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NLSTIAC Rapporteurs*
Insolvency and Arbitration: Carving out Convergence?
The NLSTIAC is the flagship conference accompanying the National Law School Trilegal International Arbitration Moot (NLSTIAM). The Conference is in its fifth edition and provides an unparalleled opportunity for law students, researchers, academics, practitioners, and corporate law firms to engage with contemporary issues in international arbitration. For law students, the Conference offers a unique opportunity to engage and network with seasoned professionals and academics.
This year, the Conference was jointly organized by the Moot Court Society and the NLS Business Law Review. It was held on 18th May, 2024 in the Allen and Overy Conference Hall on the Law School campus. Every year, the Conference has a thematic discussion on a contemporary area of corporate law. The theme for this year’s edition was an amalgamation of two areas: arbitration and insolvency. Specifically, the panel focussed on two questions: first, the effects of insolvency proceedings on the scope ratione materiae of arbitration agreements, and second, the role of arbitral institutions in facilitating cross-border insolvency proceedings.
On first principles, insolvency and arbitration are understood to be at odds with each other. This interplay has become increasingly relevant due to the rise of global trade and investment. Companies operating across borders are more likely to encounter disputes requiring international arbitration. When such a company becomes insolvent, national courts may impose moratoriums, freezing assets, impacting the interpretation of arbitration agreements, the determination of jurisdiction, and even the enforcement of awards. In such situations, the overarching question arbitral tribunals are confronted with is: whether arbitral tribunals are bound to recognise the insolvency proceedings, and if they do, how will it impact said insolvency proceeding? What follows is a report of the discussion that ensued between our esteemed panellists, complemented with engagement with the audience.
I. INTRODUCTION
The NLS-TIAC 2024 commenced with a welcome address by the Moot Court Society, NLSIU. It set the stage for this panel discussion and introduced the moderators, Professor Sahana Ramesh (Assistant Professor of Law, NLSIU) and Professor Harisankar K Sathyapalan (Associate Professor of Law, NLSIU). Professor Ramesh and Professor Sathyapalan highlighted the diverse background of the speakers, which provided a multi-disciplinary approach to the discussion. In no particular order, the speakers included:
1. Ms. Chitra Rentala (Partner, Commercial Disputes, Trilegal)
2. Dr. Ajar Rab (Founding Partner, ANR Law LLP)
3. Prof. Shahla Ali (Professor of Law and Associate Dean, University of Hong Kong)
4. Prof. (Dr.) Gary Bell (Associate Professor, National University of Singapore)
5. Ms. Varuna Bhanrale (Partner, Dispute Resolution, Trilegal)
The session hinged around distinct sub-themes within the broader theme of arbitration and insolvency. The panellists’ discussion centred around four narrower questions. This Report recounts the discussion on each of these issues. Firstly, the panellists discussed the current legal position surrounding the application of arbitration to insolvency proceedings. Secondly, the panellists debated on the normative desirability of allowing the same. Thirdly, the panel focussed on the socio-economic implications of arbitration in insolvency. Finally, the panellists discussed possible methods to reconcile the issues with insolvency arbitration into creating an implementable framework for the same.
II. THE CURRENT LEGAL POSITION REGARDING INSOLVENCY ARBITRATION
The session began with Prof. Shahla Ali’s opening remarks. Prof. Ali stated that it is essential to remember that the policy considerations impacting the question of arbitrability of insolvency are similar across jurisdictions. Her focus was on two jurisdictions: the United States (‘U.S.’) and Hong Kong (‘H.K.’). The U.S. arbitration regulatory framework is governed by the Federal Arbitration Act, which departs from the UNCITRAL Model Law on International Commercial Arbitration. The bankruptcy regulatory framework is sourced from the U.S. Bankruptcy Code. According to the same, once a bankruptcy petition is filed, an automatic stay comes into effect and proceedings against the debtor are halted. However, this stay does not apply to all arbitration proceedings against the debtor. Courts have held that a stay would apply only if bankruptcy is one of the core issues involved in the arbitration, and not peripheral.
