Examining the Convergence of Arbitration and Insolvency in India, with reference to Indus Biotech Pvt. Ltd. Vs Kotak India Venture Fund
This article has been authored by Abhay Gupta, a 3rd Year, BA., LLB. student at National Law University, Odisha
Introduction
Since the introduction of a new insolvency regime in India, the relationship between arbitration and insolvency has drawn a lot of attention from corporate and legal fraternities. Due to a lack of statutory guidance, the number of arbitral proceedings has been brought to a halt. Many jurisdictions across the globe have made some positive progress and come up with a proper statutory solution, but in India, the case is different because of it being a relatively new player in the insolvency regime.
In 2016 after the Insolvency and Bankruptcy Code, 2016, was passed, the insolvency and bankruptcy regime in India underwent through a significant transformation. However, except during the moratorium period, the aforementioned code does not contain any clear provisions that demonstrate the direct impact of the insolvency proceeding over the arbitration procedure. On the other hand, The Indian Arbitration and Conciliation Act, 1996, is also silent regarding its impact on the Corporate Resolution Insolvency Procedure (CIRP). In the post-Covid era, when the number of commercial disputes is increasing, the lack of clarity regarding the effects of these two legal instruments on one another has become considerably more critical.
So, in this article, we will endeavour to examine the convergence between the two legal instruments as well as the status of the same in India and other jurisdictions across the world, by making special reference to the Judgment of Indus Biotech Pvt. Ltd. vs. Kotak India Venture Fund (“Indus Biotech case”).
So, what was the Indus Biotech case?
In this case, the Supreme Court has deliberately expressed its view on the extent to which the arbitration can be applicable over the insolvency proceedings. Additionally, this case has taken special attention from the corporate and legal fraternity, which is trying to explore the intersection between the two laws.
In India, it is well-established law that disputes involving the rights of the general public, or rights in rem, are not subject to arbitration. The insolvency proceedings cannot be deemed arbitrable after they have been started since they include the rights of a third party. The primary issue that the court faces in such circumstances is the determination of the point that converts an in personam proceeding into an in rem proceeding, which further renders the proceeding non-arbitrable.
The matter of the case was pertaining to an appeal filed by Kotak India before the NCLT Mumbai under Section 7 of the IBC in which they sought for initiation of the Corporate Insolvency Resolution Process (“CIRP”) against Indus Biotech. The appeal came was filed in response to an alleged default on the part of Indus Biotech, on the redemption of the preference shares that were subscribed by Kotak India. But during the pendency of said CIRP appeal Indus India has also approached the NCLT under Section 8 of the Arbitration Act of 1996, and prayed to refer the matter for arbitration.
After carefully weighing all the relevant facts and circumstances, the NCLT Mumbai dismissed the appeal filed by Kotak India under section 7 of the IBC on the ground that there was not any default on the part of the respondent and further, it allowed the appeal under section 8 of the Arbitration Act and referred the matter for arbitration.
Now, Kotak India challenged the decision given by NCLT in the Supreme Court on the ground that NCLT has overpassed its Jurisdiction when it allowed an appeal under Section 8 of the Arbitration Act when the proceeding was pertaining to the rights of the masses i.e., in rem, and also when IBC does not provide any specific power to the tribunal to refer the matter for arbitration.
What is the position of the insolvency regime in this regard?
Generally, the Indian insolvency regime provides for a public announcement once the CIRP application is accepted. Such public announcement declares the imposition of a moratorium period, during which no suits or any other proceedings can be continued or instituted against the corporate debtor. Further, all the arbitration or any related legal actions initiated after the commencement of CIRP, during the moratorium period are considered as non-est under the Indian insolvency regime.
However, the settled principle does also have several exceptions, which have been created by the number of judicial precedents held by the courts of the country. These precedents provide for the continuance of arbitration proceedings subject to the satisfaction of any of the three following conditions.
If the said proceeding tends to maximize the value of the assets of the corporate debtor, or
If the said proceeding is in the interest of the corporate debtor and does not adversely affect the assets of the same,
And even when the proceedings have been allowed, then also no remedy can be sought against the corporate debtor, until the moratorium period would be in effect, etc.
So, what did the court hold in the current case?
In the present case, the court cited the case of Vidya Drolia, the rights of the third parties are only created when the CIRP application is accepted, and such rights are created in favour of creditors, and also held that the proceedings shall only have the erga omnes and not before that stage. While the appeal is in the pre-admission stage, the only thing which is required to be established by NCLT is that there is a default on the part of the corporate debtor, and only once the said default is established then the rights of the third party comes into the picture in CIRP.
The Honorable Supreme Court ruled in favour of Indus Biotech and stated that the aforementioned dispute is subject to arbitration. The court noted that the dispute in the current issue pertains to the interpretation of the clause under the agreement, which provides for the method to calculate the value of redemption of preference shares held by Kotak India. Additionally, the court agreed with NCLT’s ruling that the dispute’s subject matter did not constitute a valid debt under IBC and was, therefore, unsubstantial; hence there is a scope that the said dispute may be resolved through arbitration.
Although, this judgment has attempted to answer the question of when third-party rights are created in insolvency proceedings by offering some clarification to the legal and corporate fraternity. But more clarification is still needed as to which insolvency matters can be resolved through arbitration and which cannot be. And under what circumstances can the court rule in favour of arbitration? Hence, at this point, it becomes so important for us to refer to international jurisprudence over the convergence of these two laws.
So, what is the international perspective on the issue?
Just like the Indian insolvency regime, the transnational insolvency regime also forbids arbitral proceedings when the insolvency proceeding starts. It is prohibited in order to treat all creditors in a just and equitable way. The international insolvency jurisprudence stipulates a number of explicitly non-arbitrable issues that are referred to as “core” matters, for example, the commencement of insolvency proceedings, validation of claims made by creditors, winding up of the corporate debtor, etc. Additionally, arbitrators are not regarded as the competent authority to deal with such core matters. Hence it can be said that some matters other than core matters can be arbitrable.
So, what is the way forward?
There is an immense need for a legal framework that can clearly determine what can be arbitrable and what cannot be; because of the absence of any such framework, there is so much non-uniformity over the arbitrability of insolvency disputes. Like the practice in the USA, where there is a specific list of core and non-core matters in their bankruptcy code, India can also look for such practices. But this would be a challenging task to prepare such a list, as it has happened in the case of Swiss substantive law.
Even after being a challenging task, it is not something that cannot be done, it would be a feasible option to have a handbook that can guide domestic courts as well as the International Arbitration tribunals, by promoting a more certain transboundary approach to the scope of arbitration of an insolvency dispute. It will benefit not only Indians but also the international community by providing certainty and predictability.