The National Company Law Tribunal (“NCLT”) Mumbai Bench, on 9th June 2020 pronounced its decision in the case of Indus Biotech Private Limited vs. Kotak India Venture Fund-I . NCLT, while dismissing the petition filed under Section 7 of the Insolvency and Bankruptcy code, 2016 referred the case to Arbitration. This article seeks to elaborate on the current status of insolvency proceedings involving arbitration and further explains the ambiguities in the reasons given by NCLT while delivering the judgment.

Background of the Case

In this case, Kotak India Venture Fund-I (Financial Creditor) filed a petition under section 7 of the Insolvency and Bankruptcy Code, 2016 for seeking initiation of the Corporate Insolvency Resolution Process [“CIRP”] against Indus Biotech Private Limited (Corporate Debtor). Kotak India, while filing the petition claimed that the debtor wasn't able to redeem Optionally Convertible Redeemable Preference Shares (“OCRPS“) amounting to Rs. 367,07,50,000 crores, as per the clause provided under the Share Subscription and Shareholders Agreement (“SSSA”). Before the application under section 7 could be decided by the NCLT, Indus filed an interim application under section 8 of the Arbitration Act, before the NCLT seeking that the application filed under section 7 of the IBC be dismissed because of the existence of an arbitration agreement between the parties. On the other hand, Kotak contended that a Section 7 IBC petition belongs to that class of litigation which falls out of the scope and ambit of arbitration as these matters are in rem. Thus, the issue that fell for consideration before the NCLT was whether the provisions of the Arbitration Act prevail over the provisions of the IBC.

Kotak India Venture Fund vs. Indus Biotech Pvt. Ltd, VIA MEDIATION & ARBITRATION CENTRE

NCLT’s Judgement

While considering the aforesaid issue, the Adjudicating Authority at NCLT placed reliance on the decisions from the courts in Booz Allen & Hamilton vs. SBI Home Finance Limited (2011) 5 SCC 532, along with Hindustan Petroleum Corporation Limited vs. Pinkcity Midway Petroleum (2003) 6 SCC 503, others, etc. After considering both sides of the arguments and on a perusal of the contentions and facts, the Adjudicating Authority was not satisfied that a ‘default’ has occurred. NCLT pointed out that, it will be unnecessary to push a solvent, debt-free, and profitable company into insolvency and no meaningful purpose will be served and further opined that, the disputes that form the subject matter of the underlying Company Petition, viz., valuation of shares, calculation and conversion formula and fixing of QIPO date are all arbitrable, since they involve the valuation of the shares and fixing of the QIPO date. Therefore, an attempt must be made to reconcile the differences between the parties and their respective perceptions.

Analysis of the decision

The author agrees with the decision of the NCLT to reject the application filed by Kotak under section 7 of the IBC. However, the author contends that the approach adopted by the NCLT in doing so was quite erroneous.

Insolvency, Photo: Company Rescue

Are Insolvency Disputes Arbitrable?

In India, the legislative policy has created a distinction between the proceedings in rem (such as winding-up) and proceedings arising out of right in personam (which are arbitrable). In the present case, there is no dispute about the arbitration agreement as there is a specific arbitration clause in the SSSA. The pertinent question in the present case is whether the dispute is capable of settlement through arbitration. It has been established by the Supreme Court in Swiss Ribbons Private Limited and Another v. Union of India and Others that insolvency proceedings initiated under Section 7 of the IBC are proceedings in rem, as they have an impact on the public at large. It is now significant to mention here that, in P. Anand Gajapathi Raju v. PVG Raju the court opined that judicial authority should refer the disputes to arbitration between the contracting parties if such a clause exists. Even though section 8 of the Arbitration Act compels the court to refer the parties to arbitration, there are certain exceptions to the application of this rule. The Arbitration Act does not include any provision excluding a certain class of disputes terming them ‘non-arbitrable’ however, section 34 and section 48 of the Arbitration Act provide that an arbitral award will be set aside if the court finds that “the subject matter of the dispute is not capable of settlement by arbitration under the law for the time being in force.” In the instant case, the court, while doing so, considered the dicta in the Booz Allen and Hamilton Inc v SBI Home Finance Limited & others, where the Supreme Court, while recognizing the mandatory duty imposed under section 8 of the Arbitration Act, stated that where the dispute is non-arbitrable, the court should refuse to refer the parties to arbitration even though the parties have agreed upon arbitration as the forum for settlement of the dispute. In the aforementioned case, the Supreme Court explicitly stated that insolvency disputes are not arbitrable even when there is an arbitration agreement between the parties. However, the MNCLT’s decision in the present matter to a certain extent deters the initiation of CIRP against healthy, debt-free companies purely as a pressure tactic before an already burdened judiciary.

Whether Arbitration Act prevails over IBC?

In the present case, the NCLT referred the parties to arbitration, but it is crucial to throw light on the fact that it didn’t hold that the Arbitration Act would prevail over IBC. While the IBC was introduced to “consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons”, the Arbitration Act was promulgated to “consolidate and amend the law relating to domestic arbitration”. Thus, both the statutes are special statutes which operate in different fields of law. Section 238 of the IBC gives an overriding effect to it over all other statues. In a case where the underlying debt relates to the contract where parties have decided to submit their disputes in arbitration, an overlap between arbitration and insolvency proceedings may arise. The judicial authority in that situation under Section 8 of the ACA must refer the parties to the arbitration. At this juncture M/S Emaar Mgf Land Limited v. Aftab Singh, it is pertinent to mention the dicta of the court in where the court held that Section 8 of the ACA cannot be given such expansion where it besieges the intention of the special legislation. Interestingly, the NCLT in Para 5.2 of the case noted that “the subject matter of this IA – seeking a reference to arbitration in a petition filed under section 7 of the IBC – is something that is res Integra.” Thus, it is conclusively argued that the IBC will have an overriding effect over the ACA. Hence, the Hon’ble Mumbai bench of the NCLT has erred in dismissing the Section 7 IBC petition filed by Kotak Group by virtue of section 238, and hence, the order of the NCLT is wrong in law.

Concluding Remarks

The insolvency process is a time-bound process that endeavors to revive the distressed companies and does not offer a recovery forum. Insolvency proceedings are proceeding in rem impacting the public at large. For the first two questions, it can be easily concluded that the NCLT cannot refer to the parties for arbitration and the Arbitration Act cannot prevail over the IBC. Hence, it is clear that NCLT has hence taken a contrasting view from the law laid down by the Apex Court in a catena of judgments and has set a wrong precedent by referring an insolvency dispute (which arises out of rights in rem) to the arbitration because once the NCLT is satisfied as to the existence of ‘default’ according to section 7 of the IBC, the existence of an arbitration agreement between the parties would not restrict the NCLT from initiating CIRP against the corporate debtor. Therefore, section 8 of the Arbitration Act would not prevail over section 7 of the IBC.

About SignalX's 29A Eligibility Automation Solution.

SignalX's 29A Eligibility Check Automation solution is custom built to help Insolvency Professionals analyze RA's, discover connected parties, establish CD/RA independence and analyze CDs. Take a tour of our 29A solution by booking a free live demo today.

Click here to book a Demo