Case Commentary by: Takshima Maheshwari
Whether any application filed under Section 8 of the Arbitration Act, 1996 will be maintainable if a petition under Section 7 of the Insolvency & Bankruptcy Code is pending?
Citation: Civil Appeal No.1070 /2021 @ SLP (C) NO. 8120 OF 2020.
Date of judgement: March 26, 2021
Bench: CJISA Bobde, J. AS Bopanna, J. V Ramasubramanian
Court: Supreme Court
Facts
Indus Biotech (Petitioner)filed a petition before the Hon’ble Supreme court of India under Section 11 of the Arbitration and Conciliation Act, 1996 for the formation of an arbitration tribunal to resolve its disputes with Respondent Nos. 1–4. Respondent No. 1 is a Mauritius-based firm, whilst Respondents Nos. 2–4 are Indian companies and sister venture of Respondent-1. The dispute that was sought to be arbitrated originated between the parties under various share subscription and shareholder agreements.
Kotak India subscribed to the optionally convertible redeemable preference shares ("OCRPS") issued by Indus Biotech Private Limited in subject to the terms of the share subscription agreement and the shareholders' agreements. Before the QIPO, Indus Biotech company recommended a Qualified Initial Public Offering ("QIPO"), and Kotak chose to convert its OCRPS into equity shares. The parties negotiated the conversion formula and had disagreements that resulted in this litigation with regards to the terms of the Agreements, Kotak eventually exercised its right to seek redemption of the OCRPS.
Under Section 7[1] of the Insolvency and Bankruptcy Code, 2016 ("IBC"), Kotak approached the National Company Law Tribunal to begin the corporate solvency resolution procedure. Indus Biotech Private Limited then filed an interim application with the NCLT under Section 8[2] of the Arbitration and Conciliation Act, 1996, requesting that the issue be referred to arbitration in accordance with the dispute resolution system set forth in the Agreements. The NCLT approved the application submitted under the Arbitration Act in an order dated June 9, 2021. As a result, the Kotak petition filed under the IBC was dismissed. As a result, Kotak filed an appeal with the Supreme Court, challenging the Order.
Contentions by Petitioner
Arguments put forth by Indus Biotech Private Limited are as follows:
i. The Respondent contended that the Dispute clearly relates to the valuation of Kotak’s OCRPS, which is arbitrable before the court of law hence their application under section 8 of the Arbitration and Conciliation Act, 1996 must be admitted.
ii. According to the petitioner company, the appropriate methodology should be used to determine the actual percentage of paid-up share capital that will be converted into equity shares, as well as any refunds that may be due. There is no need to reimburse the money until an equitable agreement is reached. As a result, there is no 'debt' or 'default,' and the petitioner corporation is not in default.
iii. The petitioner claims that because the parties have not resolved the matter, the disagreement must be decided through arbitration by the Arbitral Tribunal.
Contentions by Respondent
Kotak India’s Contentions were as follows:
i. The Existence of any arbitration clause is not relevant in such situation and it is not a factor which must be considered to affect the proceedings under Section 7 IBC.
ii. The Non-payment of redemption value of OCRPS is clearly a default in payment of debt on the part of Indus Biotech Private limited and, thus, NCLT should admit the application of the petitioner under Section 7 of the Insolvency and bankruptcy code, 2016.
iii. The respondents Nos. 1 to 4 argue that an amount of Rs. 367,08,56,503/ became due and payable upon redemption of OCRPS. It is claimed that the petitioner firm was in default since the respondents No. 1 to 4 sought the money and the petitioner company did not pay it.
iv. It was also contended that because Indus Biotech Private Limited had defaulted, the event triggering the petition under Section 7 of the IB Code had occurred, and the dispute sought to be raised was not arbitrable after the insolvency proceeding had begun, the Tribunal's order admitting the application u/s 8 of the Arbitration Act was invalid.
