Waiver of Right to Continue Arbitration: Application to the NCLT under Section 60(5) of the IBC

There exists a plethora of international jurisprudence on waiver of the right to invoke arbitration, when proceedings in another forum have been substantially utilised.¹ In a situation where the parties have initiated prior, or simultaneous proceedings in a different forum, than before the Arbitral Tribunal, then such forum has to evaluate whether the proceedings have been considerably utilised for discussing the issues that would be duplicated in the arbitration. In case the proceedings have been exploited to such an extent where the key issues related to the merits of the case have already been examined, then the right to invoke arbitration would be waived off.

However, the issue regarding waiver, when arbitration proceedings have in fact already been invoked, or when a mandatory application under Section 60(5) of the Insolvency and Bankruptcy Code, 2016² (IBC) is filed before the National Company Law Tribunal (NCLT), over which the NCLT exclusive jurisdiction, has not been brought to light yet.³

In the present article, I will lay out the difficulties caused due to the non-initiation of arbitration, and the subsequent filing of Section 60(5) applications in the NCLT and also provide a course of action to achieve clarity from the conundrums.

Inconsistency with the right to arbitrate

A waiver⁴ refers to the “deliberate⁵, intentional⁶ and unequivocal abandonment of the right⁷ that is later sought to be enforced”. The issue arises when, in an arbitration, the claims have been submitted by one of the parties before the Arbitral Tribunal, but the arbitration proceedings discussing such substantive claims have not yet been initiated. In the meanwhile, if one of the parties is admitted under insolvency, an application would be required to be filed under Section 60(5) of the IBC to protect the subject-matter of arbitration, which would otherwise be sold off during the corporate insolvency resolution process (CIRP).

For a waiver to be established, various principles have been provided in international authorities, which can be relied upon due to the dearth of Indian jurisprudence on the topic. The submission before another forum shall be inconsistent with one’s right to arbitrate. Such inconsistency includes: (a) substantial invocation of the procedure;⁸ (b) the extent of the moving party’s activity, including discovery of evidence; and (c) duplicity of claims.⁹ However, when factual issues are decided by two forums, numerous practical problems arise. Concurrent jurisdiction might be exercised by both the Arbitral Tribunal and the NCLT over the factual issues, leading to duplicity of claims. Such decisions can be inconsistent with each other, and the binding value of the decisions would come into question. Further, proceedings in multiple forums can cause undue delay and diminish the economic value of the assets of the corporate debtor, further prejudicing the responding party.

Whether seeking protective measures under the IBC can lead to waiver?

Interim measures, for an arbitration proceeding seated within India, can be granted either under Section 9¹⁰ of the Arbitration and Conciliation Act, 1996¹¹ by the domestic court having jurisdiction over the arbitration, or by the Arbitral Tribunal itself under Section 17¹² of the Arbitration and Conciliation Act, 1996. If the arbitration is seated outside of India, the procedure provided in the law of such country would be followed.

However, when the matter is related to insolvency of one of the parties, NCLT has jurisdiction over disputes that may have a monetary impact¹³ on the economic value of the debtor firm since the liquidation process will be streamlined and efficient. Section 63 of the IBC¹⁴ bars any authority from entertaining any proceeding over which the “NCLT” has necessary¹⁵ jurisdiction, even in cases not related to insolvency.¹⁶ Nevertheless, Section 25(2)(b) of the IBC¹⁷ mandates the representation of corporate debtors by the resolution professional (RP) in “any court, tribunal or other authority”. Such recognition of adjudicating authorities, other than the NCLT, refutes the exclusive jurisdiction of NCLT over all disputes against corporate debtor.¹⁸

Therefore, arbitral proceedings can be initiated between the parties even with the continuance of insolvency of one of the parties, by the virtue of Section 25 of the IBC. But still, the parties cannot adopt the procedure provided under the Arbitration and Conciliation Act, 1996, or a foreign arbitration legislation for seeking protective/interim measures when one of the parties is undergoing insolvency, because the NCLT has exclusive jurisdiction under Section 60(5) of the IBC for providing protective measures. Section 60(5) is non obstante in nature. Therefore, when a party requests for the protective measure, which is urgent in nature due to the ongoing insolvency resolution process, or such order can be exclusively granted by the NCLT, the same cannot be decided by the Arbitral Tribunal, and it would not lead to the waiver of right to arbitrate.

Caveat: Issues arising out of application for protective measures under Section 60(5)

Section 60(5) primarily determines the powers of the NCLT to entertain or dispose of issues related to the corporate debtor or the insolvency process. It contains various clauses,¹⁹ which can appear to have overlapping effects on applications presented before the NCLT. Sub-clause (a) encompasses any legal action initiated by or against the corporate debtor, however, factual or substantive issues that may arise during the course of the liquidation proceedings are covered under sub-clause (c).

For establishing a conclusive principle, it is imperative to draw a connection between the principles of waiver, and Section 60(5) of the IBC. A waiver of right to invoke arbitration cannot be established when an NCLT application is filed only under sub-clause (a) because of its wide ambit,²⁰ which includes interim and protective applications within the clause. Because of the same, when a party submits an application under Section 60(5) before the NCLT after the initiation of the arbitration, certain issues can be decided by the NCLT, and other issues related to the facts can be submitted before the Arbitral Tribunal.

However, such an arrangement, even though it sounds legally efficient for the proper disposal of disputed issues, can lead to numerous concerns. Conundrums can arise because of the internationally accepted approach that a protective measure²¹ taken by the party to prevent a breach of its own rights in urgent cases does not amount to waiver.²² Furthermore, a declaration²³ requested from a forum which is not amenable to arbitration also cannot constitute waiver. The adjudication of such an application does not result in the disposal of any substantive rights submitted before the Arbitral Tribunal.

However, in certain cases, even a protective or interim application filed under clause (a) of Section 60(5) might require the determination of certain factual issues related to the dispute, which would lead to the implied submission of substantive issues by the party before the NCLT. The same would lead to either substantial invocation of proceedings before the NCLT, or duplicity of claims, which would in turn lead to waiver of right to arbitrate.

Way forward

The crux lies in ensuring that the invocation of protective measures before the NCLT does not inadvertently lead to the waiver of arbitration rights. Urgent protective actions, necessitated by the exigencies of insolvency proceedings, should not be misconstrued as a relinquishment of the right to arbitrate. The primary resolution to the above-discussed complications has to be the alteration of the language of Section 60(5) of the IBC, wherein it would be the obligation of the legislature to clarify the distinction between clauses (a) and (c). The language currently has an overlapping effect over the kind of issues that can be submitted under these clauses.

Furthermore, the powers of NCLT have to be demystified in regard to deciding questions related to factual or substantive issues while dealing with a protective measure application under clause (a). Such factual issues should essentially be submitted before the Arbitral Tribunal when an arbitration agreement is present between the parties.