This article has been written by Ms. Suhani Singh, a student studying B.A.LL.B[HONS.] from Teerthanker Mahaveer College of Law and Legal Studies, Moradabad. The author is 3^rd year law student.

TITLE: INARBITRABLE DISPUTES

• Introduction

Although insolvency proceedings are in rem and include third parties’ rights, we are all aware that they are not arbitrable in India. So what happens in situations where there is a request for the institution of insolvency procedures as well as a request to refer the same dispute to arbitration? Based on the most recent ruling by the Supreme Court in Indus Biotech Private Limited v. Kotak India Venture Fund, we will address this problem in this essay.

• Definition of Arbitrable Dispute

Any and all disagreements, controversies, or other issues that arise out of or in connection with this Agreement between the Operator and the Company are referred to as “arbitrable disputes.”

Any and all disagreements between the Operator Parties and the Company Parties that arise out of or are related to this Agreement and cannot be resolved by the Services Council within thirty (30) days (unless a longer period of time is agreed upon) of being submitted to the Services Council are referred to as Arbitrable Disputes.

• Meaning and examples of Arbitrable Disputes

Any and all disagreements, claims, controversies, and other issues between any HEP Entity and any HFC Entity, on the one hand, and arising from or relating to this Agreement, the Master Agreements, the Services and Secondment Agreement, or the alleged breach thereof, or in any other way pertaining to the subject matter of this Agreement, the Master Agreements, or the Services and Secondment Agreement, are referred to as Arbitrable Disputes.

The procedures outlined in Section 11.1(d)(i) shall still apply to the final resolution of an Arbitrable Dispute if temporary or preliminary injunctive relief is necessary before the matter can be resolved by arbitration, even if a court of competent jurisdiction has issued an order granting injunctive or another type of temporary or preliminary relief.

Any dispute that seeks confirmation of an arbitrator’s decision award may be filed in a lawsuit, action, or other legal activity before any federal or state court with appropriate authority.

Notwithstanding of any clause in this agreement to the contrary, either Party may ask a court of competent jurisdiction for temporary or preliminary injunctive relief or another type of ancillary remedy at any time, including in relation to any Arbitrable Dispute.

• In India, disagreement are arbitrable

Even though India has a strong arbitration law that is frequently updated to make it more arbitration-friendly, there is no explicit definition or classification of what types of disputes are not subject to arbitration in India. The apex court of the nation’s numerous judicial rulings have mostly served as the jurisprudence and direction in relation to this subject. The Supreme Court’s December 2020 ruling in Vidya Drolia v. Durga Trading Corporation is the most recent and thorough ruling regarding the types of issues that are not subject to arbitration.

In this case, the Supreme Court was asked to rule on whether disputes between a landlord and tenant, which are exclusively resolved in line with the Transfer of Property Act, are subject to arbitration. A woman-judge bench used to be at Himangni Enterprises!

In 2017, Kamaljeet Singh Ahluwalia rendered a negative decision on this matter. Later in 2019, a different Supreme Court two-judge bench disapproved of the ruling in the Himangni Enterprises case and submitted the case to a bigger court for decision, which resulted in the ruling in the Vidya Drolia case. In this case, the Supreme Court has established two key questions that must be addressed. They are as follows:

• When the dispute’s subject matter cannot be handled by arbitration, the term “non-arbitrability” is used.
• It is unclear who will make the decision on non-arbitrability—the court at the reference stage or the arbitral tribunal in the arbitration procedures.

 The Supreme Court has developed a four-part test to decide what is arbitrable and what is not in order to solve these concerns. The Supreme Court ruled that where the issue or basis for any dispute:

1. Has to do with real property activities that don’t concern real property rights’ inferior rights in personam;

2.Affects the rights of third parties, has an erg omnes effect, necessitates centralised adjudication, and mutual adjudication is inappropriate;

3.Has to do with the State’s unassailable sovereign and public interest functions; and

4.Is not arbitrable by necessity or specifically under a specific statute

Simply put, if an award is to be made in a dispute against the entire world (Right in rem), if their decision affects the rights of third parties or a state’s sovereign function, or if it is expressly stated in any statute that the dispute is not subject to arbitration, then in all such cases the disputes are non-arbitrable and must be resolved by public forums (courts, tribunals, etc.) only.

• Arbitrability of insolvency disputes and major issues

Due to the fact that the resolution of an insolvency dispute involves the rights of third parties, insolvency disputes are not regarded as arbitrable in India. This position has been developed as a result of numerous court rulings, including Swiss Ribbons Private Limited v. Union of India, P. Anand Gajapati Raju v. PVG Raju, and Booz Allen and Hamilton v. SBI Home Finance Limited, where the courts distinguished between the right in rem and the right in personam and ruled that insolvency disputes are not subject to arbitration. Simply put, once insolvency procedures are initiated against a person, all other legal actions taken against that person, including any ongoing arbitration proceedings, will be stopped until the insolvency proceedings are concluded.

