The Corporate & Commercial Law Society Blog, HNLU

Category: Arbitration

  • Has Indian Supreme Court Raised the Question on the Established Practice of International Commercial Arbitration? A Critical Analysis of Judicial Contradictions within its Precedent

    Has Indian Supreme Court Raised the Question on the Established Practice of International Commercial Arbitration? A Critical Analysis of Judicial Contradictions within its Precedent

    By Anchit Jain, fourth-year student at ICFAI University, Dehradun and Advocate Sanket Jha, Legal Practitioner at High Court, Mumbai

    Introduction

    Supreme Court felt trapped in its reasoning and unwillingly landed on a point that might have raised a global question on the approach of the Arbitration system of dispute resolution.

    In the case of Perkins Eastman Architects DPC & Anr v. HSCC (India) Ltd, it was provided in the agreement’s clause 24.1(ii) that the Chairman & Managing Director (‘CMD’) will possess the exclusive power to appoint the sole arbitrator on the behalf of both the parties. Moreover, this exclusion clause barred another party from choosing the arbitrator. Applicants challenged the abovementioned clause before the Supreme Court u/s 11(6) of The Arbitration & Conciliation Act, 1996 (hereinafter referred to as ‘Act’) believing the agreed procedure in non-compliance with the Act and prayed for the appointment of a sole arbitrator.

    The Court found self-interest as a biased element and reasoned it behind the disqualification of CMD. Court referred to its judgment in TRF Limited v Energo Engineering Projects Limited, where it was held that as per Section 12(5) of the Act, an ‘Managing Director’ cannot act as an arbitrator because of his ‘self-interest’ in the outcome of the award. Self-interest disfigures the credibility of an Arbitrator by questioning his ‘Impartiality and Independency’.

    Thus, the Court held that a party can neither act as nor can nominate an arbitrator.

    This piece will discuss, how this reasoning:

    1. May have raised a global debate in appointment procedure of arbitration;

    2. Is not settling amongst the various features of the Arbitration mechanism;

    3. Is (or not) in consonance with other jurisdictions.

    Tossing a Universal Debate

    The Court raised the question on the objective of Arbitration, which if not answered then might have raised a global debate. Party Autonomy in Arbitration is the prima facie reason behind its objective of speedy dispute resolution. Parties have the liberty to customize their procedure as per their convenience. They can freely choose their arbitrator. Curtailing their right on the ground of self-interest has not only challenged the basic feature of arbitration but will also question all those agreements, in which parties have provided for the appointment of arbitrator(s) by their choice. In Perkins’s Judgment, the Court realized that self-interest, as reasoning, will ‘disentitle’ the cases of similar nature.

    This question would be extended to every agreement where parties have provided to nominate a panel of 3 arbitrators as well. Autonomy is a privilege in arbitration for choosing an arbitrator.  If self-interest will bar the parties from nomination, then a party can never choose an arbitrator, because, directly or indirectly, every party has an interest in the outcome. Autonomy is the privilege of choosing this mechanism.

    However, the Court (paragraph 16) referred again to TRF for handling this possible chaos. The Court read that balancing the powers between the parties is the ideal situation through which parties can mutually appoint an arbitrator. The court believed this equilibrium as a solution, although it looks like a self-contradictory statement.

    If a party is barred from choosing an arbitrator on the ground of self-interest for eliminating biases, then the question is how parties choosing the arbitrator will ensure the exclusion of biases. On the contrary, the table may get more biased and raise a question on impartiality & independence of the Arbitrators. In this case, only the umpire might be a reasonable and fair person. Court, instead of resolving the dispute, made it more self-contradictory. This problem gets bigger in the case of the sole arbitrator, where both the parties look unsettled over the appointment.

    Encouraging Judicial Interferences

    Notably, all of this is contentiously ending up with parties seeking the Court’s intervention in the alleged dispute of Impartiality & Independence of Arbitrator. E.g. the case of Bharat Broadband Network Limited v. United Telecom Limited, where the Court upheld the appellant’s argument that as per Section 12(5)’s reasoning from the TRF’s judgment, the appointment made by the CMD stands void.

