In a landmark judgment dated 9 June 2020 re: ‘Indus Biotech Private Limited v. Kotak India Venture Fund-I’, the National Company Law Tribunal, Mumbai Bench-IV (NCLT), referred the parties to Arbitration by allowing an application filed by Indus Biotech Private Limited, (corporate debtor) under Section 8 of the Arbitration & Conciliation Act, 1996 (Arbitration Act) seeking reference to arbitration for settlement of the disputes between the parties, and dismissed the Company Petition filed by Kotak India Venture Fund-I (financial creditor) under Section 7 of the Insolvency & Bankruptcy Code 2016 (IBC).

Brief Facts

In 2007-08, Kotak India Private Equity Group, including the financial creditor, entered into separate Share Subscription and Shareholders Agreement (agreement) with the corporate debtor. In 2007 financial creditor subscribed to equity shares and Optionally Convertible Redeemable Preference Shares (OCRPS).

The financial creditor opted for and chose to convert the OCPRS into equity shares in order to make a Qualified Initial Public Offering (QIPO) as per the applicable SEBI (Issue of Capital & Disclosure Requirements) Regulations, 2018

During the QIPO process, a dispute arose between the parties regarding calculation and conversion formula to be followed while converting the respective entities’ preference shares into equity shares. The financial creditor sought to apply a conversion formula which would entitle it to 30% of the total paid-up share capital of the corporate debtor, whereas the corporate debtor sought to apply a conversion formula which would entitle the financial creditor to 10% of the total paid-up share capital. Further, the financial creditor unilaterally proposed to fix a QIPO date which was objected to by the corporate debtor.

The financial creditor, vide its letter dated 07.12.2018, unilaterally proposed to fix a new QIPO date of 30.12.2018, calling upon the corporate debtor to provide the financial creditor with an exit on 30.12.2018. The corporate Debtor vide its reply dated 24.12.2018 denied the right of the financial creditor to fix the QIPO date unilaterally, and to demand the redemption of the OCRPS, being premature.

On 31.03.2019, the financial creditor issued a Redemption Notice to the corporate debtor, inter alia calling upon the latter to pay a sum of approximately 367.09 crore to the financial creditor.

When the corporate debtor failed to redeem the OCPRS in terms of the agreement, the financial creditor filed a Company Petition under Section 7 of the IBC on 16 August 2019 seeking initiation of the insolvency proceedings against the corporate debtor.

The corporate debtor invoked the arbitration clause in the agreement by issuing a notice invoking arbitration dated 20 September 2019.

Thereafter, the corporate debtor filed an Application before the NCLT under section 8 of the Arbitration Act with a prayer to refer the parties to arbitration for settling their disputes.  

The Applicant/corporate debtor also filed a petition No. 48/2019 under Section 11 of the Arbitration Act before the Supreme Court, for appointment of arbitrators.

Arguments of the Applicant/Corporate Debtor:

That Section 8 of the Arbitration Act, which provides for the power of a judicial authority to refer parties to arbitration, is mandatory in nature. The arbitration clause in the agreement is wide enough to cover the dispute between the parties all of which are in the nature of commercial disputes. The Company Petition is in the nature of a ‘dressed up’ petition, as the real dispute is with regard to the agreement between the parties and interpretation thereof.The respondent/financial creditor is not a Financial Creditor of the applicant/corporate debtor. The corporate debtor is a highly profitable and debt-free company and is in no need of resolution.The real dispute between the parties is with regard to matters pertaining to the agreement reached between the parties and interpretation of its various clauses The Applicant/Corporate Debtor has a right under section 8 of the Arbitration & Conciliation Act, 1996, to make an application at the first available opportunity before a judicial forum, to seek a reference to arbitration

Contentions of the Financial Creditor:

That a Section 7 IBC petition belongs to a class of litigation which are incapable of being referred to arbitration as it is a matter of rights in rem which are inherently incapable of being referred to arbitration. The initiation of insolvency proceedings (CIRP) cannot be granted by an arbitrator. That the existence of an arbitration clause can never affect a Section 7 petition which was to be decided by an independent Authority. The fact of there being pre-existing disputes between the parties is irrelevant under a Section 7 petition, though it would assume significance in a petition under Section 9 of the IBC filed by an operational creditor. The IBC is a code for dealing with insolvency, either for revival or for liquidation. A Section 7 petition is not for recovery of debts and once the NCLT is satisfied of there having been a financial a debt and a default having occurred in respect thereof, the NCLT should admit the petition. The agreement provides that if the QIPO does not take place by the QIPO date, the investment will be redeemable. If it is not redeemed, it is to be treated as a ‘debt’.

