In this case the Hon’ble Bombay High Court has addressed the question that whether the moratorium under section 96 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) is in respect of debt or debtor and whether in view of the commencement of the moratorium can arbitration proceedings be stayed against some of the parties and against other parties?
The factual matrix is that the Petitioner had sanctioned a loan to one Sterling Motor Company (“SMC”). The loan documents were executed by Mr. Traun Kapoor in the capacity of the proprietor and has also stood as guarantor for the repayment of the said loan. Also, Mrs. Pavan Kapoor, Mr. B. L. Passi and Rameshwar Sweets and Namkeens Private Limited stood as guarantors. Thereafter, the Petitioner initiated arbitration proceedings. During the pendency of the said arbitration proceedings, Volkswagen Finance Private Limited filed a Company Petition against SMC and Mr. Tarun Kapoor. In view thereof, Mr. Tarun Kapoor filed an application in the Hon’ble National Company Law Tribunal (“NCLT”) thereby contending that in view of section 96 of the IBC, a moratorium had come into effect due to the initiation of the aforesaid insolvency proceedings by the said Volkswagen Finance Private Limited on account of which the arbitration proceedings were required to be kept in abeyance. In the meantime, Mr. B.L. Passi passed away and his legal heirs (the present Respondents) were impleaded as a party to the arbitration proceedings.
Vide order dated 11th January 2021, the Ld. Arbitrator accorded the benefit of the moratorium to Mr. Tarun Kapoor and Mrs. Pavan Kapoor and the proceedings against them were directed to remain in abeyance. However, the arbitration proceedings against Respondent Nos. 4 and 5 were directed to continue. Also, the Ld. Arbitrator restrained the present Respondents from disposing of their assets. Thereafter, Mr. Tarun Kapoor filed an application in the arbitration proceedings seeking adjournment of the arbitration proceedings, sine die on account of the proceedings against SMC kept in abeyance (by order dated 11th January 2021) which came to be dismissed by order dated 16th December 2021 as a result of which the proceedings continued. Subsequently, vide order dated 7th October 2022, the Ld. Arbitrator directed the arbitration proceedings to remain in abeyance as long as the moratorium is in force. Also, the Ld. Arbitrator dismissed the application filed by the Petitioner seeking vacation of the order dated 7th October 2022.
The Hon’ble Court held that it could invoke jurisdiction under Article 226 only if the arbitral tribunal acted perversely or committed patent illegality. As regards, the issue of separating and continuing arbitration proceedings, the Hon’ble Court held that Section 3(11) of the IBC defines 'debt' as a liability from any person, including financial and operational debts, without distinguishing between principal borrowers and guarantors. Similarly, the protection under Section 96 is in respect of entire debt, regardless of who owes it. Thus, the moratorium covers “all debts”, including those owed by guarantors. The court further stated that when the Hon’ble NCLT imposed moratorium under Section 96 for the principal borrower and the guarantor, it covered the entire debt without any distinction. The debt in arbitration includes liabilities of both the principal borrower and guarantors, and it cannot be divided to stay proceedings against one party while continuing against others. Also, there is no provision in the Arbitration & Conciliation Act, 1996 for splitting up arbitration proceedings; and the same has to be decided in their entirety against all the parties and the entitlement of the Claimant and the liabilities of the respective Respondents shall be determined on the basis of the evidence.
Thus, the Hon’ble Court clarified that the moratorium applies to the entire debt, not allowing selective continuation of arbitration proceedings.