The Insolvency and Bankruptcy Code, 2016 ("IBC") is a landmark legislation that was introduced in India to provide a consolidated and time-bound mechanism for resolving insolvency and bankruptcy issues. The IBC was enacted with the intention of maximizing the value of the assets of a corporate debtor, promoting entrepreneurship while simultaneously revitalizing business, and facilitating time-bound resolution of distressed assets.

It is to be noted that prior to the introduction of the IBC, there was no framework in place for reviving distressed companies. The IBC establishes a comprehensive framework for corporate insolvency resolution, liquidation, and bankruptcy, thus placing India at par with global standards of insolvency laws.

A crucial feature of the IBC is Section 14, which imposes an automatic moratorium upon the commencement of Corporate Insolvency Resolution Process ("CIRP"). The concept of moratorium is that it becomes a protective shield that halts all pending litigations and legal actions and prohibits the commencement of new proceedings against the corporate debtor for the duration of the resolution process.

However, in a globalized world, the intersection of the moratorium under Section 14 of the IBC with the theory and practice of International Commercial Arbitration has raised significant questions. While the scope of Section 14 is well-defined in Domestic Arbitrations, its applicability to foreign-seated arbitrations - arbitrations conducted outside India and governed by foreign laws, remains ambiguous.

The issue is whether this moratorium, designed to protect debtors domestically, can or should extend to foreign-seated Arbitrations. This Article examines the scope of Section 14, its implications for International Commercial Arbitration, and proposes reforms to ensure that the IBC can operate effectively even in cross-border jurisdictions.

Moratorium and objective behind moratorium period

Moratorium is not defined under the IBC. Section 14 only lays down the scope and applicability of the moratorium period. Black's Law Dictionary, however, defines a "moratorium" as "a delay in performing an obligation or taking an action legally authorized or simply agreed to be temporary".

The origin of the term 'moratorium' may be traced back to Section 446(1) of the Companies Act, 1956, which stated that no legal action could be initiated against any company after a winding-up order had been made against the corporate debtor or till such time an Official Liquidator had been appointed.

Under the IBC, upon the admission of an application under Sections 7, 9 or 10 of the Code by the National Company Law Tribunal ("NCLT"), a moratorium under Section 14 is imposed by the adjudicating authority. A moratorium under Section 14 specifically, bars -

1. the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of a judgment, decree, or order in any court of law, tribunal, arbitration panel or other authority;
2. transferring, encumbering, alienating, or disposing of by the corporate debtor of any of its assets or any legal right or beneficial interest therein; and
3. any action to foreclose, recover or enforce any security created by the corporate debtor.

The Report of the Bankruptcy Law Reforms Committee states that the purpose of the moratorium is to establish a "calm period" during which the corporate debtor can maximize its value by carrying on with its operations while its assets are being evaluated. Thus, a moratorium is a system in place under Section 14 of the IBC designed to protect a corporate debtor from malafide or prejudicial legal actions or litigation, allowing the debtor some breathing room so as to continue as a going concern.

Effect of moratorium on the arbitration proceedings

The moratorium under Section 14 of the IBC has a significant impact on arbitration proceedings within India. A bare reading of Section 14(1)(a) imposes a moratorium on the commencement of insolvency proceedings, which halts all pending legal actions and prohibits the commencement of new proceedings against the corporate debtor, including arbitration proceedings.

A division bench of the Hon'ble Supreme Court of India, in Alchemist Asset Reconstruction Ltd. v. Hotel Gaudavan (2017 SCC OnLine SC 1362), interpreted Section 14 of the IBC in great detail, stating that any arbitration instituted after the imposition of the moratorium would be non est. This position was further applied by the National Company Law Appellate Tribunal (NCLAT) in KS Oils Ltd. v. State Trade Corporation of India Ltd. (Company Appeal (AT) (Insolvency) No. 284 of 2017), wherein the NCLAT observed that ongoing arbitration proceedings must cease once a moratorium is imposed. This ensures that corporate debtors are shielded from any proceedings that could undermine the integrity of the insolvency process.

However, this stance creates a tension between insolvency law and the principle of arbitration, particularly in cases involving ongoing arbitrations. Despite this, it is well-settled that the moratorium under Section 14(1) extends to arbitrations governed by Part I of the Arbitration and Conciliation Act, 1996.

However, if arbitration proceedings are initiated after the declaration of moratorium domestically, their continuation may hinge on the nature of the claims involved. The proceedings could proceed if the claims are aimed at (a) value maximization of the assets of the corporate debtor, or (b) are distinct from any debt recovery actions against the corporate debtor.

