Tuesday 24 November 2020

Indus Biotech Private Limited Vs Kotak India Venture Fund-I - In a section 7 petition, there has to be a judicial determination by the AA as to whether there has been a ‘default’.

NCLT Mumbai-IV (09.06.2020) In Indus Biotech Private Limited  Vs Kotak India Venture Fund-I [IA No.3597/2019 in CP (IB) No.3077/2019] held that;

  • . . . .sub-section (5) of section 7 of the IBC provides for admission or rejection of application of a financial creditor where the adjudicating authority is satisfied that the documents are complete or incomplete. The Adjudicating Authority, post ascertaining and being satisfied that such a default has occurred, may admit the application of the financial creditor. In other words, the statute mandates the Adjudicating Authority to ascertain and record satisfaction as to the occurrence of default before admitting the application. Mere claim by the financial creditor that the default has occurred is not sufficient.  . . .   

  • Therefore, in a section 7 petition, there has to be a judicial determination by the Adjudicating Authority as to whether there has been a ‘default’ within the meaning of section 3(12) of the IBC.

  • . . . . Looking at the contention raised, and that the facts are not in dispute, we are not satisfied that a default has occurred.


Excerpts of the order;

1.1. The single-point reference in the Interlocutory Application (IA) is that this Adjudicating Authority refer the parties in the main CP (IB) No.3077/2019 to arbitration for settling their disputes. The IA has been filed under section 8 of the Arbitration & Conciliation Act, 1996.

1.2. The underlying Company Petition has been filed by Kotak India Venture Fund-I under section 7 of the Insolvency & Bankruptcy Code, 2016 (IBC), seeking to initiate Corporate Insolvency Resolution Process (CIRP) against Indus Biotech Private Limited [CIN: U24231MH1995PTC085656], on the ground that the Corporate Debtor had failed to redeem the Optionally Convertible Redeemable Preference Shares (OCRPS) on or before 15.04.2019 in terms of the Share Subscription and Shareholders Agreement (SSSA) dated 20.07.2007. Schedule ‘J’ of the SSSA is at p.272 of the Paper Book details the terms of the OCRPS.

1.3. The Petitioner has alleged that there was a default on the part of the Respondent in redeeming the OCRPS, which, according to the Petitioner, works out to ₹367,07,50,000/- (Rupees three hundred and sixty-seven crore seven lakh and fifty thousand only). The date of default is stated to be 16.04.2019.

1.4. The facts germane to the determination of the present Application is as follows:

(a) In 2007-08, the Kotak Private Equity Group showed interest in subscribing to the share capital of Indus Biotech Private Limited. The Kotak Group consisted of the following:-

  • (1) Kotak India Venture Fund-I (the Petitioner herein);

  • (2) Kotak India Venture (Offshore) Fund;

  • (3) Kotak Mahindra Investments Limited whose shares were subsequently transferred to Kotak Securities Limited; and

  • (4) Kotak Employees Investment Trust.

(b) The Respondent entered into separate Share Subscription & Shareholders Agreements (SSSAs), with each of the four Kotak Group entities, as follows: -

  • (1) Agreement dated 20.07.2007 with Kotak India Venture Fund-I;

  • (2) Agreement dated 20.07.2007 with Kotak India Venture (Offshore) Fund;

  • (3) Agreement dated 12.07.2007 with Kotak Mahindra Investments Limited, whose shares were subsequently transferred to Kotak Securities Limited; and

  • (4) Agreement dated 09.01.2008 with Kotak Employee Investment Trust. 

Although there were four SSSAs, the terms and conditions were materially identical to one another. In all, the Kotak Group have subscribed to a share capital of ₹27,00,00,000/- (Rupees twenty seven crore only), including both equity and preference share capital.

(c) In 2007, under the said SSSAs, the Petitioner subscribed to equity shares and Optionally Convertible Redeemable Preference Shares (OCRPS) issued by Respondent.

(d) Under regulation 5(2) of the Securities and Exchange Board of India (Issue of Capital & Disclosure Requirements) Regulations, 2018 [SEBI ICDR Regulations], any company which has any outstanding convertible securities or any other right which would entitle any person with any option to receive equity shares of the issuer, is not entitled to make a Qualified Initial Public Offering (QIPO). Accordingly, it was imperative for the Kotak Group entities to convert their respective preference shares into equity shares. Therefore, the Petitioner opted for and chose to convert the OCRPS into equity shares.

