In this Article Amiy Kumar analyses Arbitration In Insolvency Proceedings. It has been observed that conflict arises when the provision related to “reference to arbitration” under Section 8 of the Arbitration and Conciliation Act, 1996 (“ACA”) collides with insolvency proceedings under the Insolvency & Bankruptcy Code, 2016 (“IBC”). Both acts are considered special laws and are enacted in different ways in different fields of law. As far as ACA is concerned, there is no specific provision which excludes any particular set of disputes as non-arbitrable.
However, it has been settled through Booz Allen Hamilton Inc. v. SBI Home Finance ltd that while there are certain categories of cases that are non-arbitrable, the Hon’ble Supreme Court has recognized the disputes as non-arbitrable when related to action in rem. A right in rem refers to legal rights outside the contract; it is available against the public at large and a right in personam is available within the contract and against a particular individual only.
It has been further settled in the said judgment of the Apex Court that “…. a right in rem is a right exercisable against the world at large, and is not amenable to arbitration, whereas a right in personam, in which an interest is protected against specific individuals. It was also stated that disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable.” The Hon’ble Supreme Court has also labelled winding up and insolvency matters as non-arbitrable.
Further, in the case of Vidya Drolia & Ors Vs Durga Trading Corporation, the Hon’ble Supreme Court had mentioned that “…when cause of action and subject matter of the dispute affects third party rights; have erga omnes effect; require centralized adjudication, and mutual adjudication would not be appropriate and enforceable.”
Therefore, it is to be noted that if the cause of action and the subject matter of the dispute affects the right and liabilities of the third parties, it becomes a matter of action in rem and that cannot be arbitrable and adjudicated by the private forum mutually chosen by the parties. It requires adjudication by the special forum or authority which is exclusively established for that particular set of disputes requiring expert adjudication in the interest of third-party rights.
Section 238 of IBC provides that the provisions of IBC will override all the other laws and by virtue of Section 8 of the ACA, the judicial authorities are bound to refer the parties to arbitration, in case a valid arbitration agreement exists. Further, it is settled as per the rule of interpretation of statutes that in the event of a conflict between the non obstante clauses of two special statutes, the later statute must prevail.
However, in the matter of “Indus Biotech”, the Hon’ble National Company Law Tribunal (“NCLT”), Mumbai has allowed an application filed under Section 8 of ACA by the corporate debtor and dismissed the original petition filed by the financial creditor under Section 7 of IBC. The Hon’ble Supreme Court, in its recent Judgment dated 26.03.2021, upheld the decision of NCLT made in the “Indus Biotech” (Arbitration Petition).
The Supreme Court has rightly settled about Arbitration In Insolvency Proceedings that the application under Section 8 of ACA would not be maintainable after admission of the company petition filed under IBC seeking initiation of Corporate Insolvency Resolution Process as it becomes a proceeding in rem and creates third-party rights after admission of the petition. The Supreme Court has answered a much-awaited question as to when the disputes actually become non-arbitrable; this is going to help in deciding similar matters in future.
As far as insolvency proceedings are concerned, it is very clear now that the insolvency proceedings become in rem only upon admission of the application. Now Operational or Financial Creditor cannot avoid “reference to arbitration” by merely filing an insolvency application; instead, the NCLT would have to determine first the existence of default under IBC and if such default is not established, only then can the matter be referred to arbitration.
The Supreme Court has settled as to when the insolvency proceedings create third party rights and when they become a proceeding in rem. It is very clear now that admission of insolvency application affects the rights of the third party and reaches the stage of proceedings in rem after which an application under Section 8 of ACA would not be maintainable.
However, if the Adjudicating Authority is satisfied with the non-existence of default before admission of the insolvency application, then the matter can be settled through arbitration. The Supreme Court has very correctly pointed out that the natural consequence of consideration made in insolvency application of IBC would befall the application under Section 8 of ACA.