Nevertheless, in an increasingly globalized economy where cross-border transactions and international commercial arbitrations are common, the situation becomes more complex when foreign-seated arbitration is involved, raising the question whether Section 14 moratorium extends to foreign-seated arbitrations.

Scope and Limitations of Indian Moratorium on foreign-seated Arbitrations

Section 1(2) of the IBC states that the jurisdiction of the IBC extends to the territory of India. However, Section 234 introduces an important exception by allowing the Central Government to enter into 'Reciprocal Agreements' with the Government of any country outside India/ Foreign Jurisdiction for the enforcement of the IBC's provisions in other countries.

Essentially, Section 234 of the IBC is the only mechanism through which the Code can extend its reach beyond India's borders. Thus, when we interpret Section 14 in conjunction with these provisions, it suggests that the moratorium imposed under Section 14 could potentially apply to foreign-seated arbitrations, but only if India has entered into a reciprocal agreement with the Government of that country.

Without such an agreement, the scope and applicability of Section 14 remains confined to domestic arbitration only. Simply put, foreign tribunals and courts in the absence of reciprocal agreements may disregard any moratorium imposed under the IBC, allowing creditors to pursue claims against the corporate debtor abroad.

Guidance can be deriving in this regard from the judgment of the Hon'ble Bombay High Court in Ashapura Minechem Ltd. v Armada (Singapore) Pte. Ltd. & Ors. (Contempt Petition No. 89 Of 2015 Arbitration Petition No.1359 Of 2010), which dealt with the now-repealed Section 22 of the Sick Industrial Companies Act, 1985 ("SICA"), which is a similar provision to Section 14 of the IBC.

The bench of the Hon'ble Mr. Justice R.D. Dhanuka held that since the provisions of SICA including Section 22 thereof apply only within the territory of India, the same do not have any application to proceedings outside India. Therefore, it was not necessary for the Board of Industrial and Financial Reconstruction (BIFR) to give prior consent before taking action on foreign arbitral awards.

Applying the same logic and principle, in view of Section 1 of the IBC which extends the said Act to India, it can furthermore be inferred that the moratorium under Section 14 of the IBC would not apply to foreign-seated arbitrations. Of course, the situation would change if reciprocal arrangements with foreign nations, to enforce the IBC as envisaged in Sections 234 and 235 of the IBC, are established.

Presently, India has not entered into any reciprocal agreements under Section 234 with foreign states, and also, no effective measures have been taken to implement any such inter-government agreements. This creates a void wherein Section 14 is rendered inapplicable to foreign-seated arbitrations with awards not having any nexus to Indian law.

The Legal Void: Defeating the Purpose of IBC?

As currently interpreted, Section 14 does not extend to foreign-seated arbitrations unless India has entered into a reciprocal agreement with the country where the arbitration is seated, under Section 234 of the IBC, defeating the core objective of IBC and of Section 14.

In cases like Agrocorp International (P) Ltd. v. National Agro Industries Ltd. (CP(IB) No. 798/MB/C-IV/2019), the Mumbai bench of the Hon'ble NCLT admitted a petition based on an arbitral award passed in the United Kingdom, a reciprocating territory, based on Section 44A of the Code of Civil Procedure (CPC), which lays down that the said award is binding upon the parties since UK is a reciprocating territory (vide notification no. 51 published in the gazette of India on 1st March, 1953) and the same renders the award capable of enforcement in India.

However, in other cases, in the absence of any reciprocal agreements with other jurisdictions, foreign-seated arbitrations may proceed unrestrained, allowing creditors to seize assets abroad. This defeats the very purpose of Section 14 and of the IBC as a whole, creating a disadvantage for domestic creditors, prolonging the insolvency resolution process and jeopardizing asset recovery.

Without the applicability of Section 14 to foreign-seated arbitrations, Indian corporate debtors are vulnerable to enforcement actions abroad, resulting to depletion of their assets outside the country, undermining the goals of moratorium – to preserve the debtor's assets during the pendency of the insolvency process.

Moreover, the lack or absence thereof of reciprocal agreements between India and other jurisdictions leads to a scheme of inconsistent enforcement, where domestic creditors are bound by the moratorium, but foreign creditors in jurisdictions without such agreements can pursue claims unfettered. The inconsistency in treatment between domestic and foreign creditors dilutes the strength of the moratorium under Section 14, leaving Indian corporate debtors vulnerable to asset depletion overseas and complicating the insolvency resolution process.

This gap in the law risks prolonging insolvency proceedings, as international creditors may pursue parallel claims in foreign jurisdictions, ultimately defeating the timely resolution envisioned by the IBC. Additionally, the lack of reciprocal agreements hinders effective cross-border insolvency cooperation, making it more difficult to coordinate across jurisdictions necessary for managing the insolvency of multinational corporations.

