IBC and Arbitration: Arbitrability, Moratorium and Awards

Many commercial contracts that end in insolvency contain arbitration clauses. A debtor facing an insolvency application may try to send the dispute to arbitration; a creditor with an award may try to enforce it during the moratorium. The Supreme Court has worked out how the two regimes fit together: insolvency, once admitted, is a collective proceeding that arbitration cannot touch, but before admission a genuine arbitral dispute can still matter. This note explains the rules.

1. Why Insolvency Is Not Arbitrable

• Vidya Drolia v Durga Trading Corporation, 2020. The Supreme Court held that disputes relating to actions in rem, which affect third parties and require centralised adjudication, are not arbitrable; insolvency and winding up proceedings are classic examples.
• Reason. An insolvency process binds all creditors and determines their rights against a common pool; a private tribunal chosen by two parties cannot do that.
• Consequence. An arbitral tribunal cannot admit a company into insolvency, approve a plan or order liquidation, and an arbitration clause cannot oust the NCLT's jurisdiction under the Code.

Figure 1: Key principles of the interface

2. Section 7 and Section 8: Indus Biotech, 2021

Figure 2: A section 8 application against a section 7 proceeding

• Facts. A financial creditor filed a section 7 application against Indus Biotech, which applied under section 8 of the Arbitration Act to refer the dispute about the debt to arbitration.
• Holding. On 26 March 2021, a three-judge bench held that the proceedings become in rem only on admission; if a section 7 application has been admitted, a section 8 application is not maintainable.
• Procedure. Where both are pending, the NCLT must first decide the section 7 application, examining whether there is a default; if it finds a default and admits, the section 8 application fails; if not, the application is rejected and the parties may arbitrate.
• Result. On the facts, the NCLT had found no default, so the Supreme Court upheld the reference to arbitration and constituted the tribunal.

3. Arbitration as a Pre-Existing Dispute

Figure 3: Before and after admission

• Section 9 applications. An operational creditor's application must be rejected if the corporate debtor shows a plausible dispute that existed before the demand notice, including a pending suit or arbitration (Mobilox Innovations, 2017; Topic 13)
• K. Kishan v Vijay Nirman, 2018. Where an arbitral award has been challenged under section 34 of the Arbitration Act, the operational debt remains disputed, and a section 9 application on the award is not maintainable while the challenge is pending.
• Section 7 applications. A dispute about the debt does not by itself defeat a section 7 application; the NCLT examines whether a financial debt exists and is in default (Innoventive Industries, 2017)

4. During and after the CIRP

• Moratorium. Section 14(1)(a) bars the institution or continuation of arbitration proceedings against the corporate debtor, and the execution of any award against it, during the moratorium (Topic 22)
• Debtor as claimant. The moratorium does not prevent the corporate debtor, through the resolution professional, from pursuing its own claims in arbitration, since that increases the estate.
• Awards as claims. A creditor holding an award files a claim with the resolution professional; the award is evidence of the debt, but the creditor ranks according to its status as financial or operational creditor.
• After the plan. A claim based on an award that is not provided for in the approved resolution plan is extinguished (Ghanashyam Mishra, 2021), and pending arbitrations against the debtor on such claims cannot continue.
• NCLT's residuary jurisdiction. Purely contractual disputes unconnected with the insolvency remain for their ordinary forum, including arbitration, after the moratorium (TCS, 2021; Topic 72)

5. Personal Guarantors after 2026

Before 2026, an application under section 95 against a personal guarantor triggered an interim moratorium that stayed arbitration against the guarantor. Section 96(4), inserted by the 2026 Amendment, removes that interim moratorium for personal guarantors to corporate debtors. In Tata Capital v Neel Motors (2026), the Bombay High Court applied this to a pending section 95 application, allowing arbitration against the guarantors to proceed (Topic 68).

6. Frequently Asked Questions

Can a corporate debtor stop a section 7 application by invoking an arbitration clause?

Not if the NCLT finds a default and admits the application. Under Indus Biotech (2021), the NCLT first decides the section 7 application, and only if there is no default may the dispute be referred to arbitration.

Can an operational creditor file a section 9 application on an award that is under challenge?

No. K. Kishan (2018) held that a pending challenge under section 34 means the debt is disputed, so the section 9 application is not maintainable.

Can the resolution professional start arbitration against a customer who owes the corporate debtor money?

Yes. The moratorium bars proceedings against the corporate debtor, not proceedings by it.

What happens to an arbitration against the corporate debtor that was pending when the CIRP began?

It is stayed by the moratorium. The claimant must file a claim in the CIRP, and if the claim is not provided for in the approved plan, it is extinguished.

7. Related Topics

• Topic 13: Sections 8 and 9. Demand notice and pre-existing dispute.
• Topic 22: Moratorium under Section 14. What the moratorium bars.
• Topic 77: Section 238. Overriding effect over other laws.