Arbitrability of Insolvency Disputes – Harmonising the Conflicting Theories of Harm

[By Mayannk Sharma]

The author is a student of Jindal Global Law School, Sonipat.



The objective of commencing an insolvency proceeding against a Corporate Debtor is to collate all pending claims against the Corporate Debtor, and institute in rem proceedings against the same. Arbitration on the other hand intends to institute in personam proceedings between the parties. Similarly, Section 14 of the Insolvency and Bankruptcy Code, 2016 (hereinafter “IBC”) imposes a moratorium against all pending proceedings against the Corporate Debtor, which includes pending arbitration proceedings as well. This is further complicated by Section 238 (non-obstante clause) of the IBC which overrides any other legislation the IBC comes in conflict with (including the Arbitration Act). Against the backdrop of these competing approaches to dispute settlement, two schools of thought emerge. Should arbitrable disputes continue alongside the Corporate Insolvency Resolution Process (hereinafter “CIRP”) with a view to harmonise proceedings under both the laws; or should arbitration proceedings cease with immediate effect upon the commencement of the CIRP giving absolute authority to insolvency proceedings. I answer this question by relying upon the core and non-core distinction of disputes as followed in the American insolvency regime and how a similar approach is ultimately beneficial for parties to an arbitration.

Delineating the emerging pro-arbitration trend in insolvency disputes

Over the past few years, the National Company Law Tribunal (“NCLT”) and the National Company Law Appellate Tribunal (“NCLAT”) have been increasingly trying to harmonise insolvency and arbitration proceedings. The earliest known position on this conundrum was laid down in the landmark Booz Allen case, according to which insolvency matters were absolutely non-arbitrable. About two decades later, in Indus Biotech Private Limited v. Kotak India Venture there was a material shift in the Court’s practices towards arbitrability of insolvency disputes. Essentially, the Court held that the validity of a Section 8 application under the Arbitration Act would not stand dismissed merely upon filing an application for the commencement of the CIRP. In the author’s opinion, the Apex Court theorised an ex-ante and ex-post test towards determining the status of a Section 8 Application under the Arbitration Act where, if the Adjudicating Authority is of the view that there does not exist a default on behalf of the (possible) Corporate Debtor then the pending Arbitration Application does not cease to exist since the dispute remains in personam. Whereas, upon admission, the arbitration proceedings are halted since the dispute now becomes in rem and hence subject to the moratorium period.

Similarly, in March 2022, the Apex Court went a step further to harmonise the conflicting jurisprudence by allowing contingent claims[i] to be pursued in an arbitral tribunal pursuant to the completion of the CIRP process. Contingent claims have been habitually written off by the Resolution Professional with a normative value of INR 1/- citing their “inability to estimate a contingent claim’s value” which is a clear abuse of the clean slate theory. By juxtaposing earlier developments, it becomes apparent that Courts have, of late, been deviating from this settled practice. Similarly, the Apex Court in Fourth Dimension allowed the aggrieved creditors to pursue operational dues worth Rs 2400 Crores before an arbitral tribunal which were earlier written off as ‘nil’ by the Resolution Professional during the CIRP in furtherance of its previous (mal)practices. This is a positive development for both the fields of Law since it would now be permissible for contingent creditors to pursue their claims before an arbitral tribunal despite the conclusion of the CIRP process, which were earlier written off by the Resolution Professional to the detriment of such creditors.

Similarly, with the newfound clarity on foreign-seated arbitrations in India against the backdrop of PASL Wind Solutions Private Ltd. v. GE Power Conversion India Pvt. Ltd, the Supreme Court has opened avenues for creative solutions to arbitrate insolvency disputes. At present, the IBC does not envisage a cross-border application. It essentially means that the Code’s ability to centralise disputes revolving around foreign creditors or debtors is severely truncated since core concepts such as the moratorium period would no longer apply to such a foreign seated entity (or entities). Prior to PASL Wind Solutions, the only remedy that parties to a foreign seated Arbitration had in view of enforcing an arbitral award was to submit their claim to the Resolution Professional. However, IBC proceedings did not, at the time, consider such an award as valid proof of a ‘debt’, which, as per Indus Biotech is the sine qua non of initiating the CIRP proceedings and paramount for determining whether a dispute exists in rem or in personam. To that effect, with the Supreme Court’s pronouncement in PASL Wind Solutions, domestic parties have the liberty to choose a foreign seat of arbitration and pursue their claims accordingly. From a cursory understanding, it is evident that this does not ipso facto render such a ‘foreign award’ as invalid, rather, basis the recognition and enforcement of the award upon the two-fold test laid down in Section 48 of the Arbitration Act.

