INTRODUCTION

There has been a lot of discussion on the power of judicial authorities to refer a matter to arbitration. Section 8 of the Arbitration and Conciliation Act, 1996 (the Act) obligates a judicial authority to refer the dispute to arbitration in case there is a valid arbitration agreement. With time, the courts have realized the true intention of Section 8 of the Act and have held that not every judicial authority is bound to make a reference to arbitration.

A fresh controversy has arisen concerning the power of Adjudicating Authority (AA) under the Insolvency and Bankruptcy Code, 2016 (the Code) 1 to refer a matter to arbitration. In the case of Indus Biotech Private Limited v. Kotak India Venture Fund-I2 the Mumbai bench of NCLT refused to admit the application filed under Section 7 of the Code and referred the matter to arbitration by the virtue of Section 8 of the Act.

THE AA'S DECISION IN INDUS BIOTECH PRIVATE LIMITED V. KOTAK INDIA VENTURE FUND-I

Kotak India Venture fund (Kotak) subscribed to the share capital of Indus Biotech Private Limited (Indus). There was a default by Indus in redemption of the Optionally Convertible Redeemable Preference Shares (OCRPS) and consequently, Indus was dragged into insolvency proceedings for non-redemption of the shares. However, Indus invoked the arbitration clause contained in the Share Subscription & Shareholders Agreements (SSSAs) to resolve the dispute by the way of arbitration. Soon thereafter, an application under Section 8 of the Act was filed by Indus before the AA to refer the matter back to arbitration in light of a valid arbitration agreement.

Compelling arguments were made by both the parties before the AA. Indus argued that there cannot be an admission of Section 7 application as there exists an arbitration agreement and by the virtue of Section 8 of the Act, the judicial authority has an obligation to refer the dispute to arbitration. Kotak, on the other hand, argued that an arbitral tribunal is not competent to grant the reliefs sought by the financial creditor. They argued that the existence of an arbitration agreement does not affect the insolvency proceedings before the AA.

The AA after hearing the arguments of both the parties referred the dispute to arbitration on the ground that Section 8 is mandatory in nature and hence a judicial authority must compulsorily refer the matter to arbitration. It also based this decision on the point that for the AA to admit an application under Section 7 of the Code, there must be a default and in the instant case there is nothing to satisfy that a default has occurred.

This decision has brought about a lot confusion and has given rise to a couple of questions which need to be addressed. However, the question that deserves our attention is whether the AA is duty-bound to refer a dispute to arbitration. In order to answer this, it is pertinent to clear the air on the tussle between both the legislations.

DOES THE ARBITRATION AND CONCILIATION ACT, 1996 OVERRIDE THE IBC?

Although the AA framed the abovementioned question for consideration, it did not say in concrete terms that the Act would prevail over the Code or vice versa. A perusal of Section 238 of the Code can help us arrive at an answer to this question. Section 238 of the Code reads as "The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law." It is amply clear that by virtue of this Section, provisions of the Code have overriding effect.

The AA in ABG Shipyard Ltd v. ICICI Bank Ltd.3 dealt with the tussle between the Electricity Act, 2003 and the Code. The AA, on the basis of time of enactment and the objective of the code, held that although both are special laws, the Electricity Act must give way to the Code as the Code was enacted later in time. The Act here is an older piece of legislation and hence, while enacting the Code the legislature was conscious of the existence of the arbitration law.

IS IT WITHIN THE REALM OF THE AA TO REFER THE MATTER TO ARBITRATION?

Section 8 of the Act makes it compulsory for the judicial authority before which an application has been made, to refer the matter to arbitration if a valid arbitration agreement exists.4 This provision indicates that the AA has no choice but to refer it to arbitration in case a valid arbitration agreement is present. However, in order to understand the true nature and intention of Section 8, perusal of a Supreme Court decision is imperative. In M/s Emaar Mgf Land Limited v. Aftab Singh5 , the Supreme Court held that an authority under the Consumer Protection Act, 1986, is not bound to refer the matter to arbitration merely because a valid arbitration agreement exists. The Court placed reliance on Section 2(3) of the Act to hold that the judicial authorities cannot in every circumstance be duty-bound to make such a reference. Section 2(3) says that "this part (Part I)shall not affect any other law for the time being in force, by virtue of which certain disputes may not be submitted to arbitration."

The Court also held that the legislative intent behind Section 8 of the Act was not to render the special remedies under different laws redundant by making it compulsory for every authority to make a reference even if the dispute is inarbitrable. It held in very concrete terms that "The amendment in Section 8 cannot be given such expansive meaning and intent so as to inundate entire regime of special legislations where such disputes were held to be not arbitrable. Something which legislation never intended cannot be accepted as side wind to override the settled law."

Under the Code, an application under Section 7 is an application for initiation of insolvency resolution process. This is a remedy which no authority other than the AA can grant. In such a situation, resorting to Section 8 of the Act to refer the matter to arbitration is something which neither the Act nor the Code approves of. Such a reference would also go against the settled law pertaining to inarbitrability of disputes involving right in rem.

CONCLUSION

The AA in the instant case by referring the matter to arbitration has not followed the well settled principles of law. It appears that the AA has traveled beyond its jurisdiction by making the reference to arbitration. The AA's interpretation of Section 8 also seems to deviate from the correct position as it is incorrect to bring even inarbitrable matters under the sweep of Section 8. In conclusion, by virtue of the true intention of Section 8 of th Act, it would not be wrong to say that the AA is not duty-bound to refer a matter to arbitration even when a valid arbitration agreement exists.

Footnotes

1. Section 5(1), Insolvency and Bankruptcy Code, 2016.

2. IA No.3597/2019 in CP (IB) No.3077/2019

3. IA 328/2017 and C.P. (IB) No. 53/7/NCLT/AHM/2017.

4. Section 8 (1) of the Arbitration & Conciliation Act, 1996 reads as "A judicial authority, before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party to the arbitration agreement or any person claiming through or under him, so applies not later than the date of submitting his first statement on the substance of the dispute, then, notwithstanding any judgment, decree or order of the Supreme Court or any Court, refer the parties to arbitration unless it finds that prima facie no valid arbitration agreement exists"

5. 2018 (6) ArbLR 313 (SC).

Originally published by INDIAN LEGAL IMPETUS® on JULY 2020. Vol. XIII, Issue VII

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.