Supreme Court of India
INDUS BIOTECH PRIVATE LIMITEDversusKOTAK INDIA VENTURE (OFFSHORE) FUND (EARLIER KNOWN AS KOTAK INDIA VENTURE LIMITED) & ORS.
- Citation
- 2021 INSC 216
- Decided
- 26 March 2021
- Disposal
- Case Partly allowed
Holding
Since the Section 7 petition was not admitted and therefore not a proceeding in rem, the dispute remains arbitrable and the NCLT was justified in allowing the Section 8 application and dismissing the Section 7 petition.
Summary
Indus Biotech Private Ltd sought arbitration against Kotak India Venture Fund and related entities over the formula for converting optionally convertible redeemable preference shares into equity shares, claiming no default existed. Kotak filed a petition under Section 7 of the Insolvency and Bankruptcy Code (IBC) seeking a corporate insolvency resolution process, alleging a debt of Rs. 367.08 crore. Indus filed a Section 8 application under the Arbitration and Conciliation Act, 1996, asking the NCLT to refer the matter to arbitration. The NCLT allowed the Section 8 application and dismissed the Section 7 petition, holding that no default had occurred and that the petition was not yet a proceeding in rem, making the dispute arbitrable. The Supreme Court upheld the NCLT’s approach, stating that until a Section 7 petition is admitted it does not become a proceeding in rem and therefore the parties may pursue arbitration; it also ordered the constitution of an arbitral tribunal as per the parties’ agreement.
Issues considered
- The existence of a default under Section 3(12) of the IBC and whether the Section 7 petition should be admitted.
- Whether a proceeding under Section 7 IBC, pending but not admitted, is a proceeding in rem and thus non‑arbitrable.
- The applicability of Section 8 of the Arbitration and Conciliation Act, 1996, to refer the dispute to arbitration.
- The correct interpretation of the arbitration clause in the multiple Share Subscription and Shareholders’ Agreements – single versus multiple tribunals.
Legislation cited
- Arbitration and Conciliation Act, 1996s. 11(12)(a), s. 11(3), s. 11(4)(a), s. 8
- Insolvency and Bankruptcy Code, 2016s. 238, s. 3(11), s. 3(12), s. 5(7), s. 5(8), s. 61, s. 7, s. 8
Subjects
InsolvencyArbitrationDefaultSection 7 IBCSection 8 Arbitration ActNon‑arbitrabilityProceedings in remShare conversionPreference sharesCorporate debtorFinancial creditor
Judgment
112 [2021]REPORTS
SUPREME COURT 7 S.C.R. 112 [2021] 7 S.C.R.
A INDUS BIOTECH PRIVATE LIMITED
v.
KOTAK INDIA VENTURE (OFFSHORE) FUND (EARLIER
KNOWN AS KOTAK INDIA VENTURE LIMITED) & ORS.
B (Arbitration Petition (Civil) No. 48 of 2019)
MARCH 26, 2021
[S. A. BOBDE, CJI, A. S. BOPANNA AND
V. RAMASUBRAMANIAN, JJ.]
Insolvency and Bankruptcy Code, 2016 – s. 7 – Arbitration
C
and Conciliation Act, 1996: s. 8 – Dispute between petitioner and
respondents as regards calculation and conversion formula to be
applied in converting the preference shares of respondent no. 1 to
4 invested in petitioner company, into equity shares – Respondents
sought certain sum, on redemption of Optionally Convertible
D Redeemable Preference Shares-OCRPS, but the petitioner company
failed to redeem the OCRPS – Respondent sought initiation of
Corporate Insolvency Resolution Process u/s. 7 of the Code – In
the said petition, application u/s. 8 of the 1996 Act filed by the
petitioner seeking direction to refer the parties to the arbitration –
NCLT allowed the application filed by the appellant u/s. 8 of the
E
1996 Act – Justification of – Held: Justified – Dispute will be non-
arbitrable when a proceeding is in rem and a IB Code proceeding
is to be considered in rem only after it is admitted – If there is default
and the debt is payable, due to which the Adjudicating Authority
proceeds to admit the application u/s. 7, the proceeding is in rem
F and the arbitrability of the insolvency proceeding would not arise
– If the Adjudicating Authority is satisfied that there is no default
committed by the company, the petition u/s.7 would stand rejected
and the parties can secure appointment of the Arbitral Tribunal in
an appropriate proceedings – In the instant case, petition u/s. 7
was yet to be admitted, thus, had not assumed the status of
G
proceedings in rem – Conclusion reached by NCLT cannot be faulted
in view of the document produced by the petitioner indicating that
the allotment of equity shares against the OCRPS was still a matter
of discussion between the parties and no conclusion had been
arrived at so as to term it as default – Thus, since the conclusion by
H
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INDUS BIOTECH PVT LTD v. KOTAK INDIA VENTURE (OFFSHORE) 113
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the NCLT is that there is no default, the dismissal of the petition u/s A
7 of IB Code at this stage is justified – Though application u/s. 8 of
the Act, 1996 is allowed, subject to the consideration of the petition
filed u/s.11 of the Act, 1996 – Said disputes to be resolved by the
Arbitral tribunal consisting of same members but separately
constituted in respect of each agreement.
B
Dismissing the appeal and allowing the Arbitration Petition,
the Court
HELD: 1.1 In a fact situation of the instant nature when the
process of conversion had commenced and certain steps were taken
in that direction, even if the redemption date is kept in view and the C
clause in Schedule J indicating that redemption value shall constitute
a debt outstanding is taken note; when certain transactions were
discussed between the parties and had not concluded since the point
as to whether it was 30 per cent of the equity shares in the company
or 10 per cent by applying proper formula had not reached a
conclusion and thereafter agreed or disagreed, it would not have D
been appropriate to hold that there is default and admit the petition
merely because a claim was made by the respondent as per the
originally agreed date and a petition was filed. In the process of
consideration to be made by the Adjudicating Authority the facts in
the particular case is to be taken into consideration before arriving E
at a conclusion as to whether a default has occurred even if there is
a debt in strict sense of the term, which exercise in the instant case
has been done by the Adjudicating Authority. [Para 20][130-F-H;
131-A]
1.2 In such circumstance if the Adjudicating Authority finds F
from the material available on record that the situation is not yet
ripe to call it a default, that too if it is satisfied that it is profit
making company and certain other factors which need consideration,
appropriate orders in that regard would be made; the consequence
of which could be the dismissal of the petition under Section 7 of IB
Code on taking note of the stance of the corporate debtor. As G
otherwise if in every case where there is debt, if default is also assumed
and the process becomes automatic, a company which is ably running
its administration and discharging its debts in planned manner may
also be pushed to the Corporate Insolvency Resolution Process and
get entangled in a proceeding with no point of return. Therefore, H
114 SUPREME COURT REPORTS [2021] 7 S.C.R.
A the Adjudicating Authority certainly would make an objective
assessment of the whole situation before coming to a conclusion
as to whether the petition under Section 7 of IB Code is to be
admitted in the factual background. It was submitted that when it
is shown the debt is due and the same has not been paid the
Adjudicating Authority should record default and admit the
B
petition; that even in such situation the interest of the corporate
debtor is not jeopardised inasmuch as the admission orders made
by the Adjudicating Authority is appealable to the NCLAT and
thereafter to the Supreme Court where the correctness of the
order in any case would be tested. It cannot be in dispute that so
C would be the case even if the Adjudicating Authority takes a view
that the petition is not ripe to be entertained or does not
constitute all the ingredients, more particularly default, to admit
the petition, since even such order would remain appealable to
the NCLAT and the Supreme Court where the correctness in
that regard also will be examined. [Para 21][131-B-F]
D
1.3 The question would be as to whether a grave error as
contended on behalf of respondent is committed by the Adjudicating
Authority by observing in the course of the order that the invocation
of arbitration in a case like this seems to be justified. The stage of
the proceedings at which the said observation was made will be
E relevant. If the case has reached the stage to the status of a
proceeding in rem, then such observation would not be justified
and sustainable but not otherwise. In the instant case, the petition
was yet to be admitted and, therefore had not assumed the status of
a proceedings in rem. [Para 22][131-G-H; 132-A]
F 1.4 The tests to be applied to determine as to when the
subject matter is not arbitrable and on applying such test, actions
in rem is not arbitrable. A dispute will be non-arbitrable when a
proceeding is in rem and a IB Code proceeding is to be considered
in rem only after it is admitted. In the instant case the position is
G otherwise. [Para 23][132-B; 133-G]
Vidya Drolia and Others vs. Durga Trading Corporation
(2021) 2 SCC 1 – relied on.
