Indus Biotech Private Limited v. Kotak India Venture Fund-I: Arbitration Of Insolvency Proceedings?

[By Hitesh Nagpal]

The author is a student at Maharashtra National Law University, Mumbai.

In a recent decision, dated 9 June 2020, the National Company Law Tribunal(“NCLT”) Mumbai Bench in Indus Biotech Private Limited v. Kotak India Venture Fund-I, referred the financial creditor and the corporate debtor to arbitration while adjudicating a plea under section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”). In this article, the author contends that the decision of the NCLT is erroneous on two grounds; firstly, the disputes pertaining to insolvency are not capable of being referred to arbitration and secondly, the provisions of the IBC prevail over the provisions of the Arbitration & Conciliation Act, 1996 (“Arbitration Act”).

Factual Background

In 2007, Kotak India Venture Fund-I (“Financial Creditor”) subscribed to equity shares and Optionally Convertible Redeemable Preference Shares (“OCRPS”) issued by Indus Biotech Private Limited (“Corporate Debtor”). In light of regulation 5(2) of the Securities and Exchange Board of India (Issue of Capital & Disclosure Requirements) Regulations 2018, the financial creditor opted to convert OCRPS into equity shares to make a Qualified Initial Public Offering (“QIPO”). During the QIPO process, a dispute arose between the parties pertaining to the calculation and conversion formula to be followed while converting OCRPS into equity shares and while the dispute was ongoing, the financial creditor invoked the provisions of the Share Subscription and Shareholders Agreement (“SSSA”) pertaining to the early redemption of OCRPS. When the corporate debtor failed to redeem the OCRPS within the prescribed timeline, the financial creditor filed an application under section 7 of the IBC to initiate the Corporate Insolvency Resolution Process (“CIRP”) against the corporate debtor alleging that there was a default of ₹367,07,50,000/-.

Subsequently, the corporate debtor filed an application under section 8 of the Arbitration Act contending that the SSSA contains an arbitration clause and therefore, the application filed by the financial creditor shall be dismissed and the parties shall be referred to arbitration. 

Issue

Will the provisions of the Arbitration Act prevail over the provisions of the IBC?

NCLT’s Judgement

By placing reliance on the decisions of the Supreme Court in Hindustan Petroleum Corporation Limited v Pinkcity Midway Petroleums and P Anand Gajapathi Raju & others v PVG Raju (dead) & others, it was observed that where an arbitration clause exists, the court has a mandatory duty to refer the parties to arbitration. Moreover, the NCLT pointed out that “the Corporate Debtor is a solvent, debt-free and profitable company. It will unnecessarily push an otherwise solvent, debt-free company into insolvency, which is not a very desirable result at this stage.”

In light of this, the NCLT dismissed the application filed under section 7 of the IBC and referred the corporate debtor and the financial creditor to arbitration. 

Analysis

Insolvency As A Subject Matter Is Not Arbitrable

 In the present case, there is no dispute pertaining to 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. 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 Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd., the Apex Court, while deciding the scope of section 8 of the Arbitration Act, held that:

 “Sub-section (1) of Section 8 provides that the judicial authority before whom an action is brought in a matter will refer the parties to arbitration the said matter in accordance with the arbitration agreement. This, however, postulates, in our opinion, that what can be referred to the arbitrator is only that dispute or matter which the arbitrator is competent or empowered to decide.”

The application for initiating CIRP belongs to the category of dispute which is not capable of settlement by arbitration. As held in Pioneer Urban Land and Infrastructure Limited & another v Union of India, these are matters in rem, which the arbitrator has no power to reward.  In the landmark case of Booz Allen and Hamilton Inc v SBI Home Finance Limited & others, 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 despite the fact that the parties have agreed upon arbitration as the forum for settlement of the dispute. In the aforementioned case, the Supreme Court explicitly stated that disputes pertaining to insolvency are not arbitrable even when there is an arbitration agreement between the parties.

Therefore, the NCLT should have refused to refer the parties to arbitration as insolvency as a subject matter is not arbitrable.

Overriding Effect Of IBC

It is pertinent to note that the well-established principle of generalia specialibus non derogant i.e., special law prevails over general law, does not apply in the present case as both IBC and the Arbitration Act are special laws. In Engineering Enterprises v Principal Secretary, Irrigation Department, it was held that the Arbitration Act is “a special law, consolidating and amending the law relating to arbitration and matters connected therewith or incidental thereto.” Insofar as IBC is considered, section 238 clearly states that “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.”

In a plethora of cases such as Bhoruka Steel Ltd. vs. Fairgrowth Financial Services Ltd, it has been held that when there is a conflict between the provisions of two special laws, the provision of the later enactment shall prevail over the earlier one. Therefore, it can be concluded that in the present case, section 7 of the IBC has an overriding effect as IBC, being enacted in 2016, would prevail over the Arbitration Act which was enacted in.

In the present case, the NCLT delved into the nature of the dispute and held that the dispute between the parties pertains to the valuation of OCRPS and therefore, it would be better suited for arbitration. Moreover, it held that admitting the application filed under section 7 of the IBC would push a solvent, debt-free and profitable company into insolvency, which would be unnecessary. This decision of the NCLT is contrary to the decision of the Supreme Court in Innoventive Industries Ltd. v ICICI Bank, wherein it was held that when an application is filed under section 7 of the IBC, the adjudicating authority is only required to see whether a default has occurred.

Conclusion

It is well established that certain disputes cannot be referred to arbitration and insolvency is one such category laid down in decisions of the Supreme Court where disputes would be considered as non-arbitrable. The NCLT while passing the judgment failed to take into consideration that the provisions of the IBC would prevail over the Arbitration Act as IBC is a subsequent legislation i.e., later law.

In light of the above, the decision of dismissing the application filed under section 7 of IBC and referring the financial creditor and corporate debtor to arbitration was erroneous.

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