The Insolvency and Bankruptcy Code, 2016 (“Code”/ “IBC”), was introduced amidst various
other reforms introduced by the Government, with intensive prominence on the “Ease of Doing
Business in India.” Ease of Doing Business not only means prompt and easy entry, and ease of
carrying out operation of businesses; it also covers in its ambit, the ease of exit. The Indian
scenario of Insolvency, prior to putting into practice of the Code was a mosaic of pieces that did
not fit with each other. A long list of statutes governed insolvency, and hence, there was
confusion, and lack of policy direction. In many cases, the provisions of law were running
counter to a centralized theme; in many cases, there was a need for a complete rethinking as
well. While insolvency and business failure are inevitable outcome of running any business, the
existing regime did not provide incentive for easy steadfastness of insolvency. Therefore,
persistence of a standstill was often in combined interest of both the creditors and the debtor.
As for the creditors, mostly banks, there were huge losses due to such failed businesses, but
bankers could afford to not call a spade a spade, and carry on the deadwood still, under various
judicial and non-judicial structures such as the SICA, corporate debt restructuring (CDR)
schemes, and so on.
As arbitration agreements become more common, bankruptcy courts increasingly encounter
arbitration agreements to which a bankruptcy debtor is a party. Bankruptcy judges must then
determine whether to enforce an otherwise valid arbitration clause or to refuse enforcement and
decide the underlying dispute themselves. To date, bankruptcy judges facing these issues have
tended to see arbitration as a competing, quasi-judicial forum. They typically refuse to enforce
arbitration agreements when they find that bankruptcy policy would favor resolution in the
bankruptcy proceeding instead of in some other adjudicative forum. Building on previous work,
I contend in this article that arbitration is best understood not as a type of quasi-adjudication,
but as a species of contract, with the award equivalent to a contract term agreed upon by the
parties ex ante. I argue that arbitration agreements should be enforced by bankruptcy courts
unless enforcement would prevent a party from vindicating its statutory bankruptcy rights, and
that bankruptcy courts should then decide whether to enforce the award by considering whether
the award would contravene the policy of bankruptcy law if it had been a contract term. In
practice, my proposal is for enforcement of arbitration agreements with a more robust degree of
judicial review of awards than arbitration law typically allows. 1
1.2 PAST ISSUE
The foundation of any developing country is a well-functioning credit system, and resolution of
misery is an integral part of the ecosystem of credit extension and recovery. If the resolution of
distress in lending is inefficient, lenders face prolonged defaults. This would mean, lenders add
risk premiums to their lending, thereby resulting into the cost of risk affecting the entire credit
space. Economically, the very essence of secured lending is for lenders to place value on the
collateral backing the loan, and thereby minimize the risk of default, and hence, the risk
premium. However, if secured lenders are unable to realize the value of their assets due to
inefficiency of the resolution mechanism, secured lending becomes as costly as unsecured
lending.
Promptly, the log-jammed possessions in evaded entities, under the aegies of Board for
Industrial and Financial Reconstruction, was a huge consecutively cost for the country. The
state of affairs also encouraged evasions, as a defaulter less disincentive against evasion.
Having defaulted, one could still take, and continue to own and run a business. The benefit of
limited liability would mean there was very little disadvantage for the equity shareholders,
while lenders’ sufferers would continue to deepen. In this line, another connotation is interplay
between IBC and Arbitration. This interplay has become a major concern for the judiciary in
the contemporary era. 2
1.3 CONTEMPORARY ERA
Alternative Dispute Resolution (ADR) is a set of methods used instead of litigation to settle
disputes. Additionally, “ADR refers to any means of settling disputes outside of the courtroom.
ADR typically includes early neutral evaluation, negotiation, conciliation, mediation, and
arbitration. As burgeoning court queues, rising costs of litigation, and time delays continue to
plague litigants, more states have begun experimenting with ADR programs. Some of these
programs are voluntary; others are mandatory.”
The process of arbitration and mediation in India is governed by the Arbitration & Conciliation
Act, 1996. It is “An Act to consolidate and amend the law relating to domestic arbitration,
international commercial arbitration and enforcement of foreign arbitral awards as also to
define the law relating to conciliation and for matters connected therewith or incidental
thereto.” 3
The Insolvency and Bankruptcy Code of India, 2016 is the primary legislation that deals with
insolvency and bankruptcy-related disputes. It is “An Act to consolidate and amend the laws
relating to reorganization and insolvency resolution of corporate persons, partnership firms
and individuals in a time-bound manner for maximization of value of assets of such persons, to
promote entrepreneurship, availability of credit and balance the interests of all the
stakeholders including alteration in the order of priority of payment of Government dues and to
establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or
incidental thereto.” 4
1.4 Scope of Study
The preamble of the Arbitration reads that Arbitration is a right in personam and binds two
parties agreeing to opt for such mechanisms to resolve their dispute. It is imperative to note
that NCLAT in the case of Parmod Yadav & Anr. Vs. Divine Infracon Pvt. Ltd held that upon
the commencement of arbitral proceedings under section 21 of the Arbitration and Conciliation
Act, 1996, it is presumed that there is an existence of a dispute and therefore, the petition under
Section 9 of the Insolvency and Bankruptcy Code, 2016 was not maintainable. On the other
hand the Supreme Court in M/s. Ksheerabad Constructions Pvt. Ltd. (“KCPL”) vs M/s Vijay
Nirman Company Pvt. Ltd held that the pendency of a petition under Section 34 of the
Arbitration Act, constituted a pre-existing dispute under the IBC. Hence, from a clear reading
of the above judgments it can be said that, the IBC cannot be invoked to initiate the corporate
insolvency resolution process (CIRP) in respect of an operational debt where an Arbitral Award
has been passed against the operational debtor, even though the same has not yet been finally
adjudicated upon due to a challenge under Section 34 of the Arbitration Act. In a landmark
judgment of the Supreme Court held that the insolvency process for operational creditors
cannot be used to bypass the adjudicatory and enforcement process of a debt contained in other
3 Arbitration and Conciliation Act 1996.
4 Insolvency and Bankruptcy Code of India, 2016.
statutes and defined in the Agreement. Therefore, using the IBC as a substitute for debt
enforcement, the procedure had been rejected. Hence, as per the ratio held in this judgment if an
Agreement has a pre-existing Arbitration clause we cannot approach the NCLT for
adjudication. On the contrary once the moratorium period under IBC starts it impedes the filing
of any legal action including initiation of Arbitration. Accordingly, it can be said that unless a
Notice under section 21 of the Arbitration Act has been given, there is no bar on forthcoming
the NCLT even if there an Arbitration clause within the Agreement.