The Hon'ble Supreme Court in its recent judgment in Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund (earlier known as Kotak India Venture Limited) & Ors.1 settled the debate around the arbitrability of disputes once a Section 7 petition under the Insolvency & Bankruptcy Code, 2016 ("Code") is filed. Dealing with the above proposition in the factual matrix detailed hereinbelow, the Hon'ble Supreme Court came to the finding that the trigger point to determine the 'arbitrability' of the dispute is the admission of the Section 7 petition under the Code and not the date of mere filing of such petition.
The jurisdiction of the Hon'ble Supreme Court was invoked by Indus Biotech Private Limited ("Petitioner") by way of an arbitration petition preferred under Sections 11(3) read with Sections 11(4)(a) and 11(2)(a) of the Arbitration and Conciliation Act, 1996 ("Act") seeking the appointment of an arbitrator. Such appointment was sought in regard to disputes which had arisen under Share Subscription ("SS") and Shareholders' Agreements ("SA") (collectively referred as "Agreements") with Kotak India Venture (Offshore) Fund and the other respondents ("Respondents"). Under the Agreements, the Respondents had subscribed to equity shares and Optionally Convertible Redeemable Preference Shares ("OCRPS") of the Petitioner.
The Petitioner reached a decision to make a Qualified Initial Public Offering ("QIPO"), but was prevented due to a specific regulation under the Securities Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2018 ("SEBI Regulations"), which mandated conversion of the preference shares held by the Respondents in the Petitioner company into equity shares, before such QIPO could be made. Disputes arose between the parties with respect to the calculation and conversion formula to be applied in converting the preference shares of the Respondents to equity shares to enable such QIPO.
Claiming the failure of the Petitioner to pay a sum of INR 367,08,56,503/- against the redemption of OCRPS, by the agreed redemption date as per the formula supported by the Respondents a Section 7 petition ("Section 7 Petition") under the Code was filed against the Petitioner before the National Company Law Tribunal ("NCLT/Adjudicating Authority") dated 16 August 2019 for the initiation of Corporate Insolvency Resolution Process ("CIRP"). In response, the Petitioner filed a miscellaneous application under Section 8 of the Act in the said petition, seeking reference of disputes under the agreements to arbitration.
The NCLT, vide its order dated 9 June 2020, allowed the Petitioner's application under Section 8 of the Act and dismissed the Respondents' Section 7 Petition, upon reaching a finding as to absence of 'default' by the Petitioner, as envisaged under the Code.
Aggrieved by the above order of the NCLT, the Respondents invoked the jurisdiction of the Hon'ble Supreme Court by way of a connected Special Leave Petition.
Rival Contentions of the Parties
The Respondents contended that the NCLT had seriously erred in entertaining the Section 8 application of the Petitioner, being duty bound to proceed in the strict procedure envisaged under Section 7 of the Code. It further contended that the Petitioner having defaulted, the event enabling the petition under Section 7 of the Code had occurred and the dispute was no longer arbitrable after the insolvency proceedings are commenced. The primary argument set forth by the Respondents was, that proceedings under Section 7 of the Code is an action in rem, thereby rendering disputes thereafter non-arbitrable. Further, given that the Agreements provide for the manner for redemption as also the redemption value, there was no other issue which required resolution by arbitration, therefore the amount calculated therein was a debt on the date of redemption, and non-payment within the contractually stipulated 15-day period constituted a default.
The Petitioner on the other supporting the decision of the NCLT, contended that there was no 'default' in respect of a debt, inasmuch as the parties were still continuing discussions as to the process of converting OCRPS into equity shares and the allotment thereof, much prior to the agreed redemption date of 31 December 2018. Therefore, it could not be held that there had been a default on part of the Petitioner meriting admission of the Respondents' petition, merely because a claim had been made by the Respondents as per the originally agreed date and a petition was filed. The Adjudicating Authority was mandated to take into consideration the relevant facts before coming to the finding of a default by the Petitioner, even if there was a debt in the strict sense, which it had rightly done.
Findings of the Court
The Hon'ble Supreme Court noted that the Code under Section 7, contemplates that in order to trigger an application, the following four factors should be in existence:
- There should be a debt;
- 'Default' should have occurred;
- Debt should be due to a 'financial creditor'; and
- Such 'default' which has occurred, should be by a 'corporate debtor'.
The Adjudicating Authority is dutybound to ascertain existence of each of the above factors before admitting an application under Section 7 of the Code.
The Hon'ble Supreme Court noted, that actions in rem being non-arbitrable would oust the jurisdiction of an arbitral tribunal constituted under the Agreements. However, it would be important to see the stage at which such reference is sought before the Adjudicating Authority. The Hon'ble Supreme Court, drawing support from its decision in Vidya Drolia & Ors. v. Durga Trading Corporation2 probed the tests to be applied to determine as to when the subject matter of a dispute is not arbitrable. Applying said tests, the Hon'ble Supreme Court reached a finding that a dispute is not arbitrable when a proceeding is in rem and under the Code, proceedings are to be considered in rem only after it is admitted by the Adjudicating Authority.
Referring to its earlier pronouncements3 on the scope and ambit of the Code, the Hon'ble Supreme Court stated that the underlying principle is that the reference to the triggering of a petition under Section 7 of the Code to consider the same as 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 rights are created in all the creditors of the corporate debtor. Thus, the mere filing of a petition and its pendency prior to admission, therefore, cannot be construed as triggering of a proceeding in rem. Therefore, the admission of the petition for consideration of the CIRP is the relevant stage which would decide the status and nature of the proceedings.
In light of the above discussion, the Hon'ble Supreme Court upheld the decision of the NCLT, since the impugned order before it came to be passed prior to admission of the Section 7 petition preferred by the Respondents and was therefore, not yet an action in rem. The Hon'ble Supreme Court observed that the Adjudicating Authority has to advert to the material and the rival contentions of the parties before it and records a satisfaction as to whether there is a default or not. Having undertaken such exercise, the Adjudicating Authority had arrived at a clear finding of absence of default, rejected the petition and left the issue of arbitration to the Hon'ble Supreme Court by taking note of the arbitration petition pending before it. Thus, the Hon'ble Supreme Court found no fault with the NCLT's order.
The authors wish to acknowledge the research and assistance rendered by Harshvardhan Korada, a student of Amity Law School, Delhi.
1. Arbitration Petition (Civil) No. 48/2019
2. (2021) 2 SCC 1
3. Swiss Ribbons Private Limited v. Union of India [(2019) 4 SCC 17], Pioneer Urban Land & Infrastructure Limited v. Union of India [W.P.(C) No. 43/2019]
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