Insolvency Proceedings

I. Introduction

International arbitration is increasingly becoming the preferred process for resolving disputes between Indian corporates and foreign entities. Often, these arbitrations are held at foreign seats and eventually culminate in foreign awards. Indeed, even two Indian corporates can now agree to a foreign-seated arbitration, which would ultimately yield a foreign award.1 Following this, an award creditor (i.e., the party that proverbially “wins” the arbitration) is likely to seek enforcement of the foreign award against the award debtor.

A potential scenario that could emerge in this context involves an award creditor seeking to enforce a foreign award against an Indian award debtor that is insolvent. This prompts the question as to whether that award creditor can recover awarded sums from the award debtor through insolvency proceedings in India.

In answering this question, we provide a brief overview of insolvency proceedings in India and the process for enforcing foreign awards in India (Sections II & III). Then, in Section IV, we examine whether a foreign award can be introduced in Indian insolvency proceedings, which is followed by a comment on certain practical considerations that arise when a foreign award is introduced into insolvency proceedings (Section V).

II. Insolvency law in India

In India, the framework governing the resolution of insolvent debtors is set out in the Insolvency and Bankruptcy Code, 2016 (IBC). The IBC was introduced to preserve the asset value of insolvent companies from further depletion and enable creditors to recover debts swiftly, while balancing the interests of relevant stakeholders. Insolvency proceedings under the IBC [also known as corporate insolvency resolution process (CIRP)] broadly involve the following steps:2

  1. Proceedings commence when a creditor either financial or operational (as explained below)3 successfully applies to the National Company Law Tribunal (NCLT) a specialised tribunal in India to deal with company law and IBC disputes.
  2. Following this, an interim resolution professional is appointed and a moratorium over all litigation (including the execution of arbitral awards) against the corporate debtor takes effect.
  3. Simultaneously, the NCLT makes a public announcement of the insolvency proceedings, after which interested creditors can submit their claims against the corporate debtor for consideration.
  4. Thereafter, a Committee of Creditors (CoC) is formed, who in turn, appoint a resolution professional. The resolution professional prepares a resolution plan aimed at clearing the corporate debtor’s outstanding debts.
  5. This resolution plan must, then, be approved by the CoC. If it is approved by the CoC, the plan is submitted to the NCLT and is implemented following the NCLT’s approval of it. If the CoC refuses the plan, the corporate debtor goes into liquidation.

A foreign award can potentially (subject to the considerations discussed in Sections IV and V below) be introduced into an insolvency proceeding either at step (1) or step (3) above. The former scenario involves the award creditor commencing an insolvency proceeding based on a foreign award, while the latter scenario follows where a creditor other than the award creditor commences insolvency proceedings and the award creditor submits the foreign award as a claim at the relevant time.

III. Introducing a foreign award into an insolvency proceeding

As noted in Section II above, there are two scenarios in which a foreign award may be introduced. Both of these i.e. initiating insolvency proceedings on the basis of a foreign award and submitting one as a claim in ongoing proceedings is dependent on whether an award debtor’s liability under a foreign award can properly be characterised as a debt under the IBC.

Additionally, in the former scenario, it is also necessary to examine whether an award creditor can properly be characterised as either a financial or an operational creditor as per the provisions of IBC. This is because, as mentioned above, only financial and operational creditors can initiate insolvency proceedings.4

Section 5(7) of the IBC defines a financial creditor as one to which a “financial debt” is owed, while Section 5(20) of the IBC defines an operational creditor as one to which an “operational debt” is owed. Sections 5(8) and 5(21) of the IBC respectively stipulate a non-exhaustive list of liabilities that are included within the meaning of a “financial debt” and an “operational debt”.5 Neither section expressly provides any indication on whether an award creditor could be characterised under either class of creditor, or an arbitral award, under either class of debt.

Nevertheless, in Dena Bank v. C. Shivakumar Reddy,6 the Supreme Court held that “any arbitral award for payment of money, if not satisfied, would fall with the ambit of a financial debt, enabling the creditor to initiate proceedings under Section 7 of the IBC” as a financial creditor.7

The characterisation of arbitral awards as financial debts is particularly helpful for award creditors. This is because financial creditors are entitled to greater participation in the preparation of a resolution plan, and consequently, have better prospects of recovering debts as compared to operational creditors. The foregoing clearly demonstrates that arbitral awards can be treated as a debt for the purposes of initiating insolvency proceedings.

Returning to the focus of this article i.e. foreign awards, the next factor to consider is whether a foreign award ought to be recognised before insolvency proceedings based on that award can be commenced. To appreciate this discussion further, it is noteworthy that enforcement of a foreign award in India is governed by Part II of the Arbitration and Conciliation Act, 1996 (Arbitration Act) and involves two phases. To begin with, a court must determine that the award is enforceable in India according to Part II of the Arbitration Act (recognition phase). If it is enforceable, the foreign award will be deemed to be a decree of the court. Thereafter, the foreign award may be executed under the provisions of the Civil Procedure Code, 1908 (CPC) as if it were an Indian court decree (execution phase).