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INDUS BIOTECH PVT LTD v. KOTAK INDIA VENTURE (OFFSHORE) 115
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1.5 The reference to the triggering of a petition under A
Section 7 of the IB Code to consider the same as a proceedings
in rem, it is necessary that the Adjudicating Authority ought to
have applied its mind, recorded a finding of default and admitted
the petition. On admission, third party right is created in all the
creditors of the corporate debtors and will have erga omnes effect.
B
The mere filing of the petition and its pendency before admission,
therefore, cannot be construed as the triggering of a proceeding
in rem. Hence, the admission of the petition for consideration of
the Corporate Insolvency Resolution Process is the relevant stage
which would decide the status and the nature of the pendency of
the proceedings and the mere filing cannot be taken as the C
triggering of the insolvency process. [Para 24][134-G-H;
135-A-B]
1.6 The issue which is posed for consideration is arising in
a petition filed under Section 7 of IB Code, before it is admitted
and therefore not yet an action in rem. In such application, the D
course to be adopted by the Adjudicating Authority if an application
under Section 8 of the Act, 1996 is filed seeking reference to
arbitration is what requires consideration. The position of law
that the IB Code shall override all other laws as provided under
Section 238 of the IB Code needs no elaboration. In that view,
notwithstanding the fact that the alleged corporate debtor filed E
an application under Section 8 of the Act, 1996, the independent
consideration of the same dehors the application filed under
Section 7 of IB Code and materials produced therewith would
not arise. The Adjudicating Authority is duty bound to advert to
the material available before him as made available along with F
the application under Section 7 of IB Code by the financial creditor
to indicate default along with the version of the corporate debtor.
This is for the reason that, keeping in perspective the scope of
the proceedings under the IB Code and there being a timeline
for the consideration to be made by the Adjudicating Authority,
the process cannot be defeated by a corporate debtor by raising G
moonshine defence only to delay the process. In that view, even
if an application under Section 8 of the Act, 1996 is filed, the
Adjudicating Authority has a duty to advert to contentions put
forth on the application filed under Section 7 of IB Code, examine
the material placed before it by the financial creditor and record H
116 SUPREME COURT REPORTS [2021] 7 S.C.R.
A a satisfaction as to whether there is default or not. While doing
so the contention put forth by the corporate debtor shall also be
noted to determine as to whether there is substance in the defence
and to arrive at the conclusion whether there is default. If the
irresistible conclusion by the Adjudicating Authority is that there
is default and the debt is payable, the bogey of arbitration to delay
B
the process would not arise despite the position that the
agreement between the parties indisputably contains an arbitration
clause. That apart if the conclusion is that there is default and the
debt is payable, due to which the Adjudicating Authority proceeds
to pass the order as contemplated under sub-section 5(a) of Section
C 7 of IB Code to admit the application, the proceedings would then
get itself transformed into a proceeding in rem having erga omnes
effect due to which the question of arbitrability of the so-called
inter se dispute sought to be put forth would not arise. On the other
hand, on such consideration made by the Adjudicating Authority if
the satisfaction recorded is that there is no default committed by
D
the company, the petition would stand rejected as provided under
sub-section 5(b) to Section 7 of IB Code, which would leave the
field open for the parties to secure appointment of the Arbitral
Tribunal in an appropriate proceedings as contemplated in law and
the need for the NCLT to pass any orders on such application under
E Section 8 of Act, 1996 would not arise. [Paras 25, 26][135-B-H;
136-A-C]
1.7 To sum up the procedure, it is clarified that in any
proceeding which is pending before the Adjudicating Authority under
Section 7 of IB Code, if such petition is admitted upon the
F Adjudicating Authority recording the satisfaction with regard to
the default and the debt being due from the corporate debtor, any
application under Section 8 of the Act, 1996 made thereafter will
not be maintainable. In a situation where the petition under Section
7 of IB Code is yet to be admitted and, in such proceedings, if an
application under Section 8 of the Act, 1996 is filed, the Adjudicating
G Authority is duty bound to first decide the application under Section
7 of the IB Code by recording a satisfaction with regard to there
being default or not, even if the application under Section 8 of Act,
1996 is kept along for consideration. In such event, the natural
consequence of the consideration made therein on Section 7 of
H
INDUS BIOTECH PVT LTD v. KOTAK INDIA VENTURE (OFFSHORE) 117
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IB Code application would befall on the application under Section A
8 of the Act, 1996. [Para 27][136-C-E]
1.8 A perusal of the order dated 09.06.2020 would indicate
that the Adjudicating Authority, NCLT though has taken up the
application filed under Section 8 of the Act, 1996 as the lead
consideration, the petition filed under Section 7 of the IB Code B
is also taken alongside and made a part of the consideration in
the said order. A further perusal of the order would disclose that
the Adjudicating Authority was conscious of the fact that
consideration of the matter before it any further would arise only
if there is default and the debt is payable. This is evident from
the observation contained in para 5.13 of the order. The further C
narration made in para 5.14 would indicate that the Adjudicating
Authority, from the material available on record had arrived at
the conclusion that the issue involved has not led to a stage of
the default having occurred and has rightly, in that context held
that the claim of the company by invoking the arbitration clause D
is justified but the Adjudicating Authority has rightly done nothing
with regard to arbitration and has left it to this Court. Accordingly,
the Adjudicating Authority in para 5.15 has categorically recorded
that they are not satisfied that a default has occurred. [Para
28][136-F-H; 137-A]
E
1.9 NCLT was conscious that there should be judicial
determination by the Adjudicating Authority as to whether there
has been a default within the meaning of Section 3(12) while
considering a petition under Section 7 of the IB Code. The NCLT
after having recorded such finding took note of the arbitration
petition pending before this Court and, accordingly concluded the F
proceedings. [Para 29][137-B; 138-A]
1.10 The conclusion reached by the Adjudicating Authority,
NCLT in the instant case cannot be faulted if reference is made to
the documents produced by the petitioner along with an application.
It indicates that the allotment of equity shares against the OCRPS G
in view of the QIPO was still a matter of discussion between the
parties and no conclusion had been arrived at so as to term it as
default. [Para 30][138-B-C]
H
118 SUPREME COURT REPORTS [2021] 7 S.C.R.
A 1.11 In the letter dated 21.11.2018 addressed by the
petitioner to respondent no.4, it was mentioned with regard to
the fundamental issue that needs to be addressed regarding
conversion and convertible securities into equity shares since
the exist process initiated cannot move forward without such
conversion. The letter dated 17.12.2018 addressed to the
B
petitioner by respondent no.4 in fact refers to the stake in
conversion and the dispute being as to whether it should be 10
per cent of the share capital of the company as offered by the
petitioner 30 per cent as claimed by KIVF. It is that aspect of the
matter, which is still contended to be in dispute between
C the parties regarding which the arbitration is sought by the
petitioner which was also noted by Adjudicating Authority.
[Para 31][138-F-H; 139-A]
1.12 In such situation, it would be premature at this point
to arrive at a conclusion that there was default in payment of any
D debt until the said issue is resolved and the amount repayable by
the petitioner to respondent no.4 with reference to equity shares
being issued is determined. In the process, if such determined
amount is not paid it would amount to default at that stage.
Therefore, if the matter is viewed from any angle, not only the
conclusion reached by the Adjudicating Authority, NCLT insofar
E as the order on the petition under Section 7 of the IB Code at
this juncture based on the factual background is justified but also
the prayer made by the petitioner for constitution of the Arbitral
Tribunal as made in the petition filed by them under Section 11 of
the Act, 1996 before this Court is justified. [Para 32][139-A-D]
F 1.13 In that circumstance though in the operative portion
of the order dated 09.06.2020 the application filed under Section
8 of the Act, 1996 is allowed and as a corollary the petition under
Section 7 of the IB Code is dismissed; in the facts and
circumstances of the instant case it can be construed in the
G reverse. Hence, since the conclusion by the Adjudicating
Authority is that there is no default, the dismissal of the petition
under Section 7 of IB Code at this stage is justified. Though the
application under Section 8 of the Act, 1996 is allowed, the same
in any event would be subject to the consideration of the petition
H
INDUS BIOTECH PVT LTD v. KOTAK INDIA VENTURE (OFFSHORE) 119
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filed under Section 11 of the Act, 1996 before this Court. [Para A
33][139-D-F]
1.14 In the present position the parties would be left with
no remedy if the process of arbitration is not initiated and the
dispute between the parties are not resolved in that manner as
the proceedings before the NCLT has terminated. In the B
circumstance the only remedy for the parties being resolution of
their dispute through arbitration, it is considered appropriate to
take note of the substance of the arbitration clause and constitute
an appropriate Tribunal. [Para 34][139-G-H; 140-C-D]
1.15 A perusal of the arbitration agreement indicates that C
the arbitration shall be held at Mumbai and be conducted by three
arbitrators. For the purpose of appointment KIVF I, KEIT and KIVL
are to jointly appoint one arbitrator and the promoters of petitioner
company, to appoint their arbitrator. In the second agreement,
‘KMIL’ as the Investor is on the other side. In the third agreement
‘KIVFI’ as the Investor is on the other side and in the fourth D
agreement it has the same clause as in the first agreement. The two
arbitrators who are thus, appointed shall appoint the third arbitrator
who shall be the Chairperson. The recital (c) in the different
agreements though refers to each of the entity in the KIV and
amount invested in shares is referred to, it is provided therein that E
the equity shares and preference shares subscribed by KMIL, KIVF
I, KEIT and KIVL are collectively referred to as the ‘Financial
Investors Shares’. If the said aspect is taken into consideration
keeping in view the nature of the issues involved being mainly with
regard to the conversion of preference shares into equity shares and
the formula to be worked thereunder, such consideration in the F
instant facts can be resolved by the Arbitral Tribunal consisting of
same members but separately constituted in respect of each
agreement. It will be open for the Arbitral Tribunal to work out the
modalities to conduct the proceedings by holding separate
proceedings in the agreement providing for international arbitration G
and by clubbing the domestic disputes. [Para 36][141-E-H;
142-A-B]
