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TMI Blog2021 (3) TMI 1178X X X X Extracts X X X X X X X X Extracts X X X X ..... minated Mr. Justice 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 mutually nominate a third arbitrator to be the Chairperson of the Arbitral Tribunal. Arbitration petition allowed. - ARBITRATION PETITION (CIVIL) NO. 48/2019 CIVIL APPEAL NO.1070 /2021 @ SLP (C) NO. 8120 OF 2020 - - - Dated:- 26-3-2021 - CJI. S. A. Bobde , Justice A. S. Bopanna And Justice V. Ramasubramanian Counsel For The Parties : Ms. Radhika Gautam, AOR Mr. Chandra Prakash, AOR Mr. Udita Singh, AOR Mr. Jatin Pore, Adv. Ms. Ankita Agrawal, Adv. Mr. Chandra Prakash, AdvM/S. D. s. k. Legal, AOR Mr. Nakul Dewan, Sr. Adv. Mr. Somesh Chandra Jha, AOR Mr. Rahul Narang, Adv. Mr. Iqbal Chagla, Sr. Adv. Ms. Mitali Gupta, Adv. Mr. Nitin Mishra, AOR Mr. Pawanjit Bindra, Adv. Ms. Aashta Mehta, Adv. Ms. Vishakha, Adv. Ms. Deepanwita Priyanka, AOR Mr. Atmaram NS Nadkarni, Sr. Adv. Mr. Vineet Malhotra, Adv. Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iotech 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 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 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 with regard to the appropriate formula to be adopted and to arrive at the actual percentage of the paidup share capital which would be converted into equity shares and the refund if any thereafter. Until an amicable decision is taken the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed by 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 . 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 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 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 c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f 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 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 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nst 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. 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 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 applicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in Part III, particulars of the financial debt in Part IV and documents, records and evidence of default in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. (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 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 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 O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the filing of the application under Section 7 of IB Code but admission of the same on determining default. 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 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 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 de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 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 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 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 cor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the above discussion, we would like to propound a fourfold test for determining when the subject matter of a dispute 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 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 the State and hence mutual adjudication would be unenforceable; and 76.4 (4) when the subjectmatter of the dispute is expressly or by necessary implication nonarbitrable as per mandatory statute(s). 76.5 (5) These tests are not watertight compartments; they dovetail 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 nonarbitra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 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 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 be considered through the mechanism provided under the IB Code. The principles as laid down ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 will 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 cre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsequence 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nding 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 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 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 122nd meeting of the Board of Directors wherein the NonExecutive Director and Nominee Director representing Kotak India Venture were also present, the issue was considered at item No.7. It was resolved that the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... them under Section 11 of the Act, 1996 before this Court is justified. 33. 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 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 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 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at 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 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 any provision of any exhibit, annex or schedule hereto) or the 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. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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