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Arbitration and Conciliation Act prevails over Insolvency and Bankruptcy Code? The case of Indus v Kotak
Introduction: On June 9, 2020, the Mumbai bench of the National Company Law Tribunal ("NCLT") issued its decision in the matter of Indus Biotech Private Limited v. Kotak India Venture Fund. The NCLT Mumbai court dismissed Kotak India Venture Fund-plea I's under section 7 of the Insolvency and Bankruptcy Code, 2016, finding that the arbitration clause in the agreement was sufficient to handle the parties' disagreement. The ruling shows that the Arbitration and Conciliation Act of 1996 will take precedence over the Code.
Facts: Kotak and Indus Biotech signed a share subscription and shareholders' agreement ("SSSA") in which Kotak bought stock and Optionally Convertible Redeemable Preference Shares ("OCRPS") in Indus Biotech. Indus Biotech chose to conduct a Qualified Initial Public Offering as part of its business strategy ("QIPO"). Kotak was forced to convert their OCRPS into equity shares as a result of the SEBI ICDR Regulations. The agreements also allowed for early redemption on the basis that QIPO would convert OCRPS into firm equity shares.
During the conversion procedure, a disagreement emerged between the parties over the OCRPS computation and conversion formula. Indus Biotech stated that Kotak would be entitled to 10% of the whole paid-up share capital in equity shares, while Kotak claimed that it would be entitled to 30% of the total paid-up share capital in equity shares.
While the conversion of the OCRPS was being discussed, Kotak sent Indus Biotech a letter offering to redeem the OCRPS for INR 3,670,856,503. However, Indus Biotech failed to redeem the OCRPS before the SSSA's redemption deadline of April 15, 2019.
Kotak started the Corporate Insolvency Resolution Process by filing a petition under Section 7 of the Insolvency & Bankruptcy Code, 2016. In the same case, Indus Biotech filed a miscellaneous application to have the dispute arbitrated under Section 8 of the Arbitration and Conciliation Act, 1996. The NCLT had issued an order approving Indus Biotech's arbitration application, and as a result, the CIRP petition under Section 7 had been rejected. Kotak filed a special leave petition with the Supreme Court after being aggrieved by the NCLT's decision.
Decision and Analysis: The NCLT Mumbai panel stated that it is a well-established legal principle that a special law supersedes the ordinary law (generalia specialibus non -derogant). The Arbitration and Conciliation Act, 1999 was ruled to be a unique law in the case of Consolidated Engineering v. Principal Secretary Irrigation Department. According to the NCLT Mumbai bench, the controversy, in this case, centers around three things:
- The OCRPS of a Financial Creditor is valuated
- When the Financial Creditor agreed to engage in the process of converting OCRPS into equity shares of OCRPS, it had the right to redeem OCRPS.
- Choosing a date for the QIPO.
The Court concluded that the aforementioned factors are significant determinants in determining whether a default has occurred. As a result, the invocation of the arbitration provision was found to be legitimate, and the financial creditors' section 7 application under the Code was dismissed.
Although the NCLT Mumbai bench had directed both the parties to arbitration, it does not mean that Arbitration and Conciliation Act, 1966 prevails over the Code. A non-obstante clause in Section 238 of the Code says that the Code will take precedence over any other legislation that contradicts its provisions.
It is pertinent to note both the Arbitration and Conciliation Act, 1996 and the Code are special laws. The Code was created to harmonize and update the legislation governing corporate insolvency resolution. The Arbitration and Conciliation Act of 1996, on the other hand, was passed to codify and reform the legislation governing domestic arbitration. As a result, each is a unique statute that governs separate areas of law.
(This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, or Religion, Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. Further, despite all efforts made to ensure the accuracy and correctness of the information published, White Code VIA Mediation and Arbitration Centre Foundation shall not be responsible for any errors caused due to human error or otherwise.)
- Introduction
- Facts
- Decision and Analysis