1.16 Since petitioner company had nominated Mr. Justice
V.N. Khare, former Chief Justice of India through their letter the
H
120 SUPREME COURT REPORTS [2021] 7 S.C.R.
A said Arbitrator is treated as having been proposed jointly by the
Company and the promoters. Mr. Justice R.M. Lodha, former
Chief Justice of India is appointed as the second arbitrator since
the respondents had failed to nominate. The said arbitrators shall
mutually nominate a third arbitrator to be the Chairperson of the
Arbitral Tribunal. [Para 37][142-C-D]
B
Innoventive Industries Limited vs. ICICI Bank and
Another (2018) 1 SCC 407: [2017] 8 SCR 33; Swiss
Ribbons Private Limited and Another vs. Union of India
and Others (2019) 4 SCC 17: [2019] 3 SCR 535; Booz
Allen and Hamilton INC. vs. SBI Home Finance Limited
C and Others (2011) 5 SCC 532:[2011] 7 SCR 310; Booz
Allen and Hamilton vs. SBI Home Finance Ltd. & Others
(2011) 5 SCC 532:[2011] 7 SCR 310; A.Ayyasamy vs.
A. Paramasivam & Others (2016) 10 SCC 386: [2016]
11 SCR 521; Pioneer Urban Land and Infrastructure
D Limited vs. Union of India & Ors. [2019] 10 SCR 381;
M/S Duro Felguera S.A vs. M/S. Gangavaram Port
Limited (2017) 9 SCC 729 : [2017] 10 SCR 285 –
referred to.
Case Law Reference
E [2017] 8 SCR 33 referred to Para 15
[2019] 3 SCR 535 referred to Para 16
[2011] 7 SCR 310 referred to Para 16
(2021) 2 SCC 1 relied on Para 23
F
[2011] 7 SCR 310 referred to Para 23
[2016] 11 SCR 521 referred to Para 23
[2019] 3 SCR 535 referred to Para 24
[2019] 10 SCR 381 referred to Para 24
G
[2017] 10 SCR 285 referred to Para 35
H
INDUS BIOTECH PVT LTD v. KOTAK INDIA VENTURE (OFFSHORE) 121
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CIVIL ORIGINAL JURISDICTION: Arbitration Petition (Civil) A
No. 48 of 2019
Petition under Section 11(3) read with Sections 11(4)(a) and
11(12)(a) of the Arbitration and Conciliation Act, 1996 seeking the
appointment of an Arbitrator.
With B
Civil Appeal No. 1070 of 2021.
Shyam Divan, Mukul Rohtagi, Ritin Rai, C.A. Sundaram, Sr. Adv.,
Mohitt Kapoor, Ms. Sanam Tripathi, Ms. Anuradha Agnihotri, Ms.
Radhika Gautam, Zafar Inayat, Ms. Gunjan Mathur, Ms. Kritika
Bhardwaj, Advs. for the Petitioner. C
Dr. Abhishek Manu Singhvi, Darius Khambata, Atmaram NS
Nadkarni, Neeraj Kishan Kaul, Nakul Dewan, Iqbal Chagla, Sr. Advs.,
Avishkar Singhvi, Jatin Pore, Ms. Ankita Agrawal, Chandra Prakash for
M/S. DSK Legal, Vineet Malhotra, Mohit Paul, Abhishek Srinivasan,
Vishal Gohri, S.S. Rebello, Ms. Sunaina Phul, Aditdya Dewan, Ms. Udita
D
Singh, Somesh Chandra Jha, Salim M. Saiyed, Praveen Chandra, Rahul
Narang, Nitin Mishra, Ms. Mitali Gupta, Pawan Jit Bindra, Ms. Aastha
Mehta, Ms. Vishakha, Ms. Deepanwita Priyanka, Advs. for the
Respondents.
The following Judgment of the Court was delivered:
E
JUDGMENT
1. Leave granted in Special Leave Petition.
2. The Arbitration Petition is filed by ‘Indus Biotech Private
Limited’ under Section 11(3) read with Sections 11(4)(a) and 11(12)(a)
of the Arbitration and Conciliation Act, 1996 (‘Act, 1996’ for short)
seeking the appointment of an Arbitrator on behalf of the respondent F
Nos. 1 to 4 so as to constitute an Arbitral Tribunal to adjudicate upon the
disputes that have arisen between the petitioner and the respondent Nos.
1 to 4 herein. The petition filed before this Court is due to the fact that
the respondent No.1 is a Mauritius based Company and the dispute
qualifies as international arbitration. The respondents No. 2 to 4 though G
are Indian entities, they are the sister ventures of respondent No.1. Further,
according to the petitioner the subject matter involved is the same, though
under different agreements, the arbitration could be conducted as a single
process, by a single Arbitral Tribunal. Hence a common petition is filed
before this Court, instead of bifurcating the causes of action and availing
H
122 SUPREME COURT REPORTS [2021] 7 S.C.R.
A their remedy before the High Court in respect of similar disputes with
respondents No.2 to 4.
3. The petition seeking constitution of the Arbitral Tribunal
emanates from the Share Subscription and Shareholders’ Agreements
(‘SS and SA’ for short) dated 20.07.2007, 12.07.2007, 09.01.2008 and
B the Supplemental Agreements dated 22.03.2013 and 19.07.2017. Through
the said agreements the respondent Nos. 1 to 4 subscribed to equity
shares and Optionally Convertible Redeemable Preference Shares
(‘OCRPS’ for short) in the company i.e. Indus Biotech Private Ltd. In
the process of business, a decision was taken by the petitioner company
to make a Qualified Initial Public Offering (‘QIPO’ for short). However,
C under Regulation 5(2) of Securities and Exchange Board of India (Issue
of Capital and Disclosure Requirements), Regulations 2018 (‘SEBI
Regulations’ for short), a company which has any outstanding convertible
securities or any other right which would entitle any person with an
option to receive equity shares of the issuer is not entitled to make QIPO.
D 4. In that view, it had become necessary for the respondents No.1
to 4 to convert their respective preference shares invested in Indus Biotech
Private Ltd., into equity shares. In that context the petitioner company
proposed to convert the OCRPS invested by the respondents No. 1 to 4,
into equity shares. In the said process of negotiation, a dispute is stated
E to have arisen between the petitioner company and the respondents No.
1 to 4, with regard to the calculation and conversion formula to be applied
in converting the preference shares of the respondents No. 1 to 4, into
equity shares. As per the formula applied by the respondent Nos. 1 to 4,
it was claimed by them that they would be entitled to 30 per cent of the
total paid up share capital in equity shares. The petitioner company, by
F relying on the reports of the auditors and valuer contended that the
respondents No. 1 to 4 would be entitled to approximately 10 per cent of
the total paid up share capital paid by the respondent as per their
conversion formula.
5. The dispute in question, according to the petitioner company is
G with regard to the appropriate formula to be adopted and to arrive at the
actual percentage of the paid-up share capital which would be converted
into equity shares and the refund if any thereafter. Until an amicable
decision is taken there is no liability to repay the amount. Therefore,
there is no ‘debt’ or ‘default’, nor is the petitioner company unable to
pay. The petitioner company is a profit-making company and is engaged
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INDUS BIOTECH PVT LTD v. KOTAK INDIA VENTURE (OFFSHORE) 123
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in its day-to-day activity. Since the parties themselves had not resolved A
the issue, the petitioner company contends that the said dispute is to be
resolved through Arbitration by the Arbitral Tribunal.
6. On the said issue, the respondents No. 1 to 4 would however
contend that the fact of the respondents No. 1 to 4 herein having
subscribed to the OCRPS is not in dispute. In such event, on redemption B
of the same, the amount is required to be paid by the petitioner company.