Issue before the Adjudicating Authority

Will the provisions of the Arbitration & Conciliation Act, 1996 prevail over the provisions of the Insolvency & Bankruptcy Act, 2016? If so, in what circumstances ?

Findings and Observations

While considering the aforesaid issue the Adjudicating Authority at NCLT IV, Mumbai considered the ratios of the judgements passed by Superior Courts:

Re: In the case of Booz Allen & Hamilton v. SBI Home Finance Ltd., (2011) 5 SCC 532 (Booz Allen), it was held that generally and traditionally all disputes relating to rights in personam  are considered to be amenable to arbitration and all disputes relating to rights in rem are required to be adjudicated by courts and tribunals. The Supreme Court further clarified that this principle is not rigid, and disputes relating to subordinate rights in personam arising from rights in rem are arbitrable.

The Adjudicating Authority also considered the settled law ‘generalia specialibus non derogant’ - special law prevails over general law.

In this regards reliance was placed of the Consolidated Engineering Enterprises v Principal Secretary, Irrigation Department & others (2008) 7 SCC 169, wherein the Hon’ble Supreme Court held that the Arbitration & Conciliation Act is a special law, consolidating and amending the law relating to arbitration and matters connected therewith or incidental thereto.

In the case of In Hindustan Petroleum Corporation Limited v Pinkcity Midway Petroleum (2003) 6 SCC 503 , the Hon’ble Supreme Court held that where an arbitration clause exists, the court has a mandatory duty to refer dispute arising between the contracting parties to arbitrator. It quoted with approval the decision of the same court in P Anand Gajapathi Raj& others v PVG Raju (dead) & others (2000) 4 SCC 539, wherein it was held that the language of section 8 of the Arbitration & Conciliation Act, 1996, is peremptory and the court is under an obligation to refer parties to arbitration.

While Insolvency & Bankruptcy Code, 2016 was introduced to “consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons in a time bound manner for maximisation of value of assets of such persons to promote entrepreneurship, available of credit and balance the interest of all the stakeholders;”,

The Arbitration & Conciliation At, 1996 was promulgated to “to consolidate and amend the laws relating to domestic arbitration – as also to define the law relating to conciliation.”. Thus, both the statutes are special statutes which operate in different fields of law.

Further, Section 238 of the Insolvency & Bankruptcy Code gives an overriding effect to it over all other statues. It reads as follows, “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”.

The Adjudicating Authority also summarised the rules of interpretation of general laws versus special laws

(1) When a provision of law regulates a particular subject and a subsequent law contains a provision regulating the same subject, there is no presumption that the later law repeals the earlier law. f the subsequent law does not repeal the earlier rule, there can be no presumption of an intention to repeal the earlier rule.

(2) When two provisions of law - one being a general law and the other being special law govern a matter, the court should endeavour to apply a harmonious construction to the said provisions.

(3) If the repugnancy or inconsistency subsists in spite of an effort to read them harmoniously, the prior special law is not presumed to be repealed by the later general law.

(4) Where a later special law is repugnant to or inconsistent with an earlier general law, the later special law will prevail over the earlier general law.

The Adjudicating Authority further observed that in a section 7 petition there has to be a judicial determination as to whether there has been a default within the meaning of section 3(12) of the IBC. In the case of Innovative Industries Limited v/s ICICI Bank & Anr, 2017 SCC OnLine NCLAT 70, the National Company Appellate Law Tribunal (NCLAT) held that 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.

Therefore, to file an application for initiation of CIRP under section 7 of the IBC, the applicant must be a ‘financial creditor’. The term ‘financial creditor’ is defined in section 5(7) as “any person to whom a financial debt is owed”. Furthermore, the term ‘financial debt’ is defined in section 5(8) is as “a debt along with interest, if any, which is disbursed against the consideration for the time value of money”. The conclusion derived from these two definitions is that a person does not become entitled to make an application under section 7 of the IBC unless a financial debt is owed to him.

