- Purbasha Panda*
Part I of this Article dealing with the Judgment of the Singapore Court of Appeal can be accessed here. part two deals with the final observation of the SGCA and the Indian position of law in this regard.
SGCA made the following observations regarding the appropriate position of law with respect to standard of review in these kinds of disputes.
(a) Bonafide Prima facie standard of review is the appropriate standard of review
The general approach is that in presence of an arbitration clause, the jurisdiction of courts are ousted with respect to dispute which falls within the scope of the arbitration agreement. The prime question that arose in this case was “Whether such an approach can be mirrored while dealing with stay on winding up application because of presence of arbitration clause especially dealing with cross-claim or disputed debts ?”
The court relied on the dicta in the case of Pacific Recreation Pte Ltd v. S Y Technology Inc and Another[1] in this case the court has held that tests for both the situation must necessarily mirror each other. The court marked that when one raises a cross claim or a disputed claim one is simply trying to assert that the debt claim doesn’t prove its insolvency and therefore winding up order must not be granted. In the opinion of the author, the court essentially meant that there is no such specialty about a winding up application that a different standard of review must be applied to it, having ruled this the court however did take due consideration of the “bonafide interest test” to move a step ahead from just examining existence of an arbitration agreement and if the dispute falls within the scope of the arbitration agreement.
Bonafide test and the Exceptional Circumstance Test: Two Sides of the same coin
As discussed in the preceding sections, the exceptional circumstance approach was formulated in the Salford case. The exceptional circumstance test is basically similar to the bonafide prima facie test, what it entails essentially is examination of existence of arbitration agreement, the examination of whether the dispute falls within the purview of the arbitration clause and if there are existence of ‘exceptional circumstances’ the court should then dismiss or stay the winding up application. The existence of “exceptional circumstance” is obviously to prevent abuse of process of court. That is the winding up application based on a debt that is covered by an arbitration agreement will be stayed unless there are exceptional circumstances. These exceptional circumstances might be a situation where a debtor might be disputing the claim amount in the course of the proceeding but in a previous correspondence or transaction between the parties the debtor might have admitted the claim amount. The “exceptional circumstance test” is also aimed towards checking the veracity of the disputed claim.
The “bonafide prima facie test” also more or less is similar, aimed towards preventing abuse of process of court. For example, winding up applications are used as litigation strategy to create undue pressure on the opposite party to make payment through the threat of liquidation, which may lead to abuse of process of court and appellate courts generally exercise inherent power to prevent abuse of process of court and the ‘bonafide prima facie test” allows the same.
In the instant case, the SGCA essentially found the “bonafide prima facie test” to be more appropriate and more efficient in terms of avoiding abuse of process of court. The court also laid down certain circumstances which can be termed as tests to check if disputing the debt is resulting in abuse of process of court.
If the debt has been previously admitted in terms of both liability and quantum.
Genuine concern of triggering of insolvency regime.
Requirement of independent persons to investigate the company’s assets .
(b) The Prima facie standard of review promotes coherence in law
The SGCA marked that “coherence in law” with respect to these kind of disputes is extremely crucial because there is a larger tendency of the “abuse of process of courts” to occur in these kind of disputes as coherence a crystal clear position of law to be resorted by courts aids in reducing the abuse of process of court and further promotes coherence. The question that arises here is “How does the prima facie standard of review allows to promote coherence?”
The SGCA has marked that a triable standard of review is more extensive. It is mostly a test on touchstone of the merits of the dispute. That is allowing a debtor trying to stay a winding up application more leeway to present its case. The SGCA has held that this approach might encourage debtors to use winding up application as a tool to create undue pressure on parties to pay the debts by the threat of liquidation in contrast to a prima facie.
The author has found that a persistent fear expressed by SGCA runs through the entire judgement that is use of winding up application as a tool to create undue pressure on the other party to make payments which is a kind of abuse of process of court. While it is crucial to take care of this but the question that arises here is that “Does an over zealousness towards maintaining coherence to prevent abuse of process of court might cause difficulty for those cases where the factual circumstances might be peculiar, for example cases involving very covert fraudulent references, do those kind of cases mandate a test different than the “bonafide prima facie interest test” ?
