By Vinay V. Viswanathan, 4th Year, Jindal Global Law School
Introduction
This extract is taken directly from the statement of objects and reasons within the 2019 amendment to the Insolvency and Bankruptcy Code, 2016 (“IBC”),[1] which passed in the Rajya Sabha on Mar. 12, 2020. While Section 14 is referenced within this amendment, the changes made are focused on licenses, and it fails to address a very real problem: The IBC’s moratorium on “proceedings” and the inclusion of arbitral proceedings within the ambit of the statute’s language becomes problematic when it is used to prevent a shipowner in the position of a corporate debtor undergoing the CIRP from recovering assets instrumental to concluding the CIRP. However, this interpretation of the statute is, within India, the status quo since 2021, and it is ground zero of an egregious exploitation of the law as it stands against corporate shipowners.
Interplay between Corporate Shipowners and the Insolvency and Bankruptcy Code, 2016 (“IBC”) is a well-documented phenomenon—visible in cases such as the Liquidation of Mercator Shipping,[2] and Essar Shipping’s narrow brush with the same fate.[3] Matters related to the ABG Shipyard scam have gone as far as reaching the Supreme Court of India.[4] A lack of discourse on this issue from the perspective of Admiralty Law and Maritime Arbitration is a lacuna in legal scholarship which this article aims to fill.
Charterparties and the Arbitration Clause
Ships, in practice, are chartered out by a standardised special contract between the shipowner and the charterer, according to the terms of which the charterer may make use of the shipowner’s vessel in order to serve their own ends, usually for the carriage of goods by sea. This contract is known as a “charter” or “charterparty”. Cooke et al. discuss the primary categories of this standard contract: (1) voyage charters, like the New York Produce Exchange (NYPE) and Baltime 1939; (2) time charters, like GENCON and ASBATANKVOY; and (3) bareboat charters, like BARECON.[5]
A commonality between all these charters is the specific construction of their arbitration clause. The words “arising out of this Charter” have been a long-standing subject of statutory interpretation in common law courts. The mainstream stance surfaces in Ashville v. Elmer,[6] where the Court held the starting point of interpretation to be the business assumption that the parties to the agreement intended to streamline arbitration for all disputes arising out of a given transaction, and not to have different proceedings before different adjudicating authorities. The subject matter of the contract is subject matter of the arbitration, and arbitration is the primary dispute resolution mechanism adopted by standard charterparties. It is rare for a modern charterparty to depart from this norm.
On demurrage, the Laytime Definitions, 2013 align with common law cases such as Lockhart v. Falk[7] and Inverkip Steamship v. Bunge[8] to arrive at a definition for “demurrage”: the cost incurred on a daily basis when the ship stays on the port for more days than the stipulated laydays. A famous rule of thumb followed by common law courts on the matter of demurrage is “once on demurrage, always on demurrage”. This maxim was famously rationalised by Lord Reid in The Spalmatori: “The loss must fall on someone, and one would think business people who made the contract would regard it as reasonable that the man whose fault it is should pay for it.”[9] Laytime does not stop running unless there are exceptional circumstances at play, and as long as laytime runs, charterers are liable to pay demurrage to the shipowners for any laytime that exceeds the laytime stipulated within a signed charterparty. The right to demurrage held by the shipowner is not easily forfeited.
A charterer’s non-payment of demurrage in any given case is a breach of the charterparty, and qualifies squarely as a dispute “arising out of” the charterparty. In all such cases, the charterparty’s arbitration clause would make arbitration the dispute resolution mechanism of choice. Given the legal landscape in India, a dissection of the Section 14 moratorium along with its jurisprudential development will make clear why only a particular interpretive framework, namely one of purposive interpretation, is necessary for these two facets of the law to function in harmony without distorting the spirit behind their framing.
Dissecting the Moratorium
Section 14 of the IBC prohibits both the initiation or continuation of suits including execution, and the corporate debtor’s transfer, encumbrance, alienation or disposal of any assets, or beneficial interests.[10] Prima facie, the moratorium looks to be good law, as it fulfils the object of the code—to provide relief through a ‘standstill’ period during which its assets are protected, and it can strengthen its financial position.[11] As per Swiss Ribbons v. Union of India,[12] the moratorium is not adversarial to the corporate debtor, but protective of its interests. In Sundaresh Bhatt, Liquidator of ABG Shipyard v. CBIC,[13] the Supreme Court observed that the moratorium is imposed to ensure no coercive proceedings are launched or continued against the corporate debtor—a distinctly protective purpose.
