Shubhangi Tiwari
The persistence behind coming of Insolvency and Bankruptcy Code, 2016 (“IBC”) is to curtail down the willful defaulters and revive the Company/Corporate Debtor so as to protect the interests of the creditors of the Corporate Debtor. Any creditor or employer, to whom the Corporate Debtor owes, can approach the Adjudicating Authority (National Company Law Tribunal “NCLT”) upon the occurring of default by the Corporate Debtor while repaying the amount owed to various creditors.
If the NCLT forms the opinion that Corporate Debtor owes certain debt and has defaulted in clearing the same towards the Creditor, owing to the economic inability of the Corporate Debtor, the NCLT shall admit the Insolvency application and pass the order of moratorium under Section 14 till the approval of the Resolution Plan by the NCLT. Under the IBC the application is admitted to revive the company and does not deal with each and individual dispute separately.
Under Arbitration the dispute is referred to the Arbitral tribunal to settle the dispute outside the court and the arbitral award forms a binding upon both the parties. The parties who have entered into the arbitration agreement refer the dispute to the arbitration before approaching any court or tribunal. The arbitration proceedings can be invoked only by the parties who have entered into the arbitration agreement and each party will be dealt independentlydepending upon the arrangement between them.
2.2 Insolvency after pending Arbitration
2.2.1 Corporate Debtor
The Corporate Debtor contended that the share purchase agreements have an arbitration clause, whereby disputes between the parties shall be resolved under Arbitration Act. Further, stating that Section 8 is mandatory in nature which puts an obligation on the judicial authority to direct the parties for arbitration.
It was also contended that IBC ought not to be used to extort money from profitable companies; rather the first available opportunity to resolve the dispute should be made under the Arbitration Act. Therefore, the presence of a pre-existing arbitration agreement mandates the Financial Creditor to seek remedy under arbitration.
2.2.2Financial Creditor
The Financial Creditor pointed out that Section 7 of IBC is incapable of being referred to arbitration, being right in rem (right against the world at large) for matters such as probate, criminal matters, matrimonial matters, winding up etc. Also, the existence of an arbitration clause in the agreement should not be a ground to restrict Section 7 petition, which stands in contrast with a Section 8 application (Insolvency resolution by operational creditor) of IBC.
Further, Section 8 of the Arbitration Act relates to only such disputes/matters that the arbitrator is competent to decide. Therefore, the dispute being inarbitrable, the court can use alternative relief for the parties and admit the CIRP application instead of directing the parties to arbitration.
Now once the dispute arises between the Corporate Debtor and any Creditor the parties can refer the dispute to the arbitration if the arbitration agreement exists between the parties. However, the question here arises is whether ongoing arbitration proceedings bars the filing of insolvency petition under the IBC or not?
The answer to the above question varies depending upon the Section under which the application is filed i.e. under Section 7 or 9 of IBC. Even though Section 238 of the IBC clearly predominates the other laws but that comes forth only if there exists any inconsistency between the IBC and any such law.
Under Section 7 of IBC
An application filed under section 7 of the IBC is not barred by the ongoing arbitration proceedings, furthermore once an application under section 7 of the IBC is admitted the other proceedings pending before any courts or tribunals as well as the arbitral tribunals are stayed by coming of moratorium into effect from the date of admission of the application by the NCLT.
The abovementioned law has been settled by the NCLT in Reliance Commercial Finance Limited vs. Ved Cellulose Limited, (IB)-156(PB)/2017 wherein the NCLT held that:-
“Under Section 7 of the IBC there is no bar to initiate CIRP even if arbitration proceeding is pending, such a bar exists in respect of claim made by the Operational Creditor under Section 9 of the IBC.”
Under Section 9 of IBC
An application under section 7 filed by the Operational Creditor is barred due to pending Arbitration Proceedings as the on-going arbitration proceedings signifies the pre-existence of dispute between the parties and as per section 9 if any dispute is already pending between the parties before filing of the application under section 9 of IBC, no operational creditor can file an application for initiation of CIRP. The abovementioned law has been settled by National Company Law Appellate Tribunal in K Kishan vs. Vijay Nirman Company Pvt. Ltd.
