Governing the Arbitration-Insolvency Interface: The Role of Arbitral Institutions

An analysis of the interface between arbitration and insolvency in India, focusing on the underexamined role of arbitral institutions in managing insolvency-related disruptions, including mandatory disclosure, insolvency-specific procedural rules and restructuring-focused dispute resolution mechanisms.

With the increasing focus on alternative dispute resolution especially arbitration, it is pertinent to evaluate the efficacy and the coexistent nature of the same with other commercial laws. It is rare for two regimes of commercial law to pull harder in opposite directions than insolvency and arbitration.¹ As the basis of the insolvency regime is collective by nature, it congregates all claims against a debtor, imposes a moratorium on proceedings, and distributes the recovery on a pari passu basis. On the other hand, arbitration is almost its doppelganger, which is bilateral, consensual, and deliberately private. The collision of the two regimes is seen when some multinational company enters into financial distress. As the claims on which parties contractually agreed to resolve through arbitration suddenly find themselves suspended due to the moratorium. Another set of obstacle comes in when the arbitral awards are obtained against an insolvent party; it encounters enforceability questions wherein the agreement signed years earlier are challenged.

Amidst all these situations, there is a third actor who has not received the required attention from courts, academics, or policymakers, i.e. the arbitral institutions. The establishment of bodies like Singapore International Arbitration Centre (SIAC)², the London Court of International Arbitration (LCIA)³, and the International Chamber of Commerce (ICC)⁴, etc. are only passive filing rather to streamline the process. These institutions appoint arbitrators, manage timelines of the process, scrutinise arbitral awards, and run emergency mechanisms, etc. — all of which substantially get affected the moment a party enters into insolvency. Yet these institutions do not have any systematic protocols for handling the same. This article argues that fixing that gap is overdue, specifically for India as it approaches towards the development insolvency jurisprudence.

Key structural issues

The tussle between insolvency and arbitration is not merely academic rather structural. Consider a company undergoing the corporate insolvency resolution process (CIRP) under the Insolvency and Bankruptcy Code, 2016 (IBC). Once the CIRP commences, an automatic moratorium is imposed on all suits and proceedings against the corporate debtor by virtue of Section 14 IBC. In parallel, the same company may be a respondent in three ongoing arbitrations seated in Singapore, Delhi and London. The question arises: What happens to these proceedings? Does it automatically suspend the arbitration proceedings also unlike others? Does the Arbitral Tribunal dissolve immediately? Can the resolution professional choose to continue some arbitrations and abandon others?

The present law partially answers the aforementioned questions, by virtue of Section 238 under the IBC. Section 238 IBC grants the Code an overriding effect over inconsistent statues, it reads as follows:

238. Provisions of this Code to override other laws.—The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.

The courts have over the time and again interpreted the said section in broad manner. The Supreme Court in one of its very celebrated judgment in the domain of arbitration, i.e. Vidya Drolia v. Durga Trading Corpn.⁵, crafted a four-fold test for the disputes which are not arbitrable. It reads as follows:

76. In view of the above discussion, we would like to propound a fourfold test for determining when the subject-matter of a dispute in an arbitration agreement is not arbitrable:

76.1. (1) When cause of action and subject-matter of the dispute relates to actions in rem, that do not pertain to subordinate rights in personam that arise from rights in rem.

76.2. (2) When cause of action and subject-matter of the dispute affects third-party rights; have erga omnes effect; require centralised adjudication, and mutual adjudication would not be appropriate and enforceable.

76.3. (3) When cause of action and subject-matter of the dispute relates to inalienable sovereign and public interest functions of the State and hence mutual adjudication would be unenforceable.

76.4. (4) When the subject-matter of the dispute is expressly or by necessary implication non-arbitrable as per mandatory statute(s).

76.5. These tests are not watertight compartments; they dovetail and overlap, albeit when applied holistically and pragmatically will help and assist in determining and ascertaining with great degree of certainty when as per law in India, a dispute or subject-matter is non-arbitrable. Only when the answer is affirmative that the subject-matter of the dispute would be non-arbitrable.