    Arbitration ensures honest practices so that parties can rely on their arrangements and accept the award as a result of their logic and convenience. If parties have to approach the Court for an arbitrator’s appointment, so that the arbitration can commence, then it defeats the aim of a speedy resolution. Moreover, parties already have the right to appeal before the Court. This will never help the Courts in distressing the docket explosion, rather will increase the burden. This is breaching the Arbitration’s objective of minimising judicial interference.

    Character of Arbitrator

    Supreme Court quoted the 246th Law Commission Report which reads, “Party Autonomy cannot be stretched up to a point where it negates the very basic feature of Arbitrator’s Impartial and Independent character.” If the Court’s reasoning of ‘Tit for Tat’ by balancing the powers amongst the parties will be considered then it will weaken the Commission’s recommendations for ethical procedures. The report emphasizes on not appointing a party or its nominee as the arbitrator even if the same has been agreed between the parties. The reason is to ensure the Impartial & Independent character of the Arbitrator.

    Court referred the judgment of Voestapline Schienen Gmbh v. Delhi Metro Rail Corpn. Ltd, which declared Impartiality and Independency as the hallmarks of an arbitration Proceeding. Court, in both the cases, referred to the UK’s Supreme Court’s decision in Jivraj v. Hashwani which backed the ‘Impartial’ character in an Arbitrator and agreed that an arbitrator’s contract for personal service does not ask him for anyone’s personal service. The Indian judgments, also quoted the Cour de Cassation, France’s judgment, delivered in 1972 in Consorts Ury  which focused on the ‘Independent’ character of the Arbitrator and held that an independent mind is the essential quality of an arbitrator for exercising judicial power. These Foreign Judgments of the respective apex Courts allow a party to appoint an arbitrator, but both of them have asked to ensure the Impartial and Independent character of an arbitrator.

    Asymmetrical Arbitration Clause

    Interestingly, International Arbitration validates the Asymmetrical Arbitration Clause. India’s dissent to this global practice has again weakened its ambition of becoming a global hub of arbitration. This difference with the international approach will be another reason in the list where India as a seat to any International Commercial Arbitration will disappoint the parties on the global standards. The Case of Perkins falls under the jurisdiction of International Commercial Arbitration, where the appellant, the foreign party took the advantage of Indian precedents, against the settled principle of the Asymmetrical Arbitration Clause, despite its prior consent on the Agreement.

    Inadequate Reasoning

    The Court disqualified the party from making a nomination based on ‘qui facit per alium facit per se’ (what one does through another is done by oneself) from the case of Firm of Pratapchand Nopaji v. Firm of Kotrike Venkata Setty & Sons, but it is pertinent that this case was neither of arbitration nor dealt with any similar issue around the present case. It appears inappropriate to bar the objectives of the Act, through which the referred case was decided. The Court disqualified the party, on whom a pendulum of self-interest swung and did not lay, who is eligible to make the appointment on the party’s behalf. This inadequacy in precedent will take the parties before the court for further clarification which will again breach the arbitration’s objective of minimum court’s intervention.

    Test of Arbitrator

    The US Court in the case of Rosenberg v. Merrill Lynch, Pierce, Fenner & Smith, Inc held that the parties must have equal rights to participate in the selection process of the arbitrators. Thus, it is important to ascertain the rationality status of arbitrators.

    However, besides the reasoning of the Indian Court, (i) ‘Complying with the concept of Asymmetrical Arbitration Clause and stimulating it with the Indian public policy’ or (ii) ‘Defining a test of Impartial and Independent Arbitrator for a fair arbitration’, seems as few suitable alternatives.

    In the current case, the Agreement was mutually agreed between the parties, all that was required to be ensured was the hallmarks of Impartiality and Independence of Arbitrator. This can be tested through Schedule V and VII or by the received information under Schedule VI of the Act. The same test can allow parties to appoint the arbitrator, as strict emphasis on the abovementioned Schedule will keep the parties cautious about their decision on the fair appointment of an arbitrator.

