Understanding the Problem
There is a constant wiggle between international arbitration proceedings and cross-border insolvency due to their opposite nature which often creates two extreme sides, in which none of them can be labelled as right or wrong. The intersection between the two can be seen more frequently in the times of covid as corporations and businesses were not able to comply with their international contractual obligations which led to international arbitration proceedings and on the other hand were not able to pay-back to the creditors which led to initiation of domestic insolvency proceedings against them. This led to parallel international arbitration and domestic insolvency proceedings against the same party.
The conflict between the two was aptly explained by the Singapore Court of Appeal in the case of Larsen Oil and Gas Pte Ltd. v. Petroprod Ltd. (2011) as
“Arbitration and insolvency processes embody, to an extent, contrasting legal policies. On the one hand, arbitration embodies the principles of party autonomy and the decentralisation of private dispute resolution. On the other hand, the insolvency process is a collective statutory proceeding that involves the public centralisation of disputes so as to achieve economic efficiency and optimal returns for creditors.”
The intersection and conflict can be explained through an example:
Party ‘A’ (residing in India) enters into a commercial contract for delivering certain goods to party ‘B’ (residing outside India). The contract contained an arbitration clause which provided that any or all disputes arising out of or in connection with the contract shall be finally resolved by arbitration in accordance with SIAC rules. The seat of the proceedings shall be Singapore and the contract shall be governed according to the laws of India.
‘A’ failed to comply with the contract and an arbitration proceeding is initiated by ‘B’ for breach of contract and damages. Subsequently, an insolvency proceeding by a different creditor in India against ‘A’ was admitted to CIRP and a moratorium is passed against ‘A’ under section 14 of the Insolvency and Bankruptcy Code, 2016 (“IBC” hereinafter).
Now, a lot of questions arise in the present scenario, such as
- Will the moratorium include a foreign seated arbitration within its ambit in order to stay the arbitration proceedings?
No, in order to recognize foreign seated arbitration, there needs to be a pact between countries to recognise the same and India holds no such pact with other countries. But, it can be recognised on a case-to-case basis as illustrated in the further segments.
- What are the possible repercussions that might arise if the arbitration proceeding is stayed recognising the insolvency proceedings in India?
Possible repercussions include violation of party autonomy and pacta sunt servanda.
- What are the repercussions if the arbitration proceeding is not stayed?
It will go against the interest of the creditors and also against the principle of audi alteram partem which is one of the fundamental principles of natural justice.
- Is there a mid-way?
Ultimately, the probable solution regarding the conflict as addressed by different international organisations and networks was to recognise the insolvency proceedings moratorium in the interest of all the parties involved.
Detailed analysis for the above points is covered in the following segments.
Why Should Insolvency Proceedings be Recognised Under the International Arbitration?
If the arbitral proceedings are continued and no stay is granted then it will be “contrary to the public policy of India”.Section 48(2)(b) of the Arbitration and Conciliation Act, 1996 (“the act” hereinafter) explains the term as:
- Induced or affected by fraud or corruption; or
- In contravention with the fundamental policy of Indian law; or
- In conflict with most basic notions of morality or justice.
The phrase ‘contrary to the public policy of India’ was further explained by the apex court within the context of section 48(2)(b) of the act in the case of Ssyangyong Engineering and Construction Co. Ltd. v. National Highway Authority of India (2019). It stated that “fundamental policy of law” includes principles of natural justice. This was in line with the judgment of Renusagar Power Co. Ltd. v. General Electric Co. (1994). Audi Alteram Partem (the rule of fair hearing) is one of the most basic principles of natural justice which states that rights/liberty/property of a person should not be affected without him being given a chance to represent himself and it was explained by the apex court in the case of Smt, Maneka Gandhi v. Union of India and Anr.(1978) as “even where there is no specific provision for showing cause, yet in a proposed action which affects the rights of an individual it is the duty of the authority to give reasonable opportunity to be heard”.
If arbitral proceedings are conducted and an award is passed against party ‘A’ then it will affect his assets and property, in turn affecting the amount received by other creditors. Here, the rights and property of other creditors are being affected through the decision by the arbitral tribunal without giving them a chance for representing themselves, which will be contrary to the public policy of India and thus, unenforceable according to the laws of India under section 48(2)(b) of the act. The exception of public policy is also highlighted under Chapter VII of the UNCITRAL Model Law, Article V(2)(b) of the New York Convention.
