Arbitration and Conciliation Act, 1996 vs Insolvency and Bankruptcy Code, 2016
Case: Indus Biotech Pvt. Ltd. V. Kotak India Venture Fund-I[1]
Author:
Bhumi Agrawal
B.B.LL.B, Final year student,
New Law College, BVP, Pune
Introduction:
The Indian legislation provides for a various number of laws, but there may come a time when there might occur conflict between the legislations. The present case is one such example where the National Company Law Tribunal, Bombay Bench had to decide whether the Arbitration Act would prevail over the IBC.
Facts:
Kotak India Venture Fund, the respondent (hereinafter, FC), subscribed to ‘Optionally Convertible Redeemable Preference Shares’ [OCRPS], issued by Indus Biotech Private Limited, the appellant (hereinafter, CD). As a result of this subscription, the parties entered into a share subscription and shareholder agreement (SSSA). As per the SEBI regulation, for a Qualified Initial Public Offer (QIPO), the FC must seek to convert the OCRPS into equity shares of the company.
During the QIPO process, a dispute arose between the parties regarding the formula to be applied for calculation of the share of the FC in the paid-up share capital of the CD. There arose a difference of 20% in the share of paid-up share capital while applying each party’s formula. FC unilaterally decided a date for the QIPO which was opposed by the CD. Consequently, the FC sent a notice for early redemption of OCRPS amounting to Rs. 367.09 crores. The CD failed to redeem the amount.
As a result, FC filed to initiate Corporate Insolvency Resolution Process (CIRP) against CD under section 7 of the Insolvency and Bankruptcy Code, 2016. CD, on the other hand, filed an interlocutory application under section 8 of the Arbitration and Conciliation Act, 1996 for the NCLT to refer the matter to arbitration.
Issues:
Valuation of FC OCRPS
Fixation of QIPO date
Right of the FC to redeem OCRPS
Whether Arbitration act would prevail over IBC.
Contentions of the parties:
CD:
The party contended that CD is a profitable company and free from debt. Therefore, CIRP cannot be initiated against it. Also, the share subscription and shareholder agreement provide for the arbitration clause. Section 8 of the Arbitration Act makes it mandatory for the courts and tribunals to refer the parties to arbitration if a valid arbitration agreement exists.
FC:
The party contended that the matter referred under section 7 of the IBC is a right in rem and therefore, cannot be settled through arbitration. Existence of the arbitration clause in the agreement does not affect the petition under section 7 of the IBC. Additionally, as per the agreement between the parties, if QIPO date lapse the investment becomes redeemable, if not redeemed then it would be deemed as ‘debt’. In the present situation, the CD has failed to redeem, and therefore, the Authority must admit the complaint and initiate insolvency procedure.
Findings of the Tribunal:
The tribunal referred to the case of Booz Allen and Hamilton V. SBI Home Finance Ltd[2]., the Supreme Court, in that case, held that the all dispute underlying the company petitions are arbitrable. Therefore, the present dispute is the matter in personam and falls within the ambit of arbitrability.
The NCLT further applied the test of arbitrability laid down under the Booz Allen case:
a) Whether the dispute is capable of adjudication and settlement by arbitration? In this case, since the matter is a private matter and can be resolved through arbitration.
b) Whether the Arbitration agreement covers the disputes? Yes, the parties have entered into an arbitration agreement, and the arbitration clause is wide enough to cover all the disputes.
c) Whether the parties have referred the dispute to arbitration? The CD has filed for a petition to the tribunal to refer the parties to arbitration under section 8 of the Arbitration Act.
The NCLT held that:
a) Section 7 of the IBC empowers the adjudicating authority to satisfy itself of the existence of a default under section 3 (12) of the IBC, the NCLT in the present case is not satisfied with the existence of a default.
b) All the dispute which are commercial, an attempt must be made by the parties to resolve the dispute through arbitration.
c) Section 8 of the Arbitration Act, made it compulsory for the court to refer the parties to arbitration if a valid arbitration agreement exists.
d) Therefore, the NCLT found it unnecessary to push a solvent, debt-free and profitable company into insolvency and referred the parties to the arbitration.
Analysis:
The Tribunal is correct in holding that there exists no default as per the IBC, but the NCLT failed to provide any reasoning for holding the same. Whereas, in the case of, Hindustan Gas and Industries Ltd. v. Commissioner of Income-Tax[3], the Calcutta High Court, held that the preference shareholder is the shareholder of the company and cannot sue the company as a creditor. A similar opinion was given by the Gujrat High Court in Anarkali Sarabhai v. Commissioner of Income Tax, Gujarat[4].
In the present case, the tribunal did not answer the question, whether IBC would prevail over the Arbitration Act because in this case the default as provided under section 3(12) of the IBC was not established. Therefore, the CIRP could not be initiated against the CD.
Additionally, the Apex Court, in the case of Booz Allen has held that the insolvency and winding-up matters are non-arbitrable as the private forum cannot decide upon the matter in rem. The adjudicating authority not only has to decide the right of the parties but also of other parties interested in the subject matter. Therefore, such a matter cannot be referred to arbitration.
Section 238 of the IBC provides that this act has an overriding effect over all the other laws. Similarly, in the case of, ABG Shipyard Ltd. v. ICICI Bank Ltd[5]., the NCLT Ahemdabad Bench held that the IBC would have overriding effect over the Electricity Act, 2003. Although both the acts are special laws, the IBC was introduced later. Therefore, IBC would have overriding effect.
Furthermore, The Supreme Court in KSL and Industries Ltd. v. Arihant Threads Ltd[6]., held that if there is any conflict between two special laws, the special law which was introduced later in time would prevail over the other. Considering this decision of the Supreme Court, both IBC and Arbitration Act are special statutes and IBC was introduced later than the Arbitration Act. Therefore, the IBC must prevail over the Arbitration Act.
Conclusion:
It can be concluded from the above discussion that once the Tribunal is satisfied with a ‘default’ under section 3(12), the insolvency proceedings will be initiated against the CD irrespective of the existence of an arbitration agreement. Therefore, it can be said that section 7 of the IBC will have overriding effect over section 8 of the Arbitration Act.
Disclaimer: Kindly note that the views and opinions expressed are of the author, and not Law Colloquy.
References:
[1] CP (IB) No.3077/2019
[2] Civil Appeal No.5440 of 2002
[3] 1979 117 ITR 549 Calcutta
[4] 1982 138 ITR 437 Gujrat
[5] IA No. 329 of 2017 in C.P. (IB) No. 53/NCLT/AHM/2017
[6] Civil Appeal No. 5225 Of 2008
