Interpretation of Statutes: The Negative Effect of Interpretation of Expressions in a Statute on other Statutes in Pari Materia

3rd Year BA LLB,

Christ School of Law, Bangalore.

Where acts are related in such a way that they form or create a system or code of legislation and when they relate to the same person, thing, purpose, object or a class of any of these, the statutes are called in pari materia.^[1]The idea behind the rule of in pari materia can be linked to the rule of interpretation that states that the statute subjected to interpretation must be read as a whole and compared to all of its parts. Thus, the pari materia rule is an extension of this notion wherein, other statutes that deal with the same subject matter, or have the same object are considered as complimentary or supplementary to one and other, requiring them to be construed or interpreted together. However, statutes may deal with the same subject matter or further the same object in vastly different ways which may not always coincide with each other. For example, one statute’s expression may imply an encumbrance on the other wherein the Court is required to resolve the matter under the former statute, before it can rule on the latter statute. This is perhaps due to the fact that more often than not, multiple legislations may be dealing with the same rights and obligations in various different ways. Another example may be the right of a party to challenge a defective good or service in both the Civil Court as well as the Consumer Forums. Thus, interpretation of one statute may have very real negative effects on the interpretation of the other statutes in pari materia. This paper will discuss one such recent case wherein the interpretation of one statute may have impaired the functioning of the other statute in question.

The Case of M/s Annapurna Infrastructure Pvt Ltd and Ors. v. SORIL Infra Resources Ltd.^[2], is one involving several provisions of both the Insolvency and Bankruptcy Code, 2016 (“IBC”) and the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) in relation to the interpretation of the expression ‘existence of dispute’, the finality of Arbitral Awards and their subsequent enforcement. Therefore, it is prudent to first take a look at these provisions before discussing the case and its relevance to the rule of pari materia.

Under Section 8 of the IBC, an Operational Creditor^[3], (that is any person to whom an Operational Debt^[4] is owed) may on the occurrence of a default, deliver a demand notice to the Corporate Debtor^[5] (a Corporate Person who owes a debt) demanding payment of the amount involved in the default. Sub-Section (2) to Section 8 provides an opportunity for the Corporate Debtor to respond to the demand notice. It states that the Corporate Debtor can bring to the Operational Creditor’s notice, either repayment of the unpaid operational debt or the existence of a dispute and a record of the pendency of the suit or arbitration proceeding that was initiated before the demand notice was served on him. It is only after such intimation by the Corporate Debtor, that the Operati
onal Creditor can file an application under Section 9 of IBC for initiation of Insolvency Resolution Process.

Two things are fairly clear from the above provision and the definitions clause of the IBC. Firstly, Section 5(6) of the IBC defines the term ‘dispute’ to include a suit or arbitral proceedings relating to the existence of the amount of debt, the quality of goods or service or the breach of a representation or warranty.^[6] As such, the expression,“existence of a dispute” can only be in relation to any of these three instances. Secondly, such a dispute must not only have existed before the delivery of the demand notice by the Operational Creditor but also that the dispute must have been challenged in a suit or arbitral proceeding before said notice. That means if the dispute arose after the Operational Creditor has served the demand notice, the same cannot be a bar on the initiation of the Insolvency Resolution Process.However, if the dispute arising after the delivery of the demand notice is bona fide, the Adjudicating Authority, the National Company Law Tribunal (“NCLT”), may consider the same under the term ‘dispute’.^[7]

Under Section 34 of the Arbitration Act, the parties to an arbitration are given a right to raise an objection or a challenge against an arbitral award passed by an arbitrator on grounds such as an irregularity in arbitral proceedings, no notice of the award or the arbitral proceedings, if either party was under some incapacity, the invalidity of the arbitration agreement or if the arbitral award deals with a dispute that cannot be settled by arbitration.^[8]Sub-Section (3) of Section 34 also states that a challenge of such nature must be initiated within three months from the date the Arbitral Award has been received by the party. Any challenge brought after this period of three months cannot be accepted by the Court unless it is satisfied that the delay was justified.