The main point of contention tends to be the transfer of assets or beneficial interests, as ideally, the channel of transfer would be stipulated as unidirectional, wherein the corporate debtor should not have the power to diminish their own assets under moratorium. However, the wording leaves open a bidirectional interpretation. Section 14(1)(a) of the IBC can be read to preclude proceedings even in cases where the corporate debtor itself is the initiator. In cases such as hire/ freight and demurrage claims, where there is only money to gain for the shipowner, the moratorium can be invoked by entities like defaulting charterers with outstanding charges. This invocation works to shut down claims, actions, or invoices issued by the shipowner corporate debtors, under the pretext of Section 14 of the IBC imposing a moratorium on the owner in question. The jurisprudence on this actually favoured a purposive interpretation that could prevent this, until the Supreme Court’s interpretation made arbitral proceedings for demurrage claims impossible to initiate for corporate debtors, or in this case, shipowners.
The Demise of Purposive Interpretation
Purposive interpretation of Section 14 evolved from Power Grid Corporation of India, Ltd. v. Jyoti Structures[14] (“PGCIL”), which featured a petition under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) to set aside an arbitral award. During the pendency of that arbitration, a financial creditor of the respondent company had filed a CIRP application against the respondent company under Section 7 of the IBC. The issue before the Court was whether arbitral proceedings came under the ambit of “proceedings” as per Section 14(1)(a) of the IBC. The Delhi High Court held that Section 14 of the IBC would not apply to proceedings which are to the benefit of the corporate debtor, such as the impugned proceeding. The rationale being ‘proceedings’ do not mean ‘all proceedings’; focus was on the purpose of moratorium under Section 14(1)(a), and the Court held said purpose to be the prohibition of debt recovery actions against the assets of the corporate debtor. Consequently, it was held that Section 14(1)(a) is intended to have a restrictive meaning and applicability, and that the moratorium could not be invoked to annul the award.
Subsequently, in SSMP v. Perkan Food Processors[15] (“SSMP”), the Delhi High Court had to decide whether a written statement so filed against a corporate debtor undergoing CIRP was barred by Section 14 of the IBC. The Court noted that Section 14 of the IBC creates a situation where a corporate debtor undergoing CIRP is free to pursue claims, but the counterclaim is barred. Due to the clogging of proceedings and the compromise of an avenue for asset recovery, a purposive interpretation was applied to Section 14. The purposive focus was rationalised as the preservation and/ or expansion the corporate debtor’s assets, and to that end, Section 14 of the IBC should be applied flexibly at the stage of execution, so as to safeguard the assets of the corporate debtor. The Court relied on PGCIL to interpret Section 14 in this manner.
However, on Mar. 1, 2021, the Supreme Court of India pronounced P. Mohanraj v. Shah Bros (“P. Mohanraj”), which overruled the Delhi High Court’s decision in PGCIL, and ultimately held that arbitration proceedings come within the ambit of the word ‘proceedings’ in Section 14 of the IBC.[16] With this statement, purposive interpretation was undone in toto, and the ambit of a Section 14 moratorium was expanded once more to be abused in contravention with the objects and reasons for the IBC as laid out by the legislature.
The main issue lies in the Supreme Court defenestrating the entire judgment and reasoning in PGCIL, with the rationale centring on an arbitral award being upheld against the corporate debtor. In this instance, the Supreme Court has overlooked matters of the nature of demurrage, where no such award could conceivably be upheld. A corporate debtor owed demurrage cannot ‘lose’ the proceeding in a manner detrimental to its own assets. As a result, the expansion of the moratorium’s ambit has therefore docked claims in the nature of demurrage. The problematic nature of this interpretive relapse can be observed in Trading Engineers Int’l v. U. P. Power Transmission Corp.[17], where the Allahabad High Court walked a tightrope to interpret P. Mohanraj’s conclusion in a narrower manner. Purposive interpretation was defibrillated by the Court limiting the scope of application for P. Mohanraj to include Arbitration Act Section 34 proceedings exclusively as ‘proceedings’ under Section 14. However, the heart of purposive interpretation remains overruled in toto by the Supreme Court’s judgment, and no High Court in the country can reverse the damage done.
American Bankruptcy Law and Its Lessons for India
A jurisdiction with many lessons for India is the United States of America (“US”). In the US, insolvency and bankruptcy are governed by Title XI of the U. S. Code, known as the Bankruptcy Code.
