INDUS BIOTECH V.

KOTAK INDIA
VENTURE - FAILED ATTEMPT TO
RECONCILE INSOLVENCY AND
ARBITRATION REGIME

SHIVANKAR SUKUL* & DEVANG BANSAL**

The presence of an effective arbitration regime forms an indispensable

part of modern commercial dispute resolution. However, in case
of bona fide dispute between parties with an arbitration clause
concerning the quantum and existence of debt where the creditor also
has the right to apply for initiation of corporate insolvency resolution
process, there arises a conflict between arbitration and insolvency
regime. The conflict is regarding the role to be played by arbitration
in the determination of alleged debt in situations where rights
under the Insolvency regime are available to the creditor. The latest
development in this regard is the decision of the three-judge bench of
Hon’ble Supreme Court in Indus Biotech v. Kotak India Venture. While
analysing this decision with a primary focus on conducting an in-
depth analysis of the competing interest between the arbitration and
insolvency regime, the authors explain the anomalies underlying the
two crucial issues where the court has erred - misinterpretation of
the term “default” and failure of the court to reconcile the arbitration
and insolvency regimes harmoniously. The authors further delve into
the position of law in other jurisdictions on the issue of standard of
review to be adopted. Lastly, the article suggests solutions such as
the adoption of prima facie standard of review with provisions for

*
Shivankar Sukul is a fourth-year student pursuing BBA, LLB (Business Law Hons.) at
National Law University, Jodhpur and can be contacted at shivankarsukul09@gmail.com.
**
Devang Bansal is a fourth-year student pursuing BBA, LLB (Business Law Hons.) at
National Law University, Jodhpur and can be contacted at devang.bansal@nlujodhpur.
ac.in.
The GNLU Law Review - Volume 8 │ December 275

fast-track arbitration and effective implementation of information

utilities to achieve a harmonious balance between these regimes
to ensure that intent and purpose associated with these regimes is
preserved.

Keywords: Arbitration, Insolvency, CIRP, Financial

Creditor

I.  Introduction

A Three-Judge Bench of the Hon’ble Supreme Court in Indus Biotech

(P) Ltd. v. Kotak India Venture (Offshore) Fund (hereinafter ‘Indus
Biotech’),1 while dealing with a Section 11 application under Arbitration
and Conciliation Act,19962 [“Arbitration Act”] has finally decided the
long-standing controversy between Insolvency and Bankruptcy Code,
2016 [“Code”] and Arbitration Act.

Though the conclusion reached by the court wherein it allowed the

arbitration between the parties is correct, however, the path taken
by the court is unnecessarily convoluted and raises more doubts
than it solves. The article will seek to unravel some patent flaws in
the reasoning of the court such as its misinterpretation of the scheme
envisioned under the Code.

In this case, the respondent was a subscriber of Optionally

Convertible & Redeemable Preference Shares of the petitioner company.
While the discussions were underway between the parties with regard
to the quantum of conversion value of the said security, the redemption
value became due and payable back in 2018 pursuant to the Share
Subscription Agreement. As a result, the respondents moved a Section
73 application under the Code for initiation of the Corporate Insolvency

1
Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund, (2021) 6 SCC 436 : 2021
SCC OnLine SC 268 (hereinafter ‘Indus Biotech’).
2
Arbitration and Conciliation Act, 1996, § 11, No. 26, Acts of Parliament, 1996 (India).
3
Insolvency & Bankruptcy Code, 2016, § 7, No. 31, Acts of Parliament, 2016 (India).
276 INDUS BIOTECH V. KOTAK INDIA VENTURE

Resolution Process (“CIRP”) claiming to be a financial creditor of

the petitioner company. Meanwhile, the corporate debtor raised an
application under the Arbitration Act for reference of the dispute to
the arbitration which was accepted by the NCLT Mumbai in a previous
order.4 The matter reached the Hon’ble Supreme Court after the
petitioners approached it under Section 11 of the Arbitration Act for the
appointment of an arbitrator.

In the judgment, the court firstly held that the Code shall override
the provisions of the Arbitration Act and an application for initiation of
CIRP under Section 7 of the Code would be given preference over the
arbitration agreement of the parties. Settling the position of law on
this issue, the court held that in case the corporate debtor raises an
application under Section 8 of the Arbitration Act during an ongoing
legal proceeding under Section 7 of the Code, the court must first
examine the merits of the Section 7 application before entertaining the
question of reference of the parties to arbitration. It held that parties
can be referred to arbitration only when the court is satisfied that no
default occurred within the meaning of the Code.