Why Should the Arbitration Proceedings be Given Effect and Insolvency Proceedings Not To be Recognised?
There are multiple reasons as to why a stay should not be granted in the present example. If a stay is granted it will be “against the intent of the parties” which is one of the fundamental principles of international arbitration law. This principle has been highlighted by multiple courts and tribunal across the globe, for eg. by the Singapore court of appeal in the case of Insigma Technology Co. Ltd. v. Alstom Technology Ltd. (2009). The court held that “courts should construe an arbitration agreement so as to give effect to a clear intention evinced by the parties to settle their dispute by arbitration”.
Stay in proceedings will also be against the principle of “pacta sunt servanda”. This is a common principle of international law which provides that “agreements must be kept”. In the present example, the agreement and intent of the parties to resolve any or all disputes arising out of the contract by arbitration would not be recognised if a stay is granted by recognising the insolvency proceedings.
Also, the IBC extends to the whole of India according to Section 1(2) of it. So, the moratorium cannot have an effect on a Singapore seated international arbitration.
Finding the Tryst
This conflict between the two was explained by the U.S. courts in Re United States Lines Inc (1999) as “a conflict of near polar extremes: bankruptcy policy exerts an inexorable pull towards centralization while arbitration policy advocates a decentralised approach towards dispute resolution”.
The issue between the two was attempted to be resolved by the UNCITRAL Model Law on Cross-Border Insolvency (“Model Law” hereinafter) which provides for a stay of arbitral proceedings under article 20 if, foreign insolvency proceedings have been recognised. Another attempt was made by the Judicial Insolvency Network (“JIN” hereinafter) provides to recognise cross-border insolvencies but only among signatory nations. Currently, 49 states have adopted the Model law and 16 jurisdictions have adopted the JIN guidelines.
Thus, the conflict is tried to be resolved by putting a stay to arbitral proceedings and recognising cross-border insolvencies through the above-mentioned treaties. The problem in India is the non-adoption of such treaties in order to recognise foreign insolvency proceedings in India and vice-versa. Even though, Section 234 of the IBC provides for “agreements with foreign countries”, but it is not utilized for entering into bilateral treaties with foreign countries in order to recognise insolvency proceedings.
Ultimately, recognition of insolvency can provide the best solution because it takes into consideration the interest of the larger group of creditors and is not limited to one creditor. Also, the person claiming the amount through arbitration proceedings (‘B’ in the present example) can get his remedy along with other creditors through the process of insolvency. This will ultimately help him to get his claim and not compromise with the interest of other parties. In the long term, the problem of recognition of cross-border insolvency for India can only be solved by adopting Model law and JIN guidelines.
Until then, the short-term solution would be to recognise insolvencies on a case-to-case basis, keeping in mind the interest of all the parties. The same thing was done by NCLAT (National Company Law Appellate Tribunal) in the case of Jet Airways (India) Ltd. v. State Bank of India & anr. (2019). It recognised a Dutch foreign insolvency proceeding in India even without having a formal pact for recognition of insolvency proceedings between both countries. NCLAT did so by keeping in mind the interest at large which includes the interest of other creditors involved in the case. Even though, the case did not include an arbitration proceeding but this case provides the certainty that courts and tribunals can recognise foreign insolvency proceedings even without having a pact between the two countries. And this is what needs to be done until India adopts the Model law and JIN guidelines.
From the above analysis it can be concluded equality must be maintained among all the parties involved in a particular scenario (parties seeking arbitration and creditors seeking insolvency). Arbitration proceedings should not take away the rights of the creditors in the name of party autonomy and pacta sunt servanda. Arbitration proceedings should not be held at the cost of the interest of the creditors. By recognising moratorium, all the parties can seek their lending and damages under a same mechanism (insolvency proceedings) which is not detrimental to either of the parties. Thus, there is a need for optimum use of section 234 of the IBC in order to enter into agreements with foreign countries for recognition of cross-border insolvency proceedings and until then recognition can be done on a case-to-case basis.