H.K. departs from the U.S. framework in that its arbitration regime is derived from the UNCITRAL Model Law. Despite being a pro-enforcement regime, the H.K. Arbitration Ordinance recognizes statutory exceptions to this approach, including bankruptcy. However, similar to the U.S., courts adopt the test of whether bankruptcy is ‘ancillary’ or ‘non-ancillary’ to arbitration. With this, Prof. Ali introduced the approach most regimes have undertaken on the issue of arbitration of insolvency disputes – differential treatment of arbitrations where insolvency is a core issue versus where insolvency is a non-core issue.
Responding to Prof. Ali’s introductory remarks, Ms. Bhanrale compared the international approach to the Indian regime. She highlighted the synchronisation in jurisdictions when opting for the insolvency process. However, she emphasized the lack of the core and non-core distinction in Indian arbitration jurisprudence. She mentioned how courts take cognizance of whether a corporate debtor is affected by arbitration. Courts immediately place a moratorium on all litigation when insolvency proceedings commence. However, advantageous proceedings by the corporate debtor that may increase the value of assets are allowed.
Ms. Bhanrale addressed two questions: first, whether insolvency-related disputes can be arbitrated to a greater degree under the Insolvency and Bankruptcy Code (‘IBC’); second, whether insolvency can be resolved by arbitration entirely. She gave a two-fold answer, mentioning firstly, that there is a provision in the IBC which bars the application of any other statute (s. 238), implying that no other dispute resolution mechanism can apply. Secondly, according to Vidya Drolia, disputes which have the interests of the public at large cannot be determined by arbitration and must be dealt with by courts. Thus, the Indian legislative scheme, both on insolvency and arbitration, does not seem amenable to an amalgamation.
Prof. Ramesh questioned the panel over the core/non-core distinction; particularly whether the distinction was superfluous or water-tight, and whether it could gain international application. Prof. Bell nuanced the scope of the distinction, contending that the interpretation of core and non-core issues depends on whether the mechanism favours the creditor or the debtor. He further said that the process of bankruptcy has moved from favouring the creditors to restructuring, affecting the distinction. Dr. Rab intervened, stating that the answer depends on whether the insolvency is being invoked based on a disputed debt subject to an arbitration agreement. According to him, if the debt itself has nothing to do with arbitration, then the question of core/non-core does not even arise.
Ms. Rentala’s response was that while the United States has core and non-core issues, India has implicit distinctions like the inapplicability of insolvency to financial institutions. Further, she stated that if the management of the corporate debtor is fundamentally involved in the downfall, nations may not want to give outsiders the power to overturn transactions, especially pertaining to avoidance applications.
III. THE NORMATIVE (UN?)DESIRABILITY OF ARBITRATION IN INSOLVENCY
To decide whether the Indian legislative scheme requires an amendment to include insolvency arbitration, it is essential to discuss whether the same is normatively desirable. To answer the same, Prof. Harishankar invited Prof. Gary Bell to lead the discussion. Prof. Bell focussed on the difference between the nature of disputes involved typically in insolvency and arbitration. In insolvency, the core issue involved in disputes is a redistribution of liabilities. However, in arbitrations, disputes are primarily contractual in nature. Therefore, dealing with insolvency disputes in arbitration requires the adjudicatory authority to have the power to rewrite contracts.
Such is the case in most civil law jurisdictions, including Germany. Courts reason that the party’s change in circumstances into becoming insolvent vests adjudicators with the power to re-look at their debt. In the USA, the Federal Code applicable to the sale of goods provides that if parties have a change in their circumstances, the seller can decide to disburse lower quantities than initially promised, provided he proves that he is treating the creditor similarly to others. However, most common law jurisdictions do not allow similar infringement into the contractual rights of parties, at least by arbitral tribunals.
Prof. Bell further argued that the inclusion of arbitration would create a new line of procedural issues. For instance, even if one country were to allow for arbitrability of insolvency disputes, its enforceability across other jurisdictions would still be in question. Additionally, since arbitration is a consent-driven process, certain procedural remedies available with courts would not be exercisable in arbitration. For instance, courts can pass ex-parte decrees if one of the parties does not appear. In arbitrations, this process is significantly more cumbersome. Thus, arbitrating insolvency disputes could lose the essence of insolvency dispute resolution creating delays.
As an alternative solution, Prof. Bell advocated for promoting the usage of the UNCITRAL Model Law on Cross Border Insolvency and developing comity between international courts on its application. He argued that this would solve the current procedural issues attached to cross-border insolvency dispute resolution, namely avoiding delays and consistency in legal standards.
