Arbitrator’s Prior Adjudicatory Role Not a Ground for Disqualification; Delhi HC Reaffirms Extinguishment of Unresolved Claims under IBC Resolution Plan
- REEDLAW
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REEDLAW Legal News Network reports: In a significant ruling, the Delhi High Court reaffirmed that an arbitrator’s previous judicial involvement in related proceedings does not, by itself, create a conflict of interest or trigger disqualification under Section 12(5) of the Arbitration and Conciliation Act, 1996. The Court further held that once a resolution plan under Section 31 of the Insolvency and Bankruptcy Code is approved, all unaddressed or excluded claims stand irrevocably extinguished, ensuring a clean slate for the corporate debtor.
The Single-Judge Bench of Justice Jyoti Singh of the Delhi High Court, while adjudicating the petition, clarified that prior judicial or adjudicatory participation by an arbitrator does not automatically raise questions of bias or independence. The Court further observed that any claim not forming part of an approved resolution plan cannot survive independently or be re-agitated through arbitration, as the IBC framework extinguishes such claims to uphold finality and commercial certainty post-resolution.
The Petitioner instituted proceedings under Section 34 of the Arbitration and Conciliation Act, 1996, challenging an arbitral award dated 21 August 2024 rendered by a three-member Arbitral Tribunal. The Petitioner had previously undergone the Corporate Insolvency Resolution Process pursuant to admission by the NCLT, Mumbai, in July 2017 under the Insolvency and Bankruptcy Code, 2016. During this process, the Respondent filed a claim under Regulation 7 of the CIRP Regulations as an Operational Creditor. While the Resolution Professional admitted a portion of the Respondent’s claim amounting to ₹9.58 crores, a further claim of ₹9.92 crores, asserted to have arisen post-Insolvency Commencement Date, was rejected. The Committee of Creditors ultimately approved a Resolution Plan with an overwhelming majority, which received NCLT sanction in July 2018. The plan expressly extinguished operational and other claims that were not included, and this finality was subsequently upheld by the NCLAT in August 2019.
Notwithstanding the approved Resolution Plan, the Respondent continued to submit additional demands and revised cash calls against the Petitioner, eventually invoking arbitration following unsuccessful settlement negotiations. The resultant arbitral award was adverse to the Petitioner, who challenged it on multiple grounds. The central ground raised by the Petitioner involved the alleged ineligibility of the Presiding Arbitrator, who had previously presided over the Respondent’s appeal as Chairperson of the NCLAT in related insolvency proceedings. It was contended by the Petitioner that this prior adjudicatory involvement triggered disqualification under Section 12(5) read with the Seventh Schedule of the 1996 Act, thereby vitiating the arbitration by reason of bias and conflict of interest.
The Petitioner further asserted that upon sanction of the Resolution Plan under Section 31 of the IBC, all claims—whether accrued, contingent, or subsequent—stood fully extinguished and that the Tribunal had erred in entertaining such claims, contrary to the binding effect of the approved plan and in violation of Section 238 of the Code, rendering the arbitral award unsustainable in law.
Upon examining these contentions, the Delhi High Court addressed the question of de jure ineligibility of the Presiding Arbitrator. Relying on the Supreme Court’s decision in HRD Corporation v. GAIL (India) Ltd., the Court clarified that ineligibility under Entry 16 of the Seventh Schedule required a prior non-adjudicatory involvement in the specific dispute. The Court concluded that mere prior judicial or adjudicatory functions performed in related proceedings did not operate as a disqualifying factor. The Presiding Arbitrator’s previous role at the NCLAT, which entailed legal determination under the IBC, did not constitute the kind of advisory involvement contemplated by the statutory disqualification.
The Court further rejected the Petitioner’s argument that the Arbitral Tribunal had been improperly influenced by the NCLAT order, holding that the Tribunal’s consideration of the issues was independent and did not rest upon prior appellate observations. Distinctions were drawn between the scope of proceedings before the NCLAT, involving powers of the IRP, and the arbitration proceedings, which concerned the arbitrability and merits of subsequent claims.
On the merits, the Court relied on the ratio in Ghanashyam Mishra and Sons private Limited Through The Authorised Signatory v. Edelweiss Asset Reconstruction Company Limited Through The Director and Others, REEDLAW 2021 SC 04534, reaffirming the legal position that once a resolution plan is approved under Section 31 of the IBC, any claims not forming part of the plan—regardless of timing or contingent nature—are extinguished and cannot be revived or pursued by way of arbitration or other proceedings. The judgment emphasised the legislative goal of providing a clean slate for the corporate debtor and ensuring certainty for the successful resolution applicant. Accordingly, the claims arising post-Insolvency Commencement Date and not included in the approved resolution plan were held to be non-arbitrable and unenforceable in law.
Mr. Dayan Krishnan, Senior Advocate with Mr. Rishi Agrawala, Ms. Aarushi Tiku, Mr. Abhay Aghnihotri, Mr. Vikram Choudhary, Mr. Nilay Gupta, Mr. Shreedhar Kale and Mr. Sanjeevani Seshdari, Advocates, represented the Petitioner.
Mr. Jayant Mehta, Senior Advocate with Mr. Divyam Agarwal, Ms. Aditi Deshpande, Ms. Pallavi Kumar, Ms. Priya Chauhan and Ms. Jasleen Virk, Advocates, appeared for the Respondent.
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