IBC interim moratorium does not bar a Section 34 challenge to an arbitral award, Bombay High Court rules

Nav Munjal Co-operative Housing Society Ltd. (“Society”) filed a petition under Section 34 of the Arbitration and Conciliation Act, 1996, challenging an arbitral award dated 25 May 2017.

The award held that the Development Agreement and the Supplementary Development Agreement between the Society and Saranga Anil Agarwal, proprietor of M/s Rockline Construction Company (“Developer”), remained valid and subsisting; granted specific performance in favour of the Developer; awarded compensation of ₹10 crores and costs of ₹50 lakhs; and rejected the Society’s counterclaim.

During the pendency of the Section 34 proceedings, personal insolvency proceedings were initiated against the Developer under Section 95 of the Insolvency and Bankruptcy Code, 2016 (“IBC”), in her capacity as personal guarantor of a corporate debtor.

The filing triggered the interim moratorium under Section 96 of the IBC.

Whether the continuation of the Society’s petition under Section 34 of the Arbitration and Conciliation Act, 1996, constituted a legal action or proceeding “in respect of any debt” and was therefore barred by the interim moratorium under Section 96(1)(b) of the IBC?

Whether the challenge to the compensation, costs, and rejection of the Society’s counterclaim attracted the Section 96 moratorium, including in light of the concept of “excluded debt” under Section 79(15) of the IBC?

The Court applied Section 34 of the Arbitration and Conciliation Act, 1996, under which the reviewing court exercises a limited, non-appellate jurisdiction and may uphold or set aside an arbitral award, including by severing an invalid portion where permissible.

Under Section 96(1)(b) of the IBC, an interim moratorium stays pending legal actions or proceedings “in respect of any debt” and prohibits creditors from initiating such proceedings.

“Debt” under Section 3(11) means a liability or obligation in respect of a claim, while “claim” under Section 3(6) principally includes a right to payment or a contractual remedy giving rise to a right to payment.

The Court also considered “excluded debt” under Section 79(15), which includes liabilities for fines and damages arising from negligence or breach of contractual or other legal obligations, and examined its use within the IBC scheme.

The Court relied on Saranga Anilkumar Aggarwal v. Bhavesh Dhirajlal Sheth, 2025 (4) SCC 629, for the principle that the Section 96 moratorium is narrower than the corporate moratorium under Section 14 and applies only to proceedings concerning debts, not indiscriminately to every proceeding against an individual or personal guarantor.

The Court held that the Section 34 proceedings did not seek to impose or enforce a debt against the Developer.

The principal question was whether the arbitral award’s declaration that the Development Agreement subsisted and its grant of specific performance could stand.

If the award were set aside, the Developer would lose the declared contractual right to perform the Development Agreement, but the Society would not thereby become a creditor of the Developer or obtain a payment obligation against her.

The compensation and costs were treated as incidental and dependent on the specific relief; they would stand or fall with the award and would not independently create a liability against the Developer through the Section 34 proceedings.

Similarly, even if the findings rejecting the Society’s counterclaim were set aside, the Section 34 court could not itself allow the counterclaim or impose a payment obligation on the Developer.

The parties would merely return to the position of having a subsisting arbitration agreement, potentially requiring fresh arbitration.

The Court therefore found that continuation of the Section 34 petition would not disturb the Developer’s debt structure or undermine the purpose of the interim moratorium.

Rather, the proceeding concerned the Developer’s asserted contractual interest or asset in the Society’s land, not a debt owed by the Developer.

The Court did not decide the merits of the challenge to the arbitral award.

In view of a subsequent roster change, it directed the parties to mention the matter before the Bench having jurisdiction over Section 34 proceedings for further hearing.