Two Coordinate Benches of the NCLT have considered the question as to whether the recognition of an award is a prerequisite to commence insolvency proceedings and have taken divergent views. In Adityaa Energy Resources Pte Ltd. v. Cauvery Power Generation Chennai (P) Ltd.,8 the Hyderabad NCLT held that an award must be recognised and enforceable under the Arbitration Act before insolvency proceedings can be commenced based on that award.9 Effectively, this would mean that the foreign award must pass through the recognition phase as described in Section III above.

In contrast, the Mumbai NCLT in Agrocorp International (P) Ltd. v. National Steel and Agro Industries Ltd.,10 held that there was no requirement for a foreign award to be recognised before insolvency proceedings based on that award could be commenced.11 In reaching this conclusion, the Mumbai NCLT applied Section 44-A CPC, which governs the enforcement of foreign decrees in India, to the issue.12 The Mumbai NCLT reasoned that a foreign award was by itself executable in India merely because it was made in a “reciprocating territory” as referenced in Section 44-A CPC.13 However, this reasoning is problematic for two reasons.

  1. A foreign award is not equivalent to a decree capable of execution in India. As discussed above, a foreign award can only be executed once it passes through the recognition phase.
  2. The Mumbai NCLT’s decision would have been equally erroneous even if it were to be applied to the enforcement of a foreign decree. A foreign decree by itself would not be enforceable in India unless it satisfies certain substantive requirements stipulated in Section 13 CPC. Determining whether these requirements are met falls within the jurisdiction of a civil court and not the NCLT,14 just as the enforceability of a foreign award falls to be determined by an enforcement court.

Given the errors in the Mumbai NCLT’s approach, the Hyderabad NCLT’s view is the better one. Further, the Hyderabad NCLT’s views are consistent with the decision in Union of India v. Vedanta Ltd.,15 in which the Supreme Court held that a foreign award is not a decree by itself and that it only becomes executable after a court determines that it is enforceable under Part II of the Arbitration Act.16 The conclusion that the foregoing analysis leads to, is that a foreign award can be used to initiate insolvency proceedings, provided it has passed through the recognition phase in the enforcement process.

Turning now to the detail on submitting a claim based on a foreign award in an ongoing insolvency proceeding, there does not appear to be any specific case law addressing this point. However, the authors consider that it would be possible to submit a claim on this basis given that arbitral awards are recognised as debts under the IBC. Of course, a foreign award would have to be recognised in India before it can be submitted as a claim.

IV. Practical considerations

While the preceding section demonstrates that a foreign award can be introduced into insolvency proceedings, there are at least two practical concerns that remain:

  1. In what circumstances is it appropriate to initiate insolvency proceedings versus executing a foreign award in the routine manner envisioned under the Arbitration Act?
  2. Can enforcement proceedings under the Arbitration Act be initiated during the moratorium period?

We address these concerns in turn.

A. Choosing insolvency proceedings under the IBC versus executing under the Arbitration Act

A foreign award creditor after passing through the recognition phase would have a choice to either initiate insolvency proceedings or execute in the routine manner against the award debtor. However, the former process should only be initiated if the award debtor is unable to meet its liability under the award, and as a result, the award creditor legitimately seeks resolution of the debt. Indeed, Section 65 of the IBC prescribes a penalty ranging from INR 100,000 to INR 10,000,000 that may be imposed on any person that attempts to commence insolvency proceedings for “any purpose other than for the resolution of insolvency, or liquidation”. As a result, any attempts by an award creditor to initiate insolvency proceedings for malicious purposes may be met with this penalty.17

B. Commencing enforcement proceedings under the Arbitration Act during the moratorium period

As mentioned in Section II above, proceedings for the execution of an arbitral award are interdicted during the moratorium period. It is, therefore, clear that a moratorium would impact the execution phase described in Section III above.18 However, the more relevant consideration is whether a moratorium prohibits the initiation or continuation of the recognition phase. This is significant because, as discussed in Section IV above, a foreign award can only be submitted as a claim in an ongoing insolvency proceeding if it has passed through the recognition phase.19

There is no direct authority on the issue. That said, Indian courts’ observations on the impact of a moratorium on proceedings for the set-aside of a domestic award are indicative as to how an Indian court or benches of the NCLT might approach this issue.

