Order name: Alchemist Asset Reconstruction Company Limited v. Hotel Gaudavan Private Limited

Citation: 2017 SCC OnLine SC 1362

Court: Supreme Court of India

Coram: Rohinton Fali Nariman, Sanjay Kishan Kaul JJ.

Date: 23rd October 2017

Keywords: Moratorium, Non-Est, Insolvency and Bankruptcy Code.

Overview

This judgment is relevant to understand the relationship between the Arbitration and Conciliation Act, 1996 and the newly framed Insolvency & Bankruptcy Code, 2016 (“the Code”).

Facts

Respondent has invoked arbitration proceedings against Appellant after moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 has been imposed on the Appellant.

Issue

Whether arbitration proceedings can be instituted against an entity after a moratorium under Section 14 (1) (a) of the Code has been imposed on that entity?

Analysis

The Supreme Court, in this decision, unequivocally reiterated the mandate of the Insolvency and Bankruptcy Code, 2016, that, upon imposition of a moratorium under Section 14 (1)(a) of the Code, no new suit or arbitration proceedings could be initiated against the entity under moratorium. Furthermore, the continuation of any suit or legal proceeding is prohibited.

Accordingly, the Supreme Court declared the arbitration proceedings in question ‘non est’ in law. The rationale for the Court’s holding is that a moratorium provides a period of calm where creditors cannot resort to individual enforcement action, which may frustrate the object of the corporate insolvency resolution process. Also, a prohibition on the disposal of the corporate debtor’s assets would ensure that the corporate debtor or its management is not able to transfer its assets, thereby stripping the corporate debtor of value during the corporate insolvency resolution process.

Similar legal rulings can be found in the law of other countries. The UK Insolvency Act, 1986 prohibits any legal proceedings (inclusive of arbitration proceedings) against the company or property of the company except with the consent of the administrator or with the permission of the Court.[i] Maritime Electric Company v. United Jersey Bank has emphasized that the purpose of the ‘automatic stay’ is to grant the debtor a breathing spell, to consider ways of reviving business by stopping all creditor action, foreclosure, enforcement, and arbitration proceedings.[ii]

Conclusion

Any arbitration proceeding initiated after imposition of moratorium under Section 14 of the Insolvency and Bankruptcy Code, 2016 is non-est in law.

[i] Vinod Kothari & Sikha Bansal, ‘Law Relating to Insolvency and Bankruptcy Code 2016’ (2016) Taxmann.

[ii] 959 F.2d 1194, 1204 (3d Cir. 1991).