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ARBITRATION PROCEEDINGS IN REM INSOLVENCY DISPUTES.

AN ANALYSIS OF THE CONFLICT BETWEEN SECTION 7 OF THE INSOLVENCY AND BANKRUPTCY CODE, 2016 AND SECTION 8 OF THE ARBITRATION AND CONCILIATION ACT, 1996


It is said that “Justice delayed is justice denied” and at the same time, it is not unknown that some of the underlying causes for the delay in Justice administration ranges from numerous case files piled up in the Courts to inadequate number of Judges in the country. Overcoming these existing challenges is not as easy as ordering a product online with a click of a mouse. There is an investment of a lot of effort and time that goes in. Meanwhile, efforts are being made to abridge this gap, will the people continue to be a victim of this major challenge of the Indian Judiciary system or is there an alternative remedy available to seek speedy justice?


The answer to this is yes. The alternative remedy that is available to seek speedy justice is Arbitration that comes with a lot more advantages. The legislation that governs the Arbitration proceedings is The Arbitration and Conciliation Act, 1966[1] (hereinafter ‘The Act’). One of the provisions of The Act that calls for a lesser judicial intervention is Section 8[2]. It directs the adjudicating authority to refer the parties to a dispute to arbitration where there is an existing arbitration agreement. But this provision comes in conflict with the provisions contained in other legislation that direct the parties to file an application before the adjudicating authority in case of disputes, one of them being Section 7 of The Insolvency and Bankruptcy Code, 2016[3] (hereinafter ‘Code’).


The conflict in Bankruptcy and Arbitration is characterised by extreme and indefensible polar positions. A similar position was well illustrated and reflected in Re United States Lines Inc as “bankruptcy policy exerts an inexorable pull towards centralization while arbitration policy advocates a decentralized approach towards dispute resolution”[4]. It highlights that the laws pertaining to insolvency and bankruptcy through the adoption of the centralized approach empower to give rise to proceedings in rem, thereby, creating third party rights for all creditors of the debtor[5] while arbitration advocates a decentralized approach, thereby, promoting the autonomy of parties in dispute resolution giving rise to proceedings in personam[6]. When the subject matter to a dispute relates to proceedings in rem, it is non-arbitrable and the same has been well settled by the Apex Court in Vidya Drolia & Ors. vs. Durga Trading Corporation[7]while dealing with the question of non-arbitrability. The same has been well settled in Booz Allen v. SBI Home Finance Limited[8]too. The application of the said principle makes it apparent that the insolvency and bankruptcy disputes be dealt with by a centralized forum that would have a complete jurisdiction to fully dispose of the entire matter[9].

However, the question that still arises is “If Section 8 of the Act mandates the adjudicating authority to refer the parties to arbitration in insolvency and bankruptcy proceedings too when there is a valid arbitration agreement in place”?This legal issue was recently addressed in Indus Biotech Private Ltd. v. Kotak India Venture Fund-I[10]wherein Kotak India Venture Fund(hereinafter ‘Kotak India’) dragged Indus Biotech Private Ltd. (hereinafter ‘Indus Biotech’) into insolvency proceedings over non-redemption of shares by filing an application under Section 7 of the Code. However, an application under Section 8 of the Act was filed by Indus Biotechbefore the adjudicating authority to refer the matter back to arbitration in light of a valid arbitration agreement. The adjudicating authority of the National Company Law Tribunal (hereinafter ‘NCLT’)referred the case back to arbitration mainly on the basis of two grounds which are:

· Before admitting an application of insolvency, judicial determination of “default” on part of the party is mandated which was not proved before the authority considering the facts and contentions of the parties which led the NCLT to dismiss the insolvency application.

· Section 8 of the Act is pre-empty in nature and thus mandates the adjudicating authority to refer the matter back to arbitration when there is a valid arbitration agreement in place.

This ruling by NCLT raised contentions pertaining to the accuracy of the decision pronounced regarding the application of arbitration proceedings in rem insolvency cases and resulted in the filing of a Special Leave Petition by Kotak India before the Apex Court[11] instead of filing an appeal before the appellate tribunal under Section 61 of the Code[12]. The Supreme Court on 26th March 2021 upheld the decision of the NCLT to dispose of the insolvency application and refer the dispute to arbitration under Section 8 of the Act but a different reasoning behind the decision was provided. The reasoning that was given by the Supreme Court has been discussed and analyzed below in two parts.