Dr. Rab noted that it could be argued that arbitration could play a valuable role, particularly because the New York Convention allows for international consistency in insolvency dispute adjudication and enhances the enforceability of decisions across jurisdictions. However, he emphasized a critical contradiction: while insolvency is a statutory matter under sovereign control, arbitration is a private adjudication system, raising questions about whether insolvency disputes should be entrusted to arbitration.
Dr. Rab explored the complexities of not allowing arbitration in insolvency cases. He pointed out that creditors might find it easier to use insolvency to frustrate claims in such situations. The core/non-core distinction thus can become key to prevent vexatious claims of insolvency. Insolvency, being creditor-oriented, poses challenges for arbitration in adequately capturing the interests of all parties. As an example, he mentioned a hypothetical case involving Volkswagen. If insolvency proceedings were initiated in India, Volkswagen would likely insist on honouring the arbitration agreement. However, the Indian courts might block this on grounds of public policy, asserting jurisdiction and denying arbitration.
Dr. Rab further illustrated the enforceability challenges through the Photochrome case in the U.S. In this case, despite a U.S. court prohibiting insolvency proceedings, the Tokyo tribunal proceeded anyway. Consequently, the U.S. court refused to enforce the tribunal's award, highlighting the potential risks of inconsistent enforcement across borders.
He concluded by proposing a solution rooted in recognizing the principle of comity, as suggested by Prof. Gary Bell. To make arbitration and insolvency compatible, Dr. Rab argued that a submission agreement (that is, an agreement to arbitrate entered into after the dispute arises) is essential. He referenced cases like Larsen Oil and Toys R Us in the U.S., where clear submission agreements played a pivotal role. Courts in these cases first examined whether the debt was subject to insolvency, then distinguished between core and non-core issues, ultimately guiding their approach to arbitration in insolvency disputes.
Ms. Rentala agreed that there is no need for arbitration if creditors are already in India. Situating the question in a broader context, Dr. Rab disagreed and argued that the home courts are unlikely to recognise the claim of foreign creditors, something which can be avoided in arbitration.
He agreed with the need for arbitration because, even if impractical, arbitration ensures a neutral seat, which can mitigate the chance of a home court denying the case of a foreign creditor to protect the home debtor. He used the case of Jet Airways to illustrate his response to why arbitration must occur to ensure the resolution of disputes in a delocalized manner. Ms. Rentala then raised the difficulty that arises in this case, namely that the focus will shift from the revival of the debtor to the creditor’s claims.
Giving a more pragmatic outlook, Prof. Ali emphasized the fragile financial position of the debtors with separate interests and creditors with a common interest. This makes it more beneficial for the debtor to commence arbitration proceedings instead of insolvency proceedings in multiple jurisdictions. Prof. Bell then circled the issue back to comity and the fact that an enforcement system does not exist because assets of debtors exist around the world. Ms. Bhanrale concluded the discussion by stating that there is a need for a platform where everyone has a stance, but that does not necessarily mean the answer is arbitration. A standalone insolvency regime can also produce the same result, even though the current insolvency regimes do not have an international dimension.
IV. SOCIO-ECONOMIC INTERESTS WITH INSOLVENCY ARBITRATION
Focussing the discussion on other impacts of arbitration-based dispute resolution on insolvency, Prof. Harishankar directed the conversation towards the socio-economic interests involved in insolvency arbitration. Dr. Rab responded optimistically, emphasizing the potential benefits of court assistance in arbitration. He explained that while arbitral tribunals can indeed seek support from home courts, the necessity of such assistance depends on the role insolvency law plays within a given jurisdiction and whether arbitration offers a more efficient process for handling insolvency. He further questioned whether, if arbitration truly expedited insolvency proceedings, this would conflict with the public policy objectives and socio-economic goals that insolvency laws are intended to achieve.
Ms. Bhanrale then offered a counterpoint, suggesting that an effective timeline should not be the sole consideration. She raised concerns about the confidentiality intrinsic to arbitration, which might undermine the interests of multiple stakeholders. According to her, the secretive nature of the process could lead to outcomes that are misaligned with broader public interests. She stressed that legal proceedings, especially in the context of insolvency, cannot operate in isolation, as arbitration might fail to advance stakeholders' interests comprehensively. Anticipating the question of whether arbitral awards should be made public, she argued that the lack of transparency creates uncertainty for future litigants, as they are deprived of legal precedents due to closed-door arbitration sessions.