(c) Insolvency and Arbitration regimes are not in conflict with each other
The SGCA has marked that the insolvency and arbitration regime do not intersect and have separate fields of operation. One of the genuine concern with respect to implication of adopting a prima facie standard of review is that such an approach might be detrimental to creditors who are legitimately seeking to wind up insolvent companies, the recovery process might get derailed or delayed, even if the allegations might be unmeritorious. The court relied on “Larsen Oil and Gas Pte Ltd v. Petrtoprod Ltd[2] . It was observed in this case that the nature of an arbitration proceeding is starkly different to that of insolvency proceeding. Arbitration proceedings are private in nature whereas insolvency process is a collective statutory proceeding that involves public centralisation of disputes so as to achieve economic efficiency. Under this case a distinction was drawn between disputes involving an insolvent company that stem from its pre-insolvency rights and obligations as opposed to rights and obligations that stem from rights and obligation after an insolvency application is admitted.
The SGCA held that if a dispute stems from rights and obligations after the insolvency regime has been triggered, then dispute would gain a public character and the arbitration clause would be ousted and all the claims of the creditors would be satisfied through insolvency mechanism.
(d) Triable standard of review offends party autonomy
Party autonomy is one of the prime pillars on which the entire edifice of arbitration proceedings rests, the triable standard of review allows for more leeway for sustenance of winding up petitions ignoring the arbitration clause. Thus, the court keeping in spirit with the pro-arbitration stance rejected the “triable standard of review”.
DECISION OF THE SGCA IN THE INSTANT CASE
In the instant case, the court found out that the applicable standard of review is the prima facie standard of review. The court also found that the defence raised by AnAn was bonafide. SGCA rejected the argument that AnAn’s delay in particularising the appropriate claim amount and the delay in formation and submission of the other valuation report [ i.e. the Deloitte Report] does not result in abuse of process of court. The court also marked that priorly AnAn had not admitted any debt. The appeal was allowed and the winding up order by the court below was reversed. The SGCA further marked that winding up application would have been dismissed even if the higher triable issue standard was adopted. VTB was endowed with the responsibility of calculating the total claim amount under the terms of GMRA. For, the purposes of this calculation the ‘Net Value of GDRs’ had to be determined. The terms of GMRA had provided for three possible routes for calculation of this net value of GDR.VTB had chosen to go for the third route, however certain pre-conditions which had to be fulfilled before resorting to the third route, were not complied by VTB. The SGCA found that VTB had not fulfilled its contractual obligations under the terms of GMRA. SGCA also found that the reliance placed on third route by VTB was misplaced and therefore the claim amount stated by GTB would be erroneous. However, while resorting to this analysis the court was careful enough to mark that in any case such an analysis of a party’s failure to fulfil a contractual obligation would not just be a mere summary analysis. It would be a ‘triable standard of review’ analysis.
Indian position of law with respect to interplay between arbitration and winding up proceedings/ insolvency proceedings
· Indian Legal Framework of interplay between winding up and insolvency proceedings
One of the major changes which were brought by the “Insolvency and Bankruptcy Code, 2016” was removal of provisions relating to voluntary winding up and winding up due to inability to pay debts from the purview of Companies Act, 2013 to the “Insolvency and Bankruptcy Code, 2016”. Now, under the Companies Act, we have winding up proceedings on ground other than inability to pay debts as mentioned under Section 271 which includes (a) passing a special resolution to wind up (b) winding up when the corporate entity acts against sovereignty or integrity of India (c) winding up when the company is conducting affairs in fraudulent manner (d) any just and equitable ground in opinion of the tribunal.
· Interplay between winding up and arbitration proceedings
The Indian courts have also come across similar kinds of disputes, where a stay on winding up application was filed taking help of the arbitration clause. Let’s see what are the tests and standard of review that the Indian courts have adopted to decide on these kind of disputes.
