This article has been written by Amarpal Singh, pursuing a Certificate Course in National Company Law Tribunal (NCLT) Litigation from LawSikho.
Table of Contents
Introduction
The National Company Law Tribunal ( hereinafter referred as “NCLT”) Mumbai bench pronounced its judgement in the case of Indus Biotech Private limited v. Kotak India venture fund 1 on 9th June 2020. The decision created chaos in the industry as the NCLT Mumbai bench dismissed the application filed by Kotak India Venture Fund-I under section 7 of the Insolvency and Bankruptcy Code, 2016 (hereinafter as “Code”) and observed that the arbitration clause in the agreement was vide enough to cover the dispute between both the parties. The decision indicates that the provision of the Arbitration and Conciliation Act, 1996 will prevail over the Code.
This article aims to analyze the above-mentioned decision and shed light on the erroneous interpretation of laws by the NCLT Mumbai bench.
Facts of the case
Kotak India Venture Fund -1 (hereinafter referred as “Financial Creditor”) had subscribed to Optionally Convertible Redeemable Preference Shares (hereinafter referred as OCRPS) of Indus Biotech Private Limited (hereinafter referred as Corporate Debtor) in the year 2007. Subsequently, Corporate Debtor had entered into a share subscription and shareholder agreement (hereinafter referred as SSSA). In pursuance to regulation 5(2) of the Securities Exchange Board of India (Issue of Capital & Disclosure Requirement) Regulations, 2018 (hereinafter referred as SEBI ICDR Regulations) the financial creditor chose to convert OCRPS into equity shares to make a Qualified Initial Public Offering (hereinafter referred as QIPO).
During the conversion process, a dispute arose between the creditor and the Corporate Debtor with respect to the calculation and conversion formula to be used for the conversion of OCRPS into equity shares. According to the formula, which was sought to be applied by the Financial Creditor, it would have given them approximately thirty percent of the paid-up share capital of the Corporate Debtor. Whereas, according to the formula which was sought to be applied by the Corporate Debtor in line with the reports of auditors, independent valuers, and the agreed formula, it would have given the financial creditor ten percent of the total paid share capital of the Corporate Debtor.
While the dispute between the Financial Creditor and Corporate Debtor was ongoing, the Financial Creditor triggered the clause of early redemption of OCRPS in the SSSA. When the Corporate Debtor failed to redeem the OCPRPS, the Financial Creditor filed an application under Section 7 of the Code before the NCLT, Mumbai Bench to initiate the corporate insolvency process (hereinafter as “CIRP”) against the Corporate Debtor.
Subsequently, Corporate Debtor invoked the arbitration clause provided in the SSSA and filed an Interlocutory Application before the NCLT under Section 8 of the Arbitration and Conciliation Act, 1996, pleading that the SSSA contains an arbitration clause therefore, the application filed by the Financial Creditor should be dismissed and the parties should be referred to arbitration.
Issue before the NCLT Mumbai bench
Will the provisions of the Arbitration and Conciliation Act, 1996 prevail over the Code? If so, in what circumstances?
Judgement
The NCLT Mumbai bench observed that it is a settled position in law that a special law prevails over the general law (generalia specialibus non -derogant). In the case of Consolidated Engineering v. Principal Secretary Irrigation department, it was held that Arbitration and Conciliation Act, 1999 is a special law. Further reference was made to P. Anand Gajapathi v. PVG Raju & Ors. wherein it was held that language of Section 8 of Arbitration and Conciliation Act, 1996, is clear and that the court is under an obligation to refer parties to the arbitration.
Section 238 of the Code was also referred to which states that the provisions of the Code will override vis-a-vis anything inconsistent contained in any other law. The NCLT Mumbai bench held that in the present case the dispute revolves around three things:
- The valuation of Financial Creditor’s OCRPS.
- The right of the Financial Creditor to redeem OCRPS when it had decided to participate in the process to convert the OCRPS into equity share of OCRPS.
- Fixing the QIPO date.
The Court held that the above-mentioned are important determinants in coming to the judicial conclusion that a default has occurred. Thus, the invocation of the arbitration clause was held to be justified and accordingly, and the section 7 application filed by the financial creditors under the Code was dismissed.
Analysis of the decision
Determinants for Insolvency
In the current decision, the NCLT erroneously interpreted the case of Innoventive Industries Private Limited v. ICICI Bank where it was held by the Supreme Court of India that NCLT is required to satisfy itself on certain grounds which include the following:
- The Corporate Debtor has defaulted.
- An application filed by the Financial Creditor is complete.
