Introduction

The Insolvency and Bankruptcy Code, 2016 (“the Code”) established a single system for handling corporate distress situations in India. It intends to accomplish the task of restructuring or selling the companies under distress “in a time-bound manner for maximisation of value of assets“ as quickly as possible. As per the Code, the Corporate Insolvency Resolution Process (“CIRP”) is to be completed usually within 180 days (with possible 90 days extension) so that the value of the assets is maintained and the businesses that are still viable can be saved. On the other hand, an arbitration under the Arbitration and Conciliation Act, 1996 is a private dispute-resolution mechanism that parties choose when they want a confidential and expert decision. Most commercial supply contracts have arbitration clauses so that disputes are settled without the involvement of courts.

Therefore, the main question that arises from this situation is what should happen first if a debtor goes through insolvency and there are ongoing arbitrations: which process has to be prioritized? Fighting arbitration claims can be a way of stretching the deadline of the Code, thus creating a risk of value being eroded and of creditor recoveries being delayed.

This article analyses the interaction between arbitration and CIRP and what is the effect on operational creditors (“OCs”) as well as how to reconcile a fast resolution with the protection of stakeholders.

CIRP and Operational Creditors

Any creditor can trigger a CIRP under the Code. An OC, typically a supplier, must first issue a demand notice to the corporate debtor (“CD”) after default. If payment is still not made or a dispute is not raised in time, the OC can initiate CIRP against the CD. Once admitted, the NCLT sets the insolvency commencement date and appoints an Interim Resolution Professional (“IRP”) to manage the debtor. Section 14 then imposes a moratorium. Creditors cannot initiate or continue any proceedings, including arbitration, outside the CIRP.

Creditors’ claims are then vetted and approved by the RP. Resolution plans or liquidation payouts follow the statutory waterfall. Secured and priority debts are paid first, then financial and operational creditors. However, recent decisions have ensured that the OCs’ claims are not ignored. The Supreme Court, in Kalyani Transco v M/S Bhushan Power and Steel Limited and Others 2025 INSC 1165, ¶180, allowed an OC’s arbitration claim to be treated as a contingent operational claim in the plan.

But recently, the Delhi High Court in Tata Steel Ltd. v Ministry of Corporate Affairs, has held that sub-judice operational claims pending arbitration which are classified as “contingent liabilities” are extinguished once the resolution plan is approved. It further held that the arbitral tribunal ceases to enjoy jurisdiction to proceed further with the adjudication of such claims and arbitral proceedings in respect of such extinguished claims cannot continue.

A key challenge is that many operational debts involve disputes over contract performance or payment. If an OC has a pending arbitration, its exact claim in the default of the CD is uncertain until arbitration concludes. These parallel proceedings can complicate claim verification and delay the CIRP, putting further constraint on the RP who already has to abide by the Code’s strict timelines.

Arbitration and Insolvency

Section 14 of the Code imposes a moratorium against all legal proceedings against the CD. Pending arbitrations are thus stayed, unless the RP permits continuance of the same.

But the Supreme Court has delivered contrasting judgements on this issue. While in Indus Biotech v. Kotak, the Supreme Court held that arbitration cannot continue once a default has been established and insolvency has been triggered. Therefore, it was held that CIRP will override the arbitral proceedings. However, in Fourth Dimension Solutions v. Ricoh, the Court allowed an OC, whose claims were unascertained due to pending arbitration, to proceed with arbitration proceedings even after the approval of Resolution Plan.

These judgments portray an attempt by the Apex Court to harmonise these two statutes. Even though the Code’s non-obstante clause enables it to override other legislations, the Supreme Court has carved out an exception where arbitration was allowed to continue, despite the moratorium under Section 14. This helps fulfil one of the core objectives of the Code, i.e., increasing creditor confidence. OCs, who are generally left out in the resolution process, got the much needed support from the Apex Court in this regard.

