The National Company Law Tribunal, Mumbai (“MNCLT”) has, by an Order dated June 9, 2020 (“Order”), allowed an application under Section 8 (power to refer parties to arbitration where there is an arbitration agreement) of the Arbitration and Conciliation Act, 1996 (“ACA”) thereby referring a matter pending before it to arbitration. The said Section 8 application was filed by Indus Biotech Private Limited (“Corporate Debtor”) for settlement of a dispute between the Corporate Debtor and Kotak India Venture Fund-I (“Financial Creditor”). Upon allowing the Section 8 application, the MNCLT dismissed the company petition that had been filed before it by the Financial Creditor, under Section 7 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) towards seeking the initiation of Corporate Insolvency Resolution Process (“CIRP”) against the Corporate Debtor.

Facts
Brief facts of the case are that in the years 2007-2008, four entities of the Kotak Private Equity Group namely, (i) Kotak India Venture Fund-I (Financial Creditor), (ii) Kotak India Venture (Offshore) Fund, (iii) Kotak Mahindra Investments Limited and, (iv) Kotak Employees Investment Trust – (collectively referred to as the “Kotak Group”), subscribed to the share capital of the Corporate Debtor under four separate share subscription and shareholders agreements. In all, the Kotak Group invested INR 27,00,00,000 towards subscribing to equity shares and Optionally Convertible Redeemable Preference Shares (“OCRPS”) of the Corporate Debtor.

Thereafter, the Financial Creditor sought to have the Corporate Debtor make a Qualified Initial Public Offering(“QIPO”) of its securities and opted to convert the OCRPS held by it into equity shares, in view of Regulation 5(2) of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018, which mandates that any company which has any outstanding convertible securities or any other right which would entitle any person with any option to receive equity shares of the issuer, is not entitled to make a QIPO.

During the QIPO process, a dispute arose between the Corporate Debtor and the Financial Creditor and the other entities of the Kotak Group with regard to the conversion formula to be applied while converting the OCRPS held by them into equity shares of the Corporate Debtor. While the Kotak Group sought to apply a calculation formula upon application of which they would collectively hold approximately 30% of the total paid-up share capital of the Corporate Debtor, the Corporate Debtor wanted to apply a formula under which the Kotak Group would hold about 10% of the total paid-up share capital of the Corporate Debtor.

In terms of the 2007 Share Subscription and Shareholders Agreement (“SSSA”), the OCRPS issued thereunder were to be redeemed by the Corporate Debtor on or before April 15, 2019. Upon conversion of the OCRPS and the consequent QIPO being stalled due to the dispute between the parties and failure of the Corporate Debtor to redeem the said OCRPS within the aforementioned date, the Financial Creditor filed a company petition under Section 7 of the IBC on August 16, 2019, seeking the initiation of CIRP against the Corporate Debtor. Thereafter, by a letter dated September 20, 2019, the Corporate Debtor sought to refer the dispute between the parties to arbitration under the provisions of the arbitration clause of the 2007 SSSA. Consequently, the Corporate Debtor filed an Interlocutory Application (“IA”) before the MNCLT under Section 8 of the ACA.

Issue

Whether the provisions of the ACA would prevail over the provisions of the IBC? If so, under what circumstances?

Arguments

Contentions raised by the Corporate Debtor:

The Corporate Debtor, inter alia, contended that a reading of the arbitration clause of the 2007 SSSA showed that the parties had bound themselves to settle any dispute, controversy or claim arising out of, relating to or in connection with the 2007 SSSA, to be finally settled by arbitration.

It was further contended that in essence, the dispute between the parties are in relation to: (i) valuation of the Financial Creditor’s OCRPS; (ii) right of the Financial Creditor to redeem such OCRPS when it had participated in the process to convert its OCRPS into equity shares of the Corporate Debtor; and (iii) fixing of the QIPO date, all of which together constitute more than one bona fide and substantial dispute between the parties under the 2007 SSSA since August 2018.

It was further submitted that the Corporate Debtor was a highly profitable and debt-free company. It was contended that the Financial Creditor had itself benefitted by receiving dividends from the Corporate Debtor in excess of INR 13 crores on an investment of approximately INR 19 crores. Hence, the Corporate Debtor was clearly not in need of resolution.

The Corporate Debtor also submitted that the underlying company petition is in the nature of a ‘dressed-up’ petition, inasmuch as 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 and therefore, the provisions of the IBC ought not to be used as a pressure tactic to extort money from profitable companies.

The Corporate Debtor also highlighted that Section 8 of the ACA, which provides power to a judicial authority before which an action is brought to refer parties to arbitration, is mandatory in nature.

Contentions raised by the Financial Creditor:

The Financial Creditor, on the other hand, submitted that the only issue to be decided in the present matter is whether the reliefs claimed are capable of being referred to arbitration or being granted by an arbitral tribunal. If the answer is no, then the present IA should be dismissed, and the underlying company petition should be heard on merits.

