Recently, National Company Law Tribunal (NCLT), Mumbai, in a unique judgement passed in Kotak India Venture Fund- I vs Indus Biotech Private Limited (Kotak’s Case), referred parties to the Arbitration under Section 8 of the Arbitration & Conciliation Act, 1996 (Arbitration Act), while hearing the Insolvency Plea filed by the Financial Creditor under Section 7 of the Insolvency and Bankruptcy Code, 2016 (I&B Code). The NCLT in Kotak’s Case also tried to partly answer a substantial question of law regarding supremacy of Arbitration Act over I&B Code in certain circumstances. This article aims to analyze the much debated question put through this judgement.
The Booz Allen Effect
Section 8 of the Arbitration Act empowers Judicial Authority to refer parties to arbitration, before which an action is brought in a matter, which is the subject of an arbitration agreement. Initially, Supreme Court in Haryana Telecom v Sterlite Industries (India) Limited while deciding the scope of Section 8 Petitions held that, only such disputes or matters which an arbitrator is competent or empowered to decide, can be referred to arbitration under Section 8 of the Arbitration Act. Thereafter, in Booz Allen and Hamilton Inc. vs SBI Home Finance Ltd Supreme Court expressively stated that Insolvency and Winding up matters are non-arbitrable in nature due to involvement of right in rem i.e., a right exercisable against the world at large and as a result, such disputes are inherently incapable of being referred to arbitration under Section 8. Accordingly, relaying upon the ratio developed by Booz Allen & Haryana Telecom, various NCLT’s across the country, in many cases summarily rejected the defense of an ‘Arbitration Clause’ raised by Corporate Debtors in Sections 7 & 9 Insolvency Petitions.
The Dressing up Argument
The phrase ‘Dressed up Petition’ was emerged from a classic Judgement passed by the Bombay High Court in Rakesh Malhotra vs Rajinder Kumar Malhotra & Ors (Rakesh Malhotra), which means a petition which is merely costumed to evade the arbitration clause. The court in Rakesh Malhotra carved out an exception for arbitrability of Oppression and Mismanagement (O&M) cases and held that arbitration should be retained wherever it is established that the petition is mala fide, vexatious and ‘dressed up’. Furthermore, Rakesh Malhotra also went ahead to state that a common order could cover both dismissal of O&M petition and allowing of the Section 8 application for reference to the arbitration. NCLT Mumbai in Kotak’s Case observed that, since the real dispute between the parties is with regard to matters pertaining to the agreement and interpretation of its various clauses therefore, an attempt must be made to reconcile the differences between them. Further, NCLT Mumbai affirmed the contention raised by Corporate Debtor, that in Rakesh Malhotra, the Bombay High Court created a window for arbitrability of O&M cases after considering both Booz Allen and Haryana Telecom and therefore, mala fide, vexatious and ‘dressed up’ insolvency petitions should be taken into its ambit. Finally, after relying heavily upon Rakesh Malhotra NCLT Mumbai passed a common order allowing Section 8 Arbitration application and dismissing Section 7 Insolvency plea.
Special Law over General Law
Another strong reason given by NCLT Mumbai in Kotak’s Case to consider the supremacy of Arbitration Act over I&B Code is the old principle of generalia specialibus non derogant i.e. special law prevails over general law. Initially, in Gujarat Urja Vikas Nigam Limited v Essar Power Limited the Supreme Court held that the Arbitration Act is a general law. The court in that case was considering a question under the Electricity Act. It held that the Electricity Act being a special statute would have overriding effect over the Arbitration & Conciliation Act, which was the general statute. However, this decision was overruled by the Supreme Court in Consolidated Engineering Enterprises v Principal Secretary, Irrigation Department & others wherein it was 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. Thereafter, in P Anand Gajapathi Raju & others v PVG Raju (dead) & others it was held that the language of section 8 of the Arbitration & Conciliation Act, 1996, is authoritative in nature and the Judicial Authority is under an obligation to refer parties to arbitration. After discussing the series of judgments on this principle NCLT Mumbai concluded that, since the disputes were purely contractual in nature the invocation of arbitration in a case like this seems to be justified and will save a debt-free company from unnecessarily going into CIRP.
Opposing Views
In past NCLT’s across the nation in many cases have summarily disregarded the contention of arbitration clause which has strongly helped in boosting ‘anti-arbitration’ belief across these forums. NCLT Ahmedabad in Shalby vs Dr. Pranav Shah straight away dismissed the Section 8 Arbitration application stating that an arbitrator is incapable to grant the reliefs and does not have jurisdiction on subject matter of Section 9 insolvency petition. In Dinesh Chand Jain vs Fantastic Buildcon Ltd & ors NCLT New-Delhi held that the presence of an arbitration clause in the share purchase agreement would not cause any impediment with regard to initiation of CIRP because under section 7 of the Code. Furthermore, National Compaly Law Appellate Tribunal (NCLAT) in Mrs. Nandhitha Vedam vs. M/s. Udhyaman Investments Pvt. Ltd. & ors. commented that, existence of an arbitration clause cannot be taken as ground for opposing Section 7 insolvency petitions however, such ground can be taken in case of Operational Creditors in Section 9 Petitions. More interestingly, NCLAT in Thota Gurunath Reddy & Ors vs Continental Hospitals Pvt. Ltd. & Ors laid down distinction between judicial authority and adjudicating authority, it held that since, NCLT passes order under section 8 of Arbitration Act in capacity of ‘Judicial Authority’ and not in capacity of ‘Adjudicating Authority’ under I&B Code, the appeal against such orders is not maintainable before NCLAT. This means that financial & operational creditors will indirectly lose the right to appeal to NCLAT.
Conclusion
All of this leads us to believe that arbitrability of insolvency petitions remains an unsettled phenomenon in India, and as of now there is no clear picture as to ‘when’ and ‘whether’ an insolvency plea can be referred to arbitration due to several contradicting and confusing views given by tribunals. There is a desperate need of a concrete ruling from the Supreme Court on this subject matter which would cover the entire nation. Further, on a personal note we believe that in order to promote arbitration in India, an attempt must be made by tribunals to retain arbitration in case of mala fide, vexatious and ‘dressed up’ insolvency petitions.
Varun Shah, Advocate, Bombay High Court & Bhavit Baxi, Fourth Year Law student, M.K.E.S College of Law, Mumbai