On June 9, 2020, in the case of Kotak India Venture Fund vs Indus Biotech Private Limited, the Adjudicating Authority of NCLT Mumbai, referred the financial creditor and corporate debtor to Arbitration u/s 8 of Arbitration and Conciliation Act, 1996 while adjudicating an insolvency petition filed u/s 7 of IBC. NCLT also held that it is not convinced that there is a default by the Corporate Debtor, while referring the parties to arbitration.
Earlier, in the case of Harish P. vs Chemizol Additives P.Ltd., NCLT Bengaluru on June 8, 2020, 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.
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.”
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 analysed 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. SC in the case of Innoventive Industries vs ICICI Bank, (2018) 1 SCC 407 held that, it is 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. Also, it has been observed by the NCLAT in the case of Jagmohan Bajaj v. Shivam Fragrances Pvt. Ltd., that the Code is supreme so far as adjudication of insolvency petitions is concerned. 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.
Further, u/s 238 of the Code contains has a non-obstante clause which says that the Code will prevail over any other law which is not consistent with its provisions.
Going back to the Kotak India Venture Fund case, all that the NCLT 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. The powers and jurisdiction of the Adjudicating Authority is defined under the Code and it has to act strictly within the given scope.
