Indus Biotech v. Kotak: Interactions Between Insolvency and Arbitration Regimes In India

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– Anubhav Khamroi and Sakshi Saraogi*

Across several jurisdictions, there is an ongoing discussion regarding the intersection and interaction between insolvency and arbitration laws. In the Indian context, recently, the National Company Law Tribunal (‘the NCLT’), Mumbai Bench, delivered an intriguing and pioneering judgement in Indus Biotech v.Kotak India[1] (‘Indus Biotech’). The NCLT allowed an interlocutory application filed by the corporate debtor, under Section 8 of the (Indian) Arbitration & Conciliation Act 1996 (‘the 1996 Act’) and consequently referred the parties to arbitration for settlement of their contractual disputes. 

To the best of the authors’ knowledge, this is the first time that any NCLT has dismissed an application under Section of 7 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’)[2] and referred the parties to arbitration. Although the matter is currently on appeal before the NCLAT (Diary No.-20256-2020), we believe that the NCLT decision has shed some necessary light on the gap in Section 7 of the IBC. We must also mention that this judgement has raised many eyebrows and has drawn some strict criticisms, on the grounds of standard of review, arbitrability of issues, and Section 238 of the IBC. 

We shall be engaging with all the above points, while exploring the said ‘gap’ in Section 7. In brief, we believe that NCLT Mumbai adopted the correct standard of review while considering a disputed debt, raised as a ‘default’ under Section 7 of the IBC, which was also subject to an arbitration agreement. Thereafter, we shall discuss the position in Singapore and England in this regard. Finally, by developing the principles used in Indus Biotech and the foreign decisions,we believe that a Tripartite Test (or the ‘Solvency and Subject Matter’ test) can be applied as a gap-filler in Section 7 of the IBC. 

What is the ‘Gap’ in Section 7 of IBC?

Under Section 8 of the IBC,[3] if a corporate debtor proves the existence of a ‘dispute’, then the jurisdiction of the NCLT is not triggered. This is because the claims under Section 8 (operational debts) are generallyminimal[4] and cannot be used to drive an otherwise solvent company into Corporate Insolvency Resolution Process (‘CIRP’). Moreover, it gives an opportunity to the corporate debtor to dispute the default and not directly pay the creditors at their whims and fancies. Section 7, on the other hand, does not provide for a similar mechanism to dispute the claims of the respective creditors. Currently, financial creditors are allowed to move an application before the NCLT as soon asthey believe a ‘default’ has occurred. Section 7 is interpreted to not include a safe harbour/protective mechanism for the corporate debtor (which will be elaborated below), even if the debt has been challenged in arbitration or before civil courts. To clarify, this is the interpretation of Section 7 by some authorities, which we argue is untenable in law.

There is a stark difference in the applicable procedure under Section 7 and 8. While monetary considerations could be one factor, it certainly manifests a ‘gap’ in the IBC. Disputing and settling a debt are vital aspects of any insolvency regime, and in any case it would ease the workload of the NCLTs. Contrary to popular belief, if financial debts are disputed by solvent companies via the arbitration route, then it would not delay the IBC process, but instead would provide clarity regarding the substance and quantum of the financial debt. Only upon establishment of the ‘financial debt’ by an arbitral award, either the company will pay off the financial creditor(s) in subsequent instalments or the company will undergo CIRP. Thus, there is a need to provide the corporate debtors with an opportunity to raise bona fidedisputes against a ‘default’ under Section 7.

Unfortunately, Section 7 is silent on the applicable standard of review for adjudication of ‘default(s)’, when the financial debt is disputed and subject to an arbitration agreement. This raises some compelling questions: How do we interpret that ‘gap’? And in the presence of an arbitration agreement, when is an arbitral reference by the NCLT warranted? 

Standard of Review under Section 7(5) of IBC

Without relying on any precedent, let us consider Section 7, as if the matter wereres integra. The Heydon’s rule of interpretation i.e.a holistic evaluation of the text, purpose, and context of the provision,[5] as was applied by the Supreme Court in Arcelor Mittal v. Satish Kumar Gupta (2018)to interpret the scope of Section 29A and understand the scheme of the whole Act, consequently must also inform our interpretation of Section 7. 

