22 May 2020 8:42 AM GMT
Section 29A of the Arbitration and Conciliation Act, 1996 ('the Arbitration Act') provides an outer limit of 18 months to complete the arbitral proceedings, with the exception that in cases where sufficient cause is made out, the court may grant extension beyond the period of 18 months. However, the prohibition upon institution of and/or continuation of pending proceedings in terms of...
Section 29A of the Arbitration and Conciliation Act, 1996 ('the Arbitration Act') provides an outer limit of 18 months to complete the arbitral proceedings, with the exception that in cases where sufficient cause is made out, the court may grant extension beyond the period of 18 months. However, the prohibition upon institution of and/or continuation of pending proceedings in terms of section 14 and 101 of the Insolvency and Bankruptcy Code, 2016 ('IBC'), has given rise to an interesting question of law regarding the effect of the moratorium under the IBC on the timelines stipulated under the Arbitration Act. This article explores the interface between these two provisions in two broad scenarios that have beendiscussed below.
Though during the moratorium there is a prohibition from instituting and/or continuing any legal proceeding against the concerned entity,however recently, judicial interpretation has carved out certain exceptions to this norm - these include, writ petitions filed under Articles 32 and 226 of the Constitution of India, proceedings which are to the benefit of the corporate debtorand proceedings under the Negotiable Instruments Act, 1881amongst others. Accordingly, there are two broad scenarios –firstly, proceedings to which the provisions of moratorium squarely applies and secondly, proceedings that stand exempted.
Scenario 1: Proceedings which are squarely covered under the moratorium
The expression "moratorium" has not been defined under the IBC but the language indicates that the expression inter alia means prohibition on institution of new proceedings and/or continuation of pending proceedings. However, this does not answer the vital issue viz. the effect of moratorium on the time limit imposed under section 29A of the Arbitration Act. Therefore, before proceeding further, it is necessary to understand the meaning and scope of the expression "moratorium".
The comprehensive meaning of the word "moratorium", according to Merriam Webster dictionary, includes:
a. A legally authorized period of delay in the performance of a legal obligation or the payment of a debt;
In Beck Development Co. v. Southern Pacific Transportation Co., the Court of Appeal of California held that moratorium is by its nature an interim or temporary measure which contemplates future resolution or performance of issues and holding matters in temporary abeyance. This definition has been widely accepted and applied across jurisdictions.
Therefore, from the authorities cited above, meaning of the term "moratorium" can be synthesized to mean the suspension of an activity for an authorised period of time with the expectation or purpose of resumption.Therefore, in the absence of any legislative intent to the contrary, it would be reasonable, and purposive, to understand the concept of moratorium as a situation where the legal proceedings in question are put under suspension, with the expectation of resumption upon the lifting of the moratorium.
However, since neither the IBC nor the Arbitration Act expressly deal with this issue, there is an imminent need of judicial clarification. A simple resolution to this conundrum may lie in giving effect to the purposive meaning of the word "moratorium" viz. that when such a moratorium is declared, the arbitral proceedings in question would stand suspended and thereby the time under section 29A would stand paused. Once the proceedings resume upon lifting of the moratorium, time can start running from where it stopped. This would be the most obvious course to follow in such a situation. For this purpose, the court may rely upon provisions of section 60(6) of the IBC, which permits the exclusion of time spent in moratorium from the total time period available under the law of limitation and extend the same principle to section 29A of the Arbitration Act.
The aforesaid approach would surely be in consonance with the renewed vow of the Arbitration Act to ensure timely resolution, cost effectiveness and minimal court intervention. To illustrate, a situation where after the time limit under section 29A has just commenced, a moratorium is declared in respect of the defending party. Since under IBC, ideally the resolution should conclude within 330 days, it is natural that by the time the resolution process concludes, the first time limit of 12 months would stand expired. As a result, the only option available to the parties would be to mutually extend the time limit by a maximum of 6 months in terms of section 29A(3) of the Arbitration Act. Since this extension is based on mutual consent, it cannot be ruled out that in some cases, the opposite party may not readily consent. This would then require the intervention of the court under section 29A(4) and (5). Even otherwise, assuming that time is mutually extended, it is extremely difficult to conclude an arbitral proceeding within a span of just 6 months! Naturally, in such a case, the parties would have to approach the court to seek time extension. Surely, this would result in further delays and escalation in costs.
Similarly, if the moratorium is declared prior to the parties completing pleadings in terms of section 23(4), it would mean that the proceedings stand suspended at that stage and by operation of law, the parties would be prevented from filing their respective pleadings. The time limit of 6 months to complete pleadings would also stand suspended in view of the moratorium and thus, once it is impossible for the parties to achieve the milestone under section 23(4), the time limit under section 29A would not begin. Further, the consequences of default as set out in section 25 of the Arbitration Act would not follow as the failure to file the pleadings would not be without sufficient cause.
As has been observed recently, parties are seeking recourse by applying to the court for extending the time limit. This exercise can be completely avoided if the aforesaid approach is adopted.
Scenario 2: Proceedings which are excluded from the ambit of the moratorium
Though proceedings of certain nature stand exempted from the prohibition imposed under the moratorium, nevertheless, corporate debtor often find themselves in situations where they are unable to proceed in the matter either due to shortage of funds or other logistical compulsions during the resolution period. These include the inability to pay the arbitrators' fee, legal costs, unavailability of competent witnesses, etc., which invariably leads to such a party seeking stay or suspension of the arbitral proceedings till such time that the resolution process is underway. In this context, what needs to be looked at is whether there is a mechanism within the Arbitration Act that empowers the arbitral tribunal to stay or suspend the proceedings, thereby pausing the time under section 29A or whether the arbitral tribunal can take recourse to any provision of the IBC in this regard?
This is a novel predicament, which may require creative and purposive judicial intervention. While there is no express provision under the Arbitration Act which empowers the arbitral tribunal to stay or suspend the proceedings, it may however be useful to resort to the amended provisions of section 17 of the Arbitration Act, which under sub-section 1(ii)(e) empowers the arbitral tribunal to pass any interim measure of protection that may appear to be just and convenient in the circumstances. Distressed entities may seek recourse by filing an appropriate application under section 17(1)(ii)(e) of the Arbitration Act and seek stay or suspension of the arbitral proceedings till such time that the resolution process is pending. In such a situation, the principle suggested in scenario 1 may be adopted, which would result in pausing the time under section 29A. Such an approach would surely avoid unnecessary complications once the moratorium is lifted. It is settled that the power to stay or suspend arbitral proceedings is to be used sparingly, however, where the insolvency process renders a party unable to proceed, it would be just, fair and convenient to all concerned that the arbitral proceedings be stayed or suspended. Therefore, exercising this power vested under section 17, the arbitral tribunal may stay or suspend the proceedings till such time the moratorium is in effect. This would enable the parties to conclude the proceedings within the stipulated time under section 29A, without having to approach the court to seek extension of time under section 29A(4) and (5) of the Arbitration Act.
To conclude, the issue discussed in this article is relevant and imminent but yet untouched. This article offers a plausible way out to deal with this dilemma. By adopting the approach that has been suggested by above, three very crucial aspects – i.e. timely resolution of matters, cost efficacy for parties and reducing pendency in courts – can be adequately catered to.
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