Alluding to the facts in the present case, it held that a default

under Section 7 of the Code cannot be proved, if there exists a dispute
between the parties. This reasoning runs contrary to the strict default
rule introduced by the legislature in the Code for “financial defaults”.
Moreover, it also leaves loopholes in the system which the unscrupulous
parties can take advantage of.

The Code is a trailblazing piece of legislation that has employed

rather unique approaches to expedite insolvency resolution. For
initiation of CIRP, Code implements an ingenious measure to move away
from the concept of the incapacity to honour debts to the concept of
“determination of default” (hereinafter ‘Swiss Ribbons’).5 The reasons
for this approach are very pertinent and integral to achieving the
objective of this Code (which shall be discussed in the next part of the
article). However, according to the authors, an isolated interpretation of

4
Indus Biotech (P) Ltd. v. Kotak India Venture Fund- I, 2020 SCC OnLine NCLT 1430.
5
Swiss Ribbons (P) Ltd. v. Union of India, (2019) 4 SCC 17 : 2019 SCC OnLine SC 73, ¶ 37
(hereinafter ‘Swiss Ribbons’).
The GNLU Law Review - Volume 8 │ December 277

this rule without reconciling it with the arbitration regime will create a
fatal lacuna by providing an escape route to the unscrupulous litigants
to subvert arbitration clauses by dressing up Section 7 applications
initiating CIRP against the other party.

The authors in this article will seek to explore the competing

interests involved in this issue. Secondly, the article will analyse the
position taken in judgment and assess whether the court has been able
to reconcile the insolvency and arbitration regimes. Consequently, the
position of law as laid down in Indus Biotech will be compared with
the reconciliatory interpretation in arbitration-friendly regimes like
Singapore and the UK. Finally, the authors will suggest some pragmatic
solutions which can be implemented either by the judiciary or legislature
to reconcile the two regimes in the most effective manner possible.

II.  Understanding C ompeting Interests

The apparent conflict between the Arbitration Act and the Code
cannot be studied in isolation to the interests which are embodied
in them. The objective, nature, express provisions involved, and the
implications must all be considered when studying these interests.

A. The Default Rule for Financial Debts

Earlier the corporate resolution and the winding up of the company

was based on incapacity to honour its debts which led to a lot of
uncertainty in the process of winding up. To determine the capacity to
honour debts, the adjudicative authorities had to get into a long-drawn
inquiry of the balance sheet of the company and compare its assets and
liabilities (hereinafter ‘V.V. Krishna’).6 The standard of “inability to pay”
gave a lot of discretion to the court which proved to be ineffective and
long-drawn.7 Apart from showing the default of the debtor to pay dues,
the creditor also needed to prove the commercial insolvency of the

6
V.V. Krishna Iyer Sons v. New Era Mfg. Co. Ltd., 1964 SCC OnLine Ker 206 (hereinafter
‘V.V. Krishna’).
7
Aparna Ravi, Indian Insolvency Regime in Practice: An Analysis of Insolvency and
Debt Recovery Proceedings, Economic and Political Weekly (Dec. 19, 2015), https://www.
epw.in/journal/2015/51/special-articles/indian-insolvency-regime-practice.html.
278 INDUS BIOTECH V. KOTAK INDIA VENTURE

company which often proved to be a cumbersome exercise especially

considering the inconsistent judicial interpretation of the standard.8
Moreover, the courts were generous to grant more time to the corporate
debtors who were ex facie commercially insolvent and regularly
defaulted for years exercising their wide discretion.9

This complicated process and the inordinate delay gave an unfair

opportunity to the existing management to destroy the value of the
corporate debtor for personal benefits, virtually foreclosing any chances
of resolution. Thus, the legislature introduced the unique concept of
“default rule” for instilling predictability in the process and maximizing
the value of the corporate debtor.10 The default rule entails that the
financial creditor has the right to initiate the CIRP on the happening of
default as defined in the Code.