Section 7(5) of the IBC states that, “Where the Adjudicating Authority is satisfiedthat – (a) a default has occurred and the application under sub-section (2)is complete, …” [Emphasis added]. Herein, the text of Section 7 must be understood in light of the underlying context and purpose, so that our loyalty to the text of the provision does not stultify the overarching objective of the IBC. As observed in Mobilox Innovations v. Kirusa Software (2017)and K Kishan v. M/sVijay Nariman Company (2018),the UN Legislative Guide on Insolvency Law is pertinent for the current discussion, as it forms a part of the legislative history of the IBC. While commenting on the grounds to deny the application for commencement of insolvency proceedings, the Legislative Guide notes:

“In the case of a creditor application, it might include those cases where a creditor uses insolvency as an inappropriate substitute for debt enforcement procedures(which may not be well developed); to attempt to force a viable business out of the market place; or to attempt to obtain preferential payments by coercing the debtor.”[6] (emphasis added)

Accordingly, the Supreme Court in Duncans Industries v. AJ Agrochem and Swiss Ribbons v. Union of Indiahave further clarified that the purpose of the IBC is to ensure revival of the corporate debtor and it should not be utilised as a mere debt recovery tool by creditors.

Therefore, in light of the aforesaid discussion, we make two arguments:

  1.  The NCLT is not bound to pass an admission order as soon a ‘complete’ application is moved under Section 7(2) r/w Rule 4 of the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016. 
  2. Section 7(5) directs that the NCLT must be “satisfied” that a default has occurred, which implies that there must be an objective judicial determination of the default. On a perusal of relevant judgements [N G Dastane v. Mrs S Dastane (SC-1975) and Shyam Sunder Prasad v. Commissioner, Municipal Corporation of Hyderabad (APHC-2001)], it is clear that the presence of the phrase “is satisfied” in statutes, is considered to mean objective and reasonable satisfaction on a preponderance of probabilities. We believe an even closer scrutiny is necessary if the judicial order affects the status of a party, such as imposition of a moratorium and loss of control over the management of the company, once an admission order is passed under Section 7. 

Lessons from Singapore and England

Now let us delve into a tour d’horizon analysis and understand how the issue has been internationally dealt with. Recently, the Singapore Court of Appeal in AnAn Groupv. VTB Bank(2020) (‘AnAn Group’) dealt with a similar question, as is being discussed in this post. AnAn Group and VTB entered into a “global master repurchase agreement” under which AnAn would sell global depository receipts to VTB, of certain shares and then later repurchase them from VTB at pre-decided rates. Interestingly, the Court of Appeal held that a “prima facie” standard of review applies to disputed debts, raised in relation to an insolvency/winding-up application, which are subject to an arbitration agreement (¶56-57). Under the “prima facie” standard, the courts are supposed to stay/dismiss the insolvency/winding-up proceedings if: first,there is a valid arbitration agreement; second,the dispute falls within the scope of the arbitration agreement; and third,the dispute is not raised by the debtor in abuse of the court’s process.

One of the major reasons underlying the above decision, which also applies in the Indian context, is “Coherence in Law” (¶61-74). To give an illustration, let us take a situation wherein the creditor, instead of filing for insolvency, claims a ‘debt simpliciter’ before a civil court. In that case, the debtor would only have to prima facie provethat there is a valid arbitration agreement which covers the dispute and a stay/dismissal would be granted, in favour of the debtor seeking an arbitral reference. This precisely reflects the current position under Section 8 of the 1996 Act. Now, imagine if the same debt were to be pursued via the insolvency route and a higher standard of review was applied to decide on an arbitral reference. It would lead to a disastrous result, wherein the judicial standards are subject to the creditor’s choice of forum i.e. the judicial route pursued by them to enforce their debt.

Similarly, in 2014, the English Court of Appeal in Salford Estates v.Altomart, held that a lower standard of review should be applied while considering a disputed debt in relation to an insolvency/winding-up application subject to an arbitration agreement. This is because such a position would be most consistent with the legislative policy of the (English) Arbitration Act 1996, and courts ought to dismiss/stay the winding-up application, save in “wholly exceptional circumstances” (¶39). Herein, please note that the aforesaid position under the English Arbitration Act is identically reflected in the Indian context, under Section 8 of the 1996 Act. 

