Reference of Parties to Arbitration by NCLT Acting as the Adjudicating Authority: Transgressing the IBC

Kajal Singh and Nikunj Maheshwari*

Introduction

The Insolvency and Bankruptcy Code, 2016 (IBC/ the Code) was enacted to promote restructuring and an easy exit for debt ridden companies. Nonetheless, creditors finding insolvency as an easy and expeditious route, attempt to invoke the Code for the purpose of debt recovery even in the presence of an arbitration clause in the agreement. At this juncture, the Adjudicating Authority (AA) under sections 7 and 9 of the code, either rejects or accepts an application. However, there is no express bar that limits the power of the AA to a binary of accepting or rejecting. The issue assumes significance in light of recent judgements delivered in the case of Indus Biotech Pvt. Ltd. v. Kotak India Venture Fund- I and Harish P v. M/s Chemizol Additives Pvt. Ltd, by NCLT, Mumbai and NCLT Bangalore respectively.

In the aforementioned cases the tribunal referred the parties to arbitration. Thus, resorting to a third path that finds no explicit mention within the scheme prescribed under the code, engendering the following crucial question. Can the NCLT acting under IBC, refer parties to arbitration in a petition filed under section 7 or 9 of the IBC? The authors, in light of established judicial precedents and principles, attempt to establish that the AA under the Code cannot refer parties to arbitration.

Insolvency is not arbitrable

The Supreme Court in a catena of judgements including, Hindustan Petroleum Corporation Limited v Pinkcity Midway Petroleums, has held that, in cases where an arbitration clause exists, the Court has a mandatory duty to refer the dispute arising between the contracting parties to arbitrator.

However, the Court failed to define the nature of dispute that can be referred to an arbitrator. This issue was resolved by the Apex Court in the judgement of Booz Allen and Hamilton Inc v SBI Home Finance Limited. The Court in this judgement, noted that all cases are not arbitrable in nature and that legislature has reserved certain cases to be adjudicated specifically by public fora only. Insolvency is a well-recognized example of a non-arbitrable dispute. The dicta of the Court establishes that matters which are in rem or can alter the position of any other party, cannot be referred to arbitration.

As propounded by the Apex court in the case of Swiss Ribbon v. Union of India, insolvency proceedings are proceedings in rem and have the capability of altering the legal position of other creditors or stakeholders of the Company. Further, the Supreme Court in Sukanaya Holdings (P) Ltd. v. Jaykesh H Pandya noted that, bifurcation of the subject matter of an action brought before the judicial authority is not allowed and therefore, partial reference to arbitration cannot be made. Thus, even though the case of Indus Biotech before NCLT Mumbai comprised of mixed questions pertaining to valuation of shares, calculation and conversion formula and fixing of QIPO, the AA could not have referred the same to arbitration as matters in rem are inherently incapable of being referred to arbitration.

Additionally, as observed in the Law and Practice of Commercial Arbitration in England[i] the question has not been whether a particular dispute is capable of settlement by arbitration, but whether it ought to be referred to arbitration or whether it has given rise to an enforceable award. Further, an arbitrator cannot make an award which is binding on third parties or affects the public at large, such as a judgment in rem.[ii] Thus, it is conclusively argued that the arbitrator cannot grant the relief of initiating a CIRP.

IBC prevails over Arbitration and Conciliation Act, 1996 (ACA)

As per the dicta of the Supreme Court in the case of P. Anand Gajapathi Raju v. P.V.G Raju the judicial authorities under section 8 of the ACA are under an obligation to refer parties to arbitration. However, the Court in the case of M/s Emaar Mgf Land Limited v. Aftab Singh noted that section 8 cannot be given such an expansive meaning and intent so as to inundate the entire regime of special legislations where such disputes were held to be non-arbitrable.

