisable by the insolvency courts only. Such panels can also be beneficial in managing cross-border insolvency disputes effectively.  A uniform and harmonised decision that complies with international standards, such as the UNMLCBI, can be guaranteed by a specialised arbitration panel.

Through harmonizing arbitration with insolvency law, India can get a streamlined, predictable and globally competitive dispute resolution framework. This integration could help foster creditor confidence, protect debtor interests, and align with the general goal of protecting enterprise value in an expeditious and fair manner during insolvency proceedings.

Conclusion

Insolvency and arbitration coming together make for a complex group of laws, but they can be brought into harmony as well. Insolvency law is about dealing with several debts, whereas arbitration supports party independence. Despite being well designed, the IBC is affected by delays and a low rate of resolution. Arbitration is an excellent choice, especially for non-key disputes, since it offers an early settlement, helps keep assets safe and cuts down on litigation. Countries have successfully applied tools like the UNDROIT, the UNCITRAL Model Law and CISG to bring arbitration into insolvency procedures worldwide. India should amend its legal framework and make it inclusive for both insolvency and arbitration. Forming unique arbitration panels could help India achieve its goal of becoming a centre for settling worldwide disputes. Modernizing India’s insolvency regime and reassuring investors depends on having a framework that reflects proven global standards. Therefore, it is a practical reform that aligns with India’s agenda of global economic aspirations by introducing arbitration as a part of the insolvency landscape.