Indus Biotech Private Limited vs Kotak India Venture (Offshore) Fund (Earlier Known As Kotak India Venture Limited) & Ors.

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 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 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 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 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 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, 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 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 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]

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 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]

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 otherwise. [Para 23][132-B; 133-G]

Vidya Drolia and Others vs. Durga Trading Corporation (2021) 2 SCC 1 – relied on.

1.5 The reference to the triggering of a petition under 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. 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 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 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 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 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 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 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 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

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 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 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 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 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 IB Code application would befall on the application under Section

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 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 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 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]

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 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 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]

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 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 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 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 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]

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 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 filed under Section 11 of the Act, 1996 before this Court. [Para 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 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 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 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 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 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 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 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]

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 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 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.