B. Timely Identification & Resolution of Assets

The financial creditor’s interest in the assets of a firm is secured by

the time-bound process laid down in the Code. The prime object of
implementing centralized insolvency legislation in the form of the Code
can be gathered from its Statement of Objects & Reasons, which aims to
promote entrepreneurship, the interest of stakeholders, and the ease of
doing business by amending the laws concerning insolvency resolution.11
Hence the code makes every attempt to avert the commercial death
of a company by liquidation and tries to preserve it as a continuing
entity assuring recovery to creditors.12 To ensure a successful recovery
of the corporate debtor, the delay in resolution is to be minimized
as the passage of long periods pushes the company to the brink of
liquidation.13 This is because the market value of assets is susceptible
8
M.P. Ram Mohan, The Role of Insolvency Tests: Implications for Indian
Insolvency Law, IIM A hmedabad (Apr. 2021), https://web.iima.ac.in/assets/snippets/
workingpaperpdf/14365012642021-04-01.pdf.
9
Id.
10
Akshaya Kamalnath, Corporate Insolvency Resolution Law in India – A Proposal to
Overcome the ‘Initiation Problem’, SSRN (Jun. 13, 2019), https://papers.ssrn.com/sol3/
papers.cfm?abstract_id=3387001.
11
Insolvency & Bankruptcy Code, 2016, Statement of Object & Reasons, No. 31, Acts of
Parliament, 2016 (India).
12
Swiss R ibbons, supra note 5.
13
M.S. Sahoo, A Shorter Haircut: Timely Use of IBC can Help Minimise and Even Losses
for Creditors, The Indian Express (Aug. 20, 2021), https://indianexpress.com/article/
The GNLU Law Review - Volume 8 │ December 279

to a steep decrease due to speculation and a high rate of depreciation.14

Moreover, timely initiation of CIRP for stressed assets also lies integral
to the scheme of the Code, as unless the resolution process is initiated
the company faces the risk of value destruction at the hands of existing
management.15

Consequently, the timely initiation of CIRP of stressed assets and

resolution of the debts lies at the core of the scheme proposed in the
Code16 which is strengthened by the default rule enshrined in the code.17

C. Upholding Party Autonomy

On the other hand, Section 8 of the Arbitration Act enjoins the

judicial authority to refer the parties subject to an arbitration agreement
to the arbitration tribunal.18 The government recognized that the
economic reforms cannot be effectively implemented if the commercial
dispute resolution regime remains outdated.19 To rectify the situation,
the Arbitration Act was introduced. The Arbitration Act aims to
minimize the supervisory role of courts to encourage dispute resolution
through arbitration.20 The Arbitration Act was further amended to limit
judicial intervention and to strengthen the principle of party autonomy
in line with the legislative aim.21 This said autonomy can only be
attained by easy enforcement of arbitration agreements ensured by the
presence of a robust arbitration regime.22

Arbitration is a dispute resolution mechanism that recognizes party

autonomy. It allows the parties to a contract to constraint by mutual

opinion/columns/getting-the-perfect-haircut-from-the-ibc-7460418/.
14
Bankruptcy L aw R eform Committee, The report of the Bankruptcy L aw R eforms
Committee Volume I: R ationale and Design 94 (2015).
15
Swiss R ibbons, supra note 5.
16
Insolvency & Bankruptcy Code, 2016, § 7, No. 31, Acts of Parliament, 2016 (India).
17
Insolvency & Bankruptcy Code, 2016, § 4, No. 31, Acts of Parliament, 2016 (India).
18
Arbitration and Conciliation Act, 1996, § 8, No. 26, Acts of Parliament, 1996 (India).
19
Arbitration and Conciliation Act, 1996, Statement of Objects & Reasons, No. 26, Acts of
Parliament, 1996 (India).
20
N. Blackaby et al., R edfern and Hunter on International A rbitration 2.126 (6th ed.
2015) (hereinafter ‘Blackaby et al.’).
21
Arbitration and Conciliation (Amendment) Act, 2015, No. 3, Acts of Parliament, 2016
(India).
22
Vinay Reddy & V. Nagaraj, Arbitrability: The Indian Perspective, 19 J Int’l. A rb. 117,
123 (2002).
280 INDUS BIOTECH V. KOTAK INDIA VENTURE

agreement their right to approach courts as a first resort to have their

disputes adjudicated (hereinafter ‘Vidya Droliya’).23 Therefore, the
arbitration clause is to be interpreted as accommodating the intention of
parties instead of invalidating it on technicalities.24 In light of legislative
aim and provisions enacted, the court has to make the arbitration
agreement workable within the permissible limits of the law.25
Consequently, when a party intends to avoid an arbitration agreement,
strict inquiry as to the cause of the same is required.26 After such
inquiry, only when the court is satisfied that the reasons for wriggling
out of the arbitration agreement are of severe and complicated nature,
an application under Section 8 of the Arbitration Act can be rejected.27
The court should deem it more fit in presence of such reasons that
judicial intervention is made to deal with the subject matter rather than
relegating the parties to the arbitration.28

III.  A nalysing the position taken in the Judgment

A. Arbitrability of Insolvency Issues

As we have observed in the previous chapter, the interests reflected

by arbitration and insolvency regimes are poles apart. The arbitration
regime seeks to provide the parties with the choice of a private forum
for resolving their disputes.29 On the other hand, the insolvency regime
seeks to provide a central adjudication for creditors of the corporate
debtor.30 Hence, the issue of arbitrability of insolvency disputes under
Section 7 of the Code came for determination before the court.

