INDUS BIOTECH PRIVATE LIMITED versus KOTAK INDIA VENTURE (OFFSHORE) FUND (EARLIER KNOWN AS KOTAK INDIA VENTURE LIMITED) & ORS. on 26 March 2021

SUPREME COURT REPORTS

[2021] 7 S.C.R.

INDUS BIOTECH PRIVATE LIMITED

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KOTAK INDIA VENTURE (OFFSHORE) FUND (EARLIERKNOWN AS KOTAK INDIA VENTURE LIMITED) & ORS.

B(Arbitration Petition (Civil) No. 48 of 2019)

MARCH 26, 2021

[S. A. BOBDE, CJI, A. S. BOPANNA ANDV. RAMASUBRAMANIAN, JJ.]

Insolvency and Bankruptcy Code, 2016 – s. 7 – ArbitrationCand Conciliation Act, 1996: s. 8 – Dispute between petitioner andrespondents as regards calculation and conversion formula to beapplied in converting the preference shares of respondent no. 1 to4 invested in petitioner company, into equity shares – Respondentssought certain sum, on redemption of Optionally ConvertibleDRedeemable Preference Shares-OCRPS, but the petitioner companyfailed to redeem the OCRPS – Respondent sought initiation ofCorporate Insolvency Resolution Process u/s. 7 of the Code – Inthe said petition, application u/s. 8 of the 1996 Act filed by thepetitioner seeking direction to refer the parties to the arbitration –NCLT allowed the application filed by the appellant u/s. 8 of theE1996 Act – Justification of – Held: Justified – Dispute will be non-arbitrable when a proceeding is in rem and a IB Code proceedingis to be considered in rem only after it is admitted – If there is defaultand the debt is payable, due to which the Adjudicating Authorityproceeds to admit the application u/s. 7, the proceeding is in remFand the arbitrability of the insolvency proceeding would not arise– If the Adjudicating Authority is satisfied that there is no defaultcommitted by the company, the petition u/s.7 would stand rejectedand the parties can secure appointment of the Arbitral Tribunal inan appropriate proceedings – In the instant case, petition u/s. 7was yet to be admitted, thus, had not assumed the status ofGproceedings in rem – Conclusion reached by NCLT cannot be faultedin view of the document produced by the petitioner indicating thatthe allotment of equity shares against the OCRPS was still a matterof discussion between the parties and no conclusion had beenarrived at so as to term it as default – Thus, since the conclusion byH

the NCLT is that there is no default, the dismissal of the petition u/s7 of IB Code at this stage is justified – Though application u/s. 8 ofthe Act, 1996 is allowed, subject to the consideration of the petitionfiled u/s.11 of the Act, 1996 – Said disputes to be resolved by theArbitral tribunal consisting of same members but separatelyconstituted in respect of each agreement.

Dismissing the appeal and allowing the Arbitration Petition,the Court HELD: 1.1 In a fact situation of the instant nature when theprocess of conversion had commenced and certain steps were takenin that direction, even if the redemption date is kept in view and theclause in Schedule J indicating that redemption value shall constitutea debt outstanding is taken note; when certain transactions werediscussed between the parties and had not concluded since the pointas to whether it was 30 per cent of the equity shares in the companyor 10 per cent by applying proper formula had not reached aconclusion and thereafter agreed or disagreed, it would not havebeen appropriate to hold that there is default and admit the petitionmerely because a claim was made by the respondent as per theoriginally agreed date and a petition was filed. In the process ofconsideration to be made by the Adjudicating Authority the facts inthe particular case is to be taken into consideration before arrivingat a conclusion as to whether a default has occurred even if there isa debt in strict sense of the term, which exercise in the instant casehas been done by the Adjudicating Authority. [Para 20][130-F-H;131-A]

1.2 In such circumstance if the Adjudicating Authority findsfrom the material available on record that the situation is not yetripe to call it a default, that too if it is satisfied that it is profitmaking company and certain other factors which need consideration,appropriate orders in that regard would be made; the consequenceof which could be the dismissal of the petition under Section 7 of IBCode on taking note of the stance of the corporate debtor. Asotherwise if in every case where there is debt, if default is also assumedand the process becomes automatic, a company which is ably runningits administration and discharging its debts in planned manner mayalso be pushed to the Corporate Insolvency Resolution Process andget entangled in a proceeding with no point of return. Therefore, AB

