Gagan Anand
Managing Partner. Legacy Law Offices, India
anand@legacylawoffices.com

Foreign arbitral awards are central to international commercial dispute resolution. Their value lies not only in adjudicatory finality but also in the predictability of enforcement. India, as a signatory to the New York Convention, has, over time, developed a largely pro-foreign award enforcement jurisprudence under Part II of the Arbitration and Conciliation Act 1996 (the ‘Arbitration Act’). Indian courts have progressively narrowed the scope of judicial interference at the enforcement stage and have consistently reiterated that enforcement proceedings are not an occasion to revisit the merits of a foreign award.

Parallel to this evolution, the Insolvency and Bankruptcy Code 2016 (IBC), has introduced a comprehensive statutory framework for addressing corporate financial distress. The IBC is premised on collective resolution rather than individual recovery. Upon commencement of insolvency proceedings, enforcement actions against the corporate debtor are stayed and creditor claims are required to be addressed within a structured, time-bound process.

The interaction between these two regimes has been a recurring conundrum in the Indian legal jurisprudence, with decisions like that pronounced in the case of P Mohanraj v Shah Bros Ispat (P) Ltd^[1] making endeavours to provide some clarity.

The recent case of Kalyani Transco v Bhushan Power & Steel Ltd,^[2] was one such instance where the Court was faced with a challenge to a resolution plan, within which one of the objections filed by the parties was the existence of a foreign arbitral award against the corporate debtor.

The pre-existing legal position

Foreign arbitral awards are enforced in India under Part II of the Arbitration Act. Once recognised, such awards are binding and enforceable, subject only to the limited grounds for refusal set out in section 48. The Honorable Supreme Court has repeatedly emphasised that courts shall not revisit the merits of the dispute or re-examine factual or legal findings of the arbitral tribunal during enforcement proceedings.

The commencement of corporate insolvency resolution proceedings under the IBC materially alters the enforcement landscape. A statutory moratorium comes into effect, staying individual proceedings against the corporate debtor, including execution actions based on decrees and arbitral awards. Courts addressing this overlap prior to the Kalyani Transco case consistently drew a distinction between the existence of a claim and its satisfaction. Recognition of a foreign arbitral award establishes liability. Recovery of the awarded amount, however, becomes subject to the collective insolvency framework.

Section 238 of the IBC accords primacy to its provisions over inconsistent laws. In the case of Ghanshyam Mishra and Sons Pvt Ltd v Edelweiss Asset Reconstruction Co Ltd,^[3] the Honorable Supreme Court held that claims not dealt with by an approved resolution plan stand extinguished, irrespective of their source, once the same is approved. This principle applies across the spectrum of claims, including those arising from adjudicatory processes.

At the same time, arbitration jurisprudence has continued to reinforce enforceability. In the case of Vijay Karia v Prysmian Cavi e Sistemi SRL,^[4] the Court reaffirmed India’s pro-enforcement stance and underscored the narrow scope of interference under section 48. However, it is pertinent to mention that the judgment in the Vijay Karia case did not deal with the interplay between foreign award enforcement and insolvency proceedings.

As a result, while the broad contours of the interaction were understood, there was a dire need for a specific precedent which addressed the treatment of foreign arbitral awards once insolvency proceedings were to commence.

The decisions of the Kalyani case

The decision in the Kalyani Transco case arose from long-running insolvency proceedings and primarily concerned compliance with the statutory requirements of the IBC and the finality of the resolution process.

While the decision has prompted discussion on the interaction between foreign arbitral awards and insolvency proceedings, it is important to state the position with precision. While the case does not establish an exhaustive rule governing the priority or treatment of foreign arbitral award claims within insolvency proceedings, it, however, reinforces the primacy of the insolvency framework once proceedings are initiated. The judgment further affirms that claims against a corporate debtor, irrespective of their origin, must be addressed within the statutory process prescribed under the IBC. To that extent, the decision aligns with established insolvency jurisprudence rather than introducing a new arbitration-specific principle.

Concerns of enforceability

The intersection of foreign arbitral awards and insolvency proceedings has nonetheless generated concern among award holders. Recognition establishes liability, yet recovery becomes uncertain once insolvency proceedings commence. From a commercial perspective, this may appear to diminish the practical value of arbitral finality.

This concern, however, often reflects an interplay between enforceability with recoverability. Even though insolvency proceedings do not nullify the award or extinguish liability by themselves, they regulate the manner and the timing of recovery through a collective process.

It may also be essential to mention that the initiation of insolvency proceedings often results in the loss of managerial control, restrictions on commercial autonomy and significant reputational consequences. Insolvency is therefore a consequence of financial distress, not a strategic mechanism to avoid arbitral liability.

In such a case, allowing foreign award holders to bypass the insolvency process and pursue individual recovery would undermine the foundational principles of the IBC and disrupt the equilibrium between creditors. Such an approach may be inconsistent with international insolvency practice, where statutory moratoria routinely channel all creditor claims, including those arising from arbitral awards, into collective proceedings.

Coherence between arbitration and insolvency

The evolving jurisprudence reflects an attempt to maintain coherence between two distinct statutory regimes. While the Arbitration Act prioritises finality and certainty in adjudication, the IBC, on the other hand, prioritises collective resolution and equitable distribution.

Indian courts have sought to ensure that these objectives operate simultaneously. Recognition and enforceability of foreign arbitral awards remain governed by Part II of the Arbitration and Conciliation Act. Once insolvency proceedings commence, however, recovery is necessarily subject to the statutory framework of the IBC.

The decision of the Supreme Court in the Kalyani Transco case underscores the limits of individual enforcement in the face of insolvency, while leaving the legal status of foreign arbitral awards as being valid and binding determinations.

Conclusion

It should be noted that even after Kalyani, India’s pro-enforcement approach to foreign arbitral awards remains firm and the IBC continues to govern recovery and distribution once insolvency proceedings commence.

While Arbitration determines liability with finality, insolvency governs recovery when financial distress intervenes. The interaction between the two is not a legal anomaly, but a consequence of the collective logic that underpins modern insolvency regimes.

However, as the law develops, additional clarity may be required. Until then, the integrity of both arbitration and insolvency law may be sustained in coherence to one another.