NCLT Mumbai orders reference to arbitration in an insolvency petition under the IBC

In a significant judgment dated 9 June 2020 titled ‘Indus Biotech Private Limited v. Kotak India Venture Fund-I’, the National Company Law Tribunal, Mumbai Bench-IV (NCLT) allowed an application filed by the corporate debtor, Indus Biotech Private Limited, (corporate debtor) under Section 8 of the Arbitration & Conciliation Act, 1996 (Arbitration Act) seeking reference to arbitration for settlement of the disputes between the parties, while dismissing the Company Petition filed by the financial creditor, Kotak India Venture Fund-I (financial creditor) under Section 7 of the Insolvency & Bankruptcy Code 2016 (IBC).

Brief Facts

Contentions raised on behalf of the Applicant/Corporate Debtor:

Contentions raised on behalf of the Financial Creditor:

Issue framed by the NCLT:

Will the provisions of the Arbitration Act prevail over the provisions of the IBC? If so, in what circumstances?

Judgment of the NCLT

The NCLT, after considering the facts of the case and various precedents passed by superior courts, as detailed hereinafter, allowed the application under Section 8 of the Arbitration Act for reference of parties to arbitration and dismissed the Company Petition under Section 7 of the IBC, holding it incapable of being admitted at this stage.

On Arbitrability of disputes

The NCLT took note of the judgment passed by the Supreme Court in the case of Booz Allen & Hamilton v. SBI Home Finance Ltd., (2011) 5 SCC 532 (Booz Allen), whereby it was held that generally all disputes relating to rights in personam (rights restricted to the parties within the contract) are considered to be amenable to arbitration and all disputes relating to rights in rem (rights which extend to parties outside a private contract) are required to be adjudicated by courts and tribunals. The Supreme Court further held that this principle is not rigid, and disputes relating to subordinate rights in personam arising from rights in rem are arbitrable.

Special law v. General law

The NCLT observed that it is settled law that generalia specialibus non derogant - special law prevails over general law. Reliance was placed upon the Judgment of the Supreme Court in the case of Consolidated Engineering Enterprises v Principal Secretary, Irrigation Department & others, (2008) 7 SCC 169 whereby the Arbitration Act had been held to be a special law, consolidating and amending the law relating to arbitration and matters connected therewith or incidental thereto.

The NCLT further summarized the rules of interpretation of general law versus special law as follows:

Reference to Arbitration under Section 8 of the Arbitration Act

The NCLT went on to hold that Courts have a mandatory duty to refer the parties to arbitration where an arbitration clause exists, placing reliance on Supreme Court judgements in the matters of Hindustan Petroleum Corporation Limited v Pinkcity Midway Petroleums, (2003) 6 SCC 503 and Gajapathi Raju & others v PVG Raju (dead) & others, (2000) 4 SCC 539.

Section 7 of the IBC

The NCLT observed that the IBC mandates the Adjudicating Authority to ascertain and record satisfaction as to the occurrence of default before admitting the application. Therefore, there has to be a judicial determination by the Adjudicating Authority as to whether there has been a ‘default’ within the meaning of section 3(12) of the IBC (Innoventive Industries Limited v ICICI Bank, (2017) SCC OnLine NCLAT 70).

Decision

In view of the foregoing observations and considerations, the NCLT finally held as follows:

As such, the application under Section 8 of the Arbitration Act filed by the applicant/corporate debtor came to be allowed and the Company Petition under Section 7 of the IBC filed by the Financial Creditor was dismissed.

Comment

It appears that the NCLT while passing the judgment failed to consider a significant question of law raised by the financial creditor, i.e. whether an insolvency petition can be referred to arbitration in light of the fact that the arbitrator does not have the jurisdiction to initiate the corporate insolvency resolution process, i.e., the relief sought by the financial creditor? The NCLT did not take into consideration the fact that  the Supreme Court has expressly held in the cases of Booz Allen and in Haryana Telecom v Sterlite Industries (India) Ltd., (1999) 5 SCC 688, that insolvency and winding up matters are non-arbitrable and an arbitrator has no jurisdiction to order winding up of a company.

Interestingly, in the case of Shalby v Dr. Pranav Shah (2018 SCC OnLine NCLT 137), NCLT Ahmedabad Bench when faced with a similar Application for reference to arbitration in an insolvency petition pending before it, dismissed the said application imposing heavy costs upon the applicant. It was held that irrespective of an arbitration clause in the agreement between the parties, the arbitrator does not have jurisdiction over the subject matter of an insolvency petition. The argument that the insolvency resolution process is not a right in rem was rejected by NCLT Ahmedabad.

Additionally, expressly refraining from admitting a petition under Section 7 of the IBC against an otherwise “solvent, debt-free and profitable company”, as in the instant case, may be contrary to the settled position of law that under Section 7, the moment the Adjudicating Authority is satisfied that a default has occurred, the petition must be admitted, as held by the Supreme Court in Innoventive Industries Ltd. v ICICI Bank and Anr., (2018) 1 SCC 407.

-          Ajay Bhargava (Partner), Wamika Trehan (Senior Associate), Shweta Kabra (Associate)

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