Arbitration Agreements and Insolvency Proceedings – An unresolved conflict

Introduction

The National Company Law Tribunal (“NCLT”) Mumbai Bench, on 9th June 2020, in the case of Indus Biotech Private Limited v. Kotak India Venture Fund-I, referred the case to Arbitration, while refusing to admit the application filed u/s 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). It has raised very important questions in the Insolvency regime regarding (i) whether the NCLT has jurisdiction to refer the matter to arbitration, (ii) the overriding effect of IBC and (iii) the effect of a pre-existent arbitration agreement on insolvency proceedings.

This blog analyses the judgement with respect to the questions outlined above and further tries to answer those with the help of judicial precedents.

Factual Matrix

Kotak Venture Fund filed an application to initiate Corporate Insolvency Resolution Process (“CIRP”) against the Indus Biotech (Corporate Debtor) claiming that the debtor wasn’t able to redeem the Optionally Convertible Redeemable Preference Shares (“OCRPS”) as per the clause provided under the Share Subscription and Shareholders Agreement (“SSSA”). Subsequently, Indus filed another application u/s 8 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) to refer the matter to arbitration due to the existence of an arbitration clause in the SSSA.

The NCLT observed that the dispute centred on the valuation of the OCRPS, right of a financial creditor to redeem OCRPS, etc. Hence, the matter was arbitrable. Further, it said that the Indus was “a solvent, debt-free and profitable company.” Thus, no meaningful purpose would be served by initiating CIRP against it.

Jurisdiction of NCLT under IBC

The Supreme Court (“SC”) in Innoventive Industries Ltd v. ICICI Bank, held that when an application is filed u/s 7 of the IBC, the Adjudicating Authority only needs to ascertain whether a default has occurred and when this is proved to the satisfaction of the adjudicating authority, it may admit or reject the application. It is thus well settled by the SC that the only thing NCLT can do is either admit or reject the application filed u/s 7 of the IBC. Hence, the NCLT doesn’t have the jurisdiction to refer the matter to arbitration.

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. 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.

Section 238 of IBC provides an overriding effect to the code. It reads “The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.” Hence, when there is a conflicting provision of another act, the IBC will prevail by the virtue of section 238 of the IBC.

The NCLT, Ahmedabad Bench in the case of ABG Shipyard Ltd. v. ICICI Bank Ltd, held that the IBC would prevail over the Electricity Act, 2003. The Tribunal relied on the SC’s judgement in KSL and Industries Ltd. v. Arihant Threads Ltd., wherein the SC held that “it is settled law that when there are two enactments passed by the Parliament, and if there is any provision contained in such Acts which is repugnant to another, the provisions contained in the Act, which is later in point of time, shall prevail”. Hence, the NCLT, in this case, held that since both the IBC and the Arbitration Act are ‘special law’ and IBC being the later enacted law shall prevail over the Electricity Act. Further the National Company Law Appellate Tribunal (“NCLAT”), in Jagmohan Bajaj v. Shivam Fragrances Private Limited, noted that the IBC is supreme and no remedies are available under ordinary law so far as Insolvency Resolution Process is concerned.

The logical corollary to the above mentioned judicial precedents is that the IBC shall prevail over the Arbitration Act by virtue of section 238 and hence, the order of the NCLT is wrong in law.

Does an Arbitration Agreement hold any value in Insolvency Proceedings?

View of Indian Courts

A day before NCLT Mumbai’s decision in Kotak v Indus, the NCLT Bengaluru Bench in Mr. Harish P. v. M/s. Chemizol Additives Pvt. Ltd, also referred the parties to Arbitration. The NCLT noted that the Petitioner had not invoked other remedies available to him except for the provisions of the IBC. Further, it held that the petitioner can avail the alternate remedy available in the agreement, which is binding on both the parties. The petitioner cannot ‘selectively’ choose to insist payment as per the terms of the agreement, without invoking the provisions of alternated remedy provided under the agreement.

The NCLAT in Mrs. Nandhitha Vedam v. M/s. Udhyaman Investments Pvt. Ltd. & Anr was of the view that the existence of arbitration agreement cannot be a ground to reject an application filed u/s 7 of the IBC, though it can be considered if the application would have been filed u/s 9 of the IBC. Whereas NCLAT in the case of Achenbach Buschhutten CmbH & Co v. Arcotech Ltd, held that mere clause of arbitration in an agreement cannot be used as a ground to reject an application filed u/s 9 of the IBC.

As we know that Section 238 of the IBC will have an overriding effect against the laws which are ‘contradictory’ to the provisions of the IBC. But also the NCLT Mumbai Bench, in the case of Guruashish Construction Pvt. Ltd. and Anr. v. Maharashtra Housing & Area Development Authority, it was held that Section 238 cannot be construed in a manner that it “bulldoze the rights of the parties”. It was further held that it is the duty of the adjudicating authority to ascertain which issue is hit by section 238 and which is not, and if it is not properly exercised, it will jeopardize the rights of the parties.

In the case of Union of India v. Parmar Construction, the SC held that “This Court has put emphasis to act on the agreed terms and to first resort to the procedure as prescribed and open for the parties to the agreement to settle difference/disputes arising under the terms of the contract through appointment of a designated arbitrator.” Thus, contractual obligations and rights of parties under a contract need to be taken into account.

Therefore, there is no settled view as of now in the Indian Courts.

International Approach

In AnAn Group (Singapore) Pte Ltd v VTB Bank (Public Joint Stock Company), the Singapore Court of Appeal held that the winding-up proceedings will be stayed or dismissed if there is a valid arbitration agreement between the parties and the dispute falls within the scope of the arbitration agreement.

The English Court of Appeal in Salford Estates (No. 2) Ltd v Altomart Ltd found that when faced with a disputed debt that is subject to an arbitration agreement, the English courts ought to dismiss or stay the winding-up application or else it would “inevitably encourage parties to an arbitration agreement – as a standard tactic – to bypass the arbitration and the Arbitration Act 1996 by presenting a winding-up petition”.

The key objection to AnAn’s approach was well summarized by the learned first instance judge in VTB Bank (Public Joint Stock Co) v Anan Group (Singapore) Pte Ltd in Para 68 as follows: “On the whole, the Salford approach appears to “place a very heavy obstacle in the way of a party who presents a petition claiming sums due under an agreement that contains an arbitration clause” (see Eco Measure at [10]). This may be seen to deal a blow to the insolvency regime since creditors legitimately seeking to wind up insolvent companies may be delayed in or entirely derailed from the recovery of their debts by debtor-companies, which would be able to stave off winding-up proceedings simply by raising disputes which they say should be resolved by arbitration, even if these allegations may be entirely unmeritorious.”

Hence, there is a lack of consistency in the courts of other jurisdictions.

Conclusion

For the first two questions, it can be easily concluded that the NCLT cannot refer the parties for arbitration and the Arbitration Act cannot prevail over the IBC. As for the last question regarding the effect of the pre-existent arbitration agreement on the insolvency proceedings, it is uncertain, inconsistent. This issue is not yet addressed by the SC and in a manner is yet unsettled. With the inconsistency between the supremacy of IBC, contractual obligations and rights of parties, there is a prudent need that the Apex Court addresses and settles this issue.


ABOUT THE AUTHOR

Ashhab Khan

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Ashhab Khan is a second-year law student pursuing B.A.L.L.B (Hons.) from NLIU, Bhopal. He can be reached here.

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