Bombay High Court Quashes Awards Against Guarantors Despite IBC Moratorium On Debt

The Bombay High Court on Tuesday held that arbitral awards resulting in enforcement of a debt that has become temporarily unenforceable due to a statutory moratorium run contrary to the fundamental policy of Indian law.

The court consequently quashed two awards obtained by Abhyudaya Co-operative Bank against guarantors of insolvency resolution bound Nirmangold Alloys Pvt. Ltd. and Nirmangold Plasttech Pvt Ltd.

Justice Sharmila U. Deshmukh held that the arbitral tribunal continued proceedings and passed awards despite a moratorium operating in respect of the debt. The court concluded that the awards could not be sustained.

Holding that the awards resulted in enforcement of a debt that was temporarily incapable of enforcement because of a statutory bar, the Court observed,

“The impugned Awards resulting in enforcement of debt, which by reason of the statutory interdict is incapable of being enforced albeit temporarily, runs contrary to the fundamental principles of Indian law which recognises enforcement of laws in respect of legally enforceable debts. The impugned Awards disregard the binding judicial pronouncements of this Court as well as the Hon'ble Apex Court, are violative of fundamental policy of Indian law and are liable to be set aside under Section 34(2)(b)(ii) of Arbitration Act.”

The dispute arose from arbitration proceedings initiated by the bank against Nirmangold Alloys Pvt Ltd and Nirmangold Plasttech Pvt Ltd and their guarantors. In the Nirmangold Alloys matter, the bank sought recovery of more than Rs 34.18 crore.

Nirmangold Alloys was undergoing corporate insolvency resolution proceedings. Separately, two guarantors filed personal insolvency applications. Those filings triggered an interim moratorium.

The arbitral tribunal held that the arbitration could not proceed against those two guarantors because of the moratorium. It stayed proceedings against them. However, it continued the arbitration against the remaining guarantors. These included Ajeet Madhukar Mulay and Monica Ajeet Mulay. Awards were passed on February 12, 2024.

The High Court held that settled law treats the moratorium as operating in respect of the debt and not merely the debtor. It observed that continuation of the proceedings against the remaining guarantors disregarded binding decisions of the Supreme Court and the High Court.

The court also found that the arbitral tribunal refused the guarantors an opportunity to cross-examine the bank's witness. At the same time, it relied on that witness's evidence to hold that the bank's claim stood proved.

The court noted that the guarantors had specifically disputed execution of several documents. They had also alleged that some documents were forged. The Court held that their request to cross-examine the witness was reasonable in the circumstances.

Emphasizing that parties must be given a full opportunity to present their case, the Court observed,

“Under Section 18 of the Arbitration Act, the parties have to be given a full opportunity of presenting its case. The right of cross examination is an integral aspect of audi alteram partem rule. The refusal of permission for cross examination violates the right of fair hearing and equal treatment making out a ground under Section 34(2)(a)(iii) of Arbitration Act.”

The court further held that denial of cross-examination rendered the findings on the bank's claim patently illegal. It held that those findings were liable to be set aside.

On the guarantors' contention that they stood discharged because of restructuring and enhancement of the credit facilities, the Court declined to interfere. It held that examining whether there was a valid waiver under the guarantee deeds would require a factual and merits-based review. Such a review is impermissible in a challenge to an arbitral award.

The court also rejected the challenge to the arbitral tribunal's findings on stamp duty paid on the mortgage deeds and guarantee documents.

Observing that the issue would require a factual inquiry, the Court held,

“An inquiry into the insufficiency of the stamps on the documents would entail an inquiry into the issue as to which is the principal document and whether the same has been duly stamped, which enters into the realm of fact finding inquiry. Such an inquiry not conducted before the Learned Arbitrator cannot be permitted to be conducted under Section 34 of Arbitration Act.”

The court further noted that the awards declared the subsistence of the bank's charge over mortgaged properties. They permitted sale of those properties for recovery of dues. They also restrained creation of third-party rights in the properties. Further, they directed attachment of the properties until sale and realisation.

The court held that these directions amounted to enforcement of a mortgage. It held that enforcement of a mortgage concerns rights in rem and cannot be decided by an arbitral tribunal.

Holding that the awards were rendered despite a moratorium operating in respect of the debt, that the guarantors had been denied a fair opportunity to cross-examine the bank's witness, and that the awards granted relief relating to enforcement of a mortgage, the court quashed and set aside both awards dated February 12, 2024.