Solvency and Subject Matter Test in Indus Biotech: Possible Gap-Filler in IBC?

We must attempt to balance the competing interests of the financial creditor(s) and corporate debtor(s). As explained above, Section 7(5) calls for an objective judicial satisfaction of the ‘default’. On a joint reading of the Indus Biotech decision and the aforesaid international decisions, we could develop a Tripartite Test (‘Solvency and Subject matter’ test), which may assist the NCLT to decide if parties can be referred to arbitration and the Section 7 application be dismissed:

  1. Solvency of the Corporate Debtor – whether the corporate debtor is otherwise solvent and debt-free? [7]
  2. Subject Matter and Arbitrability – whether the dispute is subject to an arbitration agreement and forms an essential part of the subject matter of the original Section 7 application? And, whether such issues are arbitrable in law?[8]
  3. The dispute is not raised in abuse of the judicial process.[9]

If on a preponderance of probabilities, the corporate debtor fulfils the above test, the NCLT may refer the parties to arbitration. On the third test, the NCLT ought not delve into the merits of the dispute, but simply examine if there is an abuse of process by the debtor. To give an illustration, let us recall an observation in AnAn Group decision(¶94):

“For example, a debtor may genuinely dispute a debt which it had expressly and repeatedly admitted on previous occasions. In such a case, the debtor may appear bona fide in raising the ‘dispute’, but the court ought, in the absence of a clear and convincing reason for the change of position, to refuse a stay as it would amount to an abuse of process.” (emphasis added)

We do recognise that this is not a decision simpliciter; however, the proposed tripartite test may act as the means to reach a judicially satisfactory result. Moreover, in the interest of fairness, we must mention that there is an NCLAT decision in Nandhitha Vedam v. M/s Udhyaman Investments,which held that ongoing arbitration between a corporate debtor and financial creditor is no ground for rejecting a Section 7 application. However, it should not operate as a binding precedent for two reasons: first, the said one-line conclusion is not supported by any reasons whatsoever, and without reasons it cannot hold any precedential value;[10] and second, in any event, the corporate debtor in that case lacked sufficient funds and the objections raised were prima facie frivolous. This can be confirmed from the initial NCLT Chennai decision in CP/39/(IB)/CB/2018(¶6,11-12,15). 

Application of the Tripartite Test in Indus Biotech

In Indus Biotech, NCLT Mumbai (¶5.14-5.15) allowed the arbitral reference to decide, inter alia, the applicable valuation formula for redeeming Optionally Convertible Redeemable Preference Shares (‘OCRPS’) and fixing of the Qualified Initial Public Offering (‘QIPO’) date. The NCLT found that: (1) the corporate debtor was a solvent and profitable company; (2)the issues raised by the corporate debtor in arbitration constituted the subject matter of the original Section 7 application and are thus, important determinants while adjudicating the “default”, and (3)the issues were arbitrable. To stress on the point, arbitration was allowed only for determination of the substance and quantum of ‘financial debt’, which in turn will determine the default, if any. The arbitral tribunal will only deal with the contractual questions of fact and law, such as determination of the conversion/valuation formula and fix the QIPO date. Moreover, NCLT Mumbai upheld the principle of ‘party autonomy’. The Agreement between Indus and Kotak had an arbitration clause, which could have been invoked in case of contractual disputes. NCLT Mumbai, thus, correctly upheld Indus’ right to commence arbitration.

Further, on the question of arbitrability, all the issues referred to arbitration purely arose from the concerned Agreement and thus, related to ‘rights in personam’, which are arbitrable in nature.[11] In a slightly different context, the Delhi High Court in HDFC Bank Ltd v. Satpal Bakshi(2012) had observed that adjudication of debt, on the facts of a case, to ascertain the money payable by a borrower to the financial institution is in relation to a ‘right in personam’. Lastly, in our view, only if the arbitral award is passed in favour of the financial creditor, and the debt continues to be unpaid, then it shall open the gates to the IBC and the collective interest of the company’s creditors will come into consideration. 