An Arbitral Award becomes final and binding when the time for filing a challenge application under Section 34 has lapsed or the same is refused by the Court.^[9] After an Award has become final, it can be enforced by the Courts as if it were a decree of the Court under the Code of Civil Procedure, 1908.^[10] However, Sub-Section (1) of Section 37 of the Arbitration Act, states that a single appeal shall lie to the Court authorised by the law to hear appeals from original decrees of the Court passing the order on matters such as, granting or refusing measures under Section 9, setting aside or refusing to set aside an award under Section 34. It is to be noted that the Calcutta High Court in Sarkar and Sarkar v. State of West Bengal & Ors^[11], held that an appeal filed under Section 37 does not amount to the continuation of the arbitral proceedings under Section 34, that is to say, the automatic stay to the execution of an Arbitral Award as available under Section 34, does not carry over to an appeal under Section 37. This means that a stay order as per Order XLI Rule 5 of the Code of Civil Procedure, 1908 has to be obtained by the party filing the said appeal.

On 23rdNovember 2005 M/s Annapurna Infrastructure Pvt Ltd. (“Annapurna”) rented premises to M/s SORIL Infra Resources Ltd. (“SORIL”), by way of a Lease Deed. SORIL (the Lessee) had not paid rent for several months and as a result, Annapurna (the Lessor) initiated arbitral proceedings pursuant to the arbitration clause in the Lease Deed. A retired Judge of the Hon’ble High Court of Delhi, J (Dr) Mukundakam Sharma was appointed as the sole arbitrator for the dispute between the parties. The Award was passed on 9th September 2016 in favour of Annapurna requiring SORIL to pay certain prescribed amounts.

SORIL challenged the award under Section 34 of the Arbitration Act to set aside the award. However, on 19th December 2016, the Hon’ble High Court, dismissed the application of SORIL and re-affirmed the Award. Following this dismissal, Annapurna issued a demand notice under Section 8 of the IBC demanding payment of the amounts specified in the Arbitral Award. In response, SORIL filed a reply on 27th January 2017, raising objections on the ground that firstly, there is an ‘existence of dispute’ about the ‘Operational Debt’ and that an appeal has been filed under Section 37 of the Arbitration Act against the dismissal of the application under Section 34 of the same Act dated 9th September 2016.

The NCLAT overruled the decision of the NCLT on the ground that the NCLT had made an erroneous assessment of the expression ‘existence of dispute’ and that the allegation of forum shopping was not based on a sound principle of Law.

On the expression ‘existence of dispute’, the NCLAT observed that the language of Sub-Section (2) of Section 8 of the IBC includes ‘arbitral proceedings’ within the expression ‘existence of dispute’ but makes no mention of an application under Section 34 or an appeal under Section 37 of the Arbitration Act. Therefore, neither can be considered as an existing dispute. The NCLAT additionally observed that an Award attains finality when the time for filing an application under Section 34 of the Arbitration Act has lapsed or if the said application is filed and refused. Therefore, the pendency of an appeal under Section 37 against the dismissal of a Section 34 application does not affect the finality of the award and as a result, would not constitute an ‘existence of dispute’.

On the second issue, the NCLAT observed that based on the objectives of the IBC, an Insolvency Resolution Process “is not a suit for recovery or a suit for execution of any decree or award, and therefore the finding of the Adjudicating Authority on the question of alternate remedy was not based on any sound principle of Law.” Thus, the pendency of execution proceedings as per Section 36 would not restrict the Operational Creditor’s right to file for the initiation of the Insolvency Resolution Process.

