20 June 2024 Arbitration Law >> Business & Commercial Law  

A finance company is challenging an arbitrator's decision to put arbitration proceedings on hold due to a moratorium granted under the Insolvency and Bankruptcy Code (IBC) to a co-guarantor on a loan.

The Case:

The case involves a loan granted by a finance company to a company called Sterling Motor Company (SMC). The loan was secured by personal guarantees from the company's proprietor, his spouse, another individual, and a separate company. Following a default on the loan, the finance company initiated arbitration proceedings against all guarantors except one that settled the debt.

During the arbitration, two of the guarantors – the proprietor and his spouse – benefited from a moratorium under the IBC due to insolvency proceedings against their primary company (SMC). As a result, the arbitrator placed the arbitration on hold for these two individuals but allowed it to proceed against the legal heirs of the deceased remaining guarantor.

The finance company argues this decision is flawed. They believe the IBC moratorium, meant to protect debtors during insolvency proceedings, should only apply to the specific debt associated with the two individuals who received it, not impact the claims against the other guarantors.

Key Points of Contention:

• Can the court intervene in an arbitration process? Typically, courts avoid interfering in arbitration unless the arbitrator's order is demonstrably illegal or exceeds their jurisdiction.
• Does the IBC moratorium extend to co-guarantors? The legal interpretation hinges on whether the moratorium applies to the "debt" itself or the specific "debtor."

Precedents to Consider:

Previous court cases offer insights into how this situation might be resolved:

• Courts are generally hesitant to intervene in arbitration (SBP & Co. v. Patel Engineering Ltd.) but may do so in rare instances of clear legal errors (Deep Industries Ltd. v. ONGC).
• The IBC moratorium protects against legal actions for recovery of "debt" and is broader than protection offered under previous bankruptcy laws (State Bank of India v. V. Ramkrishnan & Anr.).
• However, the current wording of the IBC may not automatically extend the moratorium to all co-guarantors (Axis Trustee Services Ltd. v. Brij Bhushan Singhal & Anr.).

Conclusion:

The court will first determine if it has the authority to review the arbitrator's decision. If they decide to proceed, they will then analyze whether the guarantors qualify for the protection of the IBC moratorium based on the interpretation of "debt" within the code.

  Arbitration and Conciliation Act, 1996    INSOLVENCY AND BANKRUPTCY CODE, 2016