The discussion of arbitration to be introduced into insolvency law disputes has been always a debatable topic of the rights and liabilities involved in those of the corporate debtor and the financial creditor. Arbitration is majorly preferred by major players due to its ability to private and confidential nature of dispute resolution enabling the parties to ensure the stability of their commercial relationships. Yet there are some identified areas wherein the concept of arbitration can be applied and in India, insolvency disputes are separated aside from the purview of arbitration with the rights of third parties also being involved and intertwined with rights in rem. The arbitrability of insolvency law disputes in India was thoroughly covered by the Supreme Court in Indus Biotech Private Limited v. Kotak India Venture. In this case, the SC firmly decided that the issue would not be arbitrable once the petition under section 7 of the Insolvency and Bankruptcy Code, 2016 (IBC) had been admitted.
The execution of any judgement, decree, or order in any court of law, tribunal, arbitration panel, or other authority is expressly prohibited by the moratorium imposed by the IBC, as is the institution of new lawsuits or the continuing of existing lawsuits or processes against the corporate debtor. In India, the beginning of an insolvency case also precludes any authorities from taking enforcement action. Except for the implementation of a moratorium, the Code has no rules that specify how an arbitration will be affected by insolvency proceedings. The Corporate Resolution Insolvency Process (CIRP) or liquidation under the Code is not specifically mentioned in the Indian Arbitration and Conciliation Act, 1996 (Arbitration Act). The Supreme Court further noted that because both are special acts, the one that is implemented at a later date will take precedence over the other when deciding the conflict between the non-obstante clause under Section 5 of the Arbitration Act and the overriding effect under Section 238 of the IBC.In recent years, the interaction between insolvency and arbitration proceedings has gained prominence because. The IBC which was passed in 2016 and completely altered the legal framework governing insolvency disputes in India, is largely to blame for this conundrum of undecisive instances where arbitration and insolvency collide.
INTERFACE OF ARBITRATION AND INSOLVENCY LAW DISPUTES
Court rulings and judicial precedents have fairly established that a claim cannot be arbitrated if it is a component of an ongoing dispute that entails rights in rem and only matters affecting the rights in personam of the parties who refer their disputes to arbitration wherein insolvency matters are involved that includes rights in rem. The issues of arbitrability of disputes had been held in VidyaDrolia&Ors. vs. Durga Trading Corporationand Booz Allen Hamilton vs. SBI Home Finance. The IBC determines a specific ground like when insolvency procedures are initiated against a person, all other legal actions taken against that person, including any pending arbitration proceedings, will be suspended until the insolvency proceedings are resolved.
According to the IBC, a corporate debtor who has failed to make payments to its creditors both a financial or operational creditor with unpaid debts of at least INR 1 crore might seek to initiate CIRP over a corporate debtor by filing an insolvency application before the National Company Law Tribunal. The law has established an automatic mandatory moratorium to be imposed, which prioritizes insolvency proceedings over other legal actions which arbitration proceedings also include. The reasoning for this is that, as opposed to a consensual arbitration between one creditor and the bankrupt debtor, the interests of all creditors can be fairly and correctly represented in the insolvency process.
During the Indus Biotech case, the SC opted to divide the proceedings into pre-admission and post-admission phases. Prior to the institution of an insolvency petition, the insolvency proceedings remain in personam. The proceedings start once the CIRP application has been accepted. According to the SC, VidyaDrolia v. Durga Trading Corporation’s admission of the Section 7 IBC petition results in its admission triggering third-party rights in all creditors and enacting erga omnes proceedings. Thus, the matter would only cease to be arbitrable upon admission. During the pre-admission phase, the NCLT confirms that a default has occurred when financial creditors file a petition.The SC ruled that “insolvency and winding-up matters” are not amenable to arbitration in A. Ayyasamy vs. A. Paramasivam&Ors. The moratorium order is in force up until the conclusion of the CIRP.
As proof of debt, an arbitral award may be used to initiate insolvency proceedings if its credit is uncontested. As outlined in K. Kishan v. M/s Vijay Nirman Company, the Supreme Court reiterated arbitral decisions are legitimate records of operational debts but must be uncontested for an operational creditor to initiate CIRP proceedings. It was determined that the Supreme Court would not hear the case regarding corporate insolvency resolution since the arbitral tribunal rejected a counterclaim that exceeded the award on the merits and that this rejection could be reviewed by the courts, and a challenge to the arbitral award had also been filed.
In the Indus Biotech case, since the Insolvency Application would ipso facto determine the Section 8 Application, it was made clear that the NCLT must first consider the Insolvency Application while keeping the Section 8 Application open for review. Another intriguing fact about foreign jurisdictions is that a bankruptcy action in the UK would not prevent a party from seeking arbitration. A shareholder’s unjust discrimination claim could be arbitrated in Fulham Football Club v. Richards, a case in which the appellate court determined that such a claim might be arbitrated. The appeal court has underlined that the impact on third parties would determine whether an insolvency law matter is arbitrable.
Therefore, the application might be denied by upholding the goal of the code rather than sending the dispute to arbitration if the NCLT prima facie observed that the company is solvent and the process filed against the company is not justifiable or merely a recovery procedure. As a result, NCLT has adopted a different approach from the Supreme Court in a string of decisions. When a financially sound company raises disagreements over financial debt, arbitration must be used to resolve them considering the financial stakes in question. A balance must be struck between the interests of the corporate debtors and the parties seeking to resolve their disputes with such corporations and major conglomerates through arbitration.
Author(s) Name: Aathira Pillai (Maharashtra National Law University, Mumbai)
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 2021 2 SCC 1
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