INTRODUCTION

In a commercial contract, a default by one of the parties entitles the innocent party to invoke the arbitration clause and refer the dispute to the arbitral tribunal where the contract provides for the same. At the same time, the default might also fall within the contours of the Insolvency and Bankruptcy Code (IBC). However, in the event an insolvency process is initiated by one of the parties, can the other party rely on the arbitration clause to oust the jurisdiction of the National Company Law Tribunal (NCLT) and claim reference to arbitration as a right? In other words, the question of law which arises is the effect of overriding one remedy over the other.

In the recent judgment passed by the hon'ble Supreme Court in the case of TATA Consultancy Services Limited v. Vishal Ghisulal Jain, Resolution Professional, SK Wheels Private Limited1, the court answered the same in negative and held that "in terms of Section 238 and the law laid down by this Court, the existence of a clause for referring the dispute between parties to arbitration does not oust the jurisdiction of the NCLT to exercise its residuary powers under Section 60(5)(c) to adjudicate disputes relating to the insolvency of the Corporate Debtor."

BACKGROUND

The appellant, TATA Consultancy Services Limited (Appellant), entered into a facilities agreement (Agreement) with the respondent, SK Wheels Private Limited (Respondent). The Respondent had to provide premises with certain facilities to the Appellant for the purposes of conducting examinations. The agreement provided for a termination clause that entitled either party to terminate the agreement immediately by a written notice in case the breach is not cured within 30 days of the receipt of the notice. The Appellant served the termination notice to the Respondent on the 10th of June 2019 with immediate effect. The Corporate Insolvency Resolution Process was also initiated by the appellant against the respondent on the 29th of March 2019, which came to the knowledge of the Respondent on 24th April 2019.

In pursuance of this, a miscellaneous application was instituted by the Respondent under Section 60 (5) (c) of the IBC.2 The NCLT granted an ad-interim stay on the termination notice. NCLT noted that prima facie, the requisite notice of 30 days was not granted to the Respondent. In appeal, the NCLAT upheld the order of NCLT observing that "it had correctly stayed the operation of the termination notice since the main objective of the IBC is to ensure that the Corporate Debtor remains a going concern." The matter was finally appealed to the hon'ble Supreme Court where inter alia two issues were framed by the court-

  1. Whether the NCLT under Section 60(5)(c) of the IBC can adjudicate upon contractual disputes between the parties?

  2. Whether an ad-interim stay can be imposed by the NCLT?

THE HON'BLE SUPREME COURT'S VIEW ON THE JURISDICTION OF NCLT

The court while answering the above questions opined that though Clause 12 (d) of the Agreement between the parties provided for arbitration, Section 238 of the IBC had an overriding effect over it. Section 238 of the IBC reads as under:

"Section 238 - Provisions of this Code to override other laws

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." 

To substantiate the same, the hon'ble court relied on a three-judge bench Supreme Court judgment,3 wherein it was held that the IBC has an overriding effect over all the other laws. Further, the court cited the Gujarat Urja Vikas v. Amit Gupta & Ors.,4 judgment to elaborate the point that the bilateral commercial contract between the parties is an 'instrument' in terms of Section 238 of the IBC and that where the bilateral commercial contract between the parties provided that the disputes would be adjudicated by the Gujarat Electricity Regulatory Commission, the same does not bar the jurisdiction of the NCLT in context of insolvency proceedings. Similarly, the agreement in the present matter being an instrument under Section 238 of the IBC can be overridden by the IBC5 and thus, an arbitration clause cannot oust the jurisdiction of the NCLT to exercise its residuary powers.6

With regard to the two issues framed in this matter, the apex court held that the impugned order of the NCLAT and NCLT lack application of mind and are oblivious to the very core concept of corporate debtor's survival as a going concern. It was held that the inability of the Respondent to remedy the deficiency of services was not motivated by the insolvency of the respondent and thus the NCLT had no jurisdiction to entertain the present contractual dispute.7 The court accordingly set aside the NCLAT order and dismissed the proceedings for absence of jurisdiction.

ANALYSIS

Section 60(5) (c) of the IBC provides that notwithstanding anything to the contrary contained in any other law for the time being in force, the NCLT has the jurisdiction to entertain or dispose-off any question of priorities or any question of law or facts that are arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person under this Code. Hence, it is apparent from the scheme of the provision that where an application is made before the NCLT under Section 60(5) (c) of the IBC, the NCLT has the jurisdiction regardless of whether the parties have an alternate forum for dispute resolution under any other law.