Balancing Speed with Protection of Stakeholders

There are a few approaches which can facilitate balancing arbitration with CIRP while keeping operational creditors safe and ensuring speedy disposal. For the purposes of this article, we will highlight four major approaches.

First of all, it is necessary to strictly enforce the Section 14 moratorium. There should be no new suits or arbitrations if only a CIRP has been initiated. It is possible to accept the claims arising from arbitral proceedings pending as contingent operational claims, for instance, in the case of Bhushan Power & Steel Ltd. However, a substantive arbitration should be postponed until the implementation of the resolution plan. Thus, the CIRP timeline remains intact while the creditors’ rights are protected.

Second, it is also important that the RP effectively manages the claims. The RP should be the one to quickly settle and accept operation claims, even if they are in dispute. Arbitration awards in dispute can be treated as contingent claims so that they can be included in the resolution plan without causing time to be wasted. Setting up well-defined documentation requirements and having clear-cut timelines can facilitate claim verification, and also provide a way out of the uncertainty.

Third, the entity can benefit from fast-tracked arbitration practices. Response time of seven days and issuance of the final award within six months for cases related to insolvency, as per the Singapore RIA protocol, can be implemented in India as well. Corporate Debt Restructuring (“CDR”) financing or mediation of non-performing loans during CIRP would be a way to allow debtors and creditors to reach an agreement without extending the statutory deadline.

Finally, there is the option of using technology along with interim relief. NCLTs may provide the necessary first assistance to the safeguarded primary assets or the operating creditors for working capital needs. Thus, platforms like e-claim portals and AI-supported verification can speed up filing and processing of claims, including arbitral awards.

These measures, if combined, aim at ensuring that the CIRPs will be of a timely nature, without the operational creditors being excluded. Through the use of strict moratorium enforcement, efficient claims management, accelerated arbitration and technological support, India is in a position to maintain both timeliness and equity in insolvency proceedings.

The Road Ahead: Policy Recommendations

Interaction of arbitration with CIRP can be improved by supporting timely resolutions and fair treatment of operational creditors through various policy measures.

Firstly, one of the key things is to clarify the legal position. The Insolvency and Bankruptcy Board of India (“IBBI”) should clarify beyond doubt the position of arbitration under CIRP. Parliamentarians by deciding not to include “non-core” disputes in the list of core disputes can leave them to be resolved through arbitration. Besides that, NCLTs/NCLATs may be given power to allow or suspend the continuation of arbitration under Section 14 of the Code. Legal clarity brought about by the statutory provision will result in fewer conflicts and less litigation.

Secondly, adoption of swift-track ADR procedures might be of help for arbitration to match insolvency timelines. Time-bound procedures taken from Singapore’s RIA Protocol and pre-insolvency mediation of working capital debt claims would make the resolution of contentious claims possible within CIRP timelines. Six months for forcing the award might alleviate the problem whereby arbitrations cause delays in the recovery of assets.

Thirdly, making use of technology is equally important. E-claim portals, and information utilities can be very helpful in filing, verifying and monitoring of claims like arbitration awards, if far-reaching IBBI initiatives are taken up. A centralized claims database would lead to more openness, lesser delays, and better efficiency.

Last but not least, judicial guidelines may be the source of uniformity. NCLTs and NCLATs are in a position to facilitate the issuing of practice and procedure guidelines in regard to handling arbitration claims under CIRP situations, e.g., disclosure of timelines for arbitration proceedings. Training insolvency professionals and judges in this and related fields will lead to better coordination between arbitration and insolvency.

Conclusion

Arbitration and CIRP can be considered as opposite priorities of each other, i.e. one is a private resolution procedure and the other is a collective, speedy insolvency procedure. India will have to strike a balance between arbitration procedures and insolvency goals in the future by having clear rules, efficient processes, and making good use of technology. This balancing act between speed, asset protection, and protection of creditors will, on the one hand, make the insolvency regime more effective and on the other, it will contribute to quicker and more equitable corporate turnaround in the next decade.