Interim Moratorium Under Section 96 of IBC Operates In Rem Against the Debt Staying All Proceedings Against Co-guarantors

The Petitioners were guarantors for financial assistance (cash credits and term loans) provided by Respondent No. 1 Bank to M/s. Nirmangold Alloys Pvt. Ltd. and M/s. Nirmangold Plasttech Pvt. Ltd.

Due to defaults, the accounts were classified as NPA, and the Bank initiated recovery through statutory arbitration under Section 84 of the Multi-State Co-operative Societies (MSCS) Act, 2002.

During the proceedings, two other co-guarantors filed for personal insolvency under Section 94 of the IB Code, triggering an interim moratorium.

The Sole Arbitrator stayed proceedings only against those two individuals but continued against the Petitioners and passed final Awards for recovery.

The Petitioners also challenged orders refusing cross-examination of the Bank’s witness and denying a challenge to the Arbitrator’s impartiality.

1. Whether the arbitration proceedings could continue against the Petitioners notwithstanding the interim moratorium under Section 96 of the IB Code triggered by co-guarantors.

2. Whether the refusal to grant an opportunity for cross-examination of the Bank's witness violated the principles of natural justice and Section 18 of the Arbitration and Conciliation Act, 1996.

3. Whether the Arbitrator had the jurisdiction to grant reliefs in rem, such as enforcement of mortgage and attachment of property.

The Court applied Section 34 of the Arbitration and Conciliation Act, 1996, specifically the grounds of "fundamental policy of Indian law" and "patent illegality".

It relied on Section 96 of the Insolvency and Bankruptcy Code (IB Code), which imposes a moratorium on the "debt" rather than just the "debtor".

Legal precedents included Tata Capital Ltd. v. Geeta Passi, establishing that Section 96 moratorium covers the entire debt and cannot be split.

Dilip B. Jiwrajka v. Union of India, clarifying that the protection is in respect of the debt.

Regarding cross-examination, the court applied Section 18 (equality of treatment) and Section 24 (oral hearings) of the Arbitration Act.

The court applied the principle from Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd., which mandates that enforcement of mortgage rights (actions in rem) are non-arbitrable.

The Court bitingly critiqued the Arbitrator’s decision to bifurcate the proceedings. It reasoned that since a Section 96 moratorium operates against the "debt," the entire recovery proceeding must be stayed; continuing against some guarantors while others are under moratorium is a violation of the statutory scheme of the IB Code and disregards binding precedents, thus violating the "fundamental policy of Indian law".

Furthermore, the Court found that the Arbitrator failed to provide a "full opportunity" to the Petitioners under Section 18 by denying cross-examination, especially since the Bank's claim was proved based solely on its own witness’s affidavit and unverified documents.

The Court also noted that the Arbitrator’s directions to attach and sell mortgaged properties were patently illegal as they involved rights in rem, which are reserved for civil courts and are non-arbitrable.

The High Court allowed the Petitions and set aside the Arbitration Awards dated February 12, 2024. The impugned Awards were quashed and set aside.