The Financial Creditor further contended that a Section 7 petition under the IBC (being an insolvency petition) belongs to that class of litigation which is incapable of being referred to arbitration on account of being a cause/dispute in rem. The Financial Creditor submitted that initiation of CIRP cannot be granted by an arbitrator. The Financial Creditor also submitted that a Section 7 petition under the IBC is not for recovery of debts and that the IBC is a code for dealing with insolvency, either for revival or for liquidation. Only upon there being a debt and default based on a claim, should the NCLT decide to admit the petition.

It was contended that the existence of an arbitration clause can never affect a Section 7 petition under the IBC. The Financial Creditor referred to certain judgments in which the ratio decidendi was that while deciding the scope of a Section 8 petition under the ACA, only such disputes or matters which an arbitrator is competent or empowered to decide, can be referred to arbitration.

It was further argued that, in a Section 7 petition under the IBC, the claim itself may be disputed. It was also contended that the notice for redemption was given on March 31, 2019, at which point of time, there was no reference to arbitration. The Financial Creditor submitted that the first reference to arbitration was made only on September 20, 2019, which was after the filing of the petition under Section 7 of IBC on August 16, 2019.

Therefore, the present IA was only an attempt by the Corporate Debtor to wriggle out of the CIRP. It was contended that this was a diversionary tactic to prevent the main company petition from being argued. The Financial Creditor also submitted that as per the 2007 SSSA if the QIPO did not take place by the assigned date, the investment would be redeemable. If unredeemed, it was to be treated as a ‘debt’.

Observations of the National Company Law Tribunal, Mumbai

The MNCLT observed that seeking a reference to arbitration in a petition filed under Section 7 of the IBC was something that was res integra. The MNCLT relied on the judgment of Booz Allen and Hamilton v. SBI Home Finance Limited [(2011) 5 SCC 532] where it was held by the Supreme Court 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 public tribunals, being unsuited for private arbitration. This is not however a rigid or inflexible rule. Disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable.”

The MNCLT further noted that it was a settled law that generalia specialibus non derogant – special law prevails over general law – and the Supreme Court in the case of Consolidated Engineering Enterprises v. Principal Secretary, Irrigation Department and Others [(2008) 7 SCC 169] had held that the ACA is a special law, consolidating and amending the law relating to arbitration and matters connected therewith or incidental thereto. Reiterating the Supreme Court’s view in the judgement of Hindustan Petroleum Corporation Limited v. Pinkcity Midway Petroleums [(2003) 6 SCC 503], the MNCLT was of the view that where an arbitration clause exists, the court has a mandatory duty to refer any dispute arising between the contracting parties to arbitration.

With respect to Section 7 of the IBC, the MNCLT referred to Innoventive Industries Limited v. ICICI Bank, [(2017) SCC OnLine NCLAT 70] where the National Company Law Appellate Tribunal 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. In other words, the statute mandates the adjudicating authority to ascertain and record satisfaction as to the occurrence of default before admitting the petition. Mere claim by the financial creditor that the default has occurred is not sufficient. Therefore, in a Section 7 petition under the IBC, 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.

Decision of the National Company Law Tribunal, Mumbai

In allowing the application, the MNCLT held that the facts of the case did not seem to convey satisfactorily that a default had occurred. Unnecessarily pushing an otherwise solvent, debt-free company into insolvency, was not a very desirable result at that stage. The disputes that formed the subject matter of the underlying company petition were all arbitrable since they involved valuation of the shares and fixing of the QIPO date. Therefore, an attempt should be made to reconcile the differences between the parties and their respective perceptions. Accordingly, the application under Section 8 of the ACA filed by Corporate Debtor was allowed and the company petition under Section 7 of the IBC filed by the Financial Creditor was dismissed.

Vaish Associates Advocates View
While the MNCLT has in the present case allowed the application for arbitration under Section 8 of the ACA, the judgment clearly demonstrates that the decision was made purely on the basis of the facts and circumstances peculiar to the present case. In passing the said Order, the MNCLT has not gone by the general principle laid down by the Supreme Court in its decision in the case of Booz Allen and Hamilton v. SBI Home Finance Limited,[(2011) 5 SCC 532] wherein it was held that matters concerning insolvency are non-arbitrable and beyond the jurisdiction of an arbitrator.

In this context, it would be pertinent to note that in the case of Shalby v. Dr. Pranav Shah [2018 SCC OnLine NCLT 137], the National Company Law Tribunal, Ahmedabad (“NCLT Ahmedabad”) was faced with a similar application for reference to arbitration in an insolvency petition pending before it wherein, the tribunal proceeded to dismiss the said application and also imposed costs upon the applicant. While dismissing the said application, the NCLT Ahmedabad 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 orders passed by the MNCLT, Supreme Court and the NCLT Ahmedabad in the abovementioned matters is based on the facts applicable to each case. However, the MNCLT’s decision in the present matter should, to a certain extent, deter the initiation of CIRP against healthy, debt-free companies purely as a pressure tactic before an already burdened judiciary.

For more information please write to Mr. Bomi Daruwala at [email protected]

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