Arbitration is a private adjudicatory process through which parties

decide to forego their right to approach the courts in favour of arbitral
tribunals. Hence it is necessary that it should be ousted in cases where

23
Vidya Droliya v. Durga Trading Corpn., (2021) 2 SCC 1, ¶ 18 (hereinafter ‘Vidya
Droliya’).
24
MTNL v. Canara Bank, (2020) 12 SCC 767 : 2019 SCC OnLine SCC 995, ¶ 9.
25
Id.
26
A. Ayyasamy v. A. Paramasivam, (2016) 10 SCC 386.
27
Id.
28
Id.
29
Ajar Rab, Defining the Contours of The Public Policy Exception – A New Test for
Arbitrability in India, 7 Ind. Jour. of A rb. L. 161, 161 (2019).
30
Id.
The GNLU Law Review - Volume 8 │ December 281

erga omnes rights i.e., rights for and against everyone concerned are
present.31

Since insolvency disputes relate to the rights of third parties’ creditors

who have an interest in liquidation or resolution of the corporate
debtors, insolvency disputes were painted with a broad brush to be
non-arbitrable in the case of Booze Hamilton32. However, this position
changed for good in Vidya Drolia33 wherein a three-judge bench of the
court opined that, subjects should not be declared non-arbitrable by
laying bold expositions. Additionally, it advised the courts to find out the
specific erga omnes rights involved in the case.

Keeping in mind these pronouncements, the court in Indus Biotech

took a rather pragmatic approach while deciding the arbitrability of
default under Section 7 of the Code. It observed that erga omnes rights
of various creditors to the corporate debtor come into place only after
a Section 7 application for initiation of CIRP is accepted by the NCLT.
Thus, it declared that the dispute is non-arbitrable only after admission
of the application under the Code, leaving the parties competent to raise
an application for reference to an arbitrator before admission of the
corporate debtor in CIRP.34 This sensible approach provided a good start
to the judgment which was in contrast to the inchoate tangle of a mess
that followed soon.

B. Insolvency and the Stubborn Overrider

The provisions for initiation of CIRP (Section 7 of the Code) and

for referring the parties (Section 8 & 11 of the Arbitration Act) to the
arbitration are mandatory in nature. This gives rise to a clash among
provisions of both acts. This clash becomes even more intriguing by
virtue of overriding provisions present in both statutes.35

31
N. Blackaby et al., supra note 20 at 7.
32
Booz Allen and Hamilton Inc. v. SBI Home Finance Ltd., (2011) 5 SCC 532.
33
Vidya Droliya, supra note 23 at 8.
34
Indus Biotech, supra note 1 at 2.
35
Insolvency & Bankruptcy Code, 2016, § 238, No. 31, Acts of Parliament, 2016 (India);
Arbitration and Conciliation Act, 1996, § 5, No. 26, Acts of Parliament, 1996 (India).
282 INDUS BIOTECH V. KOTAK INDIA VENTURE

Interpreting this conflict, the court in Indus Biotech36 gave an

overriding effect to the provisions of the Code over the Arbitration Act,
owing to the former being a subsequent statute.37 Hence it came to
the conclusion that the Adjudicating Authority has to adjudicate over
the application filed by the financial creditor before considering the
application filed for referring the parties to the arbitration.

This interpretation was in clear disregard to the settled law of

interpretation according to which courts should first try to reconcile
two ostensibly contrary enactments.38 This principle of harmonious
construction provides that when two legislations are pitted against each
other, courts should try to ensure their complete operation in their
respective domains.39

Applying this rule in Central Bank of India v. State of Kerala, 40 the

apex court decided not to give overriding effect to the non-obstante
provisions of RDDBFI41 and SARFAESI42 over the Sales Tax statutes
after pointing out that these statutes were merely aimed to ensure a
speedy recovery for banks and not to give them priority over the first
charges created by the state taxation legislations. Similarly, provisions
in the Code are also not meant to override the jurisdiction vested in
arbitral tribunals through arbitration agreements.

However, the Hon’ble Supreme Court made no such efforts to

reconcile the object of enactments and departed from the object
oblivious of the potential effect of this judgment on the arbitration
regime in India.