The respondents No. 1 to 4 contend that on redemption of OCRPS, a
sum of Rs. 367,08,56,503/- (Rupees Three Hundred Sixty-Seven Crore
Eight Lakh Fifty-Six Thousand Five Hundred Three) became due and
payable. The respondents No. 1 to 4 having demanded the said amount
and since the same had not been paid by the petitioner company, it is C
contended that the same had constituted default. It is contended that as
the debt had not been paid by the company it had given a cause of action
for the respondents No. 1 to 4 herein to invoke the jurisdiction of the
Adjudicating Authority, NCLT by initiating the Corporate Insolvency
Resolution Process (‘CIRP’ for short) provided under the Insolvency D
and Bankruptcy Code, 2016 (‘IB Code’ for short).
7. Accordingly, the respondent No.2 herein filed the petition under
Section 7 of IB Code before the NCLT in IBC No.3077/2019 dated
16.08.2019 seeking appointment of Resolution Professional. In the said
petition, the petitioner company herein filed a Miscellaneous Application E
No.3597/2019 under Section 8 of the Act, 1996 seeking a direction to
refer the parties to arbitration, for the reasons indicated therein which is
as noted above and is similar to the contention in the arbitration petition.
The respondent No.2 herein objected to consideration of the said
application.
F
8. The NCLT, Mumbai Bench-IV through its order dated
09.06.2020 has taken note of the rival contentions and has allowed the
application filed by the petitioner herein under Section 8 of the Act,
1996. As a consequence, the petition filed by the respondent No.2 herein
under Section 7 of the IB Code is dismissed. The respondent No.2 herein
claiming to be aggrieved by the said order dated 09.06.2020 passed by G
the NCLT is before this Court in the connected SLP.
9. Since the rank of the parties is different in the above noted, two
petitions, for the ease of reference and clarity, the parties would be referred
to by their name and the respondents No. 1 to 4 in the Arbitration Petition
will be collectively referred to as ‘Kotak India Venture’. H
124 SUPREME COURT REPORTS [2021] 7 S.C.R.
A 10. In the above backdrop, we have heard Mr. Shyam Divan, Mr.
Aryama Sundaram, Mr. Mukul Rohatgi and Mr. Ritin Rai respective
learned senior counsel on behalf of Indus Biotech Private Limited, Dr.
Abhishek Manu Singhvi, learned senior counsel on behalf of Kotak India
Venture as also Mr. Khambhatta, Mr. Neeraj Kishan Kaul, Mr. Nakul
Dewan, Mr. ANS Nadkarni for the other parties and perused the petition
B
papers.
11. As a matter of fact, the transaction entered into between the
parties arising out of the SS and SA dated 20.07.2007, 12.07.2007,
09.01.2008 and the supplemental agreements dated 22.03.2013 and
19.07.2017 is not in dispute. The further fact that the SS and SA dated
C 20.07.2007, 12.07.2007 and 09.01.2008 vide Clause 20.4 provides for
arbitration in the event of any dispute, controversy or claim arising out
of, relating to or in connection with the said agreement is also not in
dispute. Further the supplemental agreements vide Clause 13 and 19
respectively provides that the provision for arbitration in Clause 20.4 of
D the SS and SA agreement dated 20.07.2007 shall apply to the supplemental
agreement is also evident. If in that context the matter is looked at, there
would be no need for this Court to advert to any other aspect in the
petition filed under Section 11 of the Act, 1996 since in the normal
circumstance, on constitution of the Arbitral Tribunal all other issues are
to be gone into by the Arbitral Tribunal relating to the above noted dispute
E between the parties. However, the nature of Arbitral Tribunal will have
to be considered since one is international arbitration and the other are
domestic.
12. Despite the said position, before concluding on the Arbitration
Petition filed by Indus Biotech Private Limited, keeping in perspective
F the objection raised by the Kotak India Venture relating to the petition
having already been instituted before the NCLT under Section 7 of the
IBC and also keeping in perspective the order dated 09.06.2020 passed
by NCLT disposing of the application filed under Section 8 of the Act,
1996; the matter requires deeper consideration on that aspect since Dr.
G Abhishek Manu Singhvi, the learned senior counsel for the Kotak India
Venture has contended with regard to a serious error said to have been
committed by the NCLT in entertaining an application under Section 8 of
the Act, 1996 in the backdrop of the legal duty cast on NCLT to proceed
strictly in accordance with the procedure contemplated under Section 7
of IB Code. It is further contented that Indus Biotech Private Limited
H having defaulted, the event enabling the petition under Section 7 of IB
INDUS BIOTECH PVT LTD v. KOTAK INDIA VENTURE (OFFSHORE) 125
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Code has occurred and the dispute sought to be raised is not arbitrable A
after the insolvency proceeding is commenced.
13. Before adverting to the contentions in this regard, it is to be
taken note that against the order dated 09.06.2020 assailed in the special
leave petition, Kotak India Venture in the normal course if aggrieved,
ought to have availed the remedy of appeal by filing an appeal in the B
NCLAT as provided under Section 61 of IB Code. Having not done so,
in a normal circumstance we would have chosen to relegate Kotak India
Venture to avail the alternate remedy of appeal. The contention on behalf
of Kotak India Venture that they do not have the remedy of appeal as it is
an order disposing an application filed under Act, 1996 and not an order
under the part as provided in Section 61 of IB Code is noted only to be C
rejected. The order dated 09.06.2020 is certainly an order passed by the
Adjudicating Authority under IB Code and petition under Section 7 of
that Code is also disposed. However, as noted from the narration made
above, the order dated 09.06.2020 passed by the NCLT is while taking
note of petition under Section 7 of IB Code, in the backdrop of Indus D
Biotech seeking for the resolution of dispute through arbitration and the
Arbitration Petition to that effect was already pending before this Court
as on the date the order was passed by the NCLT. It is only in this special
circumstance we have proceeded to entertain the petition and examine
the matter on merits.
E
14. In order to arrive at a conclusion on the correctness or otherwise
of the impugned order, at the outset it is necessary for us to take note of
the scope of the proceedings under Section 7 of the IB Code to which
detail reference is made with reference to the definitions in Section 3(6),
3(8), 3(11), 3(12) and 5(7) of the Code. It provides for the ‘financial
creditor’ to file an application for initiating Corporate Insolvency F
Resolution Process against a ‘corporate debtor’ before the Adjudicating
Authority when ‘default’ has occurred. The provision, therefore,
contemplates that in order to trigger an application there should be in
existence four factors: (i) there should be a ‘debt’ (ii) ‘default’ should
have occurred (iii) debt should be due to ‘financial creditor’ and (iv) such G
default which has occurred should be by a ‘corporate debtor’: On such
application being filed with the compliance required under sub-Section
(1) to (3) of Section 7 of IB Code, a duty is cast on the Adjudicating
Authority to ascertain the existence of a default if shown from the records
or on the basis of other evidence furnished by the financial creditor, as
contemplated under sub-Section (4) to Section 7 of IB Code. H
126 SUPREME COURT REPORTS [2021] 7 S.C.R.
A 15. This Court had the occasion to consider exhaustively the
scheme and working of the IB Code in the case of Innoventive Industries
Limited vs. ICICI Bank and Another (2018) 1 SCC 407. The
proceeding under Section 7 of the IB Code and the scope thereof is
articulated in paras 27 to 30 which read hereunder,
B “27. The scheme of the Code is to ensure that when a default
takes place, in the sense that a debt becomes due and is not paid,
the insolvency resolution process begins. Default is defined in
Section 3(12) in very wide terms as meaning non-payment of a
debt once it becomes due and payable, which includes non-
payment of even part thereof or an instalment amount. For the
C meaning of “debt”, we have to go to Section 3(11), which in turn
tells us that a debt means a liability of obligation in respect of a
“claim” and for the meaning of “claim”, we have to go back to
Section 3(6) which defines “claim” to mean a right to payment
even if it is disputed. The Code gets triggered the moment default
D is of rupees one lakh or more (Section 4). The corporate insolvency
resolution process may be triggered by the corporate debtor itself
or a financial creditor or operational creditor. A distinction is made
by the Code between debts owed to financial creditors and
operational creditors. A financial creditor has been defined under
Section 5(7) as a person to whom a financial debt is owed and a
E financial debt is defined in Section 5(8) to mean a debt which is
disbursed against consideration for the time value of money. As
opposed to this, an operational creditor means a person to whom
an operational debt is owed and an operational debt under Section
5(21) means a claim in respect of provision of goods or services.