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Athe Adjudicating Authority certainly would make an objectiveassessment of the whole situation before coming to a conclusionas to whether the petition under Section 7 of IB Code is to beadmitted in the factual background. It was submitted that when itis shown the debt is due and the same has not been paid theAdjudicating Authority should record default and admit theBpetition; that even in such situation the interest of the corporatedebtor is not jeopardised inasmuch as the admission orders madeby the Adjudicating Authority is appealable to the NCLAT andthereafter to the Supreme Court where the correctness of theorder in any case would be tested. It cannot be in dispute that soCwould be the case even if the Adjudicating Authority takes a viewthat the petition is not ripe to be entertained or does notconstitute all the ingredients, more particularly default, to admitthe petition, since even such order would remain appealable tothe NCLAT and the Supreme Court where the correctness inthat regard also will be examined. [Para 21][131-B-F]D

1.3 The question would be as to whether a grave error ascontended on behalf of respondent is committed by the AdjudicatingAuthority by observing in the course of the order that the invocationof arbitration in a case like this seems to be justified. The stage ofthe proceedings at which the said observation was made will beErelevant. If the case has reached the stage to the status of aproceeding in rem, then such observation would not be justifiedand sustainable but not otherwise. In the instant case, the petitionwas yet to be admitted and, therefore had not assumed the status ofa proceedings in rem. [Para 22][131-G-H; 132-A]F

1.4 The tests to be applied to determine as to when thesubject matter is not arbitrable and on applying such test, actionsin rem is not arbitrable. A dispute will be non-arbitrable when aproceeding is in rem and a IB Code proceeding is to be consideredin rem only after it is admitted. In the instant case the position isGotherwise. [Para 23][132-B; 133-G]

Vidya Drolia and Others vs. Durga Trading Corporation(2021) 2 SCC 1 – relied on.

1.5 The reference to the triggering of a petition underSection 7 of the IB Code to consider the same as a proceedingsin rem, it is necessary that the Adjudicating Authority ought tohave applied its mind, recorded a finding of default and admittedthe petition. On admission, third party right is created in all thecreditors 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 proceedingin rem. Hence, the admission of the petition for consideration ofthe Corporate Insolvency Resolution Process is the relevant stagewhich would decide the status and the nature of the pendency ofthe proceedings and the mere filing cannot be taken as thetriggering of the insolvency process. [Para 24][134-G-H;135-A-B]

1.6 The issue which is posed for consideration is arising ina petition filed under Section 7 of IB Code, before it is admittedand therefore not yet an action in rem. In such application, thecourse to be adopted by the Adjudicating Authority if an applicationunder Section 8 of the Act, 1996 is filed seeking reference toarbitration is what requires consideration. The position of lawthat the IB Code shall override all other laws as provided underSection 238 of the IB Code needs no elaboration. In that view,notwithstanding the fact that the alleged corporate debtor filedan application under Section 8of the Act, 1996, the independentconsideration of the same dehors the application filed underSection 7 of IB Code and materials produced therewith wouldnot arise. The Adjudicating Authority is duty bound to advert tothe material available before him as made available along withthe application under Section 7 of IB Code by the financial creditorto indicate default along with the version of the corporate debtor.This is for the reason that, keeping in perspective the scope ofthe proceedings under the IB Code and there being a timelinefor the consideration to be made by the Adjudicating Authority,the process cannot be defeated by a corporate debtor by raisingmoonshine defence only to delay the process. In that view, evenif an application under Section 8of the Act, 1996 is filed, theAdjudicating Authority has a duty to advert to contentions putforth on the application filed under Section 7 of IB Code, examinethe material placed before it by the financial creditor and record AB