Issue
The main issue in this particular case before the supreme court was that should the adjudicating authority rule on the application under Section 8 of the Arbitration and Conciliation Act of 1996 (the A&C Act) before ruling on the application under Section 7 of the Insolvency and Bankruptcy Code of 2016(the IBC)?
Secondly, the issue was regarding what shall be the inquiry of NCLT under section 7 of the IBC?
Thirdly, the issue was regarding whether the proper procedure for appointment of arbitral Tribunal was followed or not?
Judgement
The Supreme Court affirmed the NCLT's ruling, holding that an application to initiate the IBC's corporate solvency resolution process is inadmissible till the time parties reach an agreement through the arbitration process as set forth in the Agreements. The Supreme Court noted in the case of Innovative Industries Limited v. ICICI Bank and Others[3] that in order to induce an application under Section 7 of the IBC, prima facie four factors must exist:
i) there must be a debt;
ii) default must have occurred;
iii) the debt must be due to a financial creditor; and
iv) the default must have occurred by a corporate debtor.
The Supreme Court highlighted that the mere existence of a debt is not a deciding element in evaluating whether or not a default has occurred. The Supreme Court explained how the adjudicating body is required to determine the presence of a default on a case-by-case basis, relying on evidence records. Furthermore, the Supreme Court held that, while the adjudicating authority has the ability to evaluate whether a default has occurred or not, the proceedings only begin on the date of admission of the application and not on the date of filing, and are not subjected to arbitration from that point forward. As per proper procedure of law the Bench clearly stated that the dispute would be completely non-arbitrable if any default is found out, resulting in the admission of the Section 7, IBC plea. Because there was no default and no admission of the Section 7 petition in this case, the Court decided that the matter might be directed to arbitration.
Two major points which SC gave in its decision was:
(i) Simply filing of an application under Section 7 of the IBC Act does not make the proceeding in rem. It only becomes in rem on the date of admission; and
(ii) IBC supersedes all other laws.
The Supreme Court also referred to the of Vidya Drolia and Others Vs. Durga Trading Corporation[4], in which a test was established to determine when the subject matter is not arbitrable, and the Supreme Court concluded that acts in rem are not arbitrable after applying the test. Therefore, if there is already an application under Section 8 of the Arbitration and conciliation Act which is pending in a Section 7 IBC Act which has not been admitted, then the adjudicating authority will first decide regarding the application under Section 7 IBC and ascertain if there is any default by the financial debtor. This ensures that a corporate debtor can now prolong the process simply by filing an application under Section 8 of the A&C Act. The application under Section 8, A&C Act shall not be considered separately from the application under Section 7 of the IBC. In the facts and circumstances of the case, the SC justified the NCLT's approach in which it approved Section 8, Arbitration and Conciliation Act application while rejecting Section 7 IBC application as a consequence, and "interpreted in the contrary."
Case Analysis
The Supreme Court in this case comprising of a bench of CJI SA Bobde, Justices AS Bopanna and V. Ramasubramanian clearly established that in any proceeding which is pending before the Adjudicating Authority under Section 7 of the Insolvency and Bankruptcy Code 2016, such petition if admitted by the Adjudicating Authority by having a satisfactory grounds with regard to the default and the debt being due from the corporate debtor, thereafter any application seeking reference to arbitration under Section 8 of the Arbitration and Conciliation Act made will not be maintainable.
The Court determined that if a petition under Section 7 of the Insolvency and bankruptcy code,2016 is rejected, only then there will be no proceedings in rem, and thus an application under Section 8 of the Act will be maintainable. Nonetheless, the decision of this case probably saved the parties years of unnecessary litigation and delays. Furthermore, because the parties had separate arbitration agreements and the substance of the claims was comparable, the Court appropriately followed the ruling in Duro Felguera[5] and established separate arbitral panels, even though members were same. The Supreme Court thus held conclusively that in circumstances where petitions under the IBC have yet to be admitted and an application under Section 8 of the Arbitration Act is made in such proceedings, the adjudicating authority is required to first determine whether default has happened or not, even if the application under the Arbitration Act is kept along for consideration. Thus, the application under the Arbitration Act would suffer as a result of the consideration given therein to the IBC application. In the case at hand, the Supreme Court determined that the valid question is the conversion of the OCRPS and the allotment of equity shares against the OCRPS, in light of the QIPO, which was still a point of discussion between the parties, and thus it was early to ascertain if default had actually happened at the given point in time, based on the correspondences provided to it.