This strict and uncompromising reading of the Code in isolation from

interests involved in arbitration can have disastrous consequences. As
it will throw the doors wide open, for the unscrupulous parties to oust
36
Indus Biotech, supra note 1 at 2.
37
Kohinoor Creations v. Syndicate Bank, 2005 SCC OnLine Del 650 : (2005) 2 Arb LR
324.
38
Sesa Sterlite Ltd. v. Orissa Electricity Regulatory Commission, (2014) 8 SCC 444.
39
LIC v. D.J. Bahadur, (1981) 1 SCC 315 : AIR 1980 SC 2181; J.K. Cotton Spg. & Wvg.
Mills Co. Ltd. v. State of U.P., AIR 1961 SC 1170.
40
Central Bank of India v. State of Kerala, (2009) 4 SCC 94.
41
The Recovery of Debts Due to Banks and Financial Institutions Act, 1993, No. 51, Acts
of Parliament, 1993 (India).
42
Securitisation and Reconstruction of Financial Assets and Enforcement of Security
Interest Act, 2002, No. 54, Acts of Parliament, 2002 (India).
The GNLU Law Review - Volume 8 │ December 283

arbitration agreements by dressing up vexatious applications under the

Code. Identifying this fear, the Bombay High Court in Rakesh Malhotra
v. Rajinder Kumar Malhotra43 addressed the responsibility of courts
to weed out vexatious and mala fide applications dressed up in non-
arbitrable subject matters to oust arbitration agreements. However, in
Indus Biotech, the SC seems to have lost its way, leaving the arbitration
regime susceptible to tactics of unscrupulous parties.

C. Misreading “Default”

Apart from striking a blow to the arbitration regime, the court also
created a gaping loophole by misinterpreting the term “default” as
defined in the Code. The Hon’ble Supreme Court while considering
the issues held that non-payment of dues in the present case cannot
be classified as default till the dispute between the parties concerning
terms of payment is resolved.44

This view adopted is contrary to the statutory provisions which define

default as non-payment of debt that has become due and payable under
the law.45 Further, the Code defines “debt”as a liability or obligation in
respect of a claim which is due. 46 A “claim” is defined in Section 3(6)
of the Code as a right to payment, whether or not such right is reduced
to judgment, fixed, disputed, undisputed, legal, equitable, secured, or
unsecured.47

Hence the combined reading of the above-mentioned provisions

points to the conclusion that even disputed claims can form the basis
of default in the Code, for which CIRP can be initiated by a financial
creditor. This intention was also identified in Innoventive Industries Ltd.
v. ICICI Bank, 48 the first judgment which dealt with the Code.

43
Rakesh Malhotra v. Rajinder Kumar Malhotra, 2014 SCC OnLine Bom 1146 : (2015) 2
Comp LJ 288.
44
Indus Biotech, supra note 1 at 2.
45
Insolvency & Bankruptcy Code, 2016, § 3(12), No. 31, Acts of Parliament, 2016 (India).
46
Insolvency & Bankruptcy Code, 2016, § 3(11), No. 31, Acts of Parliament, 2016 (India).
47
Insolvency & Bankruptcy Code, 2016, § 3(6), No. 31, Acts of Parliament, 2016 (India).
48
Innoventive Industries Ltd. v. ICICI Bank, (2018) 1 SCC 407, ¶ 30 (hereinafter
‘Innoventive Industries’).
284 INDUS BIOTECH V. KOTAK INDIA VENTURE

However, the court ignored this mandatory and swift process

enshrined in the Code to introduce an unwarranted discretion on the
courts to ascertain the existence of a default. This approach not only
falls foul of statutory provisions but also the legal intent to reduce delays
in the process and increasing uncertainty in the process. It is to be
noted that an unwarranted implication of this judgment would be that
even the parties which do not have arbitration agreements will have an
option of raising the defense of dispute to derail the initiation of CIRP.
Thus, the judgment erred for firstly not trying to reconcile the objectives
of insolvency and arbitration regimes and secondly not interpreting the
Code in line with the legislative intent.

D. Diluting the Legislative Intent Behind the Special Position of

Financial Creditors

In misinterpreting the terms “financial debt” and “claim” as it appears

in the code, the court contravenes the very clear legislative intent behind
distinguishing the rights of operational creditors and financial creditors.
The financial creditors can initiate CIRP based on the existence of a
default irrespective of the presence of any dispute.49 On the other hand,
the operational creditors can initiate CIRP only in the absence of any
dispute raised by the corporate debtor.50 The reason for such difference
has been observed in Swiss Ribbons.51 The Hon’ble Supreme Court
observed that financial creditors are engaged in assessing the viability of
the business from the very beginning, thus they are in a better position
to identify the problems in the business and try to take corrective
actions for the company.52 Moreover, unlike operational creditors they
have huge sums invested in the business, hence, they are also more
impelled to restructure the business of the corporate creditors when
they come across a problem in the acts of the promoter group.53

However, by imposing the condition on the financial creditor to prove

an undisputed debt before initiating the CIRP, it has placed financial

49
Id.
50
Insolvency & Bankruptcy Code, 2016, § 9(3)(b), No. 31, Acts of Parliament, 2016 (India).
51
Swiss R ibbons, supra note 5 at 28.
52
Id.
53
Id.
The GNLU Law Review - Volume 8 │ December 285

creditors on the same footing as that of the operational creditor.