- There are no disciplinary proceedings pending against the proposed interim resolution professional.
The judgment further provided that the NCLT is not required to look into the factors other than those mentioned above. If all the above factors are satisfied then the NCLT must admit the application filed under Section 7 of the Code.
Whereas, the NCLT Mumbai bench, in the present case, gave its judgment solely based on the determinants that led to the occurrence of default. This is because the NCLT Mumbai bench observed that the determinants that led to the occurrence of default are arbitrable so, the invocation of an arbitration clause in the agreement is justified.
In the judgement, NCLT Mumbai Bench directed both the parties to reconcile their differences through arbitration. Further, in the judgement, it was also observed that if Section 7 application is once admitted, then no meaningful purpose will be served by pushing a solvent and debt-free company.
Existence of an arbitration agreement
In the case of M/s Nanditha Vedam v. M/s. Udhyam Investment Pvt. Ltd & Anr it was held that the existence of an arbitration agreement is not a ground to oppose a section 7 application under the Code. Further, in the case of Haryana Telecom Industries v. Sterile (India) Industries, it was held that the petition filed under the Companies Act,2013 for insolvency cannot be referred to arbitration, as the arbitrator does not have jurisdiction to order winding up of the Company.
The Supreme Court of India in the case Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd held that the judicial authority can refer parties to arbitration inter-alia if there is an existence of arbitration agreement between the parties; the dispute is the subject matter of arbitration agreement and the relief sought are those which can be granted by an arbitrator. In the case of Jagmohan Bajaj v. Shivam Fragrances Limited before the NCLAT, it was held that the Code is supreme for triggering CIRP and the same cannot be eclipsed by taking resort to remedies available under any ordinary law of the land.
Further, in the case of Pioneer Infrastructure v. Union of India the Supreme Court of India held that the proceedings under the code are right in rem and it is trite in law that proceedings in rem cannot be referred to arbitration under Section 8 of the Arbitration and Conciliation Act, 1996.
In light of the above decision, a conclusion can be drawn that the NCLT Mumbai bench should have pursued the application filed under Section 7 of the Code and decided it on merits. After, pursuing the application it could have either rejected or accepted the application without going into the question of arbitrability of the dispute. Further referring the parties by the NCLT was beyond the jurisdiction of NCLT and the decision was erroneous as the relief sought in the application filed under Section 7 of the Code, can not be granted by an arbitrator.
Conundrum between Arbitration and Conciliation Act, 1996 and IBC
Although the NCLT Mumbai bench had directed both the parties to arbitration, it does not mean that Arbitration and Conciliation Act, 1966 prevails over the Code. Section 238 of the Code contains a non-obstante clause which states that the Code will override any other law which is inconsistent with its provisions.
It is pertinent to note both the Arbitration and Conciliation Act,1996 and the Code are special laws. The Code was enacted to consolidate and amend the laws relating to insolvency resolution of corporate persons. Whereas, Arbitration and Conciliation Act, 1996 was enacted to consolidate and amend the law relating to domestic arbitration. Thus, both are special statues which operate different area of law.
In the plethora of cases one of them being KSL Industries Pvt. Ltd. v. Arhiant Threads Ltd. Supreme Court of India has held that “it is a settled law if there are two enactments passed by the parliament, and if there are provisions in both the enactments which are inconsistent to each other, the enactment which was passed later will prevail.”
Thus, it can be interpreted and implied that the Code will prevail as it was passed in 2016. Whereas, the Arbitration and Conciliation Act was passed in 1996.
Conclusion
To conclude, the NCLT Mumbai bench did not have the jurisdiction to refer the parties to arbitration, and also it had erroneously interpreted the laws to arrive at the decision. If the decisions like these are passed by NCLT, it will not only unnecessarily cause a delay in the initiation of CIRP but also discourage operational and financial creditors to approach the NCLT for efficacious remedy. Consequently, the objective of the Code, that is “establishing a time-bound process and searching for a resolution, so that the companies can be saved from bankrupt”, will be defeated.
References
- Mayank Udhwani, IBC.v. Arbitration: A case for the prevalence of the IBC over Arbitration and Conciliation Act, IndiaCorplaw, (June 22, 2020), https://indiacorplaw.in/2020/06/ibc-v-arbitration-a-case-for-prevalence-of-the-ibc-over-the-arbitration-and-conciliation-act.html
- Indus Biotech v. Kotak: Interaction between Insolvency and Arbitration Regimes in India, NLSIR Review (November 12, 2020), https://nlsir.com/indus-biotech-v-kotak-interactions-between-insolvency-and-arbitration-regimes-in-india/
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