The complexity which was arose in Vidya Drolia case⁶ was dealt by the court in Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund⁷ where court held that:

29. Therefore, to sum up the procedure, it is clarified that in any proceeding which is pending before the adjudicating authority under Section 7 of IB Code, if such petition is admitted upon the adjudicating authority recording the satisfaction with regard to the default and the debt being due from the corporate debtor, any application under Section 8 of the 1996 Act made thereafter will not be maintainable. In a situation where the petition under Section 7 of IB Code is yet to be admitted and, in such proceedings, if an application under Section 8 of the 1996 Act is filed, the adjudicating authority is duty-bound to first decide the application under Section 7 of the IB Code by recording a satisfaction with regard to there being default or not, even if the application under Section 8 of the 1996 Act is kept along for consideration. In such event, the natural consequence of the consideration made therein on Section 7 of IB Code application would befall on the application under Section 8 of the 1996 Act.

In this case, the court comprehensively dealt with the overlapping of the Section 7 petition under the IBC and Section 8 application under the Arbitration and Conciliation Act, 1996, and concluded that the mere filing of Section 7 petition would not nullify the arbitrability of the dispute.⁸ To nullify the same, the petition should be admitted with recording of reason; hence, not every dispute touching insolvency would be non-arbitrable.

Although the court has clarified the co-existent behaviour of IBC and arbitration, but these decisions have come in light of the litigations. The systemic gap still needs to be filled by bringing up structural changes.

Institutional interventions in streamlining conflicts

In addressing the conflict of insolvency-arbitration, the courts are at disadvantage for multiple reasons. First among them is that they get notified only when the intersection of both the laws creates disputes; secondly, they are not involved in the process since the beginning of disputes arose; and thirdly, the insolvency of the entity is confirmed at very later stage. The problem arises when stay application is filed by the party, months pass, tribunal awaits, and the restructuring window narrows. On the flip side, arbitral institutions are involved in the process since the commencement. They are the first one to get notified when one of the parties of the arbitration proceeding becomes insolvent, as the party informs them informally or insolvent part writes to the institution to seek instructions what happens next.

The placement of these arbitral institutions could be game changing, but remains untapped. As of now, if the SIAC or the LCIA received any such intimation from any of their parties of ongoing arbitration, they do not have any formal protocol to opt in the situation like these. Presently, in such situations, the secretariat responds on case-to-case basis, keeping the response conservative in nature. These institutions presently lack any official rules/process elucidating any kind of obligation on the parties to inform when it becomes insolvent, no defined timelines, no administrative mechanism to get in touch with the relevant insolvency court.

The institutional rules presently in force are — the Singapore International Arbitration Centre Arbitration Rules, 2016, the LCIA Arbitration Rules, 2020⁹, and the ICC Arbitration Rules, 2021¹⁰ are formulated for the awarding the bilateral claims to solvent parties. The rules and procedures formulated are sophisticated in various aspects, but they have no elucidation when a party enters into an insolvency or restructuring process. Considering the fact that these institutions jointly orchestrate thousands of proceedings a year, including high-stakes disputes of big corporations, silence seems unjustifiable.

Addressing structural gaps in the three-tier framework

Three targeted modifications within the existing regulatory framework would make substantial difference. They are as follows:

1. Mandatory disclosure

The inclusion of a mandatory disclosure in the institutional rules should require parties to notify the institution within 72 hours of the commencement of any insolvency proceeding, the appointment of an insolvency professional, or the grant of recognition order by a foreign court. This is not some drastic intervention, as institutions already impose disclosure obligations on the parties. This inclusion notification would activate an administrative halt and a structured response; recognising the insolvency representative, concurring on the point if the proceedings to be continued or suspended, and connecting with the principal insolvency forum.

2. Insolvency specific procedural rules

The institutions need specific provisions for addressing the substitution of insolvency representatives as parties, including the arbitration costs in insolvency claims, the effect of foreign moratoria on pending timelines, and the modus operandi for bifurcating proceedings where issues are arbitrable and others are not. None of these rules mandate institutions to determine arbitrability, that remains for the courts and tribunals to decide. But these institutions will act as a bridge in streamlining the process within which those determinations can be reached without any chaos.