Thus, the judgment smudges the difference between the two classes of
creditors to a vanishing point and ends this objectivity in the process of
initiating CIRP for the financial creditors and replaces it with a rather
vague and befuddled standard.

E. Preference Shareholders are not Creditors

As observed earlier in the article, the respondent wanted to initiate

the CIRP process against the Optionally Convertible and Redeemable
Preference Shares (OCRPS) assuming it to be financial debt. However,
the law has been clearly laid down in Aditya Prakash Entertainment
(P) Ltd. v. Magikwand Media (P) Ltd.54 on the point that Preference
Shareholders are not creditors of the company, as they can only be paid
out of the company’s profit55 unlike creditors who have a right to be
paid despite the profitability of the company.56 Hence the court should
have rejected the claims of the respondent in the capacity of “financial
creditors” on this very ground, nonetheless, it glossed over a catena
of contrary judgments to this effect57 and went into the questions of
conflict between arbitration and Insolvency. However, this mistake
committed by the court is not our mainstay of arguments, hence, the
next parts of the article will compare the position taken in the judgment
with the reconciliation attempted by other common law jurisdictions
such as UK and Singapore.

IV.  The Position of L aw in other Jurisdictions

Various jurisdictions across the globe have dealt with the conflict of
centralization of dispute resolution in bankruptcy law and the party
autonomy provided by arbitration law. In this section, the authors try
to analyze the position of law adopted in other relevant common law
jurisdictions.

54
Aditya Prakash Entertainment (P) Ltd. v. Magikwand Media (P) Ltd., 2018 SCC OnLine
Bom 551.
55
Companies Act, 2013, § 55, No. 18, Acts of Parliament, 2013 (India).
56
V.V. Krishna, supra note 6 at 5.
57
Anarkali Sarabhai v. Commissioner of Gift-Tax, 2001 SCC OnLine Guj 313.
286 INDUS BIOTECH V. KOTAK INDIA VENTURE

Faced with the same conflict, in AnAn (Singapore) Pte. Ltd. v. VTB
Bank, the Singapore Court of Appeal ruled that the alleged debtor must
dispute the debt in good faith on a prima facie basis for reference to
arbitration.58 This is because, when parties agree to settle conflicts by
arbitration, one party should not be allowed to override the arrangement
by pursuing the other remedy for non-payment of a contested debt.

In this case, the court extensively relied on the approach in Salford

Estates (No 2) Ltd v. Altomart Ltd adopted by the English Court
of Appeal which held that the courts ought to dismiss or stay the
winding-up application except in wholly exceptional circumstances.59
These wholly exceptional circumstances included the cases where the
corporate debtor raises patently superficial and futile defences to delay
inevitable insolvency.60

In the AnAn Case, the court was faced with a choice among the
two standards of review to assess if the parties should be referred
to arbitration. While according to the “triable issue” standard the
parties had to prove an arguable case substantially on merit to dispute
the validity of the debt to refer the parties to arbitration. However,
the “prima facie” standard merely requires the parties to establish
the existence of a bona fide dispute regarding the debt and a valid
arbitration agreement.

The Singapore Court of Appeal drew attention to the incoherent

standard adopted to review and refer debt proceedings to arbitration.61
While the prima facie standard was applied in ordinary litigation, the
triable issue standard was applicable on insolvency applications. It was
of the opinion that there is no justification to apply different standards
to the same disputed debt because it encourages the tactical use of
winding up application.