A landmark case on this regard is Tilok Chand Jain v. Swatika Strips (P) Ltd and Ors[3](Tilok Chand). This case essentially dealt with a stay on winding up application in presence of an arbitration clause. This case dealt with certain payments that had to be made to erstwhile partners upon dissolution of a partnership firm. A private limited company had entered into a partnership agreement with another partnership firm. This partnership ultimately got dissolved due to certain issues and at the time of dissolution, the private limited company undertook to make all due payments in terms of the partnership deed and later on all the partners were allotted equity shares. The petitioners in this case were not allotted any shares however during the course of the case they argued that a certain calculation of amount was made to them on basis of value of goodwill of the firm to be paid to them at the time of dissolution, which they also argued as the admitted claim. The petitioners who were erstwhile partners sent a demand notice for making the payments to the private limited company. When payments were not made even after the demand notice, they filed a winding up application for closing the private limited company. The company resisted the winding up application on several grounds. Firstly, the company argued that the value of goodwill stated as argued by petitioners was overstated. Secondly, they also argued that the partnership deed has an arbitration clause and any dispute with respect to payments falls within its scope.
The court undertook a thorough analysis of company accounts, the balance sheet drawn upon dissolution and found that there was no admitted liability and that the value of goodwill was indeed overstated. The court also found that the company was doing fair business and was in position of making its day-today payments. The court also expressed the concern that winding up application cannot be used as a recovery mechanism neither it can be used to create undue pressure on the other party to make payments. They also marked that the disputes can be duly referred to arbitration as there is a bonafide existence of disputed claim. The court went on to hold that [..] “There is not an iota of evidence on the record produced by the creditor to show the incapability of the company to pay its debt. Again, it may be noticed that the winding up cannot be ordered solely on the creditors' claim, but it is only the liability of the company to pay which is the primary consideration. In view of the facts and circumstances stated above, the dispute raised by the company appears to be bona fide and this is not a fit case for the company to be ordered to be wound up.” [..]
This judgement delivered by the Punjab and Haryana High Court was significantly relied on in numerous cases. In the case of Prime Century City Development Pvt. Ltd and Ors v. Ansal Buildwell Limited and Ors[4] the prime question that the Delhi High Court delved to analyse in this case was “Whether the presence of arbitration clause ousts the jurisdiction of company courts ?”. The court relied on multiple case laws and held that the mere presence of an arbitration clause cannot oust the jurisdiction of company courts.
The court further held that [..] In my analysis of the modus, there is hardly any scope of a clash to occur between the rights to seek arbitration and for the other party to enforce winding-up. This is for the reason that if there is an admission of debt, or a moonshine and malafide defense to the petition has been presented, an Award would be a foregone conclusion and procrastinating and deferring the inevitable end to the dispute would be contrary to and in negation of the expectation of law. Where a bona fide defense to the winding-up petition has been disclosed the petition ought to be dismissed in any case by the Company Court. It cannot enter upon disputed questions, which would either have to be adjudicated upon by means of an ordinary and regular civil suit, or by making Reference, where the parties have contracted with each other to resolve their differences through arbitration. Therefore, the Company Judge will in no circumstances substitute himself for or assume the role of the arbitrator [..].
We take a look at the major case laws in Indian Jurisdiction then it can be found that the Indian courts do not very specifically use the term “prima facie standard of review” or “triable standard of review” however the Indian courts have in spirit adopted the “prima facie standard of review” which exhorts limited judicial intervention, such that the court is merely required to determine “whether it appears on a prima facie basis that there is an arbitration clause and if the dispute is caught by the arbitration clause ?” also Indian courts have also resorted to the ‘bonafide dispute test’ as we saw previously in the case of Tilok Chand . Courts have refrained from going into the merits of the dispute that is adopting a triable standard of review as that would amount to getting into the shoes of the arbitrator.
· Interplay between insolvency and arbitration proceedings in India
In a recent decision Indus Biotech Private Limited v. Kotak India Venture Fund-I[5] of Mumbai Bench of NCLT this dichotomy was analysed and decided. This question of law essentially cropped up in an interlocutory application which was filed before NCLT in a primary insolvency application. The IA was filed u/s 8 of the A&C Act to refer the parties in the main petition to arbitration.
The Kotak Private Equity Group consisting of four entities had showed interest in subscribing to the share capital of “Indus Biotech”. Indus Biotech had entered separate “Share Subscription and Share Purchase Agreement” [‘SSSA’] agreement with each entity, however the terms and conditions of the four SSSA were materially identical. Ultimately, Kotak Group subscribed to certain equity as well ass OCRPS shares issued by Indus Biotech. Later on to fulfil certain requirements under the SEBI Issue of Capital and Disclosure Requirements Regulations, 2018 [‘ICDR Regulations’], the Kotak Group decided to convert OCRPS to equity shares. The Kotak Group also argued that as per SSSA they were entitled to trigger provisions relating to early redemption, to which Indus Biotech denied. Thus, Kotak Group invoked the arbitration agreement concerning three basic disputes, which are (a) Valuation of respondent or financial creditor’s OCRPD (b) Right of redemption with respect to conversion of OCRPS into equity shares (c) Fixing the date for qualified institutional public offering.