If the NCLT determined that there was actually no debt due or that there was not any default on the debt due based on a few specific criteria, such a decision would fall within the scope of adjudication of an application under Section 7 of the IBC, as it is commonly understood. The Supreme Court ruled that Kotak was not authorised to begin a redemption of the OCPRS since it had already started the process of converting the OCPRS into equity shares, which was the subject of a distinct dispute between the parties. The Agreement does not appear to have included such a provision on Kotak, based on a cursory reading of the judgement; thus, it appears that the adjudicatory forums have read this requirement or restriction into Kotak's contractual responsibilities. As a result, the courts have taken a broad approach in determining whether a 'debt' or a 'default' was being claimed by the applicant-party (Kotak) prematurely.
Conclusion
The decision was based on the notion that "the mere filing of a Section 7 application and its pendency before admission" cannot be viewed as initiating the insolvency process. "The main trigger point is the admission of the application on establishing default, not the filing of the application under Section 7 of the IBC," a bench of Chief Justice SA Bobde, Justices AS Bopanna, and V Ramasubramanian explained. The foregoing decision has resolved an important legal matter, and it is obvious from the decision that an application filed under Section 8 of the Arbitration and Conciliation Act is not maintainable if an insolvency case has begun under Section 7 or Section 9 of the IBC. As a result, the aforementioned ruling is a good step forward for insolvency law, as it would deter frivolous attempts by a corporate debtor to delay IBC proceedings by invoking an arbitration clause despite the fact that there is no disagreement over the debt owed to it and it is a defaulter under IBC.
The Court further relied on the fact that board meetings were held with the nominee director of Kotak present, where discussions and decisions on topics relating to the issuance of equity shares were made. The Supreme Court so affirmed the NCLT's conclusion that default could not be proven, and hence considered it necessary to reject the petition under the IBC and allow the petition under the Arbitration Act, at least temporarily.
References[u1]
· “All that is not right with Indus Biotech v. Kotak | Indus Biotech (P) Ltd. v. Kotak India Venture (Offshore) Fund: A case comment”
https://www.scconline.com/blog/post/2021/06/12/indus-biotech-v-kotak/
· “Supreme Court holds that NCLT can consider an application filed under Section 8 of Arbitration Act in a petition under Section 7 of IBC”
https://www.amsshardul.com/wp-content/uploads/2021/04/Alert-Arbitration-Issue-70-April-2021.pdf
· “Maintainability Of Application Under Section 8 Of Arbitration & Conciliation Act, 1996 In an Insolvency Proceeding”
https://www.mondaq.com/india/arbitration-dispute-resolution/1082792/maintainability-of-application-under-section-8-of-arbitration-conciliation-act-1996-in-an-insolvency-proceeding
· “SC Expounds: Arbitration Reference Not Maintainable If Filed After Admission Of Insolvency Resolution Petition U/S 7 IBC”
https://www.latestlaws.com/latest-news/sc-expounds-arbitration-reference-not-maintainable-if-filed-after-admission-of-insolvency-resolution-petition-u-s-7-ibc-read-judgment/
[1] Insolvency and Bankruptcy Code 2016, s.7 [2] Arbitration and Conciliation Act 1996, s.8 [3] Innovative Industries Limited v. ICICI Bank and Others ((2018) 1 SCC 407) [4] Vidya Drolia and Others Vs. Durga Trading Corporation (2021 2 SCC 1) [5] M/S Duro Felguera S.A vs M/S. Gangavaram Port Limited (2017) 9 SCC 729
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