Supreme Court (26.03.2021) In Indus Biotech Private Limited Vs Kotak India Venture (Offshore) Fund & Ors. [Arbitration Petition (Civil) No.. 48/2019] held that;
. . .if the finding of default is recorded and the Adjudicating Authority proceeds to admit the application, the Corporate Insolvency Resolution Process commences as provided under subsection (6) and is required to be processed further. In such event, it becomes a proceeding in rem on the date of admission and from that point onwards the matter would not be arbitrable.
As otherwise if in every case where there is debt, if default is also assumed and the process becomes automatic, a company which is ably running its administration and discharging its debts in planned manner may also be pushed to the Corporate Insolvency Resolution Process and get entangled in a proceeding with no point of return.
Therefore, the Adjudicating Authority certainly would make an objective assessment of the whole situation before coming to a conclusion as to whether the petition under Section 7 of IB Code is to be admitted in the factual background.
The underlying principle, therefore, from all the above noted decisions is that the reference to the triggering of a petition under Section 7 of the IB Code to consider the same as a proceedings in rem, it is necessary that the Adjudicating Authority ought to have applied its mind, recorded a finding of default and admitted the petition.
Excerpts of the order;
# 2. The Arbitration Petition is filed by ‘Indus Biotech Private Limited’ under Section 11(3) read with Sections 11(4) a) and 11(12)(a) of the Arbitration and Conciliation Act, 1996 (‘Act, 1996’ for short) seeking 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. The petition filed before this Court is due to the fact that the respondent No.1 is a Mauritius based Company and the dispute qualifies as international arbitration. The respondents No. 2 to 4 though are Indian entities, they are the sister ventures of respondent No.1. Further, 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.
# 6. On the said issue, the respondents No. 1 to 4 would however contend that the fact of the respondents No. 1 to 4 herein having subscribed to the OCRPS is not in dispute. In such event, on redemption of the same, the amount is required to be paid by the petitioner company. The respondents No. 1 to 4 contend that on redemption of OCRPS, a sum of Rs. 367,08,56,503/( Rupees Three Hundred SixtySeven Crore Eight Lakh FiftySix Thousand Five Hundred Three) became due and payable. The respondents No. 1 to 4 having demanded the said amount and since the same had not been paid by the petitioner company, it is contended that the same had constituted default. It is contended that as the debt had not been paid by the company it had given a cause of action for the respondents No. 1 to 4 herein to invoke the jurisdiction of the Adjudicating Authority, NCLT by initiating the Corporate Insolvency Resolution Process (‘CIRP’ for short) provided under the Insolvency and Bankruptcy Code, 2016 (‘IB Code’ for short).
# 7. Accordingly, the respondent No.2 herein filed the petition under Section 7 of IB Code before the NCLT in IBC No.3077/2019 dated 16.08.2019 seeking appointment of Resolution Professional. In the said petition, 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 respondent No.2 herein objected to consideration of the said application.
# 8. The NCLT, Mumbai Bench IV through its order dated 09.06.2020 has taken 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 the respondent No.2 herein under Section 7 of the IB Code is dismissed. The respondent No.2 herein claiming to be aggrieved by the said order dated 09.06.2020 passed by the NCLT is before this Court in the connected SLP.
# 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) and 5(7) of the Code. It provides for the ‘financial creditor’ to file an application for initiating Corporate Insolvency Resolution Process against a ‘corporate debtor’ before the Adjudicating Authority when ‘default’ has occurred. The provision, therefore, contemplates that in order to trigger an application there should be in existence four factors:
(i) there should be a ‘debt’
(ii) ‘default’ should have occurred
(iii) debt should be due to ‘financial creditor’ and
(iv) such default which has occurred should be by a ‘corporate debtor’:
On such application being filed with the compliance required under subSection (1) to (3) of Section 7 of IB Code, a duty is cast on the Adjudicating Authority to ascertain the existence of a default if shown from the records or on the basis of other evidence furnished by the financial creditor, as contemplated under subSection (4) to Section 7 of IB Code.
