In the instant matter, the Indus Biotech Pvt. Ltd. (Corporate Debtor) has filed an Interlocutory application under Section 8 of the Arbitration and Conciliation Act, 1996 wherein the underlying Insolvency petition was filed under Section 7 of the Insolvency and Bankruptcy Code, 2016 by Kotak India Venture Fund (Financial Creditor) seeking Corporate Insolvency Resolution Process. The Corporate Debtor and the Financial Creditor entered into shareholders’ agreement and share subscription wherein Financial Creditor had subscribed to the total share capital of Rs. 27,00,00,000. Under the agreement, the Financial Creditor subscribed to equity shares and Optionally Convertible Redeemable Preference Shares (OCRPS).
After a while, the Financial Creditor chose to convert Optionally Convertible Redeemable Preference Shares (OCRPS) into equity shares. In between this, the Creditor sought to trigger early redemption of the shares which the Corporate Debtor failed to. A dispute arose between the parties regarding the calculation and conversion formula to be followed for conversion.
The Corporate Debtor invoked the arbitration clause under Article 20.4 of the agreement which provides for the seat of Arbitration at Mumbai. However, the Financial Creditor sought to initiate the Corporate Insolvency Resolution Process (CIRP) proceedings by filing a petition under Section 7 of the Insolvency and Bankruptcy Code, 2016.
The issue in the instant case was Whether the provisions of the Arbitration & Conciliation Act, 1996 will prevail over the provisions of the Insolvency & Bankruptcy Code, 2016?
The Tribunal referred to the landmark judgment of Booz Allen and Hamilton Inc. V. SBI Home Finance Ltd. & Ors. (2011) 5 SCC 532, wherein the Apex Court examined the test of arbitrability. The Tribunal taking into consideration the test laid down by the Apex Court noted that disputes which have subordinate rights in personam arising from rights in rem can be considered arbitrable.
Further, it was examined by the Apex Court that, whether the Arbitration Act is a special law and can be considered to prevail over Insolvency and Bankruptcy Code, 2016 as a matter of general principle that special law prevails general law.
The Tribunal relied upon cases of Consolidated Engineering Enterprises v Principal Secretary, Irrigation Department & Ors. (2008) 7 SCC 169 and Hindustan Petroleum Corp. Ltd. v. Pinkcity Midway Petroleums (2003) 6 SCC 503, and noted that the Arbitration Act, 1996 is a special act and the whenever there an arbitration clause exists, the Court has a mandatory duty to refer the dispute arising out of the contract to arbitration under Section 8 of the Arbitration Act, 1996.
However, this does not essentially mean that one legislation would prevail over another. The Tribunal observed that Insolvency and Bankruptcy Code, 2016 provides for consolidation and amendment of laws relating to reorganization and insolvency resolution of corporate person and has a non- obstante clause.
As it can be seen that both are special laws, the Adjudicating Authority has to determine under Section 7 application whether there is default within the meaning of Section 3(12) of the Insolvency and Bankruptcy Code, 2016. The Tribunal held that; In Innoventive Industries Limited v ICICI Bank & another,21 The Hon’ble National Company Law Appellate Tribunal (NCLAT) held that sub-section (5) of section 7 of the Insolvency and Bankruptcy Code, 2016 provides for admission or rejection of application of a financial creditor where the adjudicating authority is satisfied that the documents are complete or incomplete. The Adjudicating Authority, post ascertaining and being satisfied that such default has occurred, may admit the application of the financial creditor. In other words, the statute mandates the Adjudicating Authority to ascertain and record satisfaction as to the occurrence of default before admitting the application. The mere claim by the financial creditor that the default has occurred is not sufficient. The same is subject to the Adjudicating Authority’s summary adjudication, though limited to ‘ascertainment’ and ‘satisfaction’ (paras 57 & 58). 5.13. Therefore, in a section 7 petition, there has to be a judicial determination by the Adjudicating Authority as to whether there has been a ‘default’ within the meaning of section 3(12) of the Insolvency and Bankruptcy Code, 2016.” In the present case, the Tribunal was satisfied that there is no default occurred and because Corporate Debtor is a debt-free company, it is against the prudent norms to push it into insolvency proceedings at this stage. Therefore, the Tribunal permitted the application of Corporate Debtor and referred the parties to arbitration under Section 8 of the Arbitration Act, 1996.
On the onset of the issue, the Tribunal declared that the issue of referring to arbitration in an application under Section 7 of the Insolvency and Bankruptcy Code, 2016 is res Integra. Although the Tribunal did not explicitly answer the question of whether Insolvency and Bankruptcy Code, 2016, or Arbitration Act, 1996 prevails, it did answer the procedure for determining how to deal with Section 7 application with respect to the commencement of proceedings.
The Tribunal being the adjudicating authority has to be satisfied that there is a dispute within the meaning of Section 3(12) of Insolvency and Bankruptcy Code, 2016. From the observations above, it can be said that Section 8 of the arbitration agreement will not prevail over Section 7 and will not restrict the Tribunal in initiating the Corporate Insolvency Resolution Process (CIRP) against the debtor.