19 May 2021
As the Insolvency regime in India builds its new course under the Insolvency and Bankruptcy Code, 2016 (‘Insolvency Code’), numerous issues of application have arisen and will continue to grapple the corridors of the insolvency courts. One of the concerns is the interaction between debt enforcement/ execution procedures and the Insolvency Code. Insolvency Code allows operational creditors to initiate insolvency proceedings against a debtor, with a valid proof of undisputed claim. Form 5 of the IBBI (Application to Adjudication Authority) Rules, 2016, under which an Operational Creditor makes an application for initiation of insolvency process, considers a court decree or an arbitration award adjudicating on the default as a valid evidence of default to support insolvency commencement. The all-encompassing term ‘Arbitration Award’ includes both domestic awards and foreign awards. While the domestic awards are per se enforceable before the civil courts, unless stayed in a challenge before the court, and no distinct process for enforcement needs to be complied with under the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), foreign awards must follow a procedure of recognition, prior to being considered as enforceable before Indian courts. The Rules, however, shed no light on issues such as, at what stage the arbitration awards are eligible to be presented before the insolvency courts for insolvency commencement.
Unsurprisingly, the issue has evoked different opinions by different benches of the National Company Law Tribunal. For instance, the Mumbai bench of the Tribunal in Agrocorp International Pvt. (PTE) Ltd vs. National Steel and Agro Industries Ltd[1] was faced with an insolvency commencement application by an operational creditor, which was filed on the strength of a foreign arbitration award seated in the UK. The foreign arbitral award, however, had not followed its due course of becoming enforceable under the Indian law as per Section 47 and 48 of the Arbitration Act. Irrespective, the Tribunal admitted the insolvency petition. However, the ruling was not followed by the Hyderabad bench in Adityaa Energy Resource Pte Ltd. vs. Simhapuri Energy Ltd.[2], where the Operational creditor approached the Tribunal, basing its claim on the foreign award by the Singapore International Arbitration Centre. The Tribunal rejected the application and accepted the averment that before relying on the foreign award, the Operational creditor had to obtain the order of enforceability in terms of Part-II of the Arbitration Act.
These rulings bring to life the hypothesis of an illusionary conflict between insolvency laws and enforcement procedures. The blog attempts to analyse the Agrocorp ruling and bust this illusion of any conflict between insolvency laws and enforcement procedure under the Arbitration Act.
Decoding the Agrocorp Ruling and its Results-
The insolvency commencement standards of the Insolvency Code not only limit the scope of the Code’s application, but also intend to weed out improper use of the Code. The UNCITRAL Legislative Guide on Insolvency Law, 2004[3], notes:
As a general principle it is desirable that the commencement standard be transparent and certain, facilitating access to insolvency proceedings conveniently, cost-effectively and quickly to encourage financially distressed or insolvent businesses to voluntarily commence proceedings…. Ease of access needs to be balanced with proper and adequate safeguards to prevent improper use of proceedings. (para 21)
A few paragraphs later, the Guide indicates what it means by improper use of proceedings.
Examples of improper use might include those cases where the debtor uses an application for insolvency as a means of prevaricating and unjustifiably depriving creditors of prompt payment of debts or of obtaining relief from onerous obligations, such as labour contracts. In the case of a creditor application, it might include those cases where a creditor uses insolvency as an inappropriate substitute for debt enforcement procedures (para 62)
The Supreme Court in Mobilox Innovations v. Kirusa Software Pvt. Ltd.[4] observed that the Insolvency Code did not and should not serve the purpose of a debt recovery mechanism and this view found its reiteration in the K. Kishan v. Vijay Nirman Pvt. Ltd.[5] decision of the Court. The Tribunal in the Agrocorp case missed the point that recognising a foreign award as directly enforceable through the route of insolvency proceedings would negate the procedure established under the Arbitration Act. It is also to be noted that enforcement proceedings for foreign award (under S. 47-48) are the last and final stage where the debtor can resist the award from becoming binding/ enforceable for grounds listed under Section 48 of the Arbitration Act. This statutorily available remedy would be frustrated if any degree of precedence was to attach to such a decision in the insolvency proceedings. Further, the essential determination of a foreign award, being in confirmation with the public policy of India, will be bypassed if such foreign awards are allowed to be enforced directly via insolvency proceedings.[6]
But more importantly, the decision of admitting and commencing an insolvency proceeding directly, basis a foreign award, has the effect of fundamentally shifting the nature of the proceedings, viz. the individual debtor-creditor, from in personam to in rem. If insolvency were to be initiated for unenforced foreign awards, it would halt all the proceedings going on against the debtor in any forum and compel all the creditors to gather their claims, disputed or undisputed, under the umbrella of insolvency law. This is the fundamental distinction between enforcement and insolvency. Commencement of insolvency proceedings is reasoned by, and calls into question, the inefficiency of the debtor, which is starkly at odds with the enforcement of a debt. Enforcement merely leads to an action requiring payment of debt, without indicating anything about the inefficiency of the debtor to pay. If ever, the question of non-payment and inefficiency could arise, only after the conclusion of enforcement proceedings and inability of the debtor to pay. Inability of the debtor to pay is central to the entire insolvency proceedings and is reflected in another way. Assuming that unenforced foreign awards are admitted as valid proof of default, under Section 9 of the Code, and insolvency proceedings are commenced, nothing stops the debtor from settling the claim in full under Section 12A of the Code, since the debtor still has the capacity to fulfil the claims. In that case, the insolvency proceedings become no more than just an effective legal strategy for the creditor to skip the enforcement procedure under the Arbitration Act and extort the debt. This was precisely the result in Agrocorp, when the decision was appealed before the NCLAT. The Section 9 petition was withdrawn as the claims stood settled between the parties.
