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

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

Powers of NCLT to refer the dispute to Arbitration

The Indian legal position with respect to adjudication of Insolvency by arbitration tribunal has always been under paradox due to availability of alternative remedies as prescribed under IBC Laws. §8 and 45 of the Arbitration Act endows the judicial authority to refer the dispute to the arbitration tribunal as prescribed by the arbitration clause. However, the Supreme Court in its several earlier attempts has particularly ruled out the powers of the NCLT or Company Law Board with respect to the adjudication of application under Insolvency or Winding up of the company.

Interestingly, in the Kotak case, while referring the matter to arbitration, the NCLT evaded the findings made in the case of Swiss Ribbons Pvt Ltd. vs Union of India, wherein the Apex court held that the proceedings initiated in light of §7 of the IBC are with respect to proceedings in rem as they have to be decided by public fora. Moreover, in a said judgment the court also reiterated that adjudicating authority under the IBC exercises the inherent powers to resolve applications filed under §7 of IBC.

Although provisions of §8 and §45 of the Arbitration Act do not explicitly induce “arbitrability of dispute” or “arbitrability of insolvency disputes”, the disputes referred to arbitration are of nature which the arbitration tribunal is competent to adjudicate. Consequently, it is very difficult to practically ascertain how distinctly the proceedings pertaining under §7 of IBC can be referred to arbitration by judicial authority for further enquiry. 

Nevertheless, the Supreme Court has time and again put forth the concerns of binding nature over the jurisdiction of the arbitration tribunal for non-arbitrability of disputes pertaining to liquidation of a company. However, in the Rakesh Malhotra case the court carved out an exception for arbitrability of ‘Oppression and Mismanagement’ cases and held that arbitration should be retained wherever it is established that the petition is mala fide, vexatious and dressed up. Thus, such repugnancy by the Indian courts has led to uncertainty for the judicial authorities to refer the matter to the arbitration tribunal.

Test of Arbitrability- A Crossroad

In the celebrated case of Booz Allen and Hamilaton vs SBI Homes Pvt Limited, the Supreme Court adopted the ‘test of arbitrability’: an interesting approach in evaluating jurisdiction of arbitration tribunal in adjudication of certain disputes.

Accordingly, it was held that disputes pertaining rights in personam are to be yielded to arbitration whereas, on the supplementary side of the same judgment, the court held that disputes concerning rights in rem are to be adjudicated by the courts and judicial authority. Remarkably, the test of arbitrability is laudable and clearly restricts the arbitration tribunal from adjudication of disputes concerning the insolvency and winding up of the Company.

In a way this test reaffirms the importance of the subject matters of dispute which can be specifically tried by an arbitration tribunal. Hence, judicial authorities must be extremely careful in exercising its powers laid down under §8 and 45 of Arbitration Act. Such detour approaches practiced by NCLT can be subjected to disregard of judicial precedents. Therefore, the judicial authorities must take a firm stand in light of referring the insolvency dispute to the arbitration tribunal to carve out the ambiguity in the existing legal framework.

Further, the mere understanding of adjudication of dispute under IBC can be drawn from the case of Innoventive Industries Ltd. vs ICICI Bank in which the Hon’ble Supreme Court profoundly interpreted the facet of dispute under §7 the IBC.  The Court strictly interpreted the importance of adjudication authority in the disputes pertaining to proceedings of insolvency process. The judicial authority/adjudication authority cannot bypass the CIRP process. Thus, the predominance and proceedings under IBC stands over all the laws as clearly stated by the Apex court.To determine the validity of the arbitrability of the dispute,  the apex Court made a reference to four-fold test as propounded in the celebrated case of Vidya Drolia vs Durga Trading Corporation. Interestingly, the test fills the void of ambiguity that was created in the case Booz Allen, and therefore, any further reliance upon Booz Allen has become redundant.

As stated earlier, after observation of the Supreme Court, the insolvency proceedings are considered in rem, only in the circumstances when it is admitted by the adjudicating authorities. Thus, it can be induced from the decision of Supreme Court that the adjudicating authorities are empowered to decide the scope of dispute prior to admission of petition. Hence, it is made clear that the NCLT must first consider the Insolvency Application while keeping the §8 Application pending for consideration as the outcome of the Insolvency Application will ipso facto determine the §8 Application.

Overriding of IBC Laws over Arbitration can be justified by the principles of Interpretation

A statute is an edict of legislature. Considering the statutory remedies provided for the adjudication of dispute in both the statutes, the contention of alternative remedies can be raised by the contenders during the course of settlement of disputes. In such circumstances, the judicial authority should adopt the principles of interpretation with respect to remedies provided in the Act. In a general practice of interpretation, as a rudimentary principle, it is assumed that the statutes must read as a whole and subsequently, suggesting that the intention of the legislature must be gathered by reading the statutes as a whole.

Thus, it can very well be inferred from the non-obstante clause incorporated in §238 of IBC that it calls for an overriding effect to IBC over and above any other statute or legislation, in force in the country.  This overriding provision in IBC may be a counterproductive for judicial authorities as this does not generate an eloquent, entire perspective satisfactory for adjudication of dispute. However, this can certainly assist judicial authority to confirm their conscious interpretation of provision, generating an overall competency within the trial involving contentious issues of insolvency. The adjudication of the disputes by the arbitration tribunal is the wider perspective. In Arguendo, even in the circumstances where the matter is referred to the arbitration tribunal, §7 of IBC doesn’t bar NCLT from exercising its jurisdiction under §7 of IBC. Interestingly, the NCLT in the Kotak case failed to hold the Arbitration Act over the IBC Law.

Moreover, placing reliance on the principles of interpretations, if any inconsistency arises between two statutes, it is said that the special statutes prevails over the general statutes (generalia specialibus non derogant). At the outset in the present scenario, the IBC was enacted with special purpose and objectives.  However, it still remains unclear whether this principle can be applied in the dispute pertaining to the arbitration. 

Even if it is considered that the enactment of Arbitration Act and IBC Laws are made for special purposes The Supreme Court in the KSL and Industries Ltd vs Arihant Ltd has relied on the “test of later enactment”, the court while providing the justification in the said judgement has clearly emphasised that “a later enactment should prevail over the former.”

Conclusion

The recent judgement of Supreme Court derives certain dimensions for adjudicating authorities to adjudicate upon. The application under §7 of the IBC is ought to be decided on the meritorious grounds. However, after the decision of the Supreme Court of India, the adjudicating authorities derives the power to refer the dispute to an arbitration tribunal. Such moves by the arbitration tribunal can itself stand pre-mature which can eventually dilute the primary objective for adjudication of insolvency proceedings and can result in abuse of process. Nevertheless, the decision of the Supreme Court can be also viewed from a progressive point of view, which aims to reduce the workload of the NCLT.

The Arbitration Act is private and not a public legislation. The judicial delivery mechanism under the Arbitration Act is vested in the private party interest. The proceedings of CIRP are slightly distinct and are subjected in the interest of the public at large. 

Therefore, the NCLT or judicial authorities should be cautious while exercising their powers prescribed under the §8 of Arbitration Act. Additionally, the efforts must be made by the NCLT to establish the prima facie case when the application is filed under §7 of IBC. It is imperative that the Arbitration Act cannot overrule IBC Law. Also, in the coming times there shall stand an utmost need to make certain amendments in the IBC Law with respect to the adjudication of CIRP by adjudicating authority to carve out such unsettled jurisprudential approaches.