 In recent years, the interaction between insolvency and arbitration proceedings has gained prominence. This is mostly as a result of the new Insolvency & Bankruptcy Code being passed in 2016 (IBC). It completely altered India’s system for handling insolvency cases. With this change in the law governing insolvency, it is clear that India is still in the early stages of implementing this new insolvency code. In addition, other than the imposition of a moratorium, the code contains no provisions that address how insolvency proceeding. The impact of the corporate insolvency resolution process (CIRP) on arbitrations is also not addressed in the Arbitration and Conciliation Act, 1996.s affect arbitrations.

Further more noteworthy are the overriding clauses included in both the IBC, 2016, and the Arbitration Act, 1996. Given that each of these laws are unique, a new question must be addressed: which law will take precedence over the other? In the most recent ruling by the Supreme Court in Indus Biotech Private Limited v. Kotak India Venture Fund, all of these questions have been addressed.

• Background information and the Supreme Court’s ruling in the Indus Biotech case

The Optionally Convertible Redeemable Preference Shares (OCPRS) issued by Indus Biotech Pvt. Ltd. were purchased by Kotak Venture Fund (Kotak) in 2007. (Indus). Indus and Kotak disagreed over the estimation and conversion of OCPRS into equity shares after Kotak later opted to convert the Indus had requested arbitration for the issue, and Kotak had submitted an application under Section 7 of the IBC to start the Corporate Insolvency Resolution Process (CIRP) against Indus before the NCLT. Indus had contested this, claiming that the case had to be brought to arbitration because it was covered by the section governing dispute settlement.

Indus has also stated that Kotak’s present action under Section 7 is a pressure strategy to extort money from Indus and is a “dressed-up” plea made to avoid the arbitration hearings. OCPRS into equity shares. In this instance, the NCLT used the “test of arbitrability” and noted that if the dispute is covered by the arbitration agreement or clause, the judicial authorities must send it to arbitration.

The NCLT has issued an order in favour of Indus and submitted the matter to arbitration after noting that all problems in the current case, including those involving the value and conversion of the OCPRS, fall outside the purview of the arbitration agreement or provision.

Without delving into the question of whether the NCLT has the authority to recommend the parties to arbitration, the Supreme Court also noted that the NCLT’s job is to determine, based on the evidence before it, if there is any default and debt payable by the corporation. If there is a default, the application under Section 7 of the IBC will obviously be accepted and the dispute will no longer be subject to arbitration. If there is no default, the application will be rejected, and the parties may then proceed with arbitration. Hence, the Supreme Court supported the NCLT’s decision to deny the Section 7 application, although it made the observation that the NCLT must first assess whether the Section 7 application is admissible without considering whether a Section 8 case is already pending. 

The arbitrability of the dispute will be determined only by the admission or denial of the Section 7 application. The Supreme Court further noted that because both are unique acts, the one that is implemented later will take precedence over the other when deciding the conflict between the non-obstante clause under Section 5 of the Arbitration Act and the overriding effect under Section 238 of the IBC.

• Analysis

It is made plain by the apex court that once insolvency proceedings are admitted, the matter is no longer subject to arbitration. In this case, the NCLT’s major error was referring the case to arbitration when the proper course of action would have been to determine if Indus was in default and, if so, to either continue with the CIRP or dismiss the case. The NCLT erred in dismissing the Section 7 application under the IBC based on the pending Section & application under the Arbitration Act, in my opinion.

• Conclusion

The last ten years have seen a major evolution in the arbitrability of conflicts as a result of numerous judicial rulings. The courts have often ruled on the arbitrability of dispute topics and adopted a pro-arbitration stance. The Vidya Drolia case decision by the Supreme Court has greatly simplified the situation with regard to tenancy disputes, frauds, and consumer disputes. It reflects the court’s forward-thinking philosophy and aspires to create an efficient, independent, and productive arbitration environment in India.

Making India an arbitration-friendly country is the legislative goal behind the enactment of the Arbitration Act and its ongoing amendments. The IBC was implemented to assist insolvent and struggling businesses in getting back on their feet while balancing the interests of creditors. It is not intended to replace a recovery suit. According to the ruling in the Indus case, the issue only ceases to be arbitrable after the CIRP application is admitted. It will be fascinating to monitor how insolvency proceedings develop and how they affect arbitration proceedings given the implementation of COVID-19 and the suspension of IBC for more than a year. The interests of the corporate debtors and the parties who are using arbitration to settle their issues with such corporations must be balanced. We will see an increase in the number of cases where arbitral proceedings will be tainted because of the onset of insolvency proceedings against the corporate debtors and a moratorium on all arbitration proceedings as a result of the severe financial stress and failing business environment brought on by COVID-19.

Resources Use for Research: –

1. https://www.barandbench.com
2. https://viamediationcentre.org
3. https://blogipleaders.in
4. https://indiankanoon.org
5. https://www.lawinsider.com
6. https://www.latestlaws.com
7. You Tube

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