Unnati Sinha,
This author is a student at Narsee Monjee Institute of Management Studies
Introduction
The interplay between arbitration and insolvency has gained major relevance with the implementation of a new insolvency law in India, leading to the formation of specific, appropriate legal standards. Owing to the dearth of regulatory guidance on the subject, many arbitral hearings have been put on hold while insolvency proceedings have begun. India is a newcomer to the list even though some economies have set legal precedents and further enacted standards in this area. The suspension of the arbitration processes is somewhat unfavorable for the legal profession since it seeks to lessen the role of judicial oversight and, furthermore, supports the parties' right to pick the venue of their choice for conflict settlement.
Although insolvency and arbitration appear to be at war with one another very strongly, they can coincide to the point that it necessitates legislative action or, in the lack of such action, judicial reflection. The emergence of the Insolvency and Bankruptcy Code, 2016 (“Code”), which has delivered as a powerful tool to shape such systems into a time-bound and well-governed affair, has resulted in a paradigm shift in insolvency regulation in India. Nevertheless, the author’s goal in this article is to draw attention to the fact that, despite being widely publicized and frequently complicated in its technicalities, the Corporate Insolvency Resolution Process (“CIRP”) envisaged in the Code might not always be the best course of action or yield the most suitable results. Thus, the goal is to address the conflicts between the two and propose a framework that combines the best aspects of both systems.
How does the Code work?
To "centralize and modify the laws regarding corporate reorganization and insolvency resolution in a time-bound fashion for optimization of the worth of such persons' assets to encourage entrepreneurship, availability of credit, and stabilize the interests of all the stakeholders," the Code was incorporated. A financial or operational creditor with unpaid debts of at least INR [1 crore], or USD 137,300, or a corporate debtor who has failed to make payments to its creditors may seek to initiate CIRP over a corporate debtor by submitting an insolvency application before the National Company Law Tribunal (“NCLT”), also known as the Adjudicating Authority under the Code. An Interim Resolution Professional (later replaced by a Resolution Professional) will be appointed to oversee the corporate debtor's operations throughout the CIRP period if the NCLT determines that there is a default in the payment of the aforementioned debt. Following the declaration of the default, the Code requires a public announcement and the declaration of a moratorium, which among other things forbids the institution or resumption of legal actions or other proceedings against the corporate debtor as well as the transfer, encumbering, or disposal of the corporate debtor's assets. The CIRP is not arbitrable once it has started (at least during the pendency of the insolvency resolution process). In A. Ayyasamy vs. A. Paramasivam & Ors, the Supreme Court made the observation that "insolvency and winding-up issues" are not subject to arbitration.
A Junction for Conflicts?
The friction between the underlying political goals of both systems is what causes the conflict between arbitration and insolvency. The goal of insolvency is to settle defaults in a manner that is respected by the majority of the debtor's stakeholders. The best approach to achieve those goals is through a procedure that optimizes stakeholder returns by increasing the value of the debtor and its assets and exemplifies logic in distribution by guaranteeing the highest possible return to all parties. The stakeholders would be encouraged by such a process to collectivize either voluntarily or involuntarily. In order to optimize profits and protect the interests of those stakeholders who are deeper in the hierarchy relative to formal creditors, it would encourage stakeholders to realize the necessity for a stay-on individual enforcement action.
To accomplish these goals, insolvency laws often call for an automatic halt to individual lawsuits and demand that all parties file their claims against the debtor as part of a consolidated proceeding. When claims are submitted, the procedure is carried out while making an effort to get the most money back for the debtor and have it divided in a way that balances the interests of all parties. The insolvency legislation mandates that any disputes throughout the procedure be resolved only by a specialized court created to supervise such insolvency processes. This would result in the consolidation of all issues against the debtor before a single forum, which would serve to (a) preserve the insolvency process's rationality, (b) lessen the debtor's stress, and (c) guarantee the insolvency process's prompt conclusion. In essence, insolvency law believes it is desirable for all cases facing insolvency to be heard solely by one specialized and centralized forum, with all other courts and forums' authority remaining prohibited throughout insolvency.