Harmonising Arbitration and Insolvency Disputes – An International Viewpoint

The United States has been widely acclaimed as a global arbitration and restructuring hub. The substance of practices adopted by the United States vest in segregating disputes that are exclusive to either insolvency or arbitration proceedings and letting the appropriate judicial fora take its course. For example, it would be apt to look at the practice of distinguishing between ‘core’ and ‘non-core’ proceedings that has been adopted by courts in the United States which is a much more refined approach towards arbitrability of insolvency matters. The American jurisprudence on the subject matter (particularly the U.S. Bankruptcy Code) proposes a non-exhaustive list of ‘core’ and ‘non-core’ proceedings, where insolvency courts would have jurisdiction over the former and arbitration would govern the proceedings in the latter case. To put it simply, the fundamental distinction between ‘core’ and ‘non-core’ proceedings is the degree of relativity that a claim enjoys vis-à-vis the bankruptcy filing. It can be said that a non-core practice is essentially one that enjoys a ‘broad’ nexus arising out of the debtor’s bankruptcy which could be settled by a non-bankruptcy forum or an arbitral tribunal to that effect. For example, claims of a corporate debtor against a third party who is not privy to the insolvency proceedings would ideally constitute a valid non-core proceeding and be subject to arbitration in India as per the same concept. A similar parallel can be seen with the invocation of a bank guarantee within the Indian context where claims of a Corporate Debtor against whom the CIRP is ongoing, can parallelly pursue such a claim against a third-party who is not privy to the insolvency proceedings.

The pertinent question then arises— Is it commercially viable and if so, then how can we import the concept to the Indian environment, that is, with certain modifications and restrictions? In response to this question, the author submits that the concept of ‘core’ vs ‘non-core’ proceedings already exists, albeit along the ridges of the Indian insolvency regime. As argued above, it is possible for the Adjudicating Authority of the entire CIRP process to single out contractual disputes within the framework of contingent liabilities and mandate the Resolution Professional to value the distressed company by factoring in contingent liabilities which could then be pursued parallelly before an arbitral tribunal. This is an instance of a non-core proceeding that would, as per the American approach fall outside the close knitted purview of insolvency proceedings and thus become arbitrable.

Theoretical underpinnings aside, even the Supreme Court (or rather an interpretation of the judgement) has echoed the sentiment behind distinguishing core and non-core proceedings in an insolvency proceeding. In Gujarat Urja Vikas Nigam Limited v. Amit Gupta & Ors, the Corporate Debtor entered into a Power Purchase Agreement (“PPA”) with the Appellant shortly before undergoing insolvency proceedings. The Appellant thereafter sought to terminate the PPA in view of the insolvency proceedings against the Corporate Debtor which would have been tantamount to the Corporate Debtor’s commercial death since the PPA was the only agreement that was keeping the Corporate Debtor afloat. Challenging the PPA’s termination, the Respondent appealed before the NCLT which overturned the Appellant’s decision to terminate the PPA. The NCLT’s decision was later upheld by the Supreme Court as well, albeit with a note of caution to the NCLTs and the NCLAT in its reasoning directing them to not usurp the legitimate jurisdiction of alternate adjudicatory forums such as arbitral tribunals, courts matters unrelated to the insolvency of a corporate debtor.

It is plainly evident that this observation of the Supreme Court has far-reaching consequences in terms of arbitrability of insolvency disputes. This is because the Supreme Court, in effect (or rather inadvertently) laid down a litmus test to identify matters that can be considered ‘core’ and ‘non-core’ for the purposes of determining whether a transaction is amenable to arbitration, in line with the American approach. Essentially, the litmus test to determine whether a matter is ‘core’, or ‘non-core’ is analogous to preserving the Corporate Debtor’s value or rather towards continuing its operations as a ‘going concern’. If the transaction is likely to push the Corporate Debtor into liquidation (or its corporate death), then the same shall be governed by insolvency proceedings. The threshold for achieving the same would obviously be high. Similarly, unrelated transactions that do not have the likelihood of pushing the Corporate Debtor into liquidation or reducing its value can be labelled as ‘non-core’ proceedings and thus arbitrable. Of course, the jurisprudence on this issue is novel and likely to create diverging judicial opinions as to matters that are ‘likely’ to cause liquidation of the Corporate Debtor’s and hence a ‘core’ or ‘non-core’ proceedings. Nevertheless, it is appreciable to see Indian courts adopting a pro-arbitration approach towards such polar opposite statutory objectives of the IBC and the Arbitration Act viz. centralisation and party autonomy.


The objective of this paper has been to delineate the tendency of Indian courts to embrace a pro-arbitration sentiment that is increasingly pervading isolated insolvency proceedings. Now, as India climbs up the ‘Ease of Doing Business Index’, it becomes increasingly relevant for the legislature and the judicial authorities to align their existing practices in line with the global best practices surrounding the arbitrability of insolvency disputes. The American approach of invoking arbitration during insolvency proceedings for ‘non-core’ matters offers a way out of the regulatory predicament that the IBC and the Arbitration Act find themselves in. Of course, this is still a nascent stage to predict the success of adopting such an approach because of the adjudicatory dynamics that operate in developed nations such as the United States as opposed to India, which still suffers from prolonged litigation and non-adherence to statutory timelines. Nonetheless, the ‘core’ vs ‘non-core’ distinction has been a time-tested concept in American insolvency and arbitration jurisprudence which is why a similar application is likely to benefit contracting parties situated in India and even those who are situated abroad but whose assets are subject to the IBC.


[i] Claims pending adjudication prior to the commencement of the CIRP Process.


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