    Conclusion

    Supreme Court lacked in complying with the pervasive values i.e. limiting the party’s autonomy and the asymmetrical arbitration clause weakened the objective of minimum judicial intervention. All of this will somewhere damage India’s goal of becoming a global hub of Arbitration. Self-interest is debatable, but this precedent questions the functioning of Arbitration like Party Autonomy and the Court’s intervention. The jurisprudence of Arbitration relies on the UNCITRAL’s Model law which is convenient because of its pervasive uniformity. It is established that all the states operate with the model law and less than the whole have ratified the New York Convention. Thus, it will be suitable for the judicial bodies across the globe to interpret the precedents in a universally accepted version. All that has to be cared about are the public policies of the respective states, which should also be tried to be updated with the prevailing developments. If Arbitration has to comfort the Judiciary then alike Tax or Finance, regular legislative amendments in Arbitration has to be given due attention. Till then, all that can be done is the precedential inclination towards the pervasive schemes.

  • Seat versus Venue: The Persisting Conundrum in the Indian Arbitration Context

    Seat versus Venue: The Persisting Conundrum in the Indian Arbitration Context

    BY Devanshi Prasad AND Arjun Chakladar, THIRD-YEAR STUDENTS AT NLIU, BHOPAL

    The question regarding the selection of ‘seat’ and ‘venue’ of arbitration is integral to the enforcement of the arbitral award, as well as the determination of the applicable law. However, there has been a lack of unanimity resulting in judicial ambiguity as seen in the Mankastu judgment surrounding the selection of the ‘seat’ and ‘venue’, which is analyzed and covered in the following article.

    A contract containing an arbitration clause has three underlining laws governing it, namely the proper law or the law governing the performance obligations, and contractual terms and agreement. The procedural laws namely, the curial law regulating the conduct of the arbitration proceedings and the lexarbitri or the juridical seat of arbitration. It is the Court which has supervisory jurisdiction over all arbitral aspects of the contract.

    The determination of the lexarbitri is a drawn-out and lengthy debate. Uncertainty in the contract to specify the discernible applicable laws leads to disparity and confusion surrounding the juridical seat of any arbitration. The Arbitration and Conciliation Act (‘the Act’) enacted in 1996 had failed to provide clarity to the concept. Courts have worked tirelessly to interpret the provisions and provide uniformity in the construction of its sections but the debate around delineation of seat and venue remains unresolved.

    The Ambiguity Surrounding ‘Place’, ‘Venue’ and ‘Seat’ Under the Act

    The Act does not define ‘seat’ but introduces the term ‘place’ in the statute. However, the same has not been well-defined and can be interpreted to have different meanings under various sections of the Act. This leads to ambiguity in deciding which court has the sole jurisdiction over the arbitration proceedings.

    On reading Section 20 of the Act, the initial implication points that the party autonomy extends only to the choice of ‘venue’ of arbitration. However, the Apex Court in Bharat Aluminium Company v. Kaiser Aluminum Technical Services Incorporation(‘BALCO’) has partly cleared the confusion. It established the concepts of ‘seat’ and ‘venue’ under the Act. It is imperative to read the abovementioned two sections in consonance thereby leading to the conclusion that ‘place’ connotes ‘seat’ under Section 20(1) and (2), whereas, it would connote ‘venue’ under section 20(3).

    It is common to use seat of arbitration interchangeably with place of arbitration. It determines which court has the jurisdiction to the exclusion of other courts in the arbitral proceedings. The venue on the other hand merely indicates the geographical location where the proceedings might be conducted. It may be a neutral venue decided entirely on the convenience of the parties. The seat exists independently and separately as to the venue of arbitration.

    The conundrum of seat and venue of arbitration begins where the contract remains ambiguous or silent on the provision of a seat. The possibility of concurrent jurisdictions introduces the fatality of discord and disharmony into the settlement process of claims. A new peril arises in deciding which courts’ decision would prevail over the dispute. Therefore, the determination of the seat of arbitration is of utmost importance in any arbitral dispute.