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Aa satisfaction as to whether there is default or not. While doingso the contention put forth by the corporate debtor shall also benoted to determine as to whether there is substance in the defenceand to arrive at the conclusion whether there is default. If theirresistible conclusion by the Adjudicating Authority is that thereis default and the debt is payable, the bogey of arbitration to delayBthe process would not arise despite the position that theagreement between the parties indisputably contains an arbitrationclause. That apart if the conclusion is that there is default and thedebt is payable, due to which the Adjudicating Authority proceedsto pass the order as contemplated under sub-section 5(a) of SectionC7 of IB Code to admit the application, the proceedings would thenget itself transformed into a proceeding in rem having erga omneseffect due to which the question of arbitrability of the so-calledinter se dispute sought to be put forth would not arise. On the otherhand, on such consideration made by the Adjudicating Authority if the satisfaction recorded is that there is no default committed byDthe company, the petition would stand rejected as provided undersub-section 5(b)to Section 7 of IB Code, which would leave thefield open for the parties to secure appointment of the ArbitralTribunal in an appropriate proceedings as contemplated in law andthe need for the NCLT to pass any orders on such application underESection 8of Act, 1996 would not arise. [Paras 25, 26][135-B-H;136-A-C]

1.7 To sum up the procedure, it is clarified that in anyproceeding which is pending before the Adjudicating Authority underSection 7 of IB Code, if such petition is admitted upon theFAdjudicating Authority recording the satisfaction with regard tothe default and the debt being due from the corporate debtor, anyapplication under Section 8of the Act, 1996 made thereafter willnot be maintainable. In a situation where the petition under Section7 of IB Code is yet to be admitted and, in such proceedings, if an application under Section 8of the Act, 1996 is filed, the AdjudicatingGAuthority is duty bound to first decide the application under Section7 of the IB Code by recording a satisfaction with regard to therebeing default or not, even if the application under Section 8 of Act,1996 is kept along for consideration. In such event, the naturalconsequence of the consideration made therein on Section 7 ofH

IB Code application would befall on the application under Section8 of the Act, 1996. [Para 27][136-C-E]

1.8 A perusal of the order dated 09.06.2020 would indicatethat the Adjudicating Authority, NCLT though has taken up theapplication filed under Section 8of the Act, 1996 as the leadconsideration, the petition filed under Section 7 of the IB Codeis also taken alongside and made a part of the consideration inthe said order. A further perusal of the order would disclose thatthe Adjudicating Authority was conscious of the fact thatconsideration of the matter before it any further would arise onlyif there is default and the debt is payable. This is evident fromthe observation contained in para 5.13 of the order. The furthernarration made in para 5.14 would indicate that the AdjudicatingAuthority, from the material available on record had arrived atthe conclusion that the issue involved has not led to a stage ofthe default having occurred and has rightly, in that context heldthat the claim of the company by invoking the arbitration clauseis justified but the Adjudicating Authority has rightly done nothingwith regard to arbitration and has left it to this Court. Accordingly,the Adjudicating Authority in para 5.15 has categorically recordedthat they are not satisfied that a default has occurred. [Para28][136-F-H; 137-A]

1.9 NCLT was conscious that there should be judicialdetermination by the Adjudicating Authority as to whether therehas been a default within the meaning of Section 3(12)whileconsidering a petition under Section 7 of the IB Code. The NCLTafter having recorded such finding took note of the arbitrationpetition pending before this Court and, accordingly concluded theproceedings. [Para 29][137-B; 138-A]

1.10 The conclusion reached by the Adjudicating Authority,NCLT in the instant case cannot be faulted if reference is made tothe documents produced by the petitioner along with an application.It indicates that the allotment of equity shares against the OCRPSin view of the QIPO was still a matter of discussion between theparties and no conclusion had been arrived at so as to term it asdefault. [Para 30][138-B-C]

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A1.11 In the letter dated 21.11.2018 addressed by thepetitioner to respondent no.4, it was mentioned with regard tothe fundamental issue that needs to be addressed regardingconversion and convertible securities into equity shares sincethe exist process initiated cannot move forward without suchconversion. The letter dated 17.12.2018 addressed to theBpetitioner by respondent no.4 in fact refers to the stake inconversion and the dispute being as to whether it should be 10per cent of the share capital of the company as offered by thepetitioner 30 per cent as claimed by KIVF. It is that aspect of thematter, which is still contended to be in dispute betweenCthe parties regarding which the arbitration is sought by thepetitioner which was also noted by Adjudicating Authority.[Para 31][138-F-H; 139-A]

