Insolvency of Parties and Impact on Arbitration
Section 41 of the Arbitration and Conciliation Act talks about the course to be taken if the parties to an arbitration agreement become insolvent. This section goes hand in hand with provisions of the Insolvency and Bankruptcy Code (IBC). With the ever evolving law and the continuous amendments of the A&C Act as well as the IBC, insolvency situations in arbitration have to be handled with care.
There are a couple of situations to be taken into consideration when discussing the situation of insolvency. The arbitration clause which may be entered into:
- Subsequent to the date of insolvency order:
In this case, the arbitration agreement shall be void. Once the company is declared insolvent, then the arbitration clause cannot have a binding effect on the receiver.
- Subsequent to the commencement of insolvency proceedings, but before passing the insolvency order:
In this situation, if the arbitration clause is to refer future disputes and differences, the clause can be enforceable by or against the receiver if he has chosen to adopt the contract. In this case, no permission of the NCLT would be required and the arbitration matter will proceed between the parties to the arbitration agreement except with the difference that the insolvent company would be replaced by the receiver handling the insolvency.
If the receiver chooses not to adopt the contract that the arbitration clause is a part of, then the party involved in the arbitration can apply to the NCLT for them to convince to go into an arbitration proceeding. The decision shall be sole of the NCLT, having regard to the circumstances, if the dispute should be adjudicated by arbitration. The NCLT will accordingly make an order.
If the arbitration agreement talks about referring existing disputes to arbitration, then the same shall have no effect on the receiver.
- Before the initiation of insolvency proceedings.:
In this situation, if the arbitration agreement is carried out before the insolvency proceedings came into existence; then the resolution depends on the receiver. If the receiver adopts the contract, then the party can enforce the agreement against the receiver.
If the receiver chooses not to adopt the contract, then as mentioned under situation (b) above, the party can apply to the NCLT for making a reference to arbitration.
Role of the receiver:
The provision places immense responsibility on the receiver to decide whether to resort to arbitration, in case of insolvency. It is in the receiver’s hands to choose to adopt the contract or not. If the receiver adopts the contract in which the arbitration clause lies, then it can be enforced against the insolvent whenever a dispute arises.
The receiver would choose to adopt the contract only if it is beneficial for the insolvent company. The receiver has to adopt the contract in its entirety. Thus, the receiver after adopting a contract cannot say that only a certain part of the contract and not the dispute resolution clause has been adopted. The contract has to be adopted fully.
This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being.