The Conundrum of Arbitrability of Insolvency Disputes: Need for a legal framework and proactive role of appropriate forum [Part I]

By Anushka Rungta, Student at Maharashtra National Law University Mumbai, and Pratik Irpatgire, Alumnus of Maharashtra National Law University Mumbai and Advocate

Introduction

At the outset, the unprecedented times in lieu of COVID-19 has casted a lot of skeptical approaches in the backdrop especially during the adjudication of insolvency proceedings, thus placing it notably and inevitably upon the adjudicatory authorities to preclude inadvertent interpretation of statutory remedies.    

In the Kotak India Case, the National Company Law Tribunal, Mumbai while adjudicating the insolvency plea under §7 of Insolvency and Bankruptcy Code, 2016 referred the dispute to arbitration invoking §8 of the Arbitration and Conciliation Act, 1996. Notably, the NCLT has evidently bypassed the fundamental objective of Insolvency and Bankruptcy Code by manifestly referring the parties for arbitration.

Factual Background

The dispute arose out of the ‘Share Subscription and Shareholder agreement’ (SSSA) originally instated between the Kotak Venture Fund-1 (Financial debtor) and Indus Biotech Pvt Ltd. (Corporate Debtor). The applicant eventually, as per the SSSA, subscribed to the equity shares as ‘Optionally Convertible Preference Share’.

In the due course of Qualified Initial Public offering process, the dispute arose between the parties in relation to the calculation and conversion formula required to be followed while redeeming OCRPS into the equity shares. During the pendency of the dispute, the applicant in light of the same, sought to trigger the early redemption clause incorporated in SSSA in accordance to which OCRPS were issued.

Aggrieved by the inaction and failure of the respondent in pursuance to redemption of OCRPS, the applicant chose to file an application under §7 of IBC before the NCLT seeking the initiation for Corporate Insolvency Resolution Procedure (CIRP).

However, the dispute changed its course when the applicant invoked an ‘arbitration clause’ as prescribed under the SSSA. In response, the respondent filed an Interlocutory Application before the NCLT Mumbai seeking the relief to refer the dispute to the arbitration tribunal in accordance with the SSSA. Considering the relief sought by the corporate debtor, the NCLT by virtue of §8 referred the dispute to the arbitration tribunal and dismissed the original company petition filed by the financial creditor under §7 of IBC. Thus, this raises a debatable question with regard to adjudication of Insolvency dispute by arbitration tribunal and the locus standi under §7 of IBC.

Aggrieved by the decision of NCLT, the Kotak India ventures preferred a Special Leave Petition (SLP) before the Supreme Court. Moreover, one of the parties in said SLP, the Indus Biotech Private Ltd who is also the respondent, filed an Arbitration Petition before the Supreme Court for appointment of arbitrator to resolve the said dispute. While, it was the perceived by Supreme Court that the cause and subject matter in both the petition was similar in nature, it chose to club the petitions.

Dissecting Supreme Court Decision

The Supreme Court while allowing the Arbitration Petition propounded a very vital aspect in the backdrop of §8 of Arbitration Act and §7 of IBC.  The decision of the Supreme Court is based upon the three important facets (i) Powers of adjudicating authorities to arbitral tribunal (ii) overriding the effects of IBC and (iii) arbitrability of insolvency proceedings. It was contended before the Apex court, that the NCLT erred in adjudging an application filed under §8 of Arbitration Act. Additionally, on the similar lines it contended that, it is a legal duty casted upon the NCLT to strictly comply with the procedures as contemplated under §7 of IBC. The Supreme Court, in order to assume the status of a proceedings in rem, intensely relied on the earlier precedent embraced in the celebrated cases of Swiss Ribbon Private Limited and Another vs. UoI and Booz Aleen and Hamilton vs SBI. However, it was observed that in view to apprehend the status of proceedings in rem, court opined that the stage of proceedings at which the said reference to the arbitration tribunal was made is relevant. Thus, as the instant case was yet to be admitted by the NCLT, therefore the status of rem could not be assumed.

If any proceeding is pending with the adjudicating authority under §7 of the IBC, wherein the petition is admitted upon the adjudicating authority by recording the contentment with regard to the default and the debt being due from the corporate debtor. The present case establishes that in such a circumstance, any application seeking reference to Arbitration under §8 of the Arbitration and Conciliation Act made thereafter will not be maintainable.

This decision by the Apex court has opened up new avenues for adjudicating authorities to exercise their powers under §8 of Arbitration Act. Although the Apex court has attempted to strive and settle the conundrum, it can be very-well argued that in coming times it can rather lead to many disputes pertaining to arbitrability of insolvency disputes. In light of the same article shall discuss few important aspects regarding the role casted upon the adjudicating authorities.