Introduction
The National Company Law Tribunal (hereinafter, “NCLT”) has been constituted under Section 408 of the Companies Act, 2013 (hereinafter, “Companies Act”) consisting of both judicial and technical members. While it is constituted for the purposes of adjudicating matters under the Companies Act and the Insolvency and Bankruptcy Code, 2016 (hereinafter, “IBC”), there has been much debate over the issue of the power of the NCLT to refer parties to arbitration. This is particularly so when the NCLT acts as an Adjudicating Authority under the IBC, owing to the conflict between the IBC and the Arbitration and Conciliation Act, 1996 (hereinafter, “Act” or “Arbitration Act”). An attempt to address the conflict was initially made by the NCLT in the Indus Biotech v Kotak Venture Fund I judgment (hereinafter, “NCLT judgment”). However, the NCLT judgment was at best vague and seemed to exacerbate the conflict. Presently, this issue seems to have found a closure given the recent judgment of the Supreme Court in Indus Biotech v Kotak Venture Fund (hereinafter, “SC judgment”).
This article will briefly discuss the NCLT judgment, the criticisms surrounding that judgment and the manner in which the SC judgment (although upholding the NCLT judgment) has addressed said criticisms even without directly dealing with the same.
Background of the NCLT judgment
Indus Biotech, (hereinafter, “Corporate Debtor”), filed an interlocutory application under Section 8 of the Act to refer the main petition filed by Kotak, (hereinafter, “Financial Creditor”), under Section 7 of the IBC, to arbitration. The facts of the present case pertain to the subscription of both equity and preference share capital by the Financial Creditor to the tune of Rs. 27,00,00,000/-. Under the Share Subscription and Shareholders Agreement (hereinafter, “Agreement”), the Financial Creditor subscribed to the preference shares in the form of Optionally Convertible and Redeemable Preference Shares (hereinafter, “OCRPS”). Owing to Regulation 5(2) under the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 which made it difficult for the Financial Creditor to make a Qualified Initial Public Offering (hereinafter, “QIPO”), it chose to convert its OCRPS into equity shares. Consequently, disputes arose between the parties with regards to the calculation and conversion mechanisms of the OCRPS to equity shares. Since this led to the delay in the QIPO process, the Financial Creditor filed a petition under Section 7 of the IBC before the NCLT. Simultaneously, the Corporate Debtor invoked the arbitration clause in the agreement to refer the disputes to arbitration.
The NCLT took note of the Booz Allen and Hamilton Inc v SBI Home Finance Limited judgment and held that subordinate in personam rights arising from issues in rem are arbitrable. The NCLT further observed that since the disputes only involved the conversion and calculation of the OCRPS and fixing of the QIPO date between the two parties, the present case was not an issue in rem and hence, held that the dispute is arbitrable. The NCLT also held that it is a judicial authority and has the power to refer petitions under Section 8 of the Act to arbitration. Furthermore, the NCLT took note of the accepted rules of interpretation and held that if two legislations (one general and one specific) exist, the court must harmoniously interpret the both. Lastly, the NCLT held that there was no default under Section 7 of the IBC as it felt that it was not necessary for a generally debt-free company to be going through a corporate insolvency resolution process along with the fact that there is dispute with regards to the existence of a debt.
Criticisms of the NCLT Judgment
The author believes that the NCLT eventually arrived at the right conclusion in stating that the NCLT has the power to refer parties to arbitration. This claim is based on the decision of the National Company Law Appellate Tribunal in the case of Thota Gurunath Reddy v Continental Hospitals where it was held that the NCLT performs different functions as it passes orders under different statutes. The NCLT passes an order as a Tribunal under Section 420 of the Companies Act and as an Adjudicating Authority under the IBC. Similarly, the case held that the NCLT can, in the capacity of a judicial authority, pass orders under Sections 8 and 45 of the Act.
However, while the NCLT judgment held that it has the power to refer disputes to arbitration, owing to its vagueness in reasoning and the procedure that it adopted, it completely dispensed its duties under the IBC. One of the primary issues with the NCLT judgment is that it dealt with the issue of Section 7 of the IBC in the petition filed by the Corporate Debtor under Section 8 of the Act. There was an absolute paucity in the analysis of the NCLT as to why there was no default and whether the debt claimed in fact is a financial debt in the first place under Section 5(8) of the IBC. Instead, the NCLT proceeded to refer the disputes to arbitration on the mere ground that the debt in itself was disputed and that the particular issue could be arbitrable.
However, the NCLT in Reliance Commercial Finance Ltd. v Ved Cellulose Ltd has unequivocally held that there is no bar for it to admit a Section 7 IBC petition irrespective of a pending arbitration proceeding, unlike the case under Section 9 of the IBC where the NCLT has to pay deference to pre-existing disputes.[1] Furthermore, the Bombay High Court in the case of Aditya Prakash Entertainment v Magikwand Media has held that preference shareholders cannot become creditors of the company merely because of their claim of the redemption of their shares.[2] The NCLT failed to carry out basic level of analysis required to conclude that the debt is not a financial debt and hence, there is an absence of default. This becomes a requisite duty of the NCLT as its functions under Section 7(5) of the IBC mandate it to ascertain the existence of default. Furthermore, the case of Innoventive Industries v ICCI Bank states that the NCLT ought to perform a judicial determination of satisfaction and ascertainment of existence of debt and default. The NCLT, by failing to perform that, overstepped its jurisdiction by referring the parties to arbitration.