    Tests for Determining The ‘Seat’ Of Arbitration

    The Courts effectively provided some respite in the whole debate by interpreting the vague sections of the Act. Two acceptable tests have been devised through precedents for conclusive determination of the seat. They are:

    1. Closest and most intimate connection, and
    2. Bright-line test.

    The Sulamerica case establishes that when an agreement lacks an express or implied choice of law governing the arbitration agreement, the system of law which has the closest and most intimate connection is significant. The expressly selected substantive law of contract is the implied choice of law for the arbitration agreement. In the case of Enercon (India) Ltd. v.Energon GmbH (‘Enercon’), the division bench of the Supreme Court relied on the NavieraAmazonica case and devised the first set of tests. As per this, careful attention is to be paid towards party intention and whether the legal system where the proceedings are to be conducted have a close and intimate connection to the arbitral process. The test is applicable when the arbitration clause is silent or unclear and fails to ascertain the applicable law. The intention of the parties becomes the most decisive factor in clearing up the confusion. Further, the location where the arbitration is to be conducted is a relevant point of consideration.

    Proceeding to the second test, the Shashou principle, laid down in Roger Shashoua &Ors. v. Mukesh Sharma elucidates when the ‘venue’ can be considered as the juridical ‘seat’ in any proceeding. The ‘venue’ must be expressly designated without providing any alternative situs as the ‘seat’. There must be no ‘contrary indicia’ or anything indicating the contrary combined with the arbitration being governed by a supranational body of rules.

    This was conclusively applied by the three Judge Bench of the Apex Court in BGS SGS SOMA JV v. NHPC Ltd. (‘SOMA JV’). It stated that use of expressions like “arbitration proceedings” that “shall be held” at a “venue” emphatically denotes the ‘venue’ being the appointed ‘seat’, subject to no contrary indication of the same.

    The judgment was successful in resolving the ‘seat’ and ‘venue’ dilemma. It demystified the ambiguous portion of the BALCO judgment which sought to introduce the concept of concurrent jurisdiction, and reiterated that once parties have chosen the seat of arbitration the same would indicate that the role of the seat is to have exclusive jurisdiction. It would mean that they have consented to ousting the jurisdiction of the courts of cause of action.

    SOMA JV case solidifies the principle of party autonomy, and holds the judgment pronounced in Union of India v. Hardy Exploration and Production (India) Ltd. (‘Hardy’) to be bad in law. The Hardy case, limiting party autonomy holds that ‘venue’ would not ipso facto imply the appointment of ‘seat’ without a positive indicator in furtherance of the same intention. As a test, it is precisely contrary to the bright-line test. The ‘venue’ would become the ‘seat’ only where there is something submitted in concomitance of it. However, the compeer bench of the SOMA JV case cannot inexorably overrule the Hardy case principle.

    Judicial Scenario Post SOMA JV

    Even after the SOMA JV case, discrepancies in determining the seat of arbitration subsist. If we look at two recent judgments dealing with the issue, we find that there is not much clarity on the subject.

    In Hindustan Construction Company Ltd.v. NHPC Ltd. and Ors.(‘Hindustan Construction’), the Apex Court relied upon the SOMA JV case and upheld that once a ‘venue’ is indicated to be the chosen ‘seat’, the court of that seat has jurisdiction to the exclusion of other courts.

    However, the very next day, three-judge bench of the honorable Supreme Court passed its judgment in the case of Mankastu Impex Pvt. Ltd. v. Airvisual Ltd deviating from the judgment in the Hindustan Construction case. The dispute arose from a sale-purchase agreement and led to invocation of arbitration clause over disagreements regarding renewal of original terms of agreement. A section 11 application was filed in the Supreme Court for appointing the sole arbitrator. However, contentions were raised that the seat vests in Hong Kong, the venue of arbitration proceedings in the agreement. The Court held that the seat of arbitration was in Hong Kong. The finding was based on the clause appointing Hong Kong as the “place of arbitration” along with the clause providing for referring and finally resolving all controversies and disagreements in Hong Kong.

