India: Insolvency And Bankruptcy Code, 2016 "I&B Code, 2016 V. Arbitration, 1996"

National Company Law Tribunal, Mumbai

Indus Biotech Private Limited

Kotak India Venture Fund-I

[IA No. 3597/2019 in CP (IB) No. 3077/2019] Date: 09.06.2020

FACTUAL BACKGROUND

In the present case, the Indus Biotech Pvt. Ltd. (Corporate Debtor) has filed a Interlocutory application under Section 8 of the Arbitration and Conciliation Act, 1996 (Arbitration Act, 1996) where in the underlying Insolvency petition was filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 (I&B Code) by Kotak India Venture Fund (Financial Creditor) seeking Corporate Insolvency Resolution Process.

The Financial Creditor and the Corporate Debtor entered into share subscription and shareholders agreement wherein Financial Creditor had subscribed to a total share capital of Rs. 27,00,00,000. Under the agreement, the Financial Creditor subscribed to equity shares and Optionally Convertible Redeemable Preference Shares (“OCRPS”).

After a while, the Financial Creditor chose to convert OCRPS into equity shares. In between this, the Creditor sought to trigger early redemption of the shares which the Corporate Debtor failed to. A dispute arose between the parties with regards to the calculation and conversion formula to be followed for conversion.

The Corporate Debtor invoked the arbitration clause under Article 20.4 of the agreement which provides for seat of Arbitration at Mumbai. However, the Financial Creditor sought to initiate the CIRP proceedings by filing a petition under Section 7 of the I&B Code.

ISSUES

Whether the provisions of the Arbitration & Conciliation Act, 1996 will prevail over the provisions of the Insolvency & Bankruptcy Code, 2016?

CONCLUDING VIEW

The Tribunal referred to the landmark judgement of Booz Allen and Hamilton Inc. V. SBI Home Finance Ltd. & Ors. (2011) 5 SCC 532, where in the Hon'ble Supreme Court examined the test of arbitrability. The Tribunal taking into consideration the test laid down by the Hon'ble Supreme Court noted that disputes which have subordinate rights in personam arising from rights in rem can be considered arbitrable.

Further, it was examined by the Hon'ble Supreme Court that, whether Arbitration Act is a special law and can be considered to prevail over I&B Code as a matter of general principle that special law prevails general law.

The Tribunal relied upon cases of Consolidated Engineering Enterprises v Principal Secretary, Irrigation Department & Ors. (2008) 7 SCC 169 and Hindustan Petroleum Corp. Ltd. v. Pinkcity Midway Petroleums (2003) 6 SCC 503, and noted that Arbitration Act, 1996 is a special act and the whenever there an arbitration clause exists, the Court has a mandatory duty to refer the dispute arising out of the contract to arbitration under Section 8 of the Arbitration Act, 1996.

However, this does not necessarily mean that one legislation would prevail over another. The Tribunal observed that I&B Code provides for consolidation and amendment of laws relating to reorganisation and insolvency resolution of corporate person and have a non- obstante clause. As it can be seen that both are special laws, the Adjudicating Authority has to determine under Section 7 application whether there is default within the meaning of Section 3(12) of the I&B Code. The Tribunal held that:

“5.12. In Innoventive Industries Limited v ICICI Bank & another,21 The Hon'ble National Company Law Appellate Tribunal (NCLAT) held that sub-section (5) of section 7 of the IBC provides for admission or rejection of application of a financial creditor where the adjudicating authority is satisfied that the documents are complete or incomplete. The Adjudicating Authority, post ascertaining and being satisfied that such a default has occurred, may admit the application of the financial creditor. In other words, the statute mandates the Adjudicating Authority to ascertain and record satisfaction as to the occurrence of default before admitting the application. Mere claim by the financial creditor that the default has occurred is not sufficient. The same is subject to the Adjudicating Authority's summary adjudication, though limited to ‘ascertainment' and ‘satisfaction' (paras 57 & 58).

5.13. Therefore, in a section 7 petition, 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.”

In the instant case, the Tribunal was satisfied that there is no default occurred and because Corporate Debtor is a debt free company, it is against the prudent norms to push it into insolvency proceedings at this stage. Therefore, the Tribunal allowed the application of Corporate Debtor and referred the parties to arbitration under Section 8 of the Arbitration Act, 1996.

AMLEGALS REMARKS

On the onset of the issue, the Tribunal declared that the issue of referring to arbitration in an application under Section 7of the IBC, 2016 is res intergra. Although the Tribunal did not explicitly answer the question whether IBC, 2016 or Arbitration Act, 1996 prevails, it did answer the procedure for determining how to deal with Section 7 application with respect to the commencement of proceedings.

The Tribunal being the adjudicating authority has to be satisfied that that there is a dispute within the meaning of Section 3(12) of I&B Code. From the observations above, it can be said that Section 8 of the arbitration agreement will not prevail over Section 7 and will not restrict the Tribunal in initiating CIRP against the debtor.

Originally published 20 July, 2020

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