1.12 In such situation, it would be premature at this pointto arrive at a conclusion that there was default in payment of anyDdebt until the said issue is resolved and the amount repayable bythe petitioner to respondent no.4 with reference to equity sharesbeing issued is determined. In the process, if such determinedamount is not paid it would amount to default at that stage.Therefore, if the matter is viewed from any angle, not only theconclusion reached by the Adjudicating Authority, NCLT insofarEas the order on the petition under Section 7 of the IB Code atthis juncture based on the factual background is justified but alsothe prayer made by the petitioner for constitution of the ArbitralTribunal as made in the petition filed by them under Section 11 ofthe Act, 1996 before this Court is justified. [Para 32][139-A-D]F

1.13 In that circumstance though in the operative portionof the order dated 09.06.2020 the application filed under Section8 of the Act, 1996 is allowed and as a corollary the petition underSection 7 of the IB Code is dismissed; in the facts andcircumstances of the instant case it can be construed in theGreverse. Hence, since the conclusion by the AdjudicatingAuthority is that there is no default, the dismissal of the petitionunder Section 7 of IB Code at this stage is justified. Though theapplication under Section 8 of the Act, 1996 is allowed, the samein any event would be subject to the consideration of the petition H

filed under Section 11of the Act, 1996 before this Court. [Para33][139-D-F]

1.14 In the present position the parties would be left withno remedy if the process of arbitration is not initiated and thedispute between the parties are not resolved in that manner asthe proceedings before the NCLT has terminated. In thecircumstance the only remedy for the parties being resolution oftheir dispute through arbitration, it is considered appropriate totake note of the substance of the arbitration clause and constitutean appropriate Tribunal. [Para 34][139-G-H; 140-C-D]

1.15 A perusal of the arbitration agreement indicates thatthe arbitration shall be held at Mumbai and be conducted by threearbitrators. For the purpose of appointment KIVF I, KEIT and KIVLare to jointly appoint one arbitrator and the promoters of petitionercompany, to appoint their arbitrator. In the second agreement,‘KMIL’ as the Investor is on the other side. In the third agreement‘KIVFI’ as the Investor is on the other side and in the fourthagreement it has the same clause as in the first agreement. The twoarbitrators who are thus, appointed shall appoint the third arbitratorwho shall be the Chairperson. The recital (c) in the differentagreements though refers to each of the entity in the KIV andamount invested in shares is referred to, it is provided therein thatthe equity shares and preference shares subscribed by KMIL, KIVFI, KEIT and KIVL are collectively referred to as the ‘FinancialInvestors Shares’. If the said aspect is taken into considerationkeeping in view the nature of the issues involved being mainly withregard to the conversion of preference shares into equity shares andthe formula to be worked thereunder, such consideration in theinstant facts can be resolved by the Arbitral Tribunal consisting ofsame members but separately constituted in respect of eachagreement. It will be open for the Arbitral Tribunal to work out themodalities to conduct the proceedings by holding separateproceedings in the agreement providing for international arbitrationand by clubbing the domestic disputes. [Para 36][141-E-H;142-A-B]

1.16 Since petitioner company had nominated Mr. JusticeV.N. Khare, former Chief Justice of India through their letter the AB

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Asaid Arbitrator is treated as having been proposed jointly by theCompany and the promoters. Mr. Justice R.M. Lodha, formerChief Justice of India is appointed as the second arbitrator sincethe respondents had failed to nominate. The said arbitrators shallmutually nominate a third arbitrator to be the Chairperson of theArbitral Tribunal. [Para 37][142-C-D]B