Again, the non-obstante clause appended to Section 238 gives it the widest amplitude due to which IBC would have the power to override anything inconsistent contained in any other enactment.8 Therefore, no other right under any other law can come in the way of IBC9 as the Code is complete in itself.10

On the other hand, Section 8 of the Arbitration and Conciliation Act, 1996, requires the judicial authority [it must be noted that the Act provides for "judicial authority" which includes Tribunals] to refer the parties to arbitration where the matter brought in is a matter which is subject of an arbitration agreement, unless it finds that prima facie no valid arbitration agreement exists. This obligation of the judicial authority is notwithstanding any judgment, decree or order of the Supreme Court or any court.

It has been held that the language of Section 8 of the Act, 1996, is preemptory in nature and hence, in cases where there is a valid arbitration clause in the agreement, it is obligatory for the court to refer the parties to the arbitration in terms of the arbitration agreement.11

Therefore, it creates a conundrum as to which of the fora would have the jurisdiction to adjudicate the dispute between the parties that have a valid arbitration agreement and where a simultaneous application has been filed to invoke the jurisdiction of the NCLT under Section 60(5) (c) of the IBC. The court answered this question in Solidaire India Ltd. v. Fairgrowth Financial Services Ltd and Ors.12 and gave an important principle of interpretation that if two special statutes contained non-obstante clauses, and if the harmonious construction cannot resolve the inconsistencies, then the statute which was later in time, will prevail.

Hence, one way of resolving this conundrum would be to hold that as the IBC is a later code than the Act, it shall ipso facto prevail and therefore, Section 238 of IBC shall override Section 8 of the Act, 1996.

Another aspect to be considered, however, is that the obligation of the judicial authority under Section 8 arises only upon application made to it. Wherein Section 8 provides for "if a party to the arbitration agreement or any person claiming through or under him, so applies" indicating that the judicial authority must refer the parties to arbitration only upon an application made by either of the party.

One of the facets of "arbitrability" of a dispute under Section 8 of Act, 1996, as established by Booz Allen and Hamilton Inc v SBI Home Finance Ltd.13, is whether the parties have referred the disputes to arbitration. Therefore, where the parties have, in the first instance, waived off the right to arbitrate the dispute by not filing an application under Section 8, the dispute may not be referred to the arbitration and the NCLT shall have the jurisdiction to adjudicate upon the same, provided the dispute touches upon the issue of insolvency and a CIRP application has been filed.

CONCLUSION

The hon'ble court has taken a harmonious approach to reconcile the two courses of remedies that an affected party has in case of a breach of the contract by the other party. The court has established the position that where the main issue between the parties in its form and substance relates to insolvency, the same would be within the jurisdiction of NCLT under the IBC irrespective of any other remedy available under any other statute, and a dispute resolution clause in the contract would not bar the matter to be taken up in the insolvency proceedings. However, if the issue prima facie involves a contractual dispute, the same would not be amenable to insolvency proceedings and the arbitration clause would prevail and the arbitral tribunal would have the jurisdiction to entertain such contractual dispute. The parties must, therefore, be cautious while invoking the remedy of either arbitration or insolvency proceedings to avoid prolonged litigation and costs. 

Footnotes

1. Civil Appeal No. 3045 of 2020.

2. Miscellaneous Application No 2954 of 2019.

3. Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund, AIR 2021 SC 1638.

4. (2021) 7 SCC 209.

5. Supra note 1, Para 21.

6. Section 60 (5) (c) of the IBC provides for the residuary powers of the NCLT to adjudicate disputes.

7. Supra note 1, Para 27.

8. Pr. Commissioner of Income Tax v. Monnet Ispat and Energy Ltd., SLP(C) No. 6483/2018.

9. Bhanu Ram & Ors. v. M/s HBN Daries and Allied Ltd., Company Petition, (IB)-547(PB)/2018.

10. Duncans Industries Ltd. v. A.J. Agrochem, Civil Appeal No. 5120 of 2019.

11. Hindustan Petroleum Corpn. Ltd. v.  Pinkcity Midway Petroleums AIR 2003 SC 2881.

12. (2001) 3 SCC 71.

13. (2011) 5 SCC 532.

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