    The Court side-stepped the bright-line test of SOMA JV and held that ‘seat’ and ‘venue’ must be distinguished and cannot be used interchangeably. The SOMA JV case’s reasoning that use of “arbitration proceedings” would inexorably conclude to the ‘venue’ being chosen as the ‘seat’ was not favored. Reliance was placed on the Hardy case analysis. A mere mentioning of the ‘venue’ or ‘place of arbitration’ does not conclusively relay intention to choose the ‘seat’; it must be substantiated by the conduct of the parties towards the same. Therefore, clauses must be read holistically to arrive at a conclusion. A stand-alone reading of the clause was insufficient for treating a ‘venue’ as the ‘seat’. Furthermore, the coordinate bench of SOMA JV case could not overrule the judgment rendered by the coordinate bench of the Hardy case.

    Conclusion

    The myriad of possible judicial interpretations determining the seat and venue of the arbitration still find a lack of unanimity on the concept. Therefore, parties should exercise caution in the drafting of such arbitration clauses in order to avoid any unnecessary deliberation on the same and clear any future ambiguity. The Courts in India have yet not provided a consistent clarification as to the question of seat versus venue. There still exists reluctance on the part of the courts to settle the conflicting opinions with regard to this question. The parties must ensure an express agreement, with regard to the seat of arbitration and to avoid the quagmire caused by the interchangeability of seat and venue. The Enercon and SOMA JV cases provide adequate tests however; the possibility of employing the test adopted in Hardy case inculcates chaos in the judicial process. The SOMA JV case tends to be more in line with the principles of party autonomy and therefore, should be lauded for its observations. The matter must be settled by a larger bench of the Supreme Court to reduce undue litigation on the issue, which it failed to do in the SOMA JV case.

  • Host States: The Perpetual Respondents in Investment Arbitration?

    Host States: The Perpetual Respondents in Investment Arbitration?

    By Vaidehi Balvally, a fourth-year student at HNLU, Raipur

    Here is what international investment arbitrations conventionally look like: a company contracts with a country to invest in mining, power plants, electricity, waste management, or other similar sectors. Apart from this investor-state contract, there exists a state-state international investment agreement between the home state of the company and the host state of investment, typically a Bilateral Investment Treaty (‘BIT’). This BIT guarantees investors of both states procedural rights (e.g. the right to an investment claim) and substantive rights (e.g. right against expropriation by host state). Upon breach of such rights under the contract or the BIT, a claimant-company can opt to institute an investment arbitration against the respondent-host state. 

    Off-balance access to the filing of claims

    In response to the filing of an investment claim, host states have often chosen to file counter-claims (albeit unsuccessfully, barring a few exceptions). However, it is exceptionally infrequent for host states to institute claims independently before investment tribunals. International Center for Settlement of Investment Disputes (‘ICSID‘) data exhibits that host states have largely either turned to domestic dispute resolution or worse, traded human rights for investment-friendliness (as in the case of Urbaser v. Argentina). 

    Only five cases under ICSID have moved past the jurisdictional and investor-consent barrier: Gabon’s proceedings against Société Serete S.A. which ended in a settlement (1976) (i); Tanzania’s case against a partly-owned Malaysian corporation (1998) (ii); an Indonesian province’s proceedings which failed since the province could not represent the host state (2007) (iii); Equatorial Guinea’s conciliation proceedings with CMS, which failed in coming to a settlement (2012) (iv); and a Rwandan government company’s case against a London-based power plant operator which is pending (2018) (v). 

    This asymmetry in filing claims before investment tribunals is not without good reason. Investment arbitration was created to protect foreign investment, and in turn, the investors from unbridled use of sovereign power by host states. Consequently, BITs rarely accord investors with substantive obligations, similar to third-party beneficiaries in contracts, and if host states do premise their substantive cause of action upon the BIT, the BIT either is silent or confers incomplete procedural rights to bring forth a claim. 