The Court also emphasized that the application of the triable issues
standard of review violates the principle of party autonomy as it
disregards any benefit that the parties sought to obtain by agreeing to

58
AnAn (Singapore) Pte. Ltd. v. VTB Bank, 2020 SGCA 33 (hereinafter ‘Anan’).
59
Salford Estates (No. 2) Ltd. v. Altomart Ltd. (No. 2), 2015 Ch 589.
60
Id.
61
A nA n, supra note 58 at 63.
The GNLU Law Review - Volume 8 │ December 287

refer disputes to arbitration in the first place.62 Finally, it was deemed

critical to bring certainty regarding the resolution of disputes according
to the agreed-upon method.63

The court in this case was faced with the issue of possible abuse of
lower review standards to buy time and delay inevitable insolvency. To
render such objectives unobtainable the court held that the bonafide
of the disputes raised by a corporate debtor is to be scrutinized.64
Accordingly, the referral of winding-up applications to arbitration is
not to be adopted as a default rule. In a pertinent observation, the
court held that any possible misuse of the prima facie standard must
be contrasted with the real likelihood of misuse by corporate creditors
unilaterally choosing a winding-up application to bypass the obligation
to refer the dispute to the arbitration.65

The judgment in AnAn endorsed the legislative policy to arbitrate the

dispute between the parties before initiating insolvency proceedings.
Subsequently, it highlighted as the primary principle, the intent of the
insolvency regime to enable creditors to prefer an application to wind-up
companies incompetent to honor their debts where no bona fide dispute
regarding the existence and quantum of debt exists.66 In doing so it
rendered unauthorized a state of affairs where the financial creditor
could act without giving justifications for its inconsistent actions to the
agreement. This is because in such situations the financial debtor lost
their status as a rights-bearing entity and became subject to the whims
of the financial creditor pending the dispute.

Thus, in the conflict between arbitration and insolvency, the

insolvency regime does not apply until a debt is determined by
arbitration. This is because the parties decided to settle disputes
regarding the existence of debt itself through arbitration.

AnAn cemented the logic that a system of law instituted by parties

on themselves, with the expressed purpose of resolving a debt dispute,
could be applied without making an alteration to the relationship
62
A nA n, supra note 58 at 82.
63
A nA n, supra note 58 at 86.
64
A nA n, supra note 58 at 94.
65
A nA n, supra note 58 at 107.
66
A nA n, supra note 58 at 89.
288 INDUS BIOTECH V. KOTAK INDIA VENTURE

between an arbitration agreement and the insolvency regime. It did

so by placing the autonomy at the heart of its interpretation of the
applicable review standard and making the determination of debt by
the agreed method, the organizing principle to determine the interplay
between arbitration and the insolvency process.

V.  Solutions for balancing the conflict of interests

A. Introduction of Prima Facie Standard

The earlier discussions in this article pose a very fascinating problem

of how to discourage the strategic invocation of CIRP by financial
creditors to subvert arbitration while maintaining allegiance to the
legislative intent behind “default rule” enshrined in the Code. However,
a solution to this conflict cannot be arrived upon without considering
the interests involved in the Arbitration regime.

Arbitration agreements are binding contracts that are entered into

for ousting the primary jurisdiction of the court and placing it in hands
of a private adjudicatory body.67 The effective enforcement of these
agreements lies at the very bedrock of modern international commercial
transactions as it maintains predictability and reinforces the trust of the
investors.68 These pivotal interests inextricably linked with our current
conflict must not be glossed over.

Thus, we lean in favour of the view where this binding arbitration

agreement should not be thrown out of the window merely because of
the invocation of Section 7 application for initiation of CIRP under
the Code. Thus, the English “prima facie” standard where parties
are referred to arbitration except in wholly exceptional cases should
be preferred. This approach strikes the perfect balance between the
competing interests as it upholds the sanctity of arbitration agreements
without diluting the objective “default rule” enshrined in the Code for
cases other than arbitration, which the current judgment fails to do.69

67
Vidya Droliya, supra note 23.
68
Bijoylashmi Das & Harsimran Singh, India: Commercial Arbitration in India -
An Update, Mondaq (Jul. 12, 2021, time of access), https://www.mondaq.com/india/
arbitration-dispute-resolution/284570/commercial-arbitration-in-india--an-update.
69
Indus Biotech, supra note 1 at 2.
The GNLU Law Review - Volume 8 │ December 289

B. Fast - Track Arbitrations

Though the “prima facie” standard is an effective way of upholding

the sanctity of arbitration agreements without diluting the objectivity of
default rule in cases other than arbitration, however, it comes with its
own set of concerns. Value destruction caused by inordinate delay is
the stumbling block of a successful resolution process.70 If the valuable
time elapses in a prolonged arbitration process, the objective of value
maximization will be defeated. Such reduction in value can occur due
to a variety of reasons such as market speculation or fraudulent trading
by the promoter group. Thus, the time elapsed during the arbitration
should be minimized and closely monitored.

The stated problem can be addressed by taking a resort to fast-track

arbitration. Fast-track arbitration is a stringent time-bound sub-system
of regular arbitration which cannot be delayed due to any reason. The
fast-track arbitration regime, considering time as essence, allows the
consenting parties to waive the conventional procedural and technical
requirements to accelerate the dispute resolution process. The process of
expedited arbitration as prescribed under Section 29B of the Arbitration
Act71 prescribes mainly three stipulations which are as follows.