Innoventive Industries Limited vs. ICICI Bank andAnother (2018) 1 SCC 407: [2017] 8 SCR 33; SwissRibbons Private Limited and Another vs. Union of Indiaand Others (2019) 4 SCC 17: [2019] 3 SCR 535; BoozAllen and Hamilton INC. vs. SBI Home Finance LimitedCand Others (2011) 5 SCC 532:[2011] 7 SCR 310; BoozAllen and Hamilton vs. SBI Home Finance Ltd. & Others(2011) 5 SCC 532:[2011] 7 SCR 310; A.Ayyasamy vs.A. Paramasivam & Others (2016) 10 SCC 386: [2016]11 SCR 521; Pioneer Urban Land and InfrastructureDLimited vs. Union of India & Ors. [2019] 10 SCR 381;M/S Duro Felguera S.A vs. M/S. Gangavaram PortLimited (2017) 9 SCC 729 : [2017] 10 SCR 285 –referred to.

Case Law Reference

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[2017] 8 SCR 33[2019] 3 SCR 535[2011] 7 SCR 310(2021) 2 SCC 1[2011] 7 SCR 310[2016] 11 SCR 521[2019] 3 SCR 535[2019] 10 SCR 381[2017] 10 SCR 285

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CIVIL ORIGINAL JURISDICTION: Arbitration Petition (Civil) No. 48 of 2019

Petition under Section 11(3) read with Sections 11(4)(a) and11(12)(a) of the Arbitration and Conciliation Act, 1996 seeking theappointment of an Arbitrator.

With

Civil Appeal No. 1070 of 2021.

Shyam Divan, Mukul Rohtagi, Ritin Rai, C.A. Sundaram, Sr. Adv.,Mohitt Kapoor, Ms. Sanam Tripathi, Ms. Anuradha Agnihotri, Ms.Radhika Gautam, Zafar Inayat, Ms. Gunjan Mathur, Ms. KritikaBhardwaj, Advs. for the Petitioner.

Dr. Abhishek Manu Singhvi, Darius Khambata, Atmaram NSNadkarni, Neeraj Kishan Kaul, Nakul Dewan, Iqbal Chagla, Sr. Advs.,Avishkar Singhvi, Jatin Pore, Ms. Ankita Agrawal, Chandra Prakash forM/S. DSK Legal, Vineet Malhotra, Mohit Paul, Abhishek Srinivasan,Vishal Gohri, S.S. Rebello, Ms. Sunaina Phul, Aditdya Dewan, Ms. UditaSingh, Somesh Chandra Jha, Salim M. Saiyed, Praveen Chandra, RahulNarang, Nitin Mishra, Ms. Mitali Gupta, Pawan Jit Bindra, Ms. AasthaMehta, Ms. Vishakha, Ms. Deepanwita Priyanka, Advs. for theRespondents.

The following Judgment of the Court was delivered:

JUDGMENT

1. Leave granted in Special Leave Petition.

2. The Arbitration Petition is filed by ‘Indus Biotech PrivateLimited’ 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 respondentNos. 1 to 4 so as to constitute an Arbitral Tribunal to adjudicate upon thedisputes 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 thatthe respondent No.1 is a Mauritius based Company and the disputequalifies as international arbitration. The respondents No. 2 to 4 thoughare Indian entities, they are the sister ventures of respondent No.1. Further,according to the petitioner the subject matter involved is the same, thoughunder different agreements, the arbitration could be conducted as a singleprocess, by a single Arbitral Tribunal. Hence a common petition is filedbefore this Court, instead of bifurcating the causes of action and availing A

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Atheir remedy before the High Court in respect of similar disputes withrespondents No.2 to 4.