    It is pertinent to note that all former claimant-state cases have only been based on rights conferred to host states under the investor-state contract. This implies that in the absence of BIT-based rights to investment arbitration, inequitable contracts will continue to remain unaddressed, with a change in BIT structure offering a much-needed resolution forum. 

    Possible solutions

    UK’s BITs are oft-cited as including a model clause which not only confers upon the host state a right to initiate arbitration but also establishes investor-state privity by drafting in the investor’s consent for all disputes brought forth the host state. 

    However, even with a procedural right to proceed to arbitration, most BITs are silent on substantive rights for host states. A solution adopted when the investor suffers only from contractual but not treaty-based breaches, is the use of an ‘umbrella clause’ in BITs which encompasses rights conferred upon investors in an investor-state contract into the larger umbrella of the BIT. Thus, an investor can sue for contractual breach claims in investment arbitration, the jurisdiction of which was established under the BIT, followed in Noble Ventures v. Romania, SGS v. Philippines, and Eureko v. Poland amongst others. Drawing a parallel from this solution, a reverse umbrella clause would allow the institution of investment arbitration by host states in case of a contractual breach, and was similarly used in Roussalis v. Romania to allow filing of counterclaims.  

    Breeding good governance

    After establishing how host states could be equipped with claimant’s rights, prudence demands a look at why host states should begin relying on investment arbitration more than they historically have:

    • Often, states dependent on foreign investment are hosts to judicial systems which do not fulfill rule-of-law requirements, while investment arbitration is systemically more impartial than domestic courts of host/home states. Moreover, it affords host states an international enforcement mechanism, the likes of which are unavailable for locally adjudicated decisions. 
    • Developing states of the global south are especially vulnerable to exploitation by investors with an economic prowess that parallels their whole economies. Conversely, if the judicial systems are entrenched with judicial corruption, host states may want to take a lesson from the Lago Agrio case to preserve their reputation as investment-friendly states by approaching the international investment tribunals in the first place. 
    • The adjudicatory mechanism of the host states may also be exceptionally drawn-out or unreliable, which may eventually lead a party to file for investment claims with a tribunal. To elaborate India was found guilty of a BIT breach for being unable to process investor claims locally for over nine years in White Industries v. India.
    • Another advantage for host states may be the unavailability of appeal against investment arbitration awards except to have them annulled, as opposed to the layered domestic judicial systems. Accounting for the standard of care exercised by tribunals in ensuring that it reaches the most equitable decisions, the time and economic resources invested by parties of the process are significantly lower, especially if the claimant believes it has a strong case. 
    • Even if none of these ring true for a host state, foreign investors commonly operate only out of a domestic investment vehicle in the host state, and enforcement of a decision extra-territorially may not be an option. Alternatively, extra-territorial investments may be of significance in a dispute, which lie outside domestic jurisdiction.

    Conclusion

    The number of cases that were filed under ICSID by host states but failed, if we include state-owned enterprises, have tripled in the past decade. With 70% of all investment arbitration favouring investors in 2018, the resultant backlash of host states against international investment arbitration is understandable. The reasons for this lack of trust by host states or their subsequent failure in investment arbitration has its roots in state-state BIT and investor-state contract construction, which can be remedied. 

    The drafters of the ICSID Convention were wary of investment arbitration turning into a mechanism akin to the domestic judicial review of regulatory measures and appended a report endorsing equality of access to investment arbitration to investors and host states. In contract to commercial arbitration where parties are private actors, host states intervene to secure serious human rights for its populace (water, electricity, labour rights). If this discourse of delegitimisation prevails, conduct incompatible with public welfare will lose its international voice. 

