Introduction

India has a staggering backlog of over 4.7 crore cases pending across various levels of the judiciary, including 182,000 cases that have been unresolved for the past 30 years. According to the National Judicial Data Grid, the pendency of cases increased by more than 27% between December 2019 and April 2022. As a result of the growing number of cases, the need for an alternative dispute resolution mechanism became apparent, leading to the formulation of the Arbitration and Conciliation Act, of 1996 (hereinafter referred to as the Arbitration Act).

To streamline the legal process and facilitate the “Ease of Doing Business,” there was a need to consolidate various laws related to corporate insolvency, non-performing assets (NPA), and other aspects of a company in financial distress under a single law. Therefore, the Indian government introduced the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as IBC).

In this case analysis, we will delve into a recent case heard by a 3-member bench of the Honorable Supreme Court of India, Indus Biotech Private Limited vs. Kotak India Ventures Funds & Others. The petitioner had filed a petition seeking the appointment of an arbitral tribunal to resolve a dispute with the respondent. The Supreme Court’s ruling attempted to clarify one of the most contentious statutes.

Facts Of The Case

Indus Biotech Private Limited, a Mauritius-based company (hereinafter referred to as the petitioner), filed an arbitration petition before the Supreme Court of India. As per Section 11 (4) of the Arbitration Act, the Supreme Court is responsible for appointing arbitrators in cases of international commercial arbitration. The defendant, Kotak India Venture Fund and Others (hereinafter referred to as the respondent) is an Indian entity that had subscribed to equity shares and optionally convertible redeemable preference shares (OCRPS) in the petitioner’s company through a subscription and shareholders agreement.

The petitioner company intended to make a Qualified Initial Public Offering (QIPO). However, Regulation 5(2) of the Securities and Exchange Board of India prohibits companies from making QIPOs if they have any outstanding convertible securities or rights that would allow a person to receive equity shares. Therefore, the petitioner proposed to convert the OCRPS into equity shares. However, a dispute arose between the petitioner and the respondent regarding the calculation and conversion formula to be used in the conversion process.

According to the petitioner, the key issue in dispute was determining the appropriate formula to calculate the percentage of paid-up share capital that should be converted into equity shares and any refunds, if applicable. Until an amicable decision is reached, there is no liability to repay the amount. Therefore, there is no “debt” or “default,” and the petitioner company is not unable to pay. The Petitioner Company is a profitable organization and is carrying out its routine activities. However, as the dispute between the parties remains unresolved, the Petitioner argues that the issue must be resolved through arbitration by the Arbitral Tribunal.

In response, Respondents 1 to 4 asserted that they had subscribed to the OCRPS and on redemption, the Petitioner Company was required to pay the amount. Respondents 1 to 4 claim that a sum of Rs 367, 08, 56,503 became due and payable after the redemption of OCRPS, and as it had not been paid by the Petitioner Company, it constituted a default under the Insolvency and Bankruptcy Code. Respondents 1 to 4, therefore, initiated the corporate insolvency resolution process (“CIRP”) under the Insolvency and Bankruptcy Code as the debt had not been paid.

Respondent 2 filed a petition under Section 7 Insolvency and Bankruptcy Code before NCLT seeking the appointment of a resolution professional. The Petitioner Company filed a miscellaneous application under Section 8 of the A&C Act, 1996, seeking a direction to refer the parties to arbitration, on similar grounds as the abovementioned arbitration petition. Respondent 2 objected to the consideration of the said application.

NCLT dismissed the Section 7 Insolvency and Bankruptcy Code petition, stating that there was no default by the corporate debtor justifying the invocation of Insolvency and Bankruptcy Code. It held that the arbitration application would proceed further in accordance with the provisions of the A&C Act, 1996. Respondent 2, claiming to be aggrieved by the order, appealed to the Supreme Court. The parties in the arbitration petition were collectively referred to as KIV.

Legal Issues

• Whether the NCLT erred in passing an order under Section 8 of Insolvency and Bankruptcy Code in a petition under Section 7 of Insolvency and Bankruptcy Code, which was being construed as proceeding in rem
• Whether dismissal of a case under Section 7 of Insolvency and Bankruptcy Code is illegal when an arbitration petition filed by a Corporate Debtor is pending adjudication
• Whether the dispute is Non-Arbitrable as per principles laid down in the case of Vidya Drolia vs. Durga Trading Corporation?