3. The petition seeking constitution of the Arbitral Tribunalemanates from the Share Subscription and Shareholders’ Agreements(‘SS and SA’ for short) dated 20.07.2007, 12.07.2007, 09.01.2008 andBthe Supplemental Agreements dated 22.03.2013 and 19.07.2017. Throughthe said agreements the respondent Nos. 1 to 4 subscribed to equityshares and Optionally Convertible Redeemable Preference Shares(‘OCRPS’ for short) in the company i.e. Indus Biotech Private Ltd. Inthe process of business, a decision was taken by the petitioner companyto make a Qualified Initial Public Offering (‘QIPO’ for short). However,Cunder Regulation 5(2) of Securities and Exchange Board of India (Issueof Capital and Disclosure Requirements), Regulations 2018 (‘SEBIRegulations’ for short), a company which has any outstanding convertiblesecurities or any other right which would entitle any person with anoption to receive equity shares of the issuer is not entitled to make QIPO.D4. In that view, it had become necessary for the respondents No.1to 4 to convert their respective preference shares invested in Indus BiotechPrivate Ltd., into equity shares. In that context the petitioner companyproposed to convert the OCRPS invested by the respondents No. 1 to 4,into equity shares. In the said process of negotiation, a dispute is statedEto have arisen between the petitioner company and the respondents No.1 to 4, with regard to the calculation and conversion formula to be appliedin converting the preference shares of the respondents No. 1 to 4, intoequity 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 thetotal paid up share capital in equity shares. The petitioner company, byFrelying on the reports of the auditors and valuer contended that therespondents No. 1 to 4 would be entitled to approximately 10 per cent ofthe total paid up share capital paid by the respondent as per theirconversion formula.

5. The dispute in question, according to the petitioner company isGwith regard to the appropriate formula to be adopted and to arrive at theactual percentage of the paid-up share capital which would be convertedinto equity shares and the refund if any thereafter. Until an amicabledecision is taken there is no liability to repay the amount. Therefore,there is no ‘debt’ or ‘default’, nor is the petitioner company unable topay. The petitioner company is a profit-making company and is engagedH

in its day-to-day activity. Since the parties themselves had not resolvedthe issue, the petitioner company contends that the said dispute is to beresolved through Arbitration by the Arbitral Tribunal.

6. On the said issue, the respondents No. 1 to 4 would howevercontend that the fact of the respondents No. 1 to 4 herein havingsubscribed to the OCRPS is not in dispute. In such event, on redemptionof 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, asum of Rs. 367,08,56,503/- (Rupees Three Hundred Sixty-Seven CroreEight Lakh Fifty-Six Thousand Five Hundred Three) became due andpayable. The respondents No. 1 to 4 having demanded the said amountand since the same had not been paid by the petitioner company, it iscontended that the same had constituted default. It is contended that asthe debt had not been paid by the company it had given a cause of actionfor the respondents No. 1 to 4 herein to invoke the jurisdiction of theAdjudicating Authority, NCLT by initiating the Corporate InsolvencyResolution Process (‘CIRP’ for short) provided under the Insolvencyand Bankruptcy Code, 2016 (‘IB Code’ for short).

7. Accordingly, the respondent No.2 herein filed the petition underSection 7 of IB Code before the NCLT in IBC No.3077/2019 dated16.08.2019 seeking appointment of Resolution Professional. In the saidpetition, the petitioner company herein filed a Miscellaneous ApplicationNo.3597/2019 under Section 8 of the Act, 1996 seeking a direction torefer the parties to arbitration, for the reasons indicated therein which isas noted above and is similar to the contention in the arbitration petition.The respondent No.2 herein objected to consideration of the saidapplication.

8. The NCLT, Mumbai Bench-IV through its order dated09.06.2020 has taken note of the rival contentions and has allowed theapplication filed by the petitioner herein under Section 8 of the Act,1996. As a consequence, the petition filed by the respondent No.2 hereinunder Section 7 of the IB Code is dismissed. The respondent No.2 hereinclaiming to be aggrieved by the said order dated 09.06.2020 passed bythe NCLT is before this Court in the connected SLP.

9. Since the rank of the parties is different in the above noted, twopetitions, for the ease of reference and clarity, the parties would be referredto by their name and the respondents No. 1 to 4 in the Arbitration Petitionwill be collectively referred to as ‘Kotak India Venture’.

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A10. In the above backdrop, we have heard Mr. Shyam Divan, Mr.Aryama Sundaram, Mr. Mukul Rohatgi and Mr. Ritin Rai respectivelearned senior counsel on behalf of Indus Biotech Private Limited, Dr.Abhishek Manu Singhvi, learned senior counsel on behalf of Kotak IndiaVenture as also Mr. Khambhatta, Mr. Neeraj Kishan Kaul, Mr. NakulDewan, Mr. ANS Nadkarni for the other parties and perused the petitionBpapers.