1. The Arbitral Tribunal consists of a sole arbitrator;

2. Waiver of formalities such as oral hearing; and

3. Compliance with a six months’ timeline.

This fast-track arbitration provision is based on the mutual consent

of parties providing no power to the courts to make an order for
mandatory arbitration.72 However, it is suggested that the parties can
be encouraged to adopt the procedure by mutual consent under Rule
11 of the NCLT Rules which provide the tribunals with the power to
do complete justice.73 Alternatively, the legislature can also add an
enabling clause to the Code empowering the tribunal to pass orders for
mandatory arbitration.
70
Ivo Welch, Arturo Bris & Ning Zhu, The Costs of Bankruptcy: Chapter 7 Liquidation
versus Chapter 11 Reorganization, 61 Journ. of Fin. 1253, 1275 (2006).
71
Arbitration and Conciliation Act, 1996, § 29-B, No. 26, Acts of Parliament, 1996 (India).
72
Id.
73
National Company Law Tribunal Rules, 2016, GSR 716(E) 57.
290 INDUS BIOTECH V. KOTAK INDIA VENTURE

C. Effective Implementation of Information Utilities

The problem of strategic dressing up of petition by the financial

creditor in situations when the corporate debtor is financially viable
can be solved by effective implementation of Information Utilities. The
Code envisages Information Utility as a data repository to provide core
services such as accepting and safekeeping electronic submission of
financial information.74 This information including the sum borrowed,
default made, and other security interests of corporate debtors is
kept and validated by Information Utility to deliver it to concerned
stakeholders.75

The concept of Information Utility is visualized as one of the

supporting pillars of institutional infrastructure under the Code as
it speeds up the default authentication. The objective of proposing
Information Utilities is to reduce information asymmetry and
strengthen the system of credit risk assessment to empower the
creditors and lenders to make informed choices. The ambitious time
limit prescribed in the Code is based on the belief that relevant
evidence-based information will be easily available to concerned
stakeholders through Information Utility. Additionally, as evident from
the observations of SC in Swiss Ribbons76 and Innoventive Industries77,
the “default rule”which provided different standards for Financial and
Operational Creditors was premised on the assumption of effective
working of Information Utilities.

However, Information Utilities have been miserably failing in its

duty of providing comprehensive quantity and quality of authentic
records. It is a settled debate that Information Utility is only one of the
designated methods of furnishing proof to the Adjudicating Authority or
NCLT, to prove the existence of a financial debt that has accrued to a
financial creditor.78 In such a situation, effective implementation of this
overlooked supporting institution will ensure a conducive environment
74
Insolvency & Bankruptcy Code, 2016, § 3(9), No. 31, Acts of Parliament, 2016 (India).
75
Insolvency & Bankruptcy Code, 2016, § 213, No. 31, Acts of Parliament, 2016 (India).
76
Swiss R ibbons, supra note 5.
77
Innoventive Industries, supra note 48 at 30.
78
Univalue Projects (P) Ltd. v. Union of India, 2020 SCC OnLine Cal 1452, ¶ 76;
Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate
Persons) Regulations, 2016, Gazette of India, pt. III sec. 4 (Nov. 30, 2016).
The GNLU Law Review - Volume 8 │ December 291

for the financial creditor and Adjudicating Authority to make informed

decisions quickly.

VI.  C onclusion

The solutions suggested in the article conspicuously provide that the

competing interests are not irreconcilable. The competing interest can
be solved by implementing arbitration clauses with full effect except in
exceptional circumstances where it is apparent that the invocation of
arbitration is mala fide and dilatory. This provides a twin solution as it
firstly thwarts the possibility of strategic use of arbitration to avert or
delay insolvency and it secondly maintains the integrity of default rule
in disputes between parties without an arbitration clause. However, the
Hon’ble Supreme Court in Indus Biotech miserably fails to balance as
it disturbs the integrity of the “default rule” and throws the door open
for unscrupulous litigants to avert insolvency by raising futile defences.
Thus, failing on both accounts.

Though referring the parties to arbitration may balance the

competing interests between arbitration and insolvency, however, we
must not lose sight of the fact that it comes with the problem of delay
caused by long periods taken by the arbitration process to culminate
between the parties. To resolve this issue, the authors have suggested
several ways such as passing orders for fast-track arbitration and
reinforcing institutional systems of the Code such as information
utilities to ensure speedy adjudication of “defaults” at the stage of
initiation of CIRP.