  • Dissecting ‘Dispute’ and ‘Reference to Arbitration’ under Section 7 of IBC

    Dissecting ‘Dispute’ and ‘Reference to Arbitration’ under Section 7 of IBC

    By Shubham Kumar, a Fourth-Year Student at HNLU, Raipur

    In Innoventive Industries Ltd. v/s ICICI Bank the Hon’ble Supreme Court has provided the scheme of Insolvency and Bankruptcy Code, 2016 (“IBC”) with respect to a section 7 application. An application u/s 7 can be filed on the occurrence of a default and ascertainment of the same through records of the information utility or other evidence produced by the corporate debtor. Contrasting the scheme of section 7 with section 9, it was also held that a dispute regarding debt is of no relevance until it is “due”. Therefore, if the Adjudicating Authority is satisfied with the existence of the financial debt and the default, it will admit the application u/s 7(5)(a).

    Thus, a pre-existing dispute between the corporate debtor and financial creditor had no relevance for deciding a Section 7 application until the recent order of the National Company Law Tribunal (“NCLT“) Mumbai in Kotak India Venture Fund-I v/s Indus Biotech Private Limited.

    ‘Dispute’ in terms of section 7 and section 9

    According to section 5(6) of IBC ‘dispute’ includes a suit or arbitration proceedings relating to:

    • the existence of the amount of debt;
    • the quality of goods and services; and
    • the breach of representation or warranty.

    A corporate debtor may bring to the notice of the operational creditor, any pre-existing dispute between the parties. The application u/s 9 can be accepted only in the absence of a pre-existing dispute between the parties prior to the date of demand notice. The dispute can be related to an arbitration award in relation to a pre-existing dispute challenged by the parties or a dispute in relation to the amount claimed pending before an arbitral tribunal etc.

    The Supreme Court in Mobilox Innovations v/s Kirusa Software held that the Adjudicating Authority has to be satisfied only to the extent that there exists a bona fide dispute between the parties. The court is not concerned with the outcome of the dispute.

    However, while adjudicating upon an application u/s 7 the NCLT is not required to look into any pre-existing dispute between the parties. Overturning a decision of the Hon’ble NCLT, Chennai Bench where a section 7 application was dismissed on the grounds of a pre-existing dispute between parties and pendency of civil suit between them, the Hon’ble National Company Law Appellate Tribunal (“NCLAT“) in Vinayaka Exports and another v/s. M/s. Colorhome Developers Pvt. Ltd observed that only if an application is filed by an operational creditor, can the corporate debtor raise the defence of a pre-existing dispute.

    Kotak Case: A Pandora’s box to section 7?

    In the Kotak case, Kotak Private Equity Group (“Financial Creditor“) filed a section 7 application against Indus Biotech Private Limited (“Corporate Debtor”) for the failure to redeem Optionally Convertible Redeemable Preference Shares (“OCRPS“) amounting to Rs. 367,07,50,000 crores. The Corporate Debtor contested the claim of the Financial Creditor questioning its right to redeem such OCRPS when it had participated in the process of conversion of OCRPS into equity shares, including disputes raised regarding the valuation of Financial Creditor’s OCRPS and fixing of the QIPO date. The Corporate Debtor prayed before the Hon’ble NCLT to refer the parties to arbitration pursuant to Article 20.4 of the share subscription and shareholders agreement which contained an arbitration clause for resolving disputes between the parties.

    The Hon’ble NCLT held that since there exists an arbitration clause and the dispute is capable of being arbitrated, the section 7 application cannot be admitted. The said decision of the NCLT raises three-fold concerns: firstly, with regard to the NCLTs’ power to refer a dispute to arbitration in a section 7 application, secondly, the overriding effect of Arbitration and Conciliation Act, 1996 (“Arbitration Act”) over IBC and lastly, the scope for raising a dispute in an application under Section 7.