The  Supreme Court in the case of Consolidated Engineering Enterprises v Principal Secretary, Irrigation Department, held that the ACA is a special legislation, consolidating and amending the law relating to arbitration and matters connected therewith or incidental thereto. However, Section 238 of IBC gives it an overriding effect over all other statutes. NCLT Ahmedabad in the case of AGB Shipyard Ltd. v. ICICI Bank Ltd. held that the Code would prevail over the Electricity Act, 2003 on grounds that IBC was enacted later in time. The decision of SC in the case of KSL and industries Ltd. v. Arihant Threads Ltd. bolsters the contention. The Court in the case 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”.

Powers of NCLT as AA under IB Code are not analogous to powers of tribunal under the Companies Act.

IBC is a special legalisation and as held in the case of M/s Innoventive Industries Ltd. v. ICICI Bank, it is a self-sustained code. While acting in the capacity of the AA, the NCLT is bound by the provisions as enumerated in the Code.

The dicta in the case of Thota Gurunath Reddy v. Continental Hospitals Pvt. Ltd. distinguishes between the exercise of powers by NCLT in the capacity of a Tribunal under the Companies Act, 2013 (the ‘Act’) and the exercise of powers as an AA under the IBC. NCLAT in the instant case, noted that NCLT constituted under section 408 of the Act when it passes any order under the Act, it functions as a tribunal. However, when it passes any order under IBC, it functions as an AA and when it passes an order under ACA, it functions as a judicial authority. Thus the nature of the function of a tribunal needs to be seen specifically, in  light of the provisions of the act in question.

NCLT while adjudicating matters under Companies Act can as per section 442 of the Act, suo motu, refer any matter in such proceedings to the mediation and conciliation panel. Unlike the Companies Act, the Adjudicating Authority, under IBC, does not have any express provision under which it can suo motu refer parties to arbitration. Also, it would have been impossible to foresee the introduction of the IBC at the time when section 442 was inserted under Companies Act. Had the legislature intended the NCLT under IBC to suo motu, refer parties to arbitration, it would have prescribed the same in the statute as has been done in the case of Companies Act.

The legislature deliberately confined the scope of NCLT to the scheme prescribed under sections 7 and 9 of the code. NCLT’s powers in the capacity of an AA are not analogous to powers of the Tribunal under the companies act. For instance, as held in the case of Lokhandwala Kataria v. Nisus Finance & Investment Managers the NCLT, while adjudicating matters under the IB code, cannot invoke its inherent powers under rule 11 of the NCLT Rules

The Bankruptcy Law Reforms Committee members deliberately kept the statutory process under the Code out of the ambit of inherent powers of the tribunal in order to enable the creditors to make commercially viable decisions without being interrupted by any unforeseen intervention of the AA. Thus, something which the legislation never intended cannot be accepted as a side wind to override the settled law.

Conclusion

Insolvency is a time-bound process as noted by the Supreme Court in Maharashtra Seamless Ltd. v. Padmanabhan Venkatesh. In this strict time frame NLCT cannot be expected to first adjudicate upon an application seeking reference to arbitration under section 8 of the ACA and then go into the merits to decide upon the application filed under section 7 or 9 of the Code.

In the case of Harish. P, NCLT Bengaluru noted that the provisions of the IBC cannot be invoked to settle disputes or to recover alleged outstanding amounts and therefore the parties must settle this dispute through arbitration. Notably, for the Adjudicating Authority to uphold the object of the code, it does not have to necessarily transgress the confines of the Code and refer parties to arbitration.

As propounded in the case of Swiss Ribbon, IBC is a beneficial legislation which puts the corporate debtor back on its feet, and is not intended to be a substitute to a recovery forum. Thus, if Adjudicating Authority prima facie is convinced that company is healthy and solvent and that CIRP has not been initiated for justifiable reasons it can in exercise of its power reject the application. It would have served the same objective, which is to discourage creditors from approaching NCLT to recover dues without having availed alternative legal remedy. Therefore, these two judgements of NCLT set a wrong precedence by referring parties to arbitration.  


* Kajal Singh and Nikunj Maheshwari are students at Institute of Law, Nirma University. They can be reached via their LinkedIn.

[i] Sir Michael J. Mustill and Stewart Crauford Boyd, The Law and Practice of Commercial Arbitration in England 2 (1989).

[ii] Ibid.


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