11. As a matter of fact, the transaction entered into between theparties 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 and19.07.2017 is not in dispute. The further fact that the SS and SA datedC20.07.2007, 12.07.2007 and 09.01.2008 vide Clause 20.4 provides forarbitration in the event of any dispute, controversy or claim arising outof, relating to or in connection with the said agreement is also not indispute. Further the supplemental agreements vide Clause 13 and 19respectively provides that the provision for arbitration in Clause 20.4 ofDthe SS and SA agreement dated 20.07.2007 shall apply to the supplementalagreement is also evident. If in that context the matter is looked at, therewould be no need for this Court to advert to any other aspect in thepetition filed under Section 11 of the Act, 1996 since in the normalcircumstance, on constitution of the Arbitral Tribunal all other issues areto be gone into by the Arbitral Tribunal relating to the above noted disputeEbetween the parties. However, the nature of Arbitral Tribunal will haveto be considered since one is international arbitration and the other aredomestic.

12. Despite the said position, before concluding on the ArbitrationPetition filed by Indus Biotech Private Limited, keeping in perspectiveFthe objection raised by the Kotak India Venture relating to the petitionhaving already been instituted before the NCLT under Section 7 of theIBC and also keeping in perspective the order dated 09.06.2020 passedby NCLT disposing of the application filed under Section 8 of the Act,1996; the matter requires deeper consideration on that aspect since Dr.GAbhishek Manu Singhvi, the learned senior counsel for the Kotak IndiaVenture has contended with regard to a serious error said to have beencommitted by the NCLT in entertaining an application under Section 8 ofthe Act, 1996 in the backdrop of the legal duty cast on NCLT to proceedstrictly in accordance with the procedure contemplated under Section 7of IB Code. It is further contented that Indus Biotech Private LimitedHhaving defaulted, the event enabling the petition under Section 7 of IB

Code has occurred and the dispute sought to be raised is not arbitrableafter the insolvency proceeding is commenced.

13. Before adverting to the contentions in this regard, it is to betaken note that against the order dated 09.06.2020 assailed in the specialleave petition, Kotak India Venture in the normal course if aggrieved,ought to have availed the remedy of appeal by filing an appeal in theNCLAT as provided under Section 61 of IB Code. Having not done so,in a normal circumstance we would have chosen to relegate Kotak IndiaVenture to avail the alternate remedy of appeal. The contention on behalfof Kotak India Venture that they do not have the remedy of appeal as it isan order disposing an application filed under Act, 1996 and not an orderunder the part as provided in Section 61 of IB Code is noted only to berejected. The order dated 09.06.2020 is certainly an order passed by theAdjudicating Authority under IB Code and petition under Section 7 ofthat Code is also disposed. However, as noted from the narration madeabove, the order dated 09.06.2020 passed by the NCLT is while takingnote of petition under Section 7 of IB Code, in the backdrop of IndusBiotech seeking for the resolution of dispute through arbitration and theArbitration Petition to that effect was already pending before this Courtas on the date the order was passed by the NCLT. It is only in this specialcircumstance we have proceeded to entertain the petition and examinethe matter on merits.

14. In order to arrive at a conclusion on the correctness or otherwiseof the impugned order, at the outset it is necessary for us to take note ofthe scope of the proceedings under Section 7 of the IB Code to whichdetail 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 ‘financialcreditor’ to file an application for initiating Corporate InsolvencyResolution Process against a ‘corporate debtor’ before the AdjudicatingAuthority when ‘default’ has occurred. The provision, therefore,contemplates that in order to trigger an application there should be inexistence four factors: (i) there should be a ‘debt’ (ii) ‘default’ shouldhave occurred (iii) debt should be due to ‘financial creditor’ and (iv) suchdefault which has occurred should be by a ‘corporate debtor’: On suchapplication being filed with the compliance required under sub-Section(1) to (3) of Section 7 of IB Code, a duty is cast on the AdjudicatingAuthority to ascertain the existence of a default if shown from the recordsor on the basis of other evidence furnished by the financial creditor, ascontemplated under sub-Section (4) to Section 7 of IB Code.