F 28. When it comes to a financial creditor triggering the process,
Section 7 becomes relevant. Under the Explanation to Section
7(1), a default is in respect of a financial debt owed to any financial
creditor of the corporate debtor — it need not be a debt owed to
the applicant financial creditor. Under Section 7(2), an application
G is to be made under sub-section (1) in such form and manner as is
prescribed, which takes us to the Insolvency and Bankruptcy
(Application to Adjudicating Authority) Rules, 2016. Under Rule
4, the application is made by a financial creditor in Form 1
accompanied by documents and records required therein. Form 1
is a detailed form in 5 parts, which requires particulars of the
H applicant in Part I, particulars of the corporate debtor in Part II,
INDUS BIOTECH PVT LTD v. KOTAK INDIA VENTURE (OFFSHORE) 127
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particulars of the proposed interim resolution professional in Part A
III, particulars of the financial debt in Part IV and documents,
records and evidence of default in Part V. Under Rule 4(3), the
applicant is to dispatch a copy of the application filed with the
adjudicating authority by registered post or speed post to the
registered office of the corporate debtor. The speed, within which
B
the adjudicating authority is to ascertain the existence of a default
from the records of the information utility or on the basis of evidence
furnished by the financial creditor, is important. This it must do
within 14 days of the receipt of the application. It is at the stage of
Section 7(5), where the adjudicating authority is to be satisfied
that a default has occurred, that the corporate debtor is entitled to C
point out that a default has not occurred in the sense that the
“debt”, which may also include a disputed claim, is not due. A
debt may not be due if it is not payable in law or in fact. The
moment the adjudicating authority is satisfied that a default has
occurred, the application must be admitted unless it is incomplete,
D
in which case it may give notice to the applicant to rectify the
defect within 7 days of receipt of a notice from the adjudicating
authority. Under sub-section (7), the adjudicating authority shall
then communicate the order passed to the financial creditor and
corporate debtor within 7 days of admission or rejection of such
application, as the case may be. E
29. The scheme of Section 7 stands in contrast with the scheme
under Section 8 where an operational creditor is, on the occurrence
of a default, to first deliver a demand notice of the unpaid debt to
the operational debtor in the manner provided in Section 8(1) of
the Code. Under Section 8(2), the corporate debtor can, within a F
period of 10 days of receipt of the demand notice or copy of the
invoice mentioned in sub-section (1), bring to the notice of the
operational creditor the existence of a dispute or the record of the
pendency of a suit or arbitration proceedings, which is pre-
existing—i.e. before such notice or invoice was received by the
corporate debtor. The moment there is existence of such a dispute, G
the operational creditor gets out of the clutches of the Code.
30. On the other hand, as we have seen, in the case of a corporate
debtor who commits a default of a financial debt, the adjudicating
authority has merely to see the records of the information utility
or other evidence produced by the financial creditor to satisfy H
128 SUPREME COURT REPORTS [2021] 7 S.C.R.
A itself that a default has occurred. It is of no matter that the debt is
disputed so long as the debt is “due” i.e. payable unless interdicted
by some law or has not yet become due in the sense that it is
payable at some future date. It is only when this is proved to the
satisfaction of the adjudicating authority that the adjudicating
authority may reject an application and not otherwise.”
B
(Emphasis supplied)
16. Dr. Singhvi, learned senior counsel while seeking to repel the
contention put forth on behalf of the Indus Biotech Private Limited seeks
to emphasise that a proceeding under Section 7 of IB Code is to be
C considered in a stringent manner. Referring to the Preamble to the IB
Code, it is contended that the same has evolved after all the earlier
processes like civil suit, winding up petition, SARFAESI proceeding and
SICA have failed to secure the desired result. The provision under the IB
Code is with the intention of making a debtor to seek the creditor. In that
regard, Dr. Singhvi has referred to the decisions in the case of Swiss
D Ribbons Private Limited and Another vs. Union of India and Others
(2019) 4 SCC 17 and Booz Allen and Hamilton INC. vs. SBI Home
Finance Limited and Others (2011) 5 SCC 532 to contend that the
proceeding under Section 7 of IB Code is an action in rem. As such
insolvency and winding up matters are non-arbitrable. In that background,
E the nature of transaction under the SS and SA was referred. It is in that
regard contended that the agreement provides for the manner of
redemption as also the redemption value. The date of redemption is fixed
as 31.12.2018. The OCRPS when redeemed is payable, within 15 days
from the date of redemption. In such situation, there is no other issue
which require resolution by arbitration. Further, it is contended Clause
F 5.1 and 5.2 in Schedule J to the agreement provided that the redemption
value shall constitute a debt outstanding by the Company to the holder.
Hence the amount being debt on the redemption date, if not paid within
15 days of redemption constituted default. In that background, when the
petition under Section 7 of IB Code was filed the Adjudicating Authority
G ought to have looked into that aspect alone and the consideration of an
application filed under Section 8 of the Act, 1996 is without jurisdiction is
the contention.
17. The procedure contemplated will indicate that before the
Adjudicating Authority is satisfied as to whether the default has occurred
H or not, in addition to the material placed by the financial creditor, the
INDUS BIOTECH PVT LTD v. KOTAK INDIA VENTURE (OFFSHORE) 129
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corporate debtor is entitled to point out that the default has not occurred A
and that the debt is not due, consequently to satisfy the Adjudicating
Authority that there is no default. In such exercise undertaken by the
Adjudicating Authority if it is found that there is default, the process as
contemplated under sub-Section (5) of Section 7 of IB Code is to be
followed as provided under sub-Section 5(a); or if there is no default the
B
Adjudicating Authority shall reject the application as provided under sub-
Section 5(b) to Section 7 of IB Code. In that circumstance if the finding
of default is recorded and the Adjudicating Authority proceeds to admit
the application, the Corporate Insolvency Resolution Process commences
as provided under sub-section (6) and is required to be processed further.
In such event, it becomes a proceeding in rem on the date of admission C
and from that point onwards the matter would not be arbitrable. The
only course to be followed thereafter is the resolution process under IB
Code. Therefore, the trigger point is not the filing of the application
under Section 7 of IB Code but admission of the same on determining
default.
D
18. In that circumstance, though Dr. Singhvi has referred to the
evolution of IB Code after all earlier legal process had failed to give the
rightful place to the creditor; which is sought to be achieved by the IB
Code, it cannot be said that by the procedure prescribed under the IB
Code it means that the claim of the creditor if made before the NCLT,
more particularly under Section 7 of IB Code is sacrosanct and the E
corporate debtor is denuded of putting forth its version or the contention
to show to the Adjudicating Authority that the default has not occurred
and explain the circumstance for contending so. In fact, in the very decision
relied on by both the parties in the case of Innoventive Industries Limited
(supra), this court while considering the scope of the various provisions F
under the Act and while referring to the procedure contemplated in a
petition under Section 7 of the IB Code, which is also extracted supra
reads thus: -
“It is at the stage of Section 7(5), where the Adjudicating Authority
is to be satisfied that default has occurred, that the corporate G
debtor is entitled to point out that a default has not occurred in the
sense that the ‘debt’, which may also include a disputed claim, is
not due. A debt may not be due if it is not payable in law or in
fact.”
H
130 SUPREME COURT REPORTS [2021] 7 S.C.R.
A 19. In the instant case, Dr. Singhvi, as noted earlier has referred
to clause 5.1 and 5.2 contained in Schedule J to the agreement to contend
that the OCRPS would become due within 15 days from the redemption
date and the parties are agreed that it shall constitute a debt outstanding
by the company to the Holder. The question would be; whether that
alone was sufficient to come to a conclusion that there was default as
B
well in the fact situation of the present nature. It is no doubt true that the
original period of the OCRPS was up to 31.12.2018, on which date it
could be redeemed. In that background, Mr. Shyam Divan, learned senior
counsel for Indus Biotech Private Limited has drawn our attention to
Clause 4 and 6 of the very same document to indicate that it provides for
C early redemption under the circumstances stated therein. Vide clause 6
thereof it has provided that the OCRPS could be converted into equity
shares of the company in the circumstances provided therein, which is
also on the occurrence of QIPO or Strategic Sale, provided that the
OCRPS shall be converted in the manner indicated. Regulation 5(2) of
SEBI – ICDR Regulations mandated the same. In that regard, Mr. Divan
D
has also referred to the Board meeting held on 14.03.2018 wherein QIPO
related matters were taken into consideration and the conversion of the
preference shares was discussed, to which the Nominee Director
representing the Kotak India Venture Group was also a party. The said
issue was also discussed in the subsequent meeting dated 06.04.2018
E and 10.04.2018. Therefore, the said events prima facie indicate that the
process of converting the OCRPS into equity shares and the allotment
thereof was an issue which had already commenced a while before the
redemption date agreed upon i.e., 31.12.2018 had arrived.
