IB code proceeding is to be considered in rem only after it is admitted: SC

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 that would decide the status and the nature of the pendency of the proceedings and the mere filing cannot betake as the triggering of the insolvency process. (Para 24)

INDUS BIOTECH PRIVATE LIMITED V/S KOTAK INDIA VENTURE (OFFSHORE) FUND (EARLIER KNOWN AS KOTAK INDIA VENTURE LIMITED) &ORS.

Arbitration Petition (Civil) No. 48/2019 Along with Civil Appeal No.1070 /2021 @ SLP (C) NO. 8120 oF 2020

Decided on March 26th, 2021

A Three-Judge Bench of the Hon’ble Supreme Court comprising Justice S. A. Bobde, Justice A. S. Bopanna, and Justice V. Ramasubramanian dismissed a civil appeal and constituted an Arbitral Tribunal to resolves the four agreements which are being questioned to be in default of payment.

The Arbitration Petition is filed by ‘Indus Biotech Private Limited’ under Arbitration and Conciliation Act, 1996 (‘Act, 1996’ for short) seek in the appointment of an Arbitrator on behalf of the respondent 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. All The Respondents except Respondent No.1 being an international company are domestic companies. 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 their remedy before the High Court in respect of similar disputes with respondents No.2 to 4.

The petition seeking constitution of the Arbitral Tribunal emanates from the Share Subscription and Shareholders’ Agreements (‘SS and SA’for short). 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). It had become necessary for 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 respondents No. 1 to 4, into equity shares. In the said process of negotiation, a dispute is stated 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. The Respondents claimed that they were entitled to 30 percent of the total paid-up share capital in equity shares, while the petitioner company calculated it to be 10 percent in total paid-up equity shares. The dispute in question, according to the petitioner company is 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. 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.

Accordingly, respondent No.2 herein filed the petition under Section 7 of IB Code before the NCLT in IBC. The petitioner company herein filed a Miscellaneous Application 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 NCLT, Mumbai Bench took 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 Respondent No.2 herein under Section 7 of the IB Code is dismissed.

In view of the exhaustive consideration made in Vidya Drolia and Others Vs. Durga Trading Corporation (2021 2 SCC 1) and our clear understanding that a dispute will be non arbitrable when a proceeding is in rem and an IB Code proceeding is to be considered in rem only after it is admitted it is seen that in the instant case the position is otherwise. The issue which is posed for our consideration is arising in a petition filed under Section 7 of IB Code before it is admitted and therefore not yet action in rem.

After hearing both the sides, this Court found that " 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 subsection 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 ergaomnes 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 sub­section 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 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." (Para 26)

Therefore, 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 is 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 an 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)

The Court dismissed the Civil Appeal while allowing the Arbitration Appeal by constituting an arbitration bench by accepting the arbitrator proposed by the petitioners and appointed the second arbitrator as the Respondents had failed to nominate their arbitrator. these two arbitrators would mutually nominate a third arbitrator to be the chairperson of the Arbitral tribunal.

View/Download Judgment: Indus Biotech Private Limited V/s Kotak India Venture(Offshore) Fund & Ors.

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