Conundrum over initiation of Arbitration i.e., Pre and Post Insolvency Stage:
A question often posits over the legitimacy of initiation of Arbitral Proceedings especially in its tussle with the Insolvency Regime. The two possibilities surrounding this conundrum, either in the pre or post insolvency process has been summarized as under:
1. Initiation of Arbitration after CIRP of a Corporate Debtor/Company
It is important to note that Section 14 of the Insolvency and Bankruptcy Code, 2016 imposes a prohibition on the initiation of lawsuits or the continuation of existing legal proceedings against the corporate debtor. This includes the enforcement of any judgment, decree, or order issued by any court, tribunal, arbitration panel, or other authority.
Given this context, it is evident that the commencement of the Corporate Insolvency Resolution Process (CIRP) through a notice under Section 21 of the Arbitration and Conciliation Act is explicitly prohibited by law. To further elucidate this matter, we can refer to the judgment in Alchemist Asset Reconstruction Company Ltd. Vs. M/s. Hotel Gaudavan Pvt. Ltd. & Ors., Civil Appeal No. 16929 of 2017. In this case, the Court determined that any arbitration proceedings initiated after the imposition of the moratorium, as well as appeals under Section 37 of the Arbitration Act, were rendered void or legally invalid due to the Moratorium established by Section 14 (1) (a) of the Insolvency and Bankruptcy Code, 2016.
2. Initiation of Arbitration before CIRP of a Company
Initiation of Arbitration may prove fatal and one cannot initiate CIRP for a debt as it certainly means existence of a pre-existing dispute. Therefore, one cannot opt for Application under Section 7 or 9 if a Notice under Section 21 of the A & C Act were already been issued to the party. The position was further clarified by NCLAT in the case of Parmod Yadav & Anr. Vs. Divine Infracon Pvt. Ltd., 2018 SCC OnLine NCLAT 312 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.
The Hon’ble Supreme Court while setting aside the decision of NCLAT in matter K. Kishan Vs. M/s Vijay Nirman Company Private Limited, CIVIL Appeal No. 21824 of 2017, held that pendency of petition under Section 34of the Arbitration Act constitutes a pre-existing dispute and CIRP cannot be put into motion till Section 34 petition is dismissed or arbitration award attains finality.