20. Therefore, in a fact situation of the present nature when the
F process of conversion had commenced and certain steps were taken in
that direction, even if the redemption date is kept in view and the clause
in Schedule J indicating that redemption value shall constitute a debt
outstanding is taken note; when certain transactions were discussed
between the parties and had not concluded since the point as to whether
it was 30 per cent of the equity shares in the company or 10 per cent by
G applying proper formula had not reached a conclusion and thereafter
agreed or disagreed, it would not have been appropriate to hold that there
is default and admit the petition merely because a claim was made by
Kotak Venture as per the originally agreed date and a petition was filed.
In the process of consideration to be made by the Adjudicating Authority
H
INDUS BIOTECH PVT LTD v. KOTAK INDIA VENTURE (OFFSHORE) 131
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the facts in the particular case is to be taken into consideration before A
arriving at a conclusion as to whether a default has occurred even if
there is a debt in strict sense of the term, which exercise in the present
case has been done by the Adjudicating Authority.
21. In such circumstance if the Adjudicating Authority finds from
the material available on record that the situation is not yet ripe to call it B
a default, that too if it is satisfied that it is profit making company and
certain other factors which need consideration, appropriate orders in
that regard would be made; the consequence of which could be the
dismissal of the petition under Section 7 of IB Code on taking note of the
stance of the corporate debtor. As otherwise if in every case where
there is debt, if default is also assumed and the process becomes C
automatic, a company which is ably running its administration and
discharging its debts in planned manner may also be pushed to the
Corporate Insolvency Resolution Process and get entangled in a
proceeding with no point of return. Therefore, the Adjudicating Authority
certainly would make an objective assessment of the whole situation D
before coming to a conclusion as to whether the petition under Section 7
of IB Code is to be admitted in the factual background. Dr. Singhvi,
however contended, that when it is shown the debt is due and the same
has not been paid the Adjudicating Authority should record default and
admit the petition. He contends that even in such situation the interest of
the corporate debtor is not jeopardised inasmuch as the admission orders E
made by the Adjudicating Authority is appealable to the NCLAT and
thereafter to the Supreme Court where the correctness of the order in
any case would be tested. We note, it cannot be in dispute that so would
be the case even if the Adjudicating Authority takes a view that the
petition is not ripe to be entertained or does not constitute all the ingredients, F
more particularly default, to admit the petition, since even such order
would remain appealable to the NCLAT and the Supreme Court where
the correctness in that regard also will be examined.
22. In the above backdrop the question would be as to whether a
grave error as contended on behalf of Kotak Venture is committed by the G
Adjudicating Authority by observing in the course of the order that the
invocation of arbitration in a case like this seems to be justified. In our
view, the stage of the proceedings at which the said observation was
made will be relevant. If the case has reached the stage to the status of a
proceeding in rem, then such observation would not be justified and
H
132 SUPREME COURT REPORTS [2021] 7 S.C.R.
A sustainable but not otherwise. In the instant case, the petition was yet to
be admitted and, therefore had not assumed the status of a proceedings
in rem.
23. The tests to be applied to determine as to when the subject
matter is not arbitrable and on applying such test, actions in rem is not
B arbitrable is laid down by this Court in the case of Vidya Drolia and
Others Vs. Durga Trading Corporation (2021 2 SCC 1) which reads
as hereunder:
“76. In view of the above discussion, we would like to propound
a fourfold test for determining when the subject matter of a dispute
C in an arbitration agreement is not arbitrable:
76.1 (1) when cause of action and subject matter of the dispute
relates to actions in rem, that do not pertain to subordinate rights
in personam that arise from rights in rem.
76.2 (2) when cause of action and subject matter of the dispute
D affects third party rights; have erga omnes effect; require
centralized adjudication, and mutual adjudication would not be
appropriate and enforceable;
76.3 (3) when cause of action and subject matter of the dispute
relates to inalienable sovereign and public interest functions of
E the State and hence mutual adjudication would be unenforceable;
and
76.4 (4) when the subject-matter of the dispute is expressly or by
necessary implication non-arbitrable as per mandatory statute(s).
76.5 (5) These tests are not watertight compartments; they dovetail
F
and overlap, albeit when applied holistically and pragmatically
will help and assist in determining and ascertaining with great
degree of certainty when as per law in India, a dispute or subject
matter is non-arbitrable. Only when the answer is affirmative that
the subject matter of the dispute would be non-arbitrable.
G 76.6. However, the aforesaid principles have to be applied with
care and caution as observed in Olympus Superstructures (P)
Ltd. [Olympus Superstructures (P) Ltd. v. Meena Vijay Khetan,
(1999) 5 SCC 651] : (SCC p. 669, para 35)
H
INDUS BIOTECH PVT LTD v. KOTAK INDIA VENTURE (OFFSHORE) 133
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“35. … Reference is made there to certain disputes like criminal A
offences of a public nature, disputes arising out of illegal
agreements and disputes relating to status, such as divorce,
which cannot be referred to arbitration. It has, however, been
held that if in respect of facts relating to a criminal matter, say,
physical injury, if there is a right to damages for personal injury,
B
then such a dispute can be referred to arbitration
(Keir v. Leeman [Keir v. Leeman, (1846) 9 QB 371 : 115 ER
1315] ). Similarly, it has been held that a husband and a wife
may refer to arbitration the terms on which they shall separate,
because they can make a valid agreement between themselves
on that matter. C
77. Applying the above principles to determine non-arbitrability, it
is apparent that insolvency or intracompany disputes have to be
addressed by a centralised forum, be the court or a special forum,
which would be more efficient and has complete jurisdiction to
efficaciously and fully dispose of the entire matter. They are also D
actions in rem. Similarly, grant and issue of patents and registration
of trade marks are exclusive matters falling within the sovereign
or government functions and have erga omnes effect. Such grants
confer monopoly rights. They are non-arbitrable. Criminal cases
again are not arbitrable as they relate to sovereign functions of
the State. Further, violations of criminal law are offences against E
the State and not just against the victim. Matrimonial disputes
relating to the dissolution of marriage, restitution of conjugal rights,
etc. are not arbitrable as they fall within the ambit of sovereign
functions and do not have any commercial and economic value.
The decisions have erga omnes effect. Matters relating to probate, F
testamentary matter, etc. are actions in rem and are a declaration
to the world at large and hence are non-arbitrable.”
In view of the exhaustive consideration made in Vidya Drolia and
our clear understanding that a dispute will be non-arbitrable when a
proceeding is in rem and a IB Code proceeding is to be considered in rem G
only after it is admitted it is seen that in the instant case the position is
otherwise. The decisions relied on behalf of Kotak India Venture in the
case of Booz Allen and Hamilton Vs. SBI Home Finance Ltd. & Others
(2011) 5 SCC 532 and A. Ayyasamy Vs. A. Paramasivam & Others
(2016) 10 SCC 386 need not be referred in detail and overburden this
H
134 SUPREME COURT REPORTS [2021] 7 S.C.R.
A judgment since they have been referred in Vidya Drolia which also explain
the same situation.
24. In the case of Swiss Ribbons Private Limited vs. Union of
India (2019) 4 SCC 17 and Pioneer Urban Land and Infrastructure
Limited vs. Union of India & Ors. (W.P.(C) No.43/2019) relied on
B behalf of Kotak Venture, the entire scope and ambit of the IB Code was
considered and the validity of the provisions were upheld. The said decisions
have also been relied on to contend that when the petition under Section
7 of IB Code is triggered it becomes a proceedings in rem and even the
creditor who has triggered the process would also lose control of the
proceedings as Corporate Insolvency Resolution Process is required to
C be considered through the mechanism provided under the IB Code. The
principles as laid down in Swiss Ribbons (supra) was also referred to in
detail in the case of Pioneer Urban Land and Infrastructure (supra)
wherein the observations contained in para 39 though in the case of
Real Estate Development was laid down. The relevant portion which
D has been referred to, reads as follows:-
“Thus, any allottee/home buyer who prefers an application under
Section 7 of the Code takes the risks of his flat/apartment not
being completed in the near future, in the event of there being a
breach on the part of the developers. Under the Code, he may
E never get refund of the entire principal, let alone interest. This is
because, the moment a petition is admitted under Section 7, the
resolution professional must first advertise for and find a resolution
plan by somebody, usually another developer which has then to
pass muster under the Code, i.e. that it must be approved by at
least 66 per cent of the Committee of Creditors and must further
F go through challenges before NCLT and NCLAT before the new
management can take over and either complete construction or
pay out for refund amounts.”
The underlying principle, therefore, from all the above noted
decisions is that the reference to the triggering of a petition under Section
G 7 of the IB Code to consider the same as a proceedings in rem, it is
necessary that the Adjudicating Authority ought to have applied its mind,
recorded a finding of default and admitted the petition. On admission,
third party right is created in all the creditors of the corporate debtors and
will have erga omnes effect. The mere filing of the petition and its
H pendency before admission, therefore, cannot be construed as the
INDUS BIOTECH PVT LTD v. KOTAK INDIA VENTURE (OFFSHORE) 135
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triggering of a proceeding in rem. Hence, the admission of the petition A
for consideration of the Corporate Insolvency Resolution Process is the
relevant stage which would decide the status and the nature of the pendency
of the proceedings and the mere filing cannot be taken as the triggering of
the insolvency process.