    • NCLTs’ power to refer to arbitration in a Section 7 application

    In Swiss Ribbon v/s Union of India the Hon’ble Supreme Court held that the Adjudicating Authority under IBC can exercise inherent powers given under Rule 11 of the NCLT Rules, 2016 which states that the NCLT has inherent powers to make such orders as may be necessary for meeting ends of justice or to prevent the abuse of process of the court. The inherent powers under Rule 11 are similar to the inherent power of the Company Law Board (“CLB”) under Regulation 44 which in turn is similar to the powers of the civil court u/s 151 of the Civil Procedure Code, 1909. In Union of India v. Paras Laminates (P.) Ltd. the Supreme Court has categorically held that tribunals function as court and being a judicial body, it has all those incidental and ancillary powers which are necessary to make fully effective the express grant of statutory power.

    Further, the Hon’ble NCLAT in Thota Gurunath Reddy & Ors. v/s. Continental Hospitals Pvt. Ltd. & Ors. has held that: “…it is clear that under Section 420 of the Companies Act, 2013, the National Company Law Tribunal passes an order as a ‘Tribunal’, whereas under the provisions of Section 7 or Section 9 or Section 10 or sub-section (5) of Section 60, the same very Tribunal passes an order as an ‘Adjudicating Authority’ and the same Tribunal in the capacity of ‘judicial authority’ passes order under Section 8 or Section 45 of the Arbitration Act, 1996. As the Tribunal is empowered to pass orders in different capacities under different provisions of the Act…”

    Therefore, while adjudicating upon an application u/s 7 of IBC, the NCLT ought to discharge its duty as a judicial authority, hence a reference to arbitration is not bad in law. While adjudicating an application u/s 7 or 9, the Adjudicating Authority is competent to decide upon a section 8 application under the Arbitration Act.

    • Over-riding effect of Arbitration Act over IBC

    Section 238 of IBC provides overriding effect to IBC compared to any other law for the time being in force. Section 5 of the Arbitration Act also provides for a non-obstante clause. The rules of statutory interpretation state that in case of an inconsistency arising between two special legislations, the latter enacted legislation will have an overriding effect on the previously enacted legislation. However, this is not the rule of thumb. The Hon’ble Supreme Court in Life Insurance Corporation of India and Ors. v/s D.J.Bahadur & Ors. laid down that a statute can be treated as special legislation vis-à-vis one legislation but there may be situations where the special statute will be treated as a general statute vis-à-vis another special statute. The categorisation of special or general depends on the specific problem, the topic for decision and other criteria.

    Providing a blanket overriding effect of IBC over all previous legislative enactments means going against the principles of statutory interpretation. The anatomy of the IBC is such that it does not deal with the determination of disputes and nor does it concern itself with fact-finding. The alpha and omega of IBC is to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time-bound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders.  In contrast, the Arbitration Act is a complete code for resolution of disputes. The object of the code is to provide speedy resolution of disputes between the parties. Determination of rights and obligations is thus, not within the purview of IBC. Therefore, in an issue related to determination of rights and obligations, the IBC vis-à-vis Arbitration Act, would be considered as a general statute and should have no overriding effect. 

    • Scope for raising a ‘dispute’ in Section 7

    The Innoventive Industries Ltd. case itself leaves scope for raising a dispute under Section 7 of IBC. It states that where the debt is not payable in law or in fact, a section 7 application cannot be admitted. The Hon’ble NCLT in Carnoustie Management (P.) Ltd. v/s CBS International Projects (P.) Ltd. has rightly pointed out that where the loan is itself disputed, the NCLT in a summary proceeding cannot adjudicate upon the existence of the loan, and such questions shall be decided by the competent forum. In other words, the statute mandates the NCLT to ascertain and record satisfaction as to the occurrence of default, and not go into the question of rights of the financial creditor or the corporate debtor.

    Conclusion

    Section 7 of IBC allows NCLT to admit an application on proof of debt and default but it is silent on the aspect where the debt which is being shown as default, is itself disputed. The IBC does not intend to provide a recovery forum to the creditors and should be used only when there exists a debt and default which can be ascertained by the adjudicating authority through summary adjudication. The process should not be used in a manner to threaten corporate debtors and a question of creditors right to claim the amount as debt, when disputed, should be adjudicated upon by a civil court or through arbitration.