2.3 Law and IRP Appointments
The Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016, is an exhaustive regulation governing resolution professionals. Rule 9 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 provides for a written communication in “Form 2” which is a formal consent and declaration confirming the eligibility of the proposed insolvency professional to act as a resolution professional. As per the relevant portion of “Form 2 point (vi)”, the resolution professional shall make disclosures in accordance with the Regulations. However, such disclosures, on viewing the Code of Conduct are only in the context of circumstances which arise consequent to appointment and upon acting as a resolution professional. The Code of Conduct does not provide for any disclosures of bias, independence or impartiality prior to the consent and confirmation issued by the Resolution Professional under “Form 2”.For the purposes of relevance in the context of this judgment, reference is made to point 8 A of the Code of Conduct which is extracted below:
“8A. An insolvency professional shall disclose as to whether he was an employee of or has been in the panel of any financial creditor of the corporate debtor, to the committee of creditors and to the insolvency professional agency of which he is a professional member and the agency shall publish such disclosure on its website.”
On appointment, it is incumbent on a resolution professional to disclose his employment or an empanelment to any financial creditor of the Corporate Debtor, to the committee of creditors. However, the said rule does not require disclosures to be made prior to the appointment or declaration under “Form 2” which would serve greater purpose in maintaining the sanctity of the appointment of the resolution professional. The said rule only contemplates disclosure and not disqualification.
Point 3, 3A and 5 of the Code of Conduct are of great relevance which are extracted and analysed in the content of the Judgment.
“3 .An insolvency professional must act with objectivity in his professional dealings by ensuring that his decisions are made without the presence of any bias, conflict of interest, coercion, or undue influence of any party, whether directly connected to the insolvency proceedings or not.”
An insolvency professional must act with objectivity and decisions must be without bias, conflict of interest, coercion or undue influence. The said point does not contemplate any such disclosures of bias or conflict of interest prior to the appointment of the resolution professional to an insolvency process under the Code.
“3A. An insolvency professional must disclose the details of any conflict of interests to the stakeholders, whenever he comes across such conflict of interest during an assignment.”
An insolvency professional has to disclose conflict of interest during an assignment and not prior to his appointment and issuance of confirmation to act under “Form 2”. The disclosure of conflict of interest arising post appointment only contemplates disclosure. There are other points which may be discussed in this context but is consciously restricted.
2.4 Fifth Schedule of the Arbitration & Conciliation Act, 1996
At this juncture, it is worth referring to the Fifth Schedule of the Arbitration and Conciliation Act, 1996. The extensive disclosure under the Fifth Schedule mandated for an arbitrator in “relation to the dispute, or the parties to a dispute or any indirect/ direct interest in the dispute, any previous services for any one of the parties, relationship between the counsels and parties and other involved in an arbitration……” relate to instances and grounds of “ineligibility” prior to appointment. The adoption of the Fifth Schedule ensures that there exist no circumstances which give rise to any justifiable doubts as to the independence, biasness or impartiality of an arbitrator. If any similar or close provision to the Fifth Schedule is grafted and brought into these Regulations under the Code, it could serve the purpose and there would exist no doubts as to the appointment of the resolution professional.
Additions made to the Code of Conduct and the Regulations possibly along the lines of the Fifth Schedule of the Arbitration & Conciliation Act, 1996, would go a long way in preserving the ever important pillars of independence, impartiality and unbiasness of a resolution professional. Such possible legislative changes would protect the sanctitude of the resolution professional and also shield the resolution process under the Code which is time bound. Post this Judgment, there is no doubt that these Regulations would be examined with as great a scrutiny as any other provision of the Code by a party intending to initiate a corporate insolvency resolution process. This Judgment has elevated not only the importance of changes needed in the Regulations, but has also made this aspect sine qua non to any insolvency proceedings.