Section 238 Conundrum

Section 238 of the IBC states that in the event of an inconsistency, the IBC shall prevail over all other laws. In our view, the existence of an ‘inconsistency’ must be decided on the basis of the specific provisions in question and must be ironed out on a case-to-case basis. For example, the Supreme Court in K Kishan v. M/s Vijay Nariman Company(2018), held that the right to challenge an arbitral award under the Arbitration Act does not result in an ‘inconsistency’ with the IBC, but instead clarifies that the operational debt is disputed. In Indus Biotech, NCLT Mumbai allowed the arbitral reference simply because the arbitration process would clarify the substance and quantum of the claimed financial debt. Further, the mandate of the NCLT, under the IBC, does not allow for debt recognition or adjudication of contractual disputes. There was no apparent conflict between the IBC and the Arbitration Act in Indus Biotech. In other words, the adjudication of the dispute at arbitration was considered to be a necessary precondition to invoking IBC, as it crystallises the ‘default’.

Concluding Remarks 

Indus Biotechis a highly criticized judgement as it can be used to delay the insolvency resolution process. Some may also argue that allowing arbitration to adjudicate the ‘financial debt’ will add to a lengthy litigation. However, on the flipside, we believe that Indus Biotechshould be highly celebrated, as it eases the workload of the NCLTs and provides a clearer framework for Section 7 applications. The ‘gap’ in IBC, as highlighted by Indus Biotech,should be immediately remedied so that financial creditors cannot by-pass arbitration agreements and use the threat of IBC to strong-arm corporate debtors into settling disputed debts. The ‘gap’ could possibly be remedied by legislative or executive action, or otherwise the judiciary may have to step in. 

* Anubhav Khamroi and Sakshi Saraogi are 2020 graduates from the Jindal Global Law School.


[1]CP (IB) No. 3077/2019 (National Company Law Tribunal, Mumbai Bench). 

[2]Section 7 of the IBC gives power to the financial creditor(s) to file an application against the corporate debtor before the Adjudicating Authority (‘AA’) when a default in relation to financial debt has occurred. Within 14 days, the AAhas to ascertain the existence of the default and upon satisfaction, must either admit or reject the application filed. 

[3]Section 8 of the IBC gives power to the operational creditor(s) to deliver a demand notice for unpaid operational debt. Thereafter, the corporate debtor has to reply to the notice within 10 days from receipt, by either disputing the existence of default or repaying the debt. 

[4]Swiss Ribbons Pvt. Ltd and Ors v Union of India(2019) 4 SCC 17 (Supreme Court of India).

[5]Ms Eera Through Dr Manjula Krippendorf v Govt. of NCT of Delhi(2017) 15 SCC 133 (Supreme Court of India); Also SeeArcelorMittal India Private Limited v Satish Kumar Gupta(2019) 2 SCC 1(Supreme Court of India).

[6]UN General Assembly, Resolution No.59/40, Legislative Guide on Insolvency Law of the

United Nations Commission on International Trade Law (2 December 2004) <https://undocs.org/pdf?symbol=en/A/RES/59/40> accessed 2 November 2020. Also SeeMobilox Innovations Private Limited v Kirusa Software Private Limited (2018) 1 SCC 353 (Supreme Court of India).

[7]Indus Biotech (P) Ltd. vs. Kotak India Venture Fund-I[2020] 160 SCL 554 (National Company Law Tribunal, Mumbai Bench).

[8]Indus Biotech (P) Ltd v Kotak India Venture Fund-I [2020] 160 SCL 554(National Company Law Tribunal, Mumbai Bench); Anan Group (Singapore) Pte Ltd v Vtb Bank (Public Joint Stock Company)[2020] SGCA 33 (Singapore Court of Appeal)

[9]Anan Group (Singapore) Pte Ltd v Vtb Bank (Public Joint Stock Company)[2020] SGCA 33(Singapore Court of Appeal).

[10]Government of Karnataka v Gowramma(2007) 13 SCC 482 (Supreme Court of India); Also SeeMuralidhar Sahu v State of Orissa2003 I OLR 178 (High Court of Orissa). 

[11]HDFC Bank Ltd v Satpal Singh Bakshi193 (2012) DLT 203 (High Court of Delhi). Also SeeBooz Allen and Hamilton Inc v SBI Home Finance Limited(2011) 5 SCC 532 (Supreme Court of India). 

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