On the question of what amounts to a dispute and thereby what would be considered an existing dispute, the Author is in humble disagreement with the decision of the NCLAT.. Essentially, the NCLAT has considered that the procedure for challenging an arbitral award as provided for under the Arbitration Act is not even worth considering while deciding whether there has been a ‘default’ as defined under Clause (12) of Section 3 of the IBC. Clause (12) of Section 3of the IBC defines the term ‘default’ to mean “non-payment of debt when whole or any part or instalment of the amount of debt has become due and payable and is not repaid…” This definition makes it clear that it is only when a debt is due and payable that the issue of default is brought up. Thus, default, being the main ingredient in the initiation of an Insolvency Resolution Process, must be proved to exist before said process could be initiated.

As mentioned in the Introduction, the Calcutta High Court in the case of Sarkar and Sarkar v. State of West Bengal and Ors^[12], stated that though there is no automatic stay on execution of an Award, a stay order can be requested by the appellants as per Order XLI Rule 5 of the Code of Civil Procedure, 1908. Therefore, it is likely that the Court entertaining the execution proceeding initiated by Annapurna may grant a stay on the execution of the Arbitral Award. The Author concedes to the fact that an Award is a proof of debt but, as long as the Award remains unenforceable, it cannot be said that the ‘debt’ the Award proves, has become due and payable. As such, in the instant case, the Author believes that a ‘default’ has not occurred.

This further proves the notion that the interpretation of an expression in one statute, may often negatively affect the functioning or enforcement of another. Here, the NCLAT has interpreted the phrase ‘existence of dispute’ to not include the challenge of an arbitral award and an appeal against the outcome of such challenge. This has led to the impression that, despite the fact that the procedure established under the Arbitration Act in terms of the finality and enforcement of awards, the IBC can allow applicants to enforce a debt through an award even when the same would not have been enforce under any other law. This has the effect of bypassing or rather circumventing the clear cut procedure under the Arbitration Act.

The Author humbly disagrees with the NCLAT’s observation on the second issue as well. When an Insolvency Resolution Process has been initiated, it is akin to the winding up of the Corporate Debtor, putting an end to the business of the company and rendering it one step short of dissolution. As such, all the creditors of the Company, both Financial and Operational, will take part in the liquidation of the company and the assets will be liquidated and distributed among said creditors and other claimants. Keeping this in mind, the NCLT gave a sound observation that only one remedy can be invoked at a time. Here, the Hon’ble High Court of Delhi, allowed for the execution of the award, and sought to enforce it, and at the same time, SORIL was subjected to liquidation under the IBC. Thus, SORIL would have no means to satisfy the award so executed because all its assets have now gone into liquidation. Additionally, because the Insolvency Resolution Process is a joint process, bringing together Financial as well as Operational Creditors, the guarantee of recovering a debt to its fullest extent cannot be given. This is a result of the priority of claims envisaged by the IBC.^[13]

The nature of interaction between the IBC and the Arbitration Act in this case, makes it clear that to the extent of the Arbitral Award, both legislations are in pari materia, that is to say that they deal with the same subject matter, albeit in different contexts. Thus, there must be no confusion in the fact that if Annapurna cannot prove the existence of debt, it cannot claim the debt though the IBC or the Arbitration Act. This means that the Arbitral Award must be finalised and irrevocable before the same can be executed under the Arbitration Act or used as a proof of debt under the IBC. Yet, by interpreting the expression ‘existence of dispute’ to exclude a challenge to an arbitral award and its subsequent appeal, the NCLAT has impaired the functioning and the interpretation of the Arbitration Act by providing opportunistic creditors with the ability to skip past the challenge to the award and initiate the debt recovery even before the same has been finalised.  

Although the NCLAT decided not to venture into pondering this issue, it is noteworthy that the NCLAT failed to take into consideration the case of Uttam Galva Steels Limited v. DF Deustsche Forfait AG & Anr.^[14] (“Uttam Galva Case”), which it decided only a few months prior to its decision in the present case. The NCLAT in the aforementioned case held that, where a joint application under Section 9 of the IBC is made by more than one Operational Creditor, the said application is “Impermissible”. Meaning that no joint application can be made by Operational Creditors for the initiation of Insolvency Resolution Process.