· When does an insolvency proceeding in rem commenced to result in it being non-arbitrable?

· Consequences of the determination of Insolvency Application


WHEN DOES AN INSOLVENCY PROCEEDING IN REM COMMENCED TO RESULT IN IT BEING NON-ARBITRABLE?


Under Section 7 of the Code, for the adjudicating authority to admit the insolvency application, it needs to be satisfied that the default has taken place[13]. Even the Supreme Court in the Indus Biotech case opined that mere filing of the petition does not trigger the insolvency proceedings in rem, it is only after the default has been established that the application is admitted by the adjudicating authority. Thus, it is well established through judicial precedents that proceedings become in remotely after the application is admitted, the claim of the creditors is received and a committee of creditors is established[14]. Till then, the insolvency proceedings remain in personam.


CONSEQUENCES OF THE DETERMINATION OF INSOLVENCY APPLICATION


The Supreme Court deferred from taking a similar view as of NCLT pertaining to the direct application of Section 8 of the Act and took a completely different stand on the same. It was observed that there exists no need to consider the application of Section 8 outside the ambit of Section 7 of the Code i.e., Insolvency Application. It is mandatory for NCLT to record to its satisfaction the status of “default” on part of the corporate debtor. The Supreme Court took into account both the outcomes of determination of default and propounded the two consequences of such determination that would fall under the scope and ambit of Section 8 of the Act.


· In cases where the “default” has been established, the application would be admitted by the adjudicating officer resulting in the initiation of proceedings in rem that would make the application under Section 8 inapplicable and the dispute non-arbitrable.

· In cases where there is the determination of “no default”, the insolvency application would stand rejected, and at the autonomy of the parties, the matter can proceed with arbitration under Section 8 of the Act.

Citing this reasoning, the Apex Court upheld the decision of the NCLT to refer the matter back to arbitration after rejecting the insolvency application since no default was being established on part of the corporate debtor i.e., Indus Biotech. Thus, to conclude it can be said that the application of Section 8 of the Act is ipso facto to the application of Section 7 and its outcome.

[1]The Arbitration and Conciliation Act, 1966, No. 26, Acts of Parliament, 1996 (India).

[2] Ibid. § 8.

[3] The Insolvency and Bankruptcy Code, 2016, § 7, No. 31, Acts of Parliament, 2016 (India) (hereinafter ‘IBC’).

[4]197 F.3d 631, 640 (2D Cir. 1999).

[5]Bishwajit Dubey and Prafful Goyal, Does NCLT has power to refer parties to Arbitration in an in rem Insolvency proceeding?,INDIA CORPORATE LAW: A CYRIL AMARCHAND MANGLADAS BLOG (6 April 2021),https://corporate.cyrilamarchandblogs.com/2021/04/does-nclt-has-power-to-refer-parties-to-arbitration-in-an-in-rem-insolvency-proceeding/#_ftn1.

[6]Ibid.

[7]Vidya Drolia & Ors. vs. Durga Trading Corporation, 2021 2 SCC 1 (hereinafter ‘Vidya Drolia’).

[8]Booz Allenand Hamilton Inc. v. SBI Home Finance Limited, AIR 2011 SC 2507.

[9]Vidya Drolia, supra note 7.

[10]Indus Biotech Private Ltd. V. Kotak India Venture Fund-I, 2021 SCC OnLine SC 268.

[11]Civil Appeal No. 1070/2021 @ SLP(C.) No. 8120/2020.

[12]IBC, supra note 3. § 61.

[13]Apoorv Sarvaria, Objections Raised By Corporate Debtors To Applications Filed Under Section 7 of the Insolvency and Bankruptcy Code, 2016, MONDAQ (3 May 2019), https://www.mondaq.com/india/insolvencybankruptcy/803324/objections-raised-by-corporate-debtors-to-applications-filed-under-section-7-of-the-insolvency-and-bankruptcy-code-2016.

[14]Swiss Ribbons v. Union of India, 2019 SCC OnLine SC 73.



Navin Kumar Jaggi

Saloni

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