Decision of the Adjudication Authority

Based on considerations and observations aforementioned the Adjudicating Authority NCLT IV Mumbai held as follows:

1. On a perusal of the contentions and facts, the Adjudicating Authority was not satisfied that a ‘default’ has occurred.

2. It will be unnecessary to push a solvent, debt-free and profitable company into insolvency and no meaningful purpose will be served.

3. The disputes that form the subject matter of the underlying Company Petition, viz., valuation of shares, calculation and conversion formula and fixing of QIPO date are all arbitrable, since they involve valuation of the shares and fixing of the QIPO date. Therefore, an attempt must be made to reconcile the differences between the parties and their respective perceptions.

As such, the application under Section 8 of the Arbitration Act filed by the applicant/corporate debtor came to be allowed and the Company Petition under Section 7 of the IBC filed by the Financial Creditor was dismissed.

Conclusion

IBC v. Arbitration Act

In the instant case, the Adjudicating Authority, NCLT, Mumbai did not examine whether Kotak had become a financial creditor to Indus by virtue of subscribing to the OCRPS. Had such an inquiry been undertaken, the Adjudicating Authority, NCLT, Mumbai would have come to the conclusion that Kotak was not a financial creditor. This argument is bolstered by the decision of the Bombay High Court in Aditya Prakash Entertainment Pvt Ltd. v/s Magikwand Media Pvt Ltd. In this case, Aditya Prakash Entertainment was the holder of OCRPS issued by Magikwand Media. Upon the failure of Magikwand Media to redeem the OCRPS, Aditya Prakash Entertainment had sought winding up of the company under sections 433-434 of the Companies Act, 1956. Rejecting the petition, the Bombay High Court held, “the shareholders of redeemable preference shares of the company do not become creditors of the company in case their shares are not redeemed by the company at the appropriate time. If they do not become the creditors of the company, they cannot apply for winding up of the company under Section 433(e) of the Companies Act, 1956”.

Although, the Adjudicating Authority, NCLT, in this regards, directed the parties to resolve their disputes through arbitration, it is noteworthy that the Adjudicating Authority did not hold that the Arbitration Act would prevail over the IBC and observed that law on this subject is res integra. In case of repugnancy between the provisions of the two Acts, the Arbitration Act could not prevail over the IBC .

In case of conflict, the provisions of the Arbitration Act would have to give way to the provisions of the IBC. This position is supported by the decision of the Ahmedabad Bench of the NCLT in ABG Shipyard Ltd v/s ICICI Bank Ltd (2018) 145 SCL 0430. In that case, the Adjudicating Authority had to determine whether section 56 of the Electricity Act, 2003 would override section 14 of the IBC. The Adjudicating Authority held that the IBC would prevail over the Electricity Act, 2003 for the reason that both the statutes are special law, the IBC being later in time would prevail over the Electricity Act. For this finding, the Adjudicating Authority had relied upon the decision of the Supreme Court in KSL And Inustries Ltd v/s Arihant Threads Ltd. In that case, the Supreme Court had held that “it is settled law that when there are two enactments passed by the Parliament, and if there is any provision contained in such Acts which is repugnant to another, the provisions contained in the Act, which is later in point of time, shall prevail”.

A similar application was made in the case of Shalby v Dr. Pranav Shah (2018 SCC OnLine NCLT 137), NCLT Ahmedabad Bench for reference to arbitration in an insolvency petition pending before it, was dismissed imposing heavy costs upon the applicant. It was held that irrespective of an arbitration clause in the agreement between the parties, the arbitrator does not have jurisdiction over the subject matter of an insolvency petition. The contention that the insolvency resolution process is not a right in rem was rejected by NCLT Ahmedabad.

Once the Adjudicating Authority is satisfied as to the existence of ‘default’ according to section 7 of the IBC, the existence of an arbitration agreement between the parties would not restrict the Adjudicating Authority from initiating CIRP against the corporate debtor. Therefore, section 8 of the Arbitration Act would not prevail over section 7 of the IBC.