The contention that sat well with the Tribunal in Agrocorp was that the foreign award arose out of the UK, which is also a reciprocating country under the Civil Procedure Code (‘CPC’). The Tribunal inferred that any court decree arising from such a country would automatically become enforceable before Indian courts. However, in doing so, the Tribunal missed that a foreign arbitral award is not the same as a foreign decree, and that the enforcement procedures of the two are governed under different statutes.
This position seems to be settled by the recent decision of the Supreme Court in Govt. of India vs. Vedanta Limited & Ors.[7] The Court in Vedanta put to rest the question of the status of foreign awards under the scheme of the Arbitration Act. It observed,
… a foreign award does not become a “foreign decree” at any stage of the proceedings. The foreign award is enforced as a deemed decree of the Indian Court which has adjudicated upon the petition filed under Section 47, and the objections raised under Section 48 by the party which is resisting enforcement of the award. A foreign award is not a decree by itself, which is executable as such under Section 49 of the Act. The enforcement of the foreign award takes place only after the court is satisfied that the foreign award is enforceable under Chapter 1 in Part II of the 1996 Act. After the stages of Sections 47 and 48 are completed, the award becomes enforceable as a deemed decree, as provided by Section 49. The phrase “that court” refers to the Indian court which has adjudicated on the petition filed under Section 47, and the application under Section 48.
In contrast, the procedure for enforcement of a foreign decree is not covered by the 1996 Act, but is governed by the provisions of Section 44A read with Section 13 of the CPC.
However, it is an interesting eventuality to explore when one takes the Tribunal’s reasoning to a full logical circle. Under the Arbitration Act, the awards arising from the territory of State Parties to the Convention on Recognition and Enforcement of Foreign Arbitral Awards, 1958 (‘NY Convention’), or Convention on the Execution of Foreign Arbitral Awards, 1927 (‘Geneva Convention’), are recognised and enforced. The logic that the Tribunal proposed allows all reciprocating States under the CPC to have their awards enforced via insolvency proceedings even if they are not parties to the NY or Geneva Convention. In other words, the arbitral awards, not recognised and enforceable under the Arbitration Act, are allowed via insolvency proceedings to be enforced as decree under the CPC. Currently, the territories of Samoa and Aden are among those which are not state parties to the NY Convention, but are reciprocating territories under the CPC.
Another end of this logic is that it has the effect of categorising the State Parties to the NY or Geneva Convention into two groups: those which are also reciprocating States under the CPC and those which are not. The former would have an advantage under the Indian regime over the latter, in as much as the former group of nations could have their awards automatically enforced under insolvency laws, while the latter group would have to undergo enforcement under Part II of the Arbitration Act. The whole international regime of recognition and enforcement of awards would be undermined by taking away the incentive for states to become party to NY or Geneva Convention vis-a-vis India.
In our understanding, the decision in Agrocorp perhaps does not take into consideration the above aspects. At first blush, one may reason the decision as creating alternate methods of enforcement of claims. But this alternate mode of enforcement may result in the effective dilution of the provision for enforcement as contained in the Arbitration Act.
For further information, please contact:
Bishwajit Dubey, Partner, Cyril Amarchand Mangaldas
bishwajit.dubey@cyrilshroff.com
[1] NCLT, Mumbai CP(IB) No. 798/MB/C-IV/2019.
[2] NCLT Hyderabad, CP(IB) No. 389/9/HDB/2018. The decision has been appealed before the NCLAT in CA (AT) (Ins) No. 1038/2019, Aditya Energy Resource Pte Ltd. vs. Simhapuri Energy Ltd. As per the order of 26 February, 2020 the Appeal was pending admission and vide the last available order of 8 June, 2020 it had been adjourned in light of the pandemic.
[3] United Nations Commission on International Trade Law, Legislative Guide on Insolvency Law: Part I and II, 2004. The United National General Assembly expressed appreciation on completion of UNCITRAL’s work on Legislative Guide in a resolution adopted in its 59th Session. See UNGA, A/RES/59/40, 2 December 2004.
[4] (2018) 1 SCC 353; Civil Appeal No. 9405 of 2017.
[5] (2018) 17 SCC 662; Civil Appeal Nos. 21824 and 21825 of 2017.
[6] See NCLAT decision in Usha Holdings L.L.C. vs. Francorp Advisors Pvt. Ltd., Company Appeal (AT) (Insolvency) No. 44 of 2018. In this case, NCLAT concluded that the NCLT is not a ‘court’ and hence lacks the authority to decide the validity of a foreign decree. This rationale can be extended analogously to an arbitral award.
[7] Civil Appeal No. 3185 of 2020 (arising out of SLP (Civil) No.7172 of 2020).
