Judgments

INDUS BIOTECH PVT. LTD.  VS. KOTAK INDIA VENTURE (OFFSHORE FUND)  : CASE SUMMARY

The Supreme Court held in Indus Biotech Pvt. Ltd.  Vs. Kotak India Venture (Offshore Fund ) & Ors    AIR 2021 SC 1638 that if  Application under Section 8 of Arbitration and Conciliation Act, 1996 is filed before NCLT,  the submissions made in  Section 7 IBC Application have also to be considered.  After considering all the relevant facts NCLT may admit 7 IBC Application or reject the same. In case of rejection the parties can approach appropriate forum for appointment of Arbitral Tribunal. 

FACTS OF THE CASE

Arbitration Petition was filed before the Supreme Court under provisions of Arbitration and Conciliation Act by Indus Biotech against the Respondent No. 1 to 4 seeking constitution of Arbitral Tribunal. Respondent No. 1 is a Mauritius based company while Respondent No. 2-4 are India based. The disputes arose from several Share Subscription and Shareholder’s Agreement. Through these agreements Respondent No. 1 to 4 subscribed equity shares and Optionally Convertible Redeemable Preference Shares (OCRPS)  of the Corporate Debtor.

The Corporate Debtor took a decision to issue Qualified Initial Public Offering ( QIPO).   However,  under SEBI regulations a company which has any outstanding convertible securities or any other right was not entitled to issue QIPO.  The Corporate Debtor proposed to Respondent No. 1 to 4 to covert OCRPS into equity shares. Dispute arose between the parties regarding calculation and conversion formula to be applied in conversion of OCRPS to equity shares.

The Respondents No.  1 to 4 claimed that an amount of Rs. 367,08,56,503/- on redemption of OCRPS. The Respondents demanded the said amount from the Corporate Debtor and as the same was not paid by the Corporate Debtor Petiiton under Section 7 was filed before NCLT by the Respondent No. 2.  The Corporate Debtor filed Application under Section 8 of the Arbitration and Conciliation Act, 1996 for referring the matter to arbitration.

NCLT Mumbai rejected the Application under Section 7 and allowed the Application under Section 8 of the Arbitration and Conciliation Act, 1996.

FINDINGS OF THE SUPREME COURT

The Supreme Court observe that it is not in dispute that share subscription and shareholder agreement is in existence having arbitration clauses. However, nature of Arbitration Tribunal has to be considered as one is international arbitration while others are domestic arbitrations.

It was contended before the Supreme Court that Indus Biotech Private Ltd having defaulted and Section 7 IBC Petition has been filed, dispute is no longer arbitrable.

The Supreme Court observed that the test of arbitrability in respect of in rem actions  has been laid down in Vidya Drolia & Ors Vs Durga Trading and Ors  (2021) 2 SCC 1.   The Supreme Court relying on Vidya Drolia held that a proceeding will be non-arbitrable when a proceedings  is in rem and proceedings under IBC is considered only in rem after admission.

The Supreme Court after relying on Swiss Ribbon Pvt Ltd Vs Union of India (2019) 4 SCC 17  and Pioneer Urban Land and Infrastructure Limited Vs Union of India  AIR (2019) SC 4055 held that to consider Section 7 proceedings as in rem proceedings it is necessary that the Adjudicating Authority has applied its mind, recorded a finding of default and admitted the Petition. Once Section 7 Petition is admitted third party right is created on all the creditors of the Corporate Debtor and will have erga omnes effect. Mere filing a petition cannot considered a proceedings in rem.

The Supreme Court observed that if an application under Section 8 of Arbitration and Conciliation Act is filed, the NCLT has a duty to advert to contentions put forth on the application filed under Section 7 of the Code, examine the material placed by Financial Creditor and record satisfaction whether there is a default. If the Adjudicating Authority reached to conclusion that there is default and debt is payable, arbitration should not allowed to delay the insolvency proceedings.

Once Insolvency Petition under Section 7 is admitted the proceedings will get transformed into in rem proceedings having erga omnes effect.

On the other hand if the Adjudcating Authority concluded that there is no default, the Section 7 Petition will be rejected and parties can approach appropriate authority for appointment of arbitral tribunal.  

The Supreme affirmed the view taken by NCLT. 

The Supreme Court also observed that dispute can be resolved by the Arbitral Tribunal consisting of the same members but separately constituted in respect of each agreement.

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Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.

Mukesh Kumar Suman

Mukesh Kumar Suman

Mukesh Kumar Suman is an advocate based at Delhi. He has rich experience in civil, criminal, commercial, arbitration and corporate insolvency matters. He regularly appears before District Courts, NCLT, NCLAT, High Court and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.

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