Enforceability of Foreign Arbitral Awards through Section 7 of IBC
[Chaitanya is a student at Jindal Global Law School.]
In the recent case of Dena Bank (now Bank of Baroda) v. C Shivakumar Reddy, the Supreme Court overturned the position of law followed and settled by the National Company Law Appellate Tribunal (NCLAT) on the enforceability of a debt by a decree-holder through Section 7 of the Insolvency and Bankruptcy Code 2016 (IBC). As such, petitions under Section 7 of the IBC were held to be maintainable if instituted on the basis of a recovery certificate or decree.
The NCLAT in the cases of Sushil Ansal v. Ashok Tripathi and Digamber Bhondwe v. JM Financial Asset Reconstruction Company Limited, had decided that a decree-holder would not come under the purview of a financial creditor as under Part II of the IBC. The reasoning for the same was that the definition of ‘creditor’ under Section 3(10) of the IBC dealt with Part I, whereas insolvency resolution is dealt with by Part II of the IBC, which has its own set of definitions under Section 5. The Tribunal has further reasoned that an “amount claimed under the decree is an adjudicated amount and not a debt disbursed against the consideration for the time value of money.” Therefore, the amount claimed under the decree cannot be understood as a ‘financial debt’ under Section 5(8) of the IBC. Even in Akram Khan v. Bank of India Limited, the NCLAT set aside a Section 7 petition that sought to execute a decree passed by the Debts Recovery Tribunal and held that for such instances recourse to Section 65 of the IBC was available. There was a momentary divergence from the viewpoint, in the case of Ugro Capital Limited v. Bangalore Dehydration and Drying Equipment Company Private Limited, where the NCLAT interpreted a decree-holder as a ‘creditor’ under Section 5(10) of the IBC and allowed him to proceed with his Section 7 petition.
Position of the Supreme Court
The settled position thus being that hold that a decree cannot be executed via a Section 7 IBC proceeding, the apex court diverted from it, as mentioned above, to finally settle this position by holding that a recovery certificate gave the financial creditor-bank a fresh cause of action to institute proceedings under Section 7 of the IBC. This would be of great relief to such award creditors as financial creditors enjoy greater participation in the preparation of a resolution plan. The court also extended this provision to include arbitral awards, which result in the recognition / identification of a financial debt.
While this judgment enhances the means of recovery for a decree or award-holder, it goes against the grain of the uniform line of jurisprudence of the courts on the nature of insolvency proceedings. The dominant view of the Supreme Court and the NCLAT has been that the IBC cannot and should not be turned into a debt recovery proceedings. This view of the Supreme Court as captured in Mobilox Innovations v. Kirusa Software Private Limited and K Kishan v. Vijay Nirman Private Limited, was also followed by the NCLAT in the latest case of Yash Nachrani v. Pardesi Construction Private Limited. However, the Supreme Court impliedly explained their departure from this line of jurisprudence in Dena Bank v. C Shivakumar Reddy itself, by opining that the IBC was a beneficial legislation for the equal treatment of all creditors, protection of livelihoods of employees as also the revival of the corporate debtor. Keeping in mind such an object of the IBC, relegating creditors to seek the remedy of coercive, adversarial litigation would be more detrimental to the interests of the corporate debtor and its creditors, as it would deplete its resources, making such prolonged litigation economically unviable. Therefore, a liberal and purposive construction of the IBC would allow the court to garner the intent of the legislature, which would include the recovery of a debt through Section 7 IBC, in the event the creditor holds a final decree or award.
Approaches of the NCLT: Enforceability of a Foreign Award under IBC
The question then arises as to what the approach of the court or tribunal be when a foreign arbitral award is sought to be enforced in India through a Section 7 IBC petition? For a party seeking enforcement of their foreign award, they will have to first comply with Part II of the Arbitration and Conciliation Act 1996 (Arbitration Act). This process entails of two parts. First, the award holder will have to obtain an order of the court to the effect that such an award is enforceable in India, which will result in the award being equivalent to a court decree. Second, the award, which has now been equated with a court decree, can be executed under the Civil Procedure Code 1908 (CPC).
It becomes important to answer the above stated question because the problem of enforcing a foreign arbitral award through a Section 7 IBC proceeding came up before two benches of the NCLT, where both tribunals took differing approaches. NCLT-Mumbai, in Agrocorp International (P) Limited. v National Steel and Agro Industries Limited (Agrocorp), seemingly rejected the view that a foreign award as under the Arbitration Act has to be recognised before insolvency proceedings can be commenced. Instead, it sought to compare such awards to a foreign decree as under Section 44A of the CPC, whereby foreign court decrees can be enforced in India. The Tribunal held that since the award came from a ‘reciprocating territory’, it could be executed, and by extension could be basis of a Section 7 IBC proceeding. This approach, however runs into two problems. First, it ignores and dilutes the provisions of the Arbitration Act, which require a foreign arbitral award to be recognised by an Indian court to make it enforceable; and second, it ignores that even a foreign decree is to be tested on the anvil of Section 13 of the CPC, simply because the decree is from a reciprocating territory, does not ipso facto make it enforceable in India.
In light of this ruling, it is important to discuss the approach of NCLT-Hyderabad in Adityaa Energy Resource Private Limited v. Simhapuri Energy Limited [2019 SCC OnLine NCLT 32473] (Adityaa Energy Resource) in determining the enforceability of a foreign arbitral award. This ruling came after Agrocorp, yet it did not rely on the same. While the NCLT rejected the application of the creditor seeking to enforce the foreign arbitral award, it did so by highlighting that the creditor ought to have made the award enforceable as stipulated in Part II of the Arbitration Act.
Thus, on a prima facie reading, it may be evident that the approach of NCLT-Hyderabad is the correct one. This claim is buttressed by two important rulings. First, by the NCLAT in Usha Holding LLC v. Francorp Advisors (Private) Limited, where it was decided that an Adjudicating Authority cannot determine the legality or validity of a foreign decree that creates a debt. The Agrocorp decision is a departure from this approach. Second, and more importantly, the decision in Adityaa Energy Resource, is in line with the apex court’s decision in Government of India v. Vedanta Limited, where the court held that a foreign arbitral award by itself is not a decree enforceable in India, it must pass the phase of enforceability as prescribed in Part II of the Arbitration Act.
This analysis, therefore, demonstrates that a foreign arbitral award can be enforced by a financial creditor in India under Section 7 of the IBC. However, such a financial creditor needs to be vary that they do not fall foul of Section 65 of the IBC, in a bid to enforce their debt. In case, the creditor commences insolvency proceedings, only for the purpose of reclaiming their debt, and for resolution of insolvency or liquidation, then they can be subject to the penalty outline in Section 65. Thus, such a creditor enforcing a foreign award must only seek a legitimate resolution of their debt, when the corporate debtor is unable to meet its liability. As a result, the creditor gets access to another remedy to recover the sum awarded, only if their award is recognised by an Indian court before their Section 7 IBC petition.