In contrast, arbitration law is built on the notion of party autonomy and offers parties a tool of alternative private conflict resolution that, when compared to legally constituted courts, is not only easier, quicker, and more cost-effective in settling disputes. By restricting the role of courts to the stage of enforcement, it seeks to give parties control over their interactions and the conflicts that result from them. It is this very principle of party autonomy in choosing the dispute resolution mechanism that conflicts with the insolvency policy objective of consolidating all disputes before one court. The question of whether the principle of party autonomy to have the dispute resolved through arbitration would still apply or whether it would be frustrated by the insolvency law's bar arises therefore in a scenario where an insolvency proceeding is brought against a party to the arbitration agreement.
The insolvency law is given priority in light of any potential effects that extended arbitration could have on the amount of money that the other creditors are able to collect during the insolvency process. Therefore, if arbitration and insolvency were to intersect, the insolvency process would take precedence over arbitration and supersede the rights of a party claimant or defendant to challenge or defend its claims in conformance with the dispute resolution mechanism picked by, and between, the parties, urging it to do so before an insolvency court established under the insolvency statute that has nothing to do with the dispute at hand.
The Solutions
Allowing one to predominate over the other may not be the best way to resolve the problem because both arbitration and insolvency are derived from laws and have equal legal weight. Therefore, it is justifiable to make an attempt to develop alternatives and to best align the policy goals of both arbitration and insolvency so that they can coexist.
Although it is commonly agreed that the centralization of issues at the start of bankruptcy proceedings is the focus of insolvency rules, certain investigated deviations may nonetheless offer a workable resolution to the disagreement.
The Erga Omnes Test: Contrast between In Rem and In-Personam Matters
As an alternate dispute resolution method, arbitration calls for voluntary submission. It is private since it results from the parties' contract. As it is only permitted to govern the affairs of those who submit to its jurisdiction, i.e., inter partes, it is not to influence the interests of those who are not parties to the arbitration agreement.
These features of arbitration suggest that it would not be appropriate or permitted in cases where the rights and responsibilities in dispute are owing to the entire globe, or in rem. In the absence of such activities, arbitration would have unforeseen consequences for the parties not involved in the arbitration. As a result, some sorts of conflicts continue to be left off the list of issues that can be arbitrated internationally. Insolvency and bankruptcy are actions in rem that fall under the sole jurisdiction of bankruptcy courts, whose jurisdiction is in rem at its heart, necessitating the consolidation of all claims against the debtor and central adjudication of conflicts forin the benefit of all stakeholders.
As a result, arbitration is generally used to resolve disputes that are in personam in nature, that is, when a right is applicable to or enforceable against a specific person or people. It is debatable, nevertheless, whether these in-personam issues would also include subsidiary in-personam problems resulting from more extensive in rem lawsuits.
Even while the broader insolvency action itself is non-arbitrable because it is in rem, conflicts that arise during it but have an in personam nature continue to be arbitrable. In essence, it means that regardless of how an action comes from or takes place while an insolvency procedure is ongoing, it will still be subject to arbitration if it has no effect on the world as a whole, or erga omnes. Therefore, in personam conflicts that would not affect the rights of other insolvency stakeholders or jeopardize their legitimate interests thereunder would still be arbitrable during insolvency.
The Way Forward
Although insolvency and arbitration are based on opposing legal theories, they coexist in the field of corporate law. Access to judicial conflict resolution methods is a crucial component of human rights and must be easily accessible to all parties. The already obvious gaps in legal counsel and access have grown tremendously since the COVID-19 outbreak started.
The Act and the Code's blanket prohibition on arbitrating insolvency claims must be re-examined in order to adopt ADR procedures like arbitration. This would make it possible to distinguish between the various categories of insolvency claims in order to guarantee an equal distribution among the company's stakeholders while also guaranteeing that creditors receive their just due.