Recently, the Delhi High Court upheld an arbitral award in favor of Bharat Petroresources Ltd., dismissing JSW Ispat’s challenge under Section 34 of the Arbitration Act, 1996, in a dispute over unpaid petroleum exploration costs. The Court observed that prior judicial involvement does not make an arbitrator ineligible and that post-insolvency claims can validly be entertained.
Brief Facts:
The case arose from a Production Sharing Contract (PSC) entered into between the Government of India, Bharat Petroresources Ltd., JSW Ispat (formerly Monnet Ispat & Energy Ltd.), GAIL, Engineers India Ltd., and BF Infrastructure Ltd. To regulate their inter se rights and obligations under the PSC, the consortium members executed a Joint Operating Agreement (JOA). Under the JOA, each partner was required to contribute its share of costs and expenses for petroleum exploration and development. JSW Ispat defaulted on its cash call obligations, leading the consortium to declare its participating interest as NIL and forfeit the same. Insolvency proceedings were initiated against JSW Ispat under the Insolvency and Bankruptcy Code (IBC). A Resolution Plan was approved by the adjudicating authority, which settled certain claims of the consortium members, but disputes remained over unpaid dues. Subsequently, Bharat Petroresources Ltd. invoked arbitration, and the Tribunal directed JSW Ispat to pay a substantial sum including interest and costs. JSW Ispat challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996.
Contentions of the Petitioner:
The Counsel for Petitioners contended that the arbitral proceedings were vitiated by serious legal infirmities. It was urged that the Presiding Arbitrator was ineligible under Section 12(5) of the Arbitration Act as he had previously dealt with related disputes in another capacity and had therefore been “involved in the case” within the meaning of the Seventh Schedule, giving rise to a clear conflict of interest. Further, the members of the Tribunal failed to make individual disclosures in the prescribed format, depriving the parties of an opportunity to properly assess any circumstances giving rise to justifiable doubts about independence or impartiality.
Apart from procedural infirmities, the petitioners argued that the claims adjudicated by the Tribunal were non-arbitrable, as they were permanently extinguished once the Resolution Plan was approved under Section 31 of the IBC. They emphasized that the Resolution Plan had provided for a complete extinguishment of all present and future claims not included therein, giving the successful Resolution Applicant a “clean slate.” By entertaining such extinguished claims, the Tribunal acted beyond its jurisdiction and effectively rewrote the Resolution Plan, contrary to Section 238 of the IBC. Consequently, the arbitral award, according to the petitioners, was void and unenforceable.
Contentions of the Respondent:
On the other hand, the counsel for Respondents defended the award and submitted that no ground for interference under Section 34 was made out. They argued that the challenge to the Presiding Arbitrator was misconceived because his prior adjudication was confined to a legal question distinct from the merits of the claims subsequently referred to arbitration. His prior role did not amount to “previous involvement in the case” as contemplated by the Seventh Schedule. The respondents further contended that their claims related to outstanding cash calls, plugging and abandonment costs, and other expenditures arising after the insolvency commencement date and thus were not part of the Resolution Plan.
The approval of the Resolution Plan did not mean that all future liabilities stood extinguished, as doing so would leave the claimant remediless for genuine future claims incurred in joint petroleum operations. They also maintained that the arbitral award was reasoned, based on evidence and law, and contained no patent illegality. Therefore, in terms of the limited scope of interference under Section 34, the petition was liable to be dismissed.
Observations of the Court:
The Court, while examining the challenge under Section 34 of the Arbitration and Conciliation Act, first addressed the petitioner’s plea that the Presiding Arbitrator was ineligible due to his prior role as Chairperson of NCLAT in connected insolvency proceedings. The Court observed that the core issue was whether this amounted to “previous involvement in the case” under Entry 16 of the Seventh Schedule. Referring to the statutory mandate of disclosure under Section 12, the Court reiterated that “it is clear as day that when a person is approached in connection with his possible appointment as an Arbitrator, Section 12 mandates that he gives a disclosure in writing in the format specified in the Sixth Schedule” and that “an award rendered by a person, who is ineligible to act as an Arbitrator, cannot be considered as an award in the eyes of law and will be unenforceable”
However, on the facts of the present case, the Court concluded that the petitioners had overstated their case. The NCLAT appeal, it held, was limited to the legal issue whether the Resolution Professional had the power to collate post-insolvency commencement date claims. As the Court noted“It is clear from the order of NCLAT that it did not rule on the question as to whether the future claims could be enforced against the Petitioner. In any event, by deciding this legal issue it cannot be said that the Chairperson was ‘involved’ in the case so as to make him de jure ineligible in light of the judgement in HRD Corporation (supra). Previous involvement as per the Supreme Court must be an involvement in some other avatar such as advisor or consultant to a party to arbitration and merely acting as an adjudicator or a judge is not enough, something more is required.”
The Court also rejected the argument that the arbitral award merely enforced the NCLAT order. On this, it categorically held that “Carefully read, I am unable to reach a conclusion that the finding in the arbitral award on this aspect was, in any manner, influenced by the NCLAT order or based on it and moreover, this is a legal finding applying the provisions in IBC, 2016.”
Moving to the second issue, the Court analysed whether the claims that were not part of the approved Resolution Plan stood extinguished. After reviewing the law laid down in Ghanashyam Mishra and Sons Private Limited through the Authorized Signatory Vs. Edelweiss Asset Reconstruction Company Limited through the Director and Others, the Court observed that while a Resolution Plan binds all stakeholders, it only deals with claims existing as on the insolvency commencement date. Thus “Indisputably, since all the claims related to the period post-ICD, they were not collated by the RP. In fact, as per the Respondent, the claim relating to abandonment costs arose after the Resolution Plan was approved by NCLT.” Further the Court held “The arbitral tribunal made an independent finding that under the insolvency regime, it was not open to the IRP to collate claims of creditors post the ICD. Having rendered this conclusion, the Tribunal made an oblique reference to a similar observation in the NCLAT order.”
The decision of the Court:
The Court upheld the arbitral award in favor of Bharat Petroresources Ltd., dismissing JSW Ispat’s challenge under Section 34. The Court held the Presiding Arbitrator was eligible, and the tribunal rightly entertained claims arising after the insolvency commencement date, which were not covered by the Resolution Plan. The award of over Rs.12.9 crores, including costs and interest, was enforced.
Case Title: JSW Ispat Special Products Limited v. Bharat Petroresources Limited
Case No.: O.M.P. (COMM) 533/2024 & connected matters
Coram: Justice Jyoti Singh
Counsel for the Petitioner: Sr.Adv. Dayan Krishnan, with Adv. Rishi Agrawala, Aarushi Tiku, Abhay Aghnihotri,Vikram Choudhary,Nilay Gupta, Shreedhar Kale and Sanjeevani Seshdari,
Counsel for the Respondents: Sr. Adv. Jayant Mehta, with Adv. Divyam Agarwal, Aditi Deshpande, Pallavi Kumar, Priya Chauhan and Jasleen Virk.