Thus, if Indian law does not protect corporate debtors from foreign actions, the value maximization objective and ensuring equitable treatment of all creditors' collapses and the fundamental purpose of the IBC is defeated. This also discourages genuine foreign investors and creditors from doing business with Indian companies, as they may believe that there are greater risks in recovering their investments during insolvency proceedings.

The Way Forward: Harmonizing Insolvency and Foreign-seated Arbitration

To address the challenge of foreign-seated arbitrations bypassing the protections of Section 14, India's legislative and judicial framework must evolve to extend the moratorium's applicability and develop a comprehensive mechanism for cross-border insolvency disputes. Through legislative amendments, India must modernize its legal framework by adopting the UNCITRAL Model Law on Cross-Border Insolvency (as recommended by the Insolvency Law Committee) which facilitates cooperation between jurisdictions in handling multinational insolvencies.

This step would enable mutual recognition of insolvency proceedings, aligning India's insolvency law with global practices. Additionally, the IBC should be amended to explicitly clarify that Section 14's moratorium extends to foreign-seated arbitrations, particularly when Indian assets or interests are at stake. India should also focus on establishing reciprocal agreements with key foreign jurisdictions, as envisaged under Sections 234 and 235 of the IBC, ensuring that foreign courts respect India's moratorium provisions, harmonizing cross-border insolvency practices.

The judiciary plays a pivotal role in this evolution of interpreting the IBC with an international outlook. The courts should adopt a purposive interpretation of Section 14, considering the objectives of protecting debtor assets beyond domestic boundaries.

Furthermore, India must actively participate in international cooperation and dialogue on insolvency and arbitration issues through forums like UNCITRAL to promote cooperation on insolvency matters and work toward developing uniform standards for handling cross-border insolvency and arbitration disputes, thereby reducing the legal inconsistencies that currently plague global corporate insolvency resolution and multinational corporations. Additionally, encouraging International Arbitration institutions to adopt rules that consider the impact of insolvency proceedings can help harmonize the treatment of such cases globally.

First instance of recognition of Indian insolvency proceedings in foreign jurisdiction

A key development in cross-border insolvency was the recognition of Indian insolvency proceedings in the United States ("U.S.") in SBI v. SEL Mfg. Co. Ltd. (CP (IB) No. 114/Chd/Pb/2017), in November, 2019, under Chapter 15 of the U.S. Bankruptcy Code, which is based on the UNCITRAL Model Law on Cross-Border Insolvency. The U.S. court recognized insolvency proceedings initiated in India, before the NCLT, Chandigarh Bench, as a "foreign main proceeding", under Section 1502(4) of the U.S. Bankruptcy Code.

The recognition was granted after the foreign representative established India as the "center of main interests" for SEL Mfg, the debtor company. This recognition helped ensure the maximization of asset value while also protecting the interests of creditors, thus aligning with the overarching objectives of cross-border insolvency frameworks and marking a step forward for cross-border insolvency cooperation.

While this case did not involve arbitration proceedings, the recognition of Indian insolvency proceedings by a foreign court is still a significant step forward. If more nations begin to consistently recognize the insolvency proceedings of other countries, especially in cases involving foreign-seated arbitration, it will pave the way for a more harmonized global insolvency framework.

This harmonization is essential, as it would reconcile the objectives of insolvency law and international arbitration, leading to smoother resolutions in cross-border disputes while protecting creditors and maximizing the value of debtor assets across jurisdictions.

Conclusion
The current framework of the IBC, particularly Section 14, is a robust mechanism for safeguarding corporate debtors during insolvency proceedings. However, it does not adequately address the complexities of cross-border insolvency and foreign-seated arbitrations.

Its limited applicability to foreign-seated arbitrations exposes a significant gap in the legal framework, undermining IBC's goal of maximizing value for creditors and preserving debtor assets. Without reciprocal agreements or legislative clarity, foreign creditors can continue pursuing claims against a corporate debtor, thereby frustrating the very purpose of the moratorium.

To resolve this, India must adopt the UNCITRAL Model Law on Cross-Border Insolvency and forge reciprocal agreements with key foreign jurisdictions to ensure that foreign-seated arbitrations are subject to the protections afforded by the IBC.

Additionally, a clearer legislative framework and purposive judicial interpretation are necessary to prevent exploitation of this legal gap. Harmonizing insolvency and arbitration laws will ensure that Indian corporate debtors are adequately protected, not just within domestic boundaries, but also in the global arena.