(e) During the QIPO process, a dispute arose between the Respondent and the Petitioner and the other entities of the Kotak Group with regard to the calculation and conversion formula to be followed while converting the respective entities’ preference shares into equity shares of the Respondent. The Kotak Group entities sought to apply a calculation formula which would give them approximately thirty percent of the total paid-up share capital of the Respondent, whereas according to the Respondent and in line with the reports of the auditors, independent valuer and agreed conversion formula, the Kotak Group would be entitled to approximately ten percent of the total paid-up share capital of the Respondent.

(f) Some months after this dispute emerged and was ongoing, the Petitioner contended that they were entitled to trigger provisions relating to early redemption of OCRPS in a sum of ₹367,08,56,503/-.

(g) Since this was the gist of the dispute, the Respondent invoked the arbitration agreement under the SSSA by its letter dated 20.09.2019, seeking to refer the disputes between the parties to arbitration. The Respondent contends that the arbitral proceedings are deemed to have commenced on that date, i.e., 20.09.2019, by virtue of section 21 of the Arbitration & Conciliation Act, 1996.

 

5. Findings

5.1. We have given anxious thought to the skilful arguments of the learned Senior Counsel appearing for the parties. We have also perused the pleadings in this behalf.

5.2. At the outset, we must say that the subject matter of this IA – seeking a reference to arbitration in a petition filed under section 7 of the IBC – is something that is res integra. The facts of the case are, however, undisputed, and therefore, we seek to address the points of law that need to be addressed. In our endeavour to arrive at a decision, we have tried to be guided by the decisions of the constitutional courts under other laws, and the underlying reasons in arriving at those decisions. The case law cited by both Senior Counsel is a good starting point in this quest.

5.3. Booz Allen lays down three tests of arbitrability of a dispute in para 34 of the judgment

  • (a) Whether the disputes are capable of adjudication and settlement by arbitration?

  • (b) Whether the disputes are covered by the arbitration agreement?

  • (c) Whether the parties have referred the disputes to arbitration?

In para 36 thereof, the well-recognised examples of non-arbitrable disputes have been laid down to be –

  • (i) disputes relating to rights and liabilities which give rise to or rise out of criminal offences;

  • (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody;

  • (iii) guardianship matters;

  • (iv) insolvency and winding-up matters;

  • (v) testamentary matters (grant of probate, letters of administration and succession certificate); and

  • (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdiction to grant eviction or decide the disputes.

In para 38, the judgment further notes that “generally and traditionally, all disputes relating to rights in personam are considered to be amenable to arbitration; and all disputes relating to rights in rem are required to be adjudicated by courts and public tribunals, being unsuited for private arbitration. This is not however a rigid or inflexible rule. Disputes relating to subordinate rights in personam arising from rights in rem have always been considered to be arbitrable.”

5.4. The Hon’ble Supreme Court added a seventh category to the six categories of cases in Booz Allen, vide its judgment in Vimal Kishor Shah & others v Jayesh Dinesh Shah & others. The Hon’ble Court held that cases arising out of trust deed and Trusts Act cannot be decided by arbitration (para 54 of the judgment).

5.5. Be that as it may, the question that really needs to be answered is this: Will the provisions of the Arbitration & Conciliation Act, 1996 prevail over the provisions of the Insolvency & Bankruptcy Act, 2016? If so, in what circumstances?

5.6. It is settled law that generalia specialibus non derogantspecial law prevails over general law.

5.7. In Gujarat Urja Vikas Nigam Limited v Essar Power Limited, the Hon’ble Supreme Court held that the Arbitration & Conciliation Act, 1996 is a general law. The court in that case was considering a question under the Electricity Act. It held that the Electricity Act being a special statute would have overriding effect over the Arbitration & Conciliation Act, which was the general statute. However, this decision was overturned by the Hon’ble Supreme Court in Consolidated Engineering Enterprises v Principal Secretary, Irrigation Department & others, wherein the Hon’ble Court held that the Arbitration & Conciliation Act is a special law, consolidating and amending the law relating to arbitration and matters connected therewith or incidental thereto.

5.8. In Hindustan Petroleum Corporation Limited v Pinkcity Midway Petroleums, the Hon’ble Supreme Court held that where an arbitration clause exists, the court has a mandatory duty to refer dispute arising between the contracting parties to arbitrator. It quoted with approval the decision of the same court in P Anand Gajapathi Raju & others v PVG Raju (dead) & others, wherein it was held that the language of section 8 of the Arbitration & Conciliation Act, 1996, is peremptory and the court is under an obligation to refer parties to arbitration.

5.9. The Preamble of the IBC reads that it is an Act to “consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons … in a time-bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, available of credit and balance the interests of all the stakeholders ….” The Preamble of the Arbitration & Conciliation Act, 1996, reads that “it is an Act to consolidate and amend the law relating to domestic arbitration … as also to define the law relating to conciliation ….”

