ARBITRABILITY OF INSOLVENCY DISPUTES IN INDIA

INTRODUCTION-

The popularity of arbitration as a means of dispute settlement is increasing by every day. The Arbitration and Conciliation Act was passed in the year 1996 to ensure the growth of this mechanism in India as well as to integrate Indian jurisprudence concerning the same with that of the rest of the world. However, the act doesn’t address the issue of whether all disputes can be subject to the arbitration dispute resolution process in the first place. In this context, this article discusses the clash between the implementation of decentralized, party-dominated arbitration mechanisms and the state-controlled insolvency resolution process. The insolvency resolution process, for which the Insolvency and Bankruptcy Code 2016 is the leading statute, is a highly centralized process that seeks to bring control of the resolution process into the hand of a single authority (the ‘Insolvency Resolution Professional’). On the other hand, arbitration as a process, on a conceptual level, seeks to put power in the hands of parties to the dispute. This puts both these mechanisms at loggerheads, and the lack of legislative clarity means that it is up to the judiciary to establish clearly which process would prevail over the other. The extreme jurisprudential gap between both the processes was also marked by the United States Court of Appeals In Re United States Lines Inc.

JUDICIAL PRECEDENTS-

The leading judgment when it comes to the arbitrability of disputes in India, in general, was given by the honorable Supreme Court in Vidya Drolia & Ors. vs. Durga Trading Corporation. It provided for a ‘four-fold’ test which stated that a dispute would not be arbitrable under the following circumstances-

  • Wherever the subject matter of the suit is related to actions that are in rem in nature;
  • Wherever the subject matter of the suit has any impact on the rights of the third parties; and requires adjudication by a centralized authority;
  • Wherever the subject matter of the suit concerns the legitimate interests of a sovereign state; and
  • Wherever the subject matter of the suit cannot be arbitrated as given under any other specific legislation.

In other words, the in rem nature of Insolvency disputes is the key argument that can prohibit the application of arbitration proceedings on such disputes. Section 14 of IBC imposes a moratorium period in favor of Corporate Debtor during which no legal proceedings can be instituted against the latter, including arbitration proceedings. The major issue that arises in this context is, exactly when does any insolvency proceeding become non-arbitrable? Is any case matter consisting of debt default non-arbitrable from the get-go? The Supreme Court’s judgment in the case of Indus Biotech Private Limited v. Kotak India Venture Fund has clarified this issue to a large extent. Kotak had purchased optionally convertible redeemable preference shares (OCRPS), but when Indus Biotech released a Qualified Initial Public Offering, Kotak claimed a 30% share in the total paid-up capital in equity shares. Following this, Indus Biotech claimed that Kotak is only entitled to 10% of the share capital and refused to pay any further amount. Kotak filed for the initiation of the corporate insolvency resolution process under Section 7 of IBC against Indus Biotech. In the meantime, Indus Biotech applied for the initiation of arbitration proceedings under Section 8 of the Arbitration and Conciliation Act, 1996. The matter was first adjudicated at NCLT, who ruled in favor of Indus Biotech, as it didn’t find any default to have occurred. NCLT also pointed out that the mere existence of debt doesn’t amount to default, and also that Indus Biotech is an efficient and profitable corporation; as such in the absence of confirmed default, the CIRP cannot be initiated and until the latter happens, arbitration proceedings can be instituted under Section 8 of Arbitration &Conciliation Act.

The rationale is simple, once CIRP is initiated by the adjudicating authority; the issue becomes in rem and affects the public at large and not just any individual or group of individuals who have filed for the initiation of CIRP. As such, an arbitration proceeding cannot be allowed between a certain group of creditors and the financial debtor, as the same might result in compromising the other creditors’ legitimate interests. Conversely, if the court/tribunal finds that there is no default and there is no need to initiate CIRP, it can comfortably direct both the concerned parties (creditors and debtors) to arbitration. Kotak appealed against the judgment in the Supreme Court through a Special Leave Petition (SLP). The apex court upheld the decision given by NCLT concerning the dismissal of the CIRP application and subsequent allowance to initiate an arbitration proceeding. The issue at hand was whether Kotak has ownership of 30% of the total paid-up capital or just 10%. Since this particular issue wasn’t ruled in favor of Kotak (who claimed a 30% share), thus, it cannot be said that Indus had defaulted and no CIRP could be initiated against the latter.

IN OTHER JURISDICTIONS-

In the United States, jurisprudence is generally in favor of arbitration, which makes sense given it’s highly libertarian political foundations. However, there are still certain ‘core’ insolvency issues that the American courts have identified and which eliminate any probability of arbitration being allowed to resolve a dispute. British law is also heavily in favor of arbitration, and its expansive interpretation was also evident in the case of Riverrock Securities Limited v International Bank of St Petersburg (Joint Stock Company). In this case, the arbitration agreement between the parties decided England as the seat for arbitration, and thus even though the subject matter of the case fell under insolvency law of Russia (where the dispute arose), it was held that it was non-arbitrable in Russia does not concerns the English court who will follow the English interpretation and hold the parties accountable to the arbitration agreement.

ANALYSIS AND CONCLUSION-

The objective of the Insolvency and Bankruptcy Code, 2016, as clearly stated in its preamble, is to maximize the assets of insolvent corporate persons and ensure the interests of creditors and ‘all stakeholders’. This makes clear that the process provided by the legislation is intended to be highly collective, and seeks to ensure that the economic rights of none of the parties are violated. With this in mind, it can be said that the approach of the Indian judiciary concerning the issue of arbitration of matters concerning insolvency matter has been very well done. The United States’ approach to demarcating ‘core’ issues that can never be arbitrable can be useful in the Indian context as well. Although it can be also said that Indian jurisprudence is headed in the same direction. Vidya Drolia case guidelines provide a general idea of what kind of issues wouldn’t be referred to arbitration under any circumstances. The jurisprudence related to both insolvency and arbitration in India is still fairly new and is still growing. Landmark judgments such as Vidya Drolia and Indus Biotech give a fair idea of how the Indian legal regime intends to tackle the contrast between the two dispute resolution processes. While the CIRP, once officially initiated by the appropriate authority, bars any possibility of arbitration between the creditors and debtors, at any previous stage, arbitration can be entered into following Section 8 of the Arbitration and Conciliation Act, 1996 and the arbitration clause of that specific contract.

Author(s) Name: Swastik Shukla (National Law Institute
University, Bhopal)