Adjudicating authority under the Insolvency & Bankruptcy Code does not have jurisdiction to refer parties to arbitration

On June 9, 2020, The National Company Law Tribunal (NCLT/Adjudicating Authority) Mumbai in the case Kotak India Venture Fund vs Indus Biotech Private Limited referred the financial creditor and Corporate debtor to Arbitration under Section 8 of Arbitration and Conciliation Act, 1996 (Act) while adjudicating an insolvency petition filed under Section 7 of Insolvency and Bankruptcy Code, 2016 (Code).

While referring the parties to arbitration, NCLT also held that it is not convinced that there is a default by the Corporate Debtor.

Earlier, on June 8, 2020, NCLT Bengaluru in the case of Harish P. vs. Chemizol Additives Pvt. Ltd. suo moto referred the parties to the mediation or Arbitration by using its power under Section 442 of the Companies Act, 2013 while deciding an insolvency petition filed by the operational creditor under Section 9 of the Code. In this case the NCLT emphasized that since an arbitration agreement exists between the parties, proceedings under the code shall not be the first recourse.

Both these cases have raised a very pertinent issue i.e. whether the NCLT can refer the parties to the arbitration in proceedings under the Code?

Section 8 of the Arbitration Act, 1996 provides:

“8. Power to refer parties to arbitration where there is an arbitration agreement.—

(1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.

(2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.

(3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued and an arbitral award made.”

Section 8 of the Arbitration Act can be resorted to refer the parties to arbitration if an action brought before a judicial forum is a subject matter of an Arbitration Agreement. The Supreme Court in the case of Booz Allen & Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532 held that the judicial authority can only refer the parties to arbitration inter alia if an arbitration agreement is entered between the parties, the dispute is subject matter of arbitration agreement, and the relief sought are those which can be granted by an arbitrator. The jurisdiction of the NCLT under the Code has to be analyzed with this in mind.

The duty of the Adjudicating Authority under Section 7 of the Code is to ascertain whether a corporate debtor has defaulted in paying a due and payable debt. Under Section 9, the Adjudicating Authority has to also ascertain whether there is evidence of a bona fide pre-existing dispute or not. It may be apposite to extract the ratio laid down in the case of Innoventive Industries v. ICICI Bank, (2018) 1 SCC 407, wherein the Supreme Court discussed the duty of the adjudicating authority and held that

“It is at the stage of Section 7(5), where the adjudicating authority is to be satisfied that a default has occurred, that the corporate debtor is entitled to point out that a default has not occurred in the sense that the “debt”, which may also include a disputed claim, is not due. A debt may not be due if it is not payable in law or in fact. The moment the adjudicating authority is satisfied that a default has occurred, the application must be admitted unless it is incomplete, in which case it may give notice to the applicant to rectify the defect within 7 days of receipt of a notice from the adjudicating authority. Under sub-section (7), the adjudicating authority shall then communicate the order passed to the financial creditor and corporate debtor within 7 days of admission or rejection of such application, as the case may be.”

It is therefore no longer res integra that the Adjudicating Authority is bound by the contours of Section 7 and Section 9 of the Code, and all it can do is either admit or reject such applications. These proceedings are summary in nature and the Code does not empower the Adjudicating Authority to refer such proceedings to arbitration under section 8 of the Arbitration Act.

It is pertinent to mention that the Booz Allen case mandates that the relief sought in the main proceedings shall be of the nature of relief which would be within an arbitrator’s jurisdiction to grant as well. Under Section 7 and 9 of the Code, the relief sought by creditors is that of initiation of Corporate Insolvency Resolution Process (CIRP) against a corporate debtor. It has been observed by the National Company Law Appellate Tribunal (NCLAT) in the case of Jagmohan Bajaj v. Shivam Fragrances Private Limited, that the Code is supreme so far as adjudication of insolvency petitions is concerned. The NCLAT held that:

“6. … I&B Code is supreme so far as triggering of Insolvency Resolution Process is concerned and same cannot be eclipsed by taking resort to remedies available under ordinary law of the land.”

This means that a similar relief cannot be granted outside the framework of the Code, and therefore no arbitrator has the power to grant such relief. Therefore, even if a valid arbitration agreement is entered between the Parties, they cannot be referred to arbitration by the NCLT in insolvency proceedings.

The Supreme Court in the case of Pioneer infrastructure v Union India held that the proceedings under the Code are proceedings in rem. It is a settled point of law that proceedings in rem cannot be referred to arbitration under Section 8 of the Arbitration Act. For example, Section 8 applications are not allowed in oppression and mismanagement cases under the Companies Act because such cases are matters in rem as held in the case of Haryana Telecom v. Sterlite Industries, (1999) 5 SCC 688. Similarly, it can bes aid that the NCLT cannot refer the parties to arbitration in the proceedings under the Code as such proceedings are in rem.

The NCLAT in the case of Mrs. Nandhitha Vedam v. M/s. Udhyaman Investments Pvt. Ltd. & Anr, has also held that existence of an arbitration agreement is no ground to oppose an application filed by a financial creditor under Section 7 of the Code. Also, with regard to Section 9, NCLAT in the case of Achenbach Buschhutten CmbH & Co v. Arcotech Ltd. held that the mere existence of an arbitration agreement between the parties cannot be ground for refusal to admit an application filed by an operational creditor under Section 9 of the Code in the absence of a pre-existing dispute. Therefore, law in this regard appears to be well settled and existence of an arbitration agreement cannot be the sole ground to escape insolvency proceedings under the Code.

Further, the Code contains a non-obstante clause under Section 238 which provides that the Code will override other laws which are inconsistent with its provisions. Even if we assume (in arguendo) that relief of CIRP can be granted by Arbitrator, the parties cannot be referred to arbitration because the Code will have an overriding effect upon the Arbitration Act.

Going back to the Kotak India Venture Fund case (supra), NCLT Mumbai while deciding the application under Section 8 of the Arbitration Act held that it was not convinced that a default existed. Firstly, this finding could not have been arrived at in such an application; it could only have been decided while deciding the main insolvency application filed by the financial creditor on merits. Notwithstanding that, if the NCLT reached such a conclusion all it could have done is reject the application filed by the financial creditor instead of going into the question whether the dispute between the parties was arbitrable or not.

As far as the Chemizol Additives case (supra) is concerned, the corporate debtor had not even filed any application under Section 8 of the Arbitration Act. In fact, notice of the application filed by the operational creditor was not even issued to the corporate debtor. Despite that the NCLT Bengaluru invoked powers provided under Section 442 of the Companies Act, 2013 to refer the parties to mediation or arbitration. The invocation of this provision appears to be erroneous. The provision applies to Special Courts and empowers the ‘Tribunal’ under the Companies Act, 2013 to refer parties to mediation or alternate dispute resolution. The NCLT under the Code is not a tribunal - it is an ‘Adjudicating Authority’. Further, the Supreme Court in Innoventive’s case held that the Code is a complete code in itself therefore the NCLT cannot use its power under Section 442 to suo moto refer parties to arbitration or mediation for the proceedings pending under the Code.

Reference to arbitration by NCLT in both cases does not seem to the pass the muster of well-settled law both under the Code and Arbitration Act. The jurisdiction and powers of the NCLT is defined under the Code and it has to act within the four corners of the same. These cases may lead to the fragmentation of the evolving jurisprudence of the Code unless rectified by the Appellate Authority or the Supreme Court.

The author is a final-year student at National University for Study and Research in Law, Ranchi.