25. As noted, the issue which is posed for our consideration is B
arising in a petition filed under Section 7 of IB Code, before it is admitted
and therefore not yet an action in rem. In such application, the course to
be adopted by the Adjudicating Authority if an application under Section
8 of the Act, 1996 is filed seeking reference to arbitration is what requires
consideration. The position of law that the IB Code shall override all
other laws as provided under Section 238 of the IB Code needs no C
elaboration. In that view, notwithstanding the fact that the alleged
corporate debtor filed an application under Section 8 of the Act, 1996,
the independent consideration of the same dehors the application filed
under Section 7 of IB Code and materials produced therewith will not
arise. The Adjudicating Authority is duty bound to advert to the material D
available before him as made available along with the application under
Section 7 of IB Code by the financial creditor to indicate default along
with the version of the corporate debtor. This is for the reason that,
keeping in perspective the scope of the proceedings under the IB Code
and there being a timeline for the consideration to be made by the
Adjudicating Authority, the process cannot be defeated by a corporate E
debtor by raising moonshine defence only to delay the process. In that
view, even if an application under Section 8 of the Act, 1996 is filed, the
Adjudicating Authority has a duty to advert to contentions put forth on
the application filed under Section 7 of IB Code, examine the material
placed before it by the financial creditor and record a satisfaction as to F
whether there is default or not. While doing so the contention put forth
by the corporate debtor shall also be noted to determine as to whether
there is substance in the defence and to arrive at the conclusion whether
there is default. If the irresistible conclusion by the Adjudicating Authority
is that there is default and the debt is payable, the bogey of arbitration to
delay the process would not arise despite the position that the agreement G
between the parties indisputably contains an arbitration clause.
26. That apart if the conclusion is that there is default and the
debt is payable, due to which the Adjudicating Authority proceeds to
pass the order as contemplated under sub-section 5(a) of Section 7 of
IB Code to admit the application, the proceedings would then get itself H
136 SUPREME COURT REPORTS [2021] 7 S.C.R.
A transformed into a proceeding in rem having erga omnes effect due to
which the question of arbitrability of the so-called inter se dispute sought
to be put forth would not arise. On the other hand, on such consideration
made by the Adjudicating Authority if the satisfaction recorded is that
there is no default committed by the company, the petition would stand
rejected as provided under sub-section 5(b) to Section 7 of IB Code,
B
which would leave the field open for the parties to secure appointment
of the Arbitral Tribunal in an appropriate proceedings as contemplated in
law and the need for the NCLT to pass any orders on such application
under Section 8 of Act, 1996 would not arise.
27. Therefore, to sum up the procedure, it is clarified that in any
C proceeding which is pending before the Adjudicating Authority under
Section 7 of IB Code, if such petition is admitted upon the Adjudicating
Authority recording the satisfaction with regard to the default and the
debt being due from the corporate debtor, any application under Section
8 of the Act, 1996 made thereafter will not be maintainable. In a situation
D where the petition under Section 7 of IB Code is yet to be admitted and,
in such proceedings, if an application under Section 8 of the Act, 1996 is
filed, the Adjudicating Authority is duty bound to first decide the application
under Section 7 of the IB Code by recording a satisfaction with regard to
there being default or not, even if the application under Section 8 of Act,
1996 is kept along for consideration. In such event, the natural
E consequence of the consideration made therein on Section 7 of IB Code
application would befall on the application under Section 8 of the Act,
1996.
28. In the above background, on reverting to the fact situation in
this case, a perusal of the order dated 09.06.2020 would indicate that the
F Adjudicating Authority, NCLT though has taken up the application filed
under Section 8 of the Act, 1996 as the lead consideration, the petition
filed under Section 7 of the IB Code is also taken alongside and made a
part of the consideration in the said order. A further perusal of the order
would disclose that the Adjudicating Authority was conscious of the fact
G that consideration of the matter before it any further would arise only if
there is default and the debt is payable. This is evident from the observation
contained in para 5.13 of the order. The further narration made in para
5.14 would indicate that the Adjudicating Authority, from the material
available on record had arrived at the conclusion that the issue involved
has not led to a stage of the default having occurred and has rightly, in
H that context held that the claim of the company by invoking the arbitration
INDUS BIOTECH PVT LTD v. KOTAK INDIA VENTURE (OFFSHORE) 137
FUND (EARLIER KNOWN AS KOTAK INDIA VENTURE LIMITED)
clause is justified but the Adjudicating Authority has rightly done nothing A
with regard to arbitration and has left it to this Court. Accordingly, the
Adjudicating Authority in para 5.15 has categorically recorded that they
are not satisfied that a default has occurred.
29. It would be appropriate to extract the relevant findings recorded
by the NCLT which demonstrates that NCLT was conscious that there B
should be judicial determination by the Adjudicating Authority as to
whether there has been a default within the meaning of Section 3(12)
while considering a petition under Section 7 of the IB Code. The relevant
finding taken note above read as hereunder: -
“5.13 Therefore, in a section 7 petition, there has to be a judicial
C
determination by the Adjudicating Authority as to whether there
has been a ‘default’ within the meaning of section 3(12) of the
IBC.
5.14 In the present case, the dispute centres around three things
–(1) The valuation of the Respondent/Financial Creditor’s OCRPS;
(2) The right of the Respondent/Financial Creditor to redeem such D
OCRPS when it had participated in the process to convert its
OCRPS into equity shares of the Applicant/Corporate Debtor;
and (3) Fixing of the QIPO date. All of these things are important
determinants in coming to a judicial conclusion that a default has
occurred. The invocation of arbitration in a case like this seems to E
be justified.
5.15 Looking at the contention raised, and that the facts are not in
dispute, we are not satisfied that a default has occurred. We note
Mr. Mustafa Doctor’s statements that the Applicant/Corporate
Debtor is a solvent, debt-free and profitable company. It will
unnecessarily push an otherwise solvent, debt-free company into F
insolvency, which is not a very desirable result at this stage. The
disputes that form the subject matter of the underlying Company
Petition, viz., valuation of shares, calculation and conversion formula
and fixing of QIPO date are all arbitrable, since they involve
valuation of the shares and fixing of the QIPO date. Therefore, G
we feel that an attempt must be made to reconcile the difference
between the parties and their respective perceptions. Also, no
meaningful purpose will be served by pushing the Applicant/
Corporate Debtor into CIRP at this stage.”
(emphasis supplied) H
138 SUPREME COURT REPORTS [2021] 7 S.C.R.
A The NCLT after having recorded such finding has taken note of
the arbitration petition pending before this court and has accordingly
concluded the proceedings.
30. The conclusion reached by the Adjudicating Authority, NCLT
in the instant case cannot be faulted if reference is made to the documents
B produced by Indus Biotech Private Limited along with an application and
referred to by Mr. Shyam Divan, learned senior counsel are noted. It
indicates that the allotment of equity shares against the OCRPS in view
of the QIPO was still a matter of discussion between the parties and no
conclusion had been arrived at so as to term it as default. The said issue
was initiated in the 121st meeting of the Board of Directors wherein the
C Nominee Director representing Kotak India Venture Fund was also
present. The IPO related matters were discussed as item No.6 and at
6(c). The discussion and decision that the conversion of the outstanding
preference shares would take place after issuance of bonus shares as
per the provisions of the Shareholders Agreement was recorded. In the
D 122nd meeting of the Board of Directors wherein the Non-Executive
Director and Nominee Director representing Kotak India Venture were
also present, the issue was considered at item No.7. It was resolved that
the Board has accorded approval to the allocation of such percentage of
the offer as may be determined by the Board to any category. Further,
though in the Extraordinary General Body meeting dated 10.04.2018,
E the Representative Directors of the Kotak India Venture had obtained
leave of absence, the resolution adopted in the said meeting had indicated
that the equity shares of the company proposed to be issued and allotted
as bonus equity shares shall be subject to the provisions of the
memorandum of association and articles of association of the company.
F The Company Secretary was authorised to do all such acts in that regard.
31. In the letter dated 21.11.2018 addressed by Indus Biotech
Private Limited to Kotak India Venture, it was mentioned with regard to
the fundamental issue that needs to be addressed regarding conversion
and convertible securities into equity shares since the exist process initiated
G cannot move forward without such conversion. The letter dated
17.12.2018 addressed to Indus Biotech Private Limited by Kotak India
Venture in fact refers to the stake in conversion and the dispute being as
to whether it should be 10 per cent of the share capital of the company as
offered by Indus Biotech Private Limited or 30 per cent as claimed by
Kotak India Venture Fund. It is that aspect of the matter, which is still
H contended to be in dispute between the parties regarding which the
INDUS BIOTECH PVT LTD v. KOTAK INDIA VENTURE (OFFSHORE) 139
FUND (EARLIER KNOWN AS KOTAK INDIA VENTURE LIMITED)
arbitration is sought by Indus Biotech Private Limited, which was also A
noted by Adjudicating Authority. We express no opinion on the merits of
the rival contention relating to the dispute.