3. Restructuring focused dispute resolution platforms

Nowadays with increasing development of the IBC, insolvency regimes prioritise rescue over liquidation. We can take the example of major restructuring as seen in Jaiprakash Associates Limited’s, CIRP¹¹ which involves dozens of creditors, numerous set of executory contracts, valuation disputes, and governance disagreements. It becomes nearly impossible for the National Company Law Tribunal (NCLT) to adjudicate every bilateral dispute that arose within the structure. These institutions intervening can offer a parallel track offering mediation-arbitration for creditor disputes, expert determination for valuation questions, and an articulated platform for negotiating plans. Therefore, this will only complement, not replace, the judicial supervision of the collective process.

Comparative jurisprudence and emerging practices

With the evolving landscape of commercial dispute resolution, other jurisdictions are attempting whatever is possible. Singapore has made a conscious and deliberate move by enacting the Insolvency, Restructuring and Dissolution Act, 2018. This legislation outlines a comprehensive restructuring structure that functions alongside arbitration rather than standing as an obstacle. The Court of Appeal in the case of Larsen Oil and Gas Pte Ltd. v. Peptropod Ltd.¹² formulated the boundary for arbitrability consciously, reserving arbitration for resolving pre-insolvency bilateral claims while saving collective claims for insolvency courts.¹³ With this ecosystem, the SIAC has benefitted a lot in the absence of its own formal insolvency protocol.

Another jurisdiction which has acted in pursuance of the coexistent nature of arbitration and insolvency is England. They have enacted the Corporate Insolvency and Governance Act, 2020 (UK), which has established a concept of imposition of statutory moratorium and restructuring framework which sits along with the arbitral proceeding rather than displacing it. In fact, under the Article 22.1(ix) of the LCIA’s Rules facilitates a partial tool for managing related proceedings with party’s consent, which is itself a task in insolvency contexts.¹⁴

There is one more law is existence, i.e. (European Union) EU Insolvency Regulation (Recast) 2015/848¹⁵, which propounds one of the most progressive frameworks for cross-border coordination among courts, but leaves the room of arbitration unaddressed. The result of the same is that across all the EU member states, the judicial negotiation of insolvency-arbitration conflicts is being managed on a case-by-case basis. Precisely, this is the problem which can be curbed by institutional protocols.

The Indian context: Issues and challenges

When it comes to India, it deserves special attention as the commercial disputes are burgeoning. Since 2016, insolvency practice has been transformed wherein resolution proceedings are concentrated before the NCLT, and definitively subordinating other forums. The IBC has included Section 238 as an overriding clause, collaborated with judicial deference to the IBC‘s public law character has proffered a structure which is defiance to arbitral interference with CIRP proceedings. This is doctrinally coherent.

But two judicial developments present a shady picture. Firstly, position establish by judiciary in the case of Indus Biotech¹⁶ and secondly, the active consideration of India to adopt the UNCITRAL Model Law on Cross-Border Insolvency.¹⁷ If adopted, Indian Courts would start the recognition of foreign insolvency proceedings and granting relief in their support.¹⁸ This adoption would, formulate a framework in which proceeding seated in India including the SIAC, Mumbai Centre for International Arbitration (MCIA)¹⁹ or Delhi International Arbitration Centre (DIAC)²⁰ arbitrations could be affected through foreign insolvency recognition orders. Therefore, before we adopt the UNCITRAL model, institutions operating in India need adequate protocols.

Conclusion

By now, it has been established that arbitral institutions are governing actors for commercial dispute resolution globally. These institutions have formulated the procedural norms under which thousands of disputes are dispensed every year, with their established rule-making authority. The issue is that authority established is not being utilised to curb the specific problem which pops up at the intersection of insolvency and arbitration.

The reforms proposed above are mandatory disclosure, insolvency specific procedural rules and restructuring focused platforms are not radical. They are just commensurate responses to widely recorded and emerging problem. For India in particular, where the IBC structure is fully developed but cross border aspect still remains underdeveloped, the aforementioned proposal can act a clear policy case for the existing institutions to fill the void. As the insolvency-arbitration interface will not be resolved itself, and the institutions sitting at the centre should stop pretending otherwise.