Further, by terming the conflict between IBC and the Arbitration Act as res integra, the NCLT judgment provided the platform for the NCLT in future cases to decide on the issue of Section 8 of the Act by trumping the petition under Section 7 of the IBC. The NCLT only stated the need for a harmonious interpretation of the IBC and the Act, but did not go further to describe the boundaries of its jurisdiction under both the legislations. This is in abject violation of Section 238 of the IBC, a non-obstante clause as the provision states that the IBC would override any other legislation for the time being in force, including the Arbitration Act. This would mean that the NCLT ought to give primacy to the proceedings under the IBC even if a petition is filed under the Arbitration Act. This view is also echoed by the Supreme Court in the case of Emaar MGF v Aftab Singh which stated that Section 8 of the Act cannot be legislated with the intent of doing away with the remedies granted in special legislations. Therefore, the NCLT failed to clearly demarcate its jurisdiction under Section 7 and Section 8 of the IBC and the Act respectively.
The SC Judgment– Righting the Wrongs of the NCLT
The Corporate Debtor filed a petition for arbitration under Sections 11(3) and 11(4) of the Act to appoint arbitrators on behalf of the Financial Creditor. The Supreme Court in this application also appraised itself of the NCLT judgment and gave its reasoning of the issue dealt with by the NCLT.
Referring to the judgment of Vidya Drolia & Others v Durga Trading Corporation, the Supreme Court held that matters that have erga omnes effect would be an issue in rem and observed that insolvency issues are issues in rem. However, the Supreme Court clarified that insolvency matters assume erga omnes effect only after the NCLT has judicially ascertained and satisfied itself of the fact that a default has occurred; only then a right is created for all the creditors of the corporate debtor. A mere filing of a Section 7 petition under the IBC cannot be said to give rights to all the creditors of the corporate debtor. Hence, for the insolvency matter to be in rem, the NCLT must have recorded default and admitted the petition.
Interestingly, the Supreme Court did not directly address the issue about the powers of the NCLT in referring the disputes to arbitration. The Supreme Court, however, observed that the NCLT ought to deal with the Section 7 petition of the IBC first, irrespective of the fact that a Section 8 petition has been filed under the Act. It then went on to hold that the decision of the NCLT under the Section 7 of the IBC would naturally decide the outcome of the Section 8 petition filed under the Act. If the NCLT records default, the Section 8 petition under the Act is automatically dismissed; whereas if the NCLT does not record default, it is not mandatory for the NCLT to advert to the contentions under the Section 8 petition, as the parties have the autonomy to then constitute the Arbitral Tribunal.
This reasoning of the Supreme Court clears the confusion that arose after the NCLT judgment. The decree that the NCLT must first deal with the Section 7 petition under the IBC, despite the filing of an application under Section 8 of the Act, squarely addresses the first criticism of the NCLT judgment. The order did take note of the fact that the NCLT addressed the issue of default under IBC through the Section 8 petition and held that such practices cannot be followed in future NCLT cases. This critical observation of the Supreme Court would mean that the NCLT would be expected to perform its mandatory duty under Sections 7(5)(a) and 7(5)(b) of the IBC and would have to earnestly determine the questions of debt and default.
Furthermore, the clear indication of the trigger point of the proceeding becoming in rem also potentially results in the prevention of the tussle between the IBC and the Arbitration Act. This is because Section 7 of the IBC assumes primacy and the result of the Section 8 petition only becomes a corollary to the adjudication of the former petition. This clearly demarcates the jurisdiction of the NCLT in both the legislations which the NCLT judgment very clearly failed to do so.
Conclusion
This Supreme Court judgment is a welcome step as it clarifies the powers of the NCLT in referring disputes to arbitration. Though it was clear from the NCLT judgment that it has the power to refer disputes to arbitration, the extent and time of such reference by the NCLT has been explicated by the Supreme Court. This potentially avoids a conflict between the IBC and the Arbitration Act, thereby also ensuring that the NCLT does not dispense its mandatory duty under Section 7 of the IBC.
[1] Mobilox Innovations Private Limited v Kirusa Software Private Limited, (2018) 1 SCC 353 (SC); Kunal Dey, ‘The Game of Jurisdictions: Arbitration and Insolvency Proceedings’, 2020, available at <https://indiacorplaw.in/2020/05/the-game-of-jurisdictions-arbitration-and-insolvency-proceedings.html> accessed 23 May 2021
[2] Mayank Udhwani, ‘IBC v. Arbitration: A Case for Prevalence of the IBC over the Arbitration and Conciliation Act’, 2020, available at < https://indiacorplaw.in/2020/06/ibc-v-arbitration-a-case-for-prevalence-of-the-ibc-over-the-arbitration-and-conciliation-act.html> accessed 23 May 2021