In Power Grid Corpn. of India Ltd. v. Jyoti Structures Ltd.,20 the Delhi High Court held that proceedings for the set-aside of a domestic award would not be affected by the moratorium.21 The principal reasons for this finding were that the object of a moratorium was to prevent a corporate debtor’s asset value from further reduction, and that, any proceeding that does not lead to such a result would be excluded from the moratorium.22 Applying this proposition to the facts, the Delhi High Court concluded that a set-aside proceeding (as opposed to execution) would not, by itself, affect a corporate debtor’s asset value as it would only involve a determination of the grounds enumerated in Section 34 of the Arbitration Act.23

While logical, the Supreme Court in P. Mohanraj v. Shah Bros. Ispat (P) Ltd.,24 held that the decision in PGCIL was incorrect.25 The Supreme Court took the view that a set-aside proceeding “may result in an arbitral award against the corporate debtor being upheld”, which in turn would require the corporate debtor to pay on the award.26 This logic is somewhat difficult to follow as an award debtor would be liable to pay under an award as soon as it is made and until the time that it is set aside. There is nothing in the Arbitration Act to suggest that an award debtor’s liability is only triggered once an award is upheld in set-aside proceedings.

Nevertheless, this decision holds this field at present. As such, courts and the NCLT are likely to follow a similar approach in determining whether a moratorium would apply to the recognition phase of an enforcement proceeding.

Therefore, if a foreign award does not go through the recognition phase of enforcement proceedings prior to the commencement of insolvency proceedings, an award creditor will not be able to commence enforcement proceeding while the moratorium is in effect. The implication of this is that that foreign award will not be recognised in India, and as a corollary, cannot form the basis for a claim in insolvency proceedings. This creates a somewhat unreasonable hurdle given that it would be difficult for an award creditor to predict when some other creditor might initiate insolvency proceedings against the award debtor.

V. Conclusion

Foreign awards can be introduced into an insolvency proceeding, which is useful for award creditors seeking to recover awarded sums from an insolvent award debtor. While there appears to be little difficulty in commencing insolvency proceedings based on a foreign award, an award debtor will only be able to claim based on a foreign award in an ongoing insolvency proceeding if that award has passed through the recognition phase prior to the commencement of that insolvency proceeding. Nevertheless, the fact that award creditors can participate in insolvency proceedings only goes to strengthen the popularity of international arbitration.

† Partner, Khaitan & Co.

†† Senior Associate, Khaitan & Co.

†††Associate, Khaitan & Co.

1. PASL Wind Solutions (P) Ltd. v. GE Power Conversion India (P) Ltd., (2021) 7 SCC 1, para 91.

2. See Insolvency and Bankruptcy Board of India, Understanding the IBC: Key Jurisprudence and Practical Considerations: A Handbook (International Finance Corporation 2020), p. 59 for a flow chart summarising the corporate insolvency resolution process.

3. As a precondition to applying to the NCLT, an operational creditor must give notice of the debt to the corporate debtor and can only proceed with the application if the corporate debtor does not—within 10 days of the receiving the notice—pay the debt or state the existence of a dispute over the debt. No analogous precondition is applicable to financial creditors.

4. See IBC, Ss. 7 and 9.

5. See Kotak Mahindra Bank Ltd. v. A. Balakrishnan, (2022) 9 SCC 186, paras 46-55 (holding that the words “and includes” in Section 5(8) of the IBC establishes legislative intent that liabilities beyond those which are expressly listed in the section can fall within the ambit of a “financial debt”).

6. (2021) 10 SCC 330.

7. (2021) 10 SCC 330, para 130.

8. 2019 SCC OnLine NCLT 22389.

9. 2019 SCC OnLine NCLT 22389, para 30.

10. 2019 SCC OnLine NCLT 20328.

11. 2019 SCC OnLine NCLT 20328, paras 35-36.

12. 2019 SCC OnLine NCLT 20328.

13. Awards and decrees made in a “reciprocating territory” are capable of enforcement in India provided they meet other substantive requirements stipulated in the Arbitration Act and the CPC, respectively. The Government of India, by notification, designates such territories.

14. See Usha Holdings LLC v. Francorp Advisors (P) Ltd., 2018 SCC OnLine NCLAT 792, para 14.

15. (2020) 10 SCC 1, para 82.

16. (2020) 10 SCC 1, para 82.

17. See, e.g., HDFC Bank Ltd. v. Bhagwan Das Auto Finance Ltd., 2019 SCC OnLine NCLAT 1338, para 5-6.

18. See, e.g. Vitol SA v. Asian Natural Resources (India) Ltd., 2017 SCC OnLine NCLT 20078, paras 1 and 15.3 (The Ahmedabad NCLT refused to withdraw its earlier stay order on execution proceedings against the corporate debtor given that a moratorium under S. 14 of the IBC was in effect).

19. This consideration would not be relevant for insolvency proceedings initiated based on a foreign award as the moratorium only operates once proceedings have been commenced. Effectively, an award creditor can, first, apply for recognition, and then, once the award has been recognised, apply for commencement of insolvency proceedings.

20. 2017 SCC OnLine Del 12189.

21. 2017 SCC OnLine Del 12189, para 15.

22. 2017 SCC OnLine Del 12189, para 10.

23. 2017 SCC OnLine Del 12189, para 14.

24. (2021) 6 SCC 258.

25. (2021) 6 SCC 258, para 97.

26. (2021) 6 SCC 258.

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