The prime question before NCLT was in presence of an arbitration clause in the SSSA should the primary insolvency petition filed under Section 7 of the Code has to be admitted which was filed by Indus Biotech. Kotak Group argued that the SSSA contained an arbitration agreement which is wide enough to cover dispute between the parties. Kotak Group further argued that the insolvency application cannot sustain and that Indus Biotech would not be a financial creditor. They further argued that the mandate provided u/s 8 of the A&C Act for reference to arbitration is satisfied in this given case. The requirements are basically existence of an arbitration agreement and singularity of the scope of the arbitration agreement and the scope of the underlying dispute. They also further argued that the Section 7 petition filed by Indus Biotech is essentially a dressed up petition. The case of Rakesh Malhotra v. Rajinder Kumar Malhotra[6] was relied on to establish that any court has power to refer the parties to arbitration if it is found that the company petition is malafide and vexatious in nature.
Indus Biotech on the other hand advanced all their arguments in light of one primary question of law that is “Whether the reliefs claimed in the insolvency petition is capable of being referred to arbitration?”. The counsel for Indus Biotech essentially argued that insolvency matters are inherently non-arbitrable. He referred to the Pioneer Case and argued that insolvency petitions usually deal with rights in rem as held in this case. They further relied on Booz Allen to establish that insolvency petitions which essentially deals with rights in rem are non-arbitrable.
The NCLT bench analysed the entire dispute and the case laws relied by both parties elaborately and made certain observations. With respect to reliance placed on Booz Allen and the reading of the Booz Allen judgement that certain kind of matters are strictly non-arbitrable. The bench referred to Para 38 of Booz Allen “generally and traditionally, all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. This is not however a rigid or inflexible rule. Disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable.” Thus, the dicta in Booz Allen clearly provides that the analysis to the question “whether a dispute is arbitrable or non-arbitrable” does not merely stop on the strict division of list of arbitrable and non-arbitrable matters, rather the test goes a step ahead.
Though, the Bench clarified the extent to which Booz Allen can be relied in these kind of cases, however it did not base its decision in the instant case on this analysis.
The Bench marked that to trigger any insolvency application, the first step is occurrence of an default as provided under Section 6 of the Code. The court found out that the Indus Biotech, the “Corporate Debtor” in this case is a financially healthy company and there was no occurrence of default in the instant case. Hence, to drag a financially healthy company to insolvency would not be sustainable. Since, the mandate provided under Section 6 of the Code for admission of an insolvency application was not satisfied in this case, the bench marked that the insolvency petition cannot be admitted and referred the parties to arbitration.
On interplay between IBC and arbitration proceedings the court marked that Section 238 of the Code provides for an overriding effect of IBC over any other law, similarly Section 5 of the A&C Act starts with a non-obstante clause and provides for an overriding effect. The court found that when there are two legislations with non-obstante clauses on their operation, then the piece of legislation formulated later overrides the former. However, in the instant case since the requirements to trigger IBC were not fulfilled and the corporate debtor was a financially healthy company, the court referred the parties to arbitration.
To summarize the points discussed in this case, a simple approach of relying on the list of arbitrable and non-arbitrable matters enumerated in Booz Allen to clearly rule out the possibility of arbitration of insolvency matters is not entirely correct, sub-ordinate personam rights arising from primary in rem proceedings can be arbitrated. Secondly, section 238 of the code gives an overriding effect to IBC over any other legislation but this overriding effect can be brought to use and IBC can be triggered only when the essentials requirements for an insolvency application is fulfilled and default happens to be one such essential requirements and without the occurrence of it IBC cannot be triggered.
* Purbasha is a Staff Writer at the Arbitration Workshop and is a graduate of the 2020 batch of NUSRL, Ranchi. She can be contacted at purbasha.nusrl.13@gmail.com