5.10. Section 238 of the IBC reads as follows: -

  • “238. The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law.”

5.11. The rules of interpretation are fairly well-settled: -

(1) When a provision of law regulates a particular subject and a subsequent law contains a provision regulating the same subject, there is no presumption that the later law repeals the earlier law. The rule making authority while making the later rule is deemed to know the existing law on the subject. If the subsequent law does not repeal the earlier rule, there can be no presumption of an intention to repeal the earlier rule.

(2) When two provisions of law - one being a general law and the other being special law govern a matter, the court should endeavour to apply a harmonious construction to the said provisions. But where the intention of the rule making authority is made clear either expressly or impliedly, as to which law should prevail, the same shall be given effect.

(3) If the repugnancy or inconsistency subsists in spite of an effort to read them harmoniously, the prior special law is not presumed to be repealed by the later general law. The prior special law will continue to apply and prevail in spite of the subsequent general law. But where a clear intention to make a rule of universal application by superseding the earlier special law is evident from the later general law, then the later general law, will prevail over the prior special law.

(4) Where a later special law is repugnant to or inconsistent with an earlier general law, the later special law will prevail over the earlier general law.

5.12. In Innoventive Industries Limited v ICICI Bank & another, The Hon’ble National Company Law Appellate Tribunal (NCLAT) held that sub-section (5) of section 7 of the IBC provides for admission or rejection of application of a financial creditor where the adjudicating authority is satisfied that the documents are complete or incomplete. The Adjudicating Authority, post ascertaining and being satisfied that such a default has occurred, may admit the application of the financial creditor. In other words, the statute mandates the Adjudicating Authority to ascertain and record satisfaction as to the occurrence of default before admitting the application. Mere claim by the financial creditor that the default has occurred is not sufficient. The same is subject to the Adjudicating Authority’s summary adjudication, though limited to ‘ascertainment’ and ‘satisfaction’ (paras 57 & 58).

5.13. Therefore, in a section 7 petition, there has to be a judicial determination by the Adjudicating Authority as to whether there has been a ‘default’ within the meaning of section 3(12) of the IBC.

5.14. In the present case, the dispute centres around three things – 

  • (1) The valuation of the Respondent/Financial Creditor’s OCRPS; 

  • (2) The right of the Respondent/Financial Creditor to redeem such OCRPS when it had participated in the process to convert its OCRPS into equity shares of the Applicant/Corporate Debtor; and 

  • (3) Fixing of the QIPO date. 

All of these things are important determinants in coming to a judicial conclusion that a default has occurred. The invocation of arbitration in a case like this seems to be justified,

5.15. Looking at the contention raised, and that the facts are not in dispute, we are not satisfied that a default has occurred. We note Mr Mustafa Doctor’s statements that the Applicant/Corporate Debtor is a solvent, debt-free and profitable company. It will unnecessarily push an otherwise solvent, debt-free company into insolvency, which is not a very desirable result at this stage. The disputes that form the subject matter of the underlying Company Petition, viz., valuation of shares, calculation and conversion formula and fixing of QIPO date are all arbitrable, since they involve valuation of the shares and fixing of the QIPO date. Therefore, we feel that an attempt must be made to reconcile the differences between the parties and their respective perceptions. Also, no meaningful purpose will be served by pushing the Applicant/Corporate Debtor into CIRP at this stage.

5.16. We further note that the Arbitration Petition bearing Arbitration Case No.48/2019 filed by the Applicant/Corporate Debtor is pending consideration before the Hon’ble Supreme Court for appointment of an arbitrator.

6. Order

6.1. For all the above reasons, the present IA No.3597/MB.I/2019 is allowed.

6.2. As a natural corollary, the underlying Company Petition bearing CP No.3077/MB.IV/2019 is incapable of being admitted at this stage, and is, accordingly, dismissed.

 

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Arbitration & Conciliation Act,1996.

Section 8. Power to refer parties to arbitration where there is an arbitration agreement.—

(1) A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.

(2) The application referred to in sub-section (1) shall not be entertained unless it is accompanied by the original arbitration agreement or a duly certified copy thereof.

(3) Notwithstanding that an application has been made under sub-section (1) and that the issue is pending before the judicial authority, an arbitration may be commenced or continued, and an arbitral award made.


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The sole purpose of this post is to create awareness on the "IBC - Case Law" and to provide synopsis of the concerned case law, must not be used as a guide for taking or recommending any action or decision. A reader must refer to the full citation of the order & do one's own research and seek professional advice if he intends to take any action or decision in the matters covered in this post.