This discussion concluded with Dr. Rab proposing a theoretical solution. He suggested that insolvency proceedings could be made public if necessary. In his view, the features of arbitration could be adapted to include transparency measures, potentially through interventions like ICSID regulations, ensuring that insolvency arbitration aligns better with public interests.
V. A POSSIBLE RECONCILIATION
Finally, the session focussed on a detailed discussion on the proposed insolvency arbitration mechanism. Ms. Bhanrale began by clarifying that the proposed scheme would not follow conventional insolvency or arbitration procedures. She emphasized that an arbitration model for insolvency would not be fully autonomous and would operate under several legal caveats. In essence, she advocated for a hybrid model supported by an overarching statute.
Ms. Rentala further developed this point by arguing that the proposed model should not be regarded strictly as arbitration but rather as an international convention on the IBC. She suggested that the focus had shifted towards the internationalization of insolvency law, a responsibility already undertaken by Resolution Professionals. According to Ms. Rentala, an arbitrator in this context would need to assess both parties' positions to determine the correct legal outcome.
Dr. Rab concurred with Ms. Rentala's view, adding that the term “award” was being used strategically to bring the IBC within the ambit of the New York Convention. This would facilitate the international enforceability of decisions made under the proposed mechanism.
Concluding the discussion, Prof. Ali and Dr. Rab compared the proposed mechanism to international judicial bodies like the International Court of Justice (ICJ) and the International Criminal Court (ICC). Similar to these institutions, the new model could involve appointing judges in a regional manner to create a sovereign, extra-territorial body, which they termed ‘Arb-Insol’. Prof. Bell contributed to this dialogue, observing that procedural challenges could be addressed through the establishment of specially created, formalized institutions designed to handle such matters.
VI. CONCLUSION
The panel discussion at the NLSTIAC 2024 shed light on the intricate relationship between insolvency and arbitration, highlighting the challenges and potential avenues for harmonizing the two. The speakers delved into the current legal frameworks, contrasting approaches in the United States, Hong Kong, and India, and explored the absence of a core and non-core distinction in Indian jurisprudence. While jurisdictions like the U.S. and Hong Kong adopt nuanced tests to determine the applicability of arbitration in insolvency disputes, India takes a more rigid approach, limiting the role of arbitration in insolvency matters due to legislative barriers such as s. 238 of the IBC.
The panellists also engaged in a lively debate about the normative desirability of incorporating arbitration into insolvency proceedings. Prof. Bell and Dr. Rab pointed out the fundamental differences between the contractual nature of arbitration and the broader redistributive goals of insolvency, which require adjudicatory authorities to rewrite contracts. The discussion further emphasized the procedural complexities, with questions raised about international enforceability and the lack of procedural remedies typically available in courts. While proponents of arbitration, like Dr. Rab, highlighted its potential for enhancing international consistency, others were sceptical about whether arbitration could capture the wider socio-economic interests involved in insolvency.
The socio-economic implications of insolvency arbitration were a critical theme, particularly the tension between the confidentiality of arbitration and the public interest. Ms. Bhanrale’s concerns about the secretive nature of arbitration undermining broader stakeholder interests stood in contrast to Dr. Rab’s optimistic view that arbitration could be adapted to include transparency measures, such as those used in ICSID arbitration.
Finally, the discussion on reconciling insolvency and arbitration proposed a hybrid model underpinned by international conventions. The suggestion to create an ‘Arb-Insol’ institution, akin to international courts like the ICJ, offers a potential solution to the procedural challenges identified throughout the panel. This internationalized framework could help bridge the gap between sovereign insolvency laws and the global enforceability of arbitration awards. Ultimately, while the panellists agreed that a stand-alone insolvency regime could achieve similar outcomes, the proposed model for insolvency arbitration holds promise for addressing the complexities of cross-border insolvency in a globalized world.
*The report for the TIAC Conference was prepared by Akshat Agarwal, Harshvardhan Ray, Meenal Jain, Rohan Srivastava, Rishabh Devaiah and Utkarsh Panda, who were the rapporteurs for the event.
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