Rule/Court’S Observation In The Present Case

The admission or rejection of the petition under Section 7 Insolvency and Bankruptcy Code should not be based on the originally agreed date until the parties have reached a conclusion and agreed or disagreed on the matter.

It is necessary to consider the facts of each case before deciding whether a default has occurred. Therefore, no order can be issued under Section 7 of Insolvency and Bankruptcy Code until a default has occurred.

The adjudicating authority did not err in concluding that arbitration is appropriate if the Insolvency and Bankruptcy Code application is not a proceeding in rem because Section 7 Insolvency and Bankruptcy Code  has not been admitted.

Section 7 of the Insolvency and Bankruptcy Code (IBC) in India deals with the initiation of the corporate insolvency resolution process by financial creditors. It empowers financial creditors, such as banks and financial institutions, to file an application before the National Company Law Tribunal (NCLT) for initiating insolvency proceedings against a corporate debtor. The application should be supported by evidence of default and should meet the minimum threshold for default as prescribed by the IBC. This provision provides a legal framework for financial creditors to seek resolution of their unpaid debts through the insolvency process.

In light of the Vidya Drolia case, a dispute is Non-Arbitrable when a proceeding is in rem and an Insolvency and Bankruptcy Code proceeding is only considered in rem after it is admitted.

The Supreme Court has established that for a petition under Section 7 Insolvency and Bankruptcy Code to be considered as a proceeding in rem, the adjudicating authority must have applied its mind, recorded a finding of default, and admitted the petition. Third-party rights are created in all creditors of the corporate debtor upon admission, and this has erga omnes effect. Therefore, the mere filing of the petition and its pendency before admission cannot be considered as the triggering of a proceeding in rem. Thus, the admission of the petition is the stage that decides the status and nature of the pending proceedings, and mere filing cannot initiate the insolvency process.

In summary, if a petition is admitted by the adjudicating authority under Section 7 Insolvency and Bankruptcy Code, after recording satisfaction of the default and debt due from the corporate debtor, any subsequent application under Section 8 of the Arbitration & Conciliation Act, 1996 would not be maintainable. However, if a petition under Section 7 Insolvency and Bankruptcy Code is yet to be admitted and an application under Section 8 of the Arbitration & Conciliation Act, 1996 is filed, the adjudicating authority must first decide the Section 7 Insolvency and Bankruptcy Code application, even if the application under Section 8 is considered simultaneously. The outcome of the Section 7 Insolvency and Bankruptcy Code application would affect the Section 8 Arbitration & Conciliation Act application.

Court’s Judgement

• The Honorable Bench examined the NCLT’s findings regarding the petition filed under Section 7 of the Insolvency And Bankruptcy Code and concluded that the issue in question has not yet reached the stage of default for the petitioner, and thus did not warrant any action against the petitioner.
• As the amount owed by the petitioner to the defendant in regard to equity shares has not been determined, it would not be fair to accuse the petitioner of non-payment of debt.
• Therefore, in light of the current circumstances, it would be prudent for the parties to resolve their disputes through the arbitration clause by forming an appropriate tribunal.

Analysis And Conclusion

Conclusively, in my opinion, the Supreme Court’s finding is positive and consistent with previous rulings. Additionally, the Court relied on NCLT’s finding in Paragraphs 30-31, indicating the importance of correctly adjudicating the case. The Court also discussed the method of determining whether a matter is arbitrable, citing the Vidya Drolia vs. Durga Trading Corporation case. It is worth noting that Insolvency and Bankruptcy Code and arbitration’s intent will be frustrated if a profitable company that pays its debts on time is also pushed into the corporate insolvency process. The ruling in this case further clarifies some ambiguity regarding the interplay between Section 238 of Insolvency and Bankruptcy Code and the Arbitration Act. Although the Court made a pragmatic distinction between Section 7 of Insolvency and Bankruptcy Code and Section 8 of the Arbitration Act, this idea must be applied and considered for universal application.

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