32. In such situation, in our opinion, it would be premature at this
point to arrive at a conclusion that there was default in payment of any
debt until the said issue is resolved and the amount repayable by Indus B
Biotech Private Limited to Kotak India Venture with reference to equity
shares being issued is determined. In the process, if such determined
amount is not paid it will amount to default at that stage. Therefore, if
the matter is viewed from any angle, not only the conclusion reached by
the Adjudicating Authority, NCLT insofar as the order on the petition
under Section 7 of the IB Code at this juncture based on the factual C
background is justified but also the prayer made by Indus Biotech Private
Limited for constitution of the Arbitral Tribunal as made in the petition
filed by them under Section 11 of the Act, 1996 before this Court is
justified.
33. In that circumstance though in the operative portion of the D
order dated 09.06.2020 the application filed under Section 8 of the Act,
1996 is allowed and as a corollary the petition under Section 7 of the IB
Code is dismissed; in the facts and circumstances of the present case it
can be construed in the reverse. Hence, since the conclusion by the
Adjudicating Authority is that there is no default, the dismissal of the E
petition under Section 7 of IB Code at this stage is justified. Though the
application under Section 8 of the Act, 1996 is allowed, the same in any
event will be subject to the consideration of the petition filed under Section
11 of the Act, 1996 before this Court. The contention as to whether
payment of investment in preferential shares can be construed as financial
debt was raised in the written submissions. However, we have not adverted F
to that aspect since the same was not the basis of the impugned order
passed by the Adjudicating Authority.
34. Since we have arrived at the above conclusion, the next aspect
relates to the appointment of the Arbitral Tribunal as sought in the petition.
Essentially the main contention that has been urged is with regard to the G
proceedings before the NCLT and, therefore, the dispute not being
arbitrable. However, in the present position the parties would be left with
no remedy if the process of arbitration is not initiated and the dispute
between the parties are not resolved in that manner as the proceedings
before the NCLT has terminated. Mr. Shyam Divan, learned senior counsel H
140 SUPREME COURT REPORTS [2021] 7 S.C.R.
A for Indus Biotech Private Limited has contended that the transaction
between the parties is a common one and as such it would be efficient if
the dispute is resolved by a single Arbitral Tribunal. Further in view of
the objection raised on behalf of the respondent No.4 (Kotak India
Venture) that the arbitration clause has not been invoked in accordance
with the requirement therein, since the promoters have to suggest one
B
arbitrator and not the Company, Mr. ANS Nadkarni, learned senior
counsel representing the promoters who are arrayed as respondent Nos.5
to 11 in the arbitration petition has pointed out that the affidavit has been
filed supporting the petition seeking arbitration and, therefore, the Tribunal
be constituted. Though Mr. Neeraj Kishan Kaul, learned senior counsel
C and Mr. Nitin Mishra, learned counsel had in their argument opposed the
reference to arbitration by pointing out lacunae in the manner the clause
was invoked and the name of the arbitrator was suggested, in the
circumstance the only remedy for the parties being resolution of their
dispute through arbitration as indicated above, we consider it appropriate
to take note of the substance of the arbitration clause and constitute an
D
appropriate Tribunal.
35. In that regard it would be necessary to consider as to whether
the matter is to be referred to a Single Tribunal or the Tribunal be appointed
in respect of each of the agreements. Mr. Nitin Mishra in his written
submission has contended that there cannot be composite arbitration. In
E that regard the decision in the case of M/S Duro Felguera S.A vs M/S.
Gangavaram Port Limited, (2017) 9 SCC 729 is relied upon with
specific reference to paragraphs 38 and 55 therein, while Mr. Ritin Rai
has pressed para 44 of the same decision into service seeking common
Tribunal. In the said case there were five separate contracts each having
F independent existence with separate arbitration clauses and in that light,
it was held that there cannot be a single Arbitral Tribunal for International
Commercial Arbitration and domestic arbitration and bifurcated
accordingly. In the instant case also four separate agreements have been
entered into between the parties. The provision for arbitration contained
in clause 20.04 is similar in all the agreements and the supplemental
G agreements have also adopted the same. Clause 20.4.1 reads as
hereunder:
“20.4.1 Except as provided in Section 20.4.2, the parties hereto
irrevocably agree that any dispute, controversy or claim arising
out of, relating to or in connection with this Agreement (including
H
INDUS BIOTECH PVT LTD v. KOTAK INDIA VENTURE (OFFSHORE) 141
FUND (EARLIER KNOWN AS KOTAK INDIA VENTURE LIMITED)
any provision of any exhibit, annex or schedule hereto) or the A
existence, breach, termination or validity hereof (a “Dispute”) shall
be finally settled by arbitration. The arbitration shall be conducted
in accordance with the international arbitration rules of the
Arbitration and Conciliation Act, 1996. The arbitration shall be
held at Mumbai and shall be conducted by three (3) arbitrators.
B
For purpose of appointing such arbitrators, KIVF I, KEIT and
KIVL shall jointly, on the one hand, and the Promoters, as a group,
on the other hand, shall each appoint one arbitrator, and the third
arbitrator, who shall be the chairperson, shall be selected by the
two party-appointed arbitrators. In the event that any party fails
to appoint an arbitrator within fifteen (15) days after receipt of C
written notice of the other party’s intention to refer a Dispute to
arbitration, or in the event of the two party-appointed arbitrators
failing to identify the third arbitrator within fifteen (15) days after
the two party-appointed arbitrators are selected such arbitrator
shall be appointed by a Court of competent jurisdiction on an
D
application initiated by any party. An arbitral tribunal thus constituted
is herein referred to as a “Tribunal”. In the event an appointed
arbitrator may not continue to act as an arbitrator of a Tribunal,
then the party (or the two appointed arbitrators, in the case of the
third arbitrator) that appointed such arbitrator shall have the right
to appoint a replacement arbitrator in accordance with the E
provisions of this Section 20.4.1.”
36. A perusal of the arbitration agreement indicates that the
arbitration shall be held at Mumbai and be conducted by three arbitrators.
For the purpose of appointment KIVF I, KEIT and KIVL are to jointly
appoint one arbitrator and the promoters of Indus Biotech Private Limited, F
to appoint their arbitrator. In the second agreement dated 20.07.2007,
‘KMIL’ as the Investor is on the other side. In the third agreement dated
20.07.2007, ‘KIVFI’ as the Investor is on the other side and in the fourth
agreement dated 09.01.2008 it has the same clause as in the first
agreement. The two arbitrators who are thus appointed shall appoint the
third arbitrator who shall be the Chairperson. The recital (c) in the different G
agreements though refers to each of the entity in the Kotak Investment
Venture and amount invested in shares is referred to, it is provided therein
that the equity shares and preference shares subscribed by KMIL, KIVF
I, KEIT and KIVL are hereafter collectively referred to as the ‘Financial
Investors Shares’. If the said aspect is taken into consideration keeping H
142 SUPREME COURT REPORTS [2021] 7 S.C.R.
A in view the nature of the issues involved being mainly with regard to the
conversion of preference shares into equity shares and the formula to be
worked thereunder, such consideration in the present facts can be resolved
by the Arbitral Tribunal consisting of same members but separately
constituted in respect of each agreement. It will be open for the Arbitral
Tribunal to work out the modalities to conduct the proceedings by holding
B
separate proceedings in the agreement providing for international
arbitration and by clubbing the domestic disputes. All other issues which
have been raised on merits are to be considered by the Arbitral Tribunal
and therefore they have not been referred to in this proceedings.
37. Since Indus Biotech Private Limited had nominated Mr. Justice
C V.N. Khare, former Chief Justice of India through their letter dated
15.10.2019 the said learned Arbitrator is treated as having been proposed
jointly by the Company and the promoters. Mr. Justice R.M. Lodha,
former Chief Justice of India is appointed as the second arbitrator since
the respondents had failed to nominate. The said learned arbitrators shall
D mutually nominate a third arbitrator to be the Chairperson of the Arbitral
Tribunal.
38. In the result, the following order;
(i) Civil Appeal arising out of SLP(C)No.8120 of 2020 is dismissed.
E (ii) Arbitration Petition No.48 of 2019 is allowed.
(iii) Parties to bear their own costs in these proceedings.
Nidhi Jain Appeal dismissed and Arbitration allowed.
F
G
H
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