Section 362 of the Bankruptcy Code invokes what is known as an automatic stay, namely, “an ex parte temporary order against the world without the need to show irreparable injury or other requisites necessary for preliminary injunctive relief.”[18] A ‘claim’, and subsequently, the terms upon which the automatic stay arises, is defined under Section 101(5) of the Bankruptcy Code. The Court of Appeals clarified this as requiring “some prepetition relationship, such as contact, exposure, impact, or privily, between the debtor’s prepetition conduct and the claimant.”[19] Furthermore, the US Supreme Court held that this ‘claim’ is distinct from claims in other areas of law, like property claims, in that those are defined separately in non-bankruptcy statutes.[20]
The US has attributed to bankruptcy and its ancillary claims a unique character which sets the direction of both the claim and the transfer of assets. Under US law, the stay applies against the world and all independent civil actions aimed at the corporate debtor, and therein lies the conceptual difference between the Bankruptcy Code and the IBC. The IBC applies the moratorium to the corporate debtor itself instead of addressing each action. To that end, the word ‘proceedings’ as contemplated by Section 14(1)(a) of the IBC needs an interpretive framework to harmonise the IBC’s application with its purpose.
The Way Forward
The loss of PGCIL as good law has had a ripple effect, shaking the foundations of cases like SSMP. This has resulted in a loss of flexibility when the moratorium is applied. While the Allahabad High Court tried to remedy this, it is by no means a sustainable stopgap. As things stand, the shipowner corporate debtor has been defanged and rendered unable to pursue claims of its own—rendered vulnerable to exploitation by charterers who can challenge the validity of proceedings in cases where shipowners are subject to insolvency resolution. The way forward is the purposive interpretation of the IBC as affirmed in SSMP, in spite of its basis being overruled. The framework laid out in said case is among the most pragmatic instances of statutory interpretation put to paper. It was an invocation of the moratorium as the protective instrument it was created to be. The courts and legislatures ought to work together to ensure the objects of the IBC are not contravened by interpretation that turns hostile the black letter of the law against its spirit. Maritime arbitration is a small and specialised field, but its smooth functioning is the bedrock upon which international commerce functions. Catering to a conducive maritime environment is essential to India’s success on the international stage, especially if it intends to become another global hub for arbitration.
[1] The Insolvency and Bankruptcy Code (Second Amendment) Bill, no. 376 of 2019 (India).
[2] C.P.(IB)-1400(MB)/2019.
[3] CP(IB) 153 of 2020.
[4] IANS, CIRP initiated in cases of DHFL, ABG Shipyard, Bhushan Power & Steel, Economic Times (Mar. 27, 2023, 4:35 P.M.) https://energy.economictimes.indiatimes.com/news/power/cirp-initiated-in-cases-of-dhfl-abg-shipyard-bhushan-power-steel/99034799 ; See also Sundaresh Bhatt, Liquidator of ABG Shipyard v. CBIC, (2023) 1 SCC 472.
[5] Julian Cooke et al., Voyage Charters 3 (4th ed., 2014).
[6] [1988] 2 Lloyd’s Rep. 73, at 81, col. 1.
[7] [1875] 33 L. T. Rep. 96, at 98, col. 1.
[8] [1917] 2 KB 193, at 200.
[9] [1962] 2 Lloyd’s Rep. 175, at 179, col. 2.
[10] Insolvency and Bankruptcy Code, 2016, §14(1).
[11] Power Grid Corpn. of India Ltd. v. Jyoti Structures Ltd., 2017 SCC OnLine Del 12189, ¶8.
[12] (2019) 4 SCC 17, at 55, ¶28.
[13] (2023) 1 SCC 472, at 488, ¶36.2.
[14] 2017 SCC OnLine Del 12189.
[15] 2019 SCC OnLine Del 9339.
[16] (2021) 6 SCC 258, at 347, ¶97 (Given as ¶74 within the Supreme Court copy linked herein).
[17] 2022 SCC OnLine All 564, ¶83-88 (Allahabad High Court, Lucknow Bench, Matters under Art. 227 no. 23908/ 2021).
[18] 169 B.R. 531 (S.D.N.Y. 1994).
[19] 58 F.3d 1573 (11th Cir. 1995).
[20] 440 U.S. 48 (1979).
Centre for Maritime Law 