# 17. The procedure contemplated will indicate that before the Adjudicating Authority is satisfied as to whether the default has occurred or not, in addition to the material placed by the financial creditor, the corporate debtor is entitled to point out that the default has not occurred and that the debt is not due, consequently to satisfy the Adjudicating Authority that there is no default. In such exercise undertaken by the Adjudicating Authority if it is found that there is default, the process as contemplated under subSection (5) of Section 7 of IB Code is to be followed as provided under subSection 5(a); or if there is no default the Adjudicating Authority shall reject the application as provided under subSection 5(b) to Section 7 of IB Code. In that circumstance if the finding of default is recorded and the Adjudicating Authority proceeds to admit the application, the Corporate Insolvency Resolution Process commences as provided under subsection (6) and is required to be processed further. In such event, it becomes a proceeding in rem on the date of admission and from that point onwards the matter would not be arbitrable. The only course to be followed thereafter is the resolution process under IB Code. Therefore, the trigger point is not the filing of the application under Section 7 of IB Code but admission of the same on determining default.
# 20. Therefore, in a fact situation of the present nature when the process of conversion had commenced and certain steps were taken in that direction, even if the redemption date is kept in view and the clause in Schedule J indicating that redemption value shall constitute a debt outstanding is taken note; when certain transactions were discussed between the parties and 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 corporate debtor. As otherwise if in every case where there is debt, if default is also assumed and the process becomes automatic, a company which is ably running its administration and discharging its debts in planned manner may also be pushed to the Corporate Insolvency Resolution Process and get entangled in a proceeding with no point of return. Therefore, the Adjudicating Authority certainly would make an objective assessment of the whole situation before coming to a conclusion as to whether the petition under Section 7 of IB Code is to be admitted in the factual background. Dr. Singhvi, however contended, that when it is shown the debt is due and the same has not been paid the Adjudicating Authority should record default and admit the petition. He contends that even in such situation the interest of the corporate debtor is not jeopardised inasmuch as the admission orders made by the Adjudicating Authority is appealable to the NCLAT and thereafter to the Supreme Court where the correctness of the order in any case would be tested. We note, it cannot be in dispute that so would be the case even if the Adjudicating Authority takes a view that the petition is not ripe to be entertained or does not constitute all the ingredients, more particularly default, to admit the petition, since even such order would remain appealable to the NCLAT and the Supreme Court where the correctness in that regard also will be examined.
# 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 in Swiss Ribbons (supra) was also referred to in detail in the case of Pioneer Urban Land and Infrastructure (supra) wherein the observations contained in para 39 though in the case of Real Estate Development was laid down. . . . . . . . . .The underlying principle, therefore, from all the above noted decisions is that the reference to the triggering of a petition under Section 7 of the IB Code to consider the same as a proceedings in rem, it is necessary that the Adjudicating Authority ought to have applied its mind, recorded a finding of default and admitted the petition. On admission, third party right is created in all the creditors of the corporate debtors and will have erga omnes effect. 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 which would decide the status and the nature of the pendency of the proceedings and the mere filing cannot be taken as the triggering of the insolvency process.
# 27. 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 being 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 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.
# 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 mat 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 the Adjudicating Authority has rightly done nothing with regard to arbitration and has left it to this Court. Accordingly, the Adjudicating Authority in para 5.15 has categorically recorded that they are not satisfied that a default has occurred.
# 32. In such situation, in our opinion, it would be premature at this point to arrive at a conclusion that there was default in payment of any debt until the said issue is resolved and the amount repayable by Indus Biotech Private Limited to Kotak India Venture with reference to equity shares being issued is determined. In the process, if such determined amount is not paid it will amount to default at that stage. Therefore, if the matter is viewed from any angle, not only the conclusion reached by the Adjudicating Authority, NCLT insofar as the order on the petition under Section 7 of the IB Code at this juncture based on the factual background is justified but also the prayer made by Indus Biotech Private Limited for constitution of the Arbitral Tribunal as made in the petition filed by 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.
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Note;- Synopsis of NCLT Mumbai-IV judgement In Indus Biotech Private Limited Vs Kotak India Venture Fund-I are given in link; Indus Biotech Private Limited Vs Kotak India Venture Fund-I
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