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15. This Court had the occasion to consider exhaustively thescheme and working of the IB Code in the case of Innoventive IndustriesLimited vs. ICICI Bank and Another (2018) 1 SCC 407. Theproceeding under Section 7 of the IB Code and the scope thereof isarticulated in paras 27 to 30 which read hereunder,

“27. The scheme of the Code is to ensure that when a defaulttakes place, in the sense that a debt becomes due and is not paid,the insolvency resolution process begins. Default is defined inSection 3(12) in very wide terms as meaning non-payment of adebt once it becomes due and payable, which includes non-payment of even part thereof or an instalment amount. For themeaning of “debt”, we have to go to Section 3(11), which in turntells us that a debt means a liability of obligation in respect of a“claim” and for the meaning of “claim”, we have to go back toSection 3(6) which defines “claim” to mean a right to paymenteven if it is disputed. The Code gets triggered the moment defaultis of rupees one lakh or more (Section 4). The corporate insolvencyresolution process may be triggered by the corporate debtor itselfor a financial creditor or operational creditor. A distinction is madeby the Code between debts owed to financial creditors andoperational creditors. A financial creditor has been defined underSection 5(7) as a person to whom a financial debt is owed and afinancial debt is defined in Section 5(8) to mean a debt which isdisbursed against consideration for the time value of money. Asopposed to this, an operational creditor means a person to whoman operational debt is owed and an operational debt under Section5(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 Section7(1), a default is in respect of a financial debt owed to any financialcreditor of the corporate debtor — it need not be a debt owed tothe applicant financial creditor. Under Section 7(2), an applicationis to be made under sub-section (1) in such form and manner as isprescribed, which takes us to the Insolvency and Bankruptcy(Application to Adjudicating Authority) Rules, 2016. Under Rule4, the application is made by a financial creditor in Form 1accompanied by documents and records required therein. Form 1is a detailed form in 5 parts, which requires particulars of theapplicant in Part I, particulars of the corporate debtor in Part II, particulars of the proposed interim resolution professional in PartIII, particulars of the financial debt in Part IV and documents,records and evidence of default in Part V. Under Rule 4(3), theapplicant is to dispatch a copy of the application filed with theadjudicating authority by registered post or speed post to theregistered office of the corporate debtor. The speed, within whichthe adjudicating authority is to ascertain the existence of a defaultfrom the records of the information utility or on the basis of evidencefurnished by the financial creditor, is important. This it must dowithin 14 days of the receipt of the application. It is at the stage ofSection 7(5), where the adjudicating authority is to be satisfiedthat a default has occurred, that the corporate debtor is entitled topoint out that a default has not occurred in the sense that the“debt”, which may also include a disputed claim, is not due. Adebt may not be due if it is not payable in law or in fact. Themoment the adjudicating authority is satisfied that a default hasoccurred, the application must be admitted unless it is incomplete,in which case it may give notice to the applicant to rectify thedefect within 7 days of receipt of a notice from the adjudicatingauthority. Under sub-section (7), the adjudicating authority shallthen communicate the order passed to the financial creditor andcorporate debtor within 7 days of admission or rejection of suchapplication, as the case may be.

29. The scheme of Section 7 stands in contrast with the schemeunder Section 8 where an operational creditor is, on the occurrenceof a default, to first deliver a demand notice of the unpaid debt tothe operational debtor in the manner provided in Section 8(1) ofthe Code. Under Section 8(2), the corporate debtor can, within aperiod of 10 days of receipt of the demand notice or copy of theinvoice mentioned in sub-section (1), bring to the notice of theoperational creditor the existence of a dispute or the record of thependency of a suit or arbitration proceedings, which is pre-existing—i.e. before such notice or invoice was received by thecorporate debtor. The moment there is existence of such a dispute,the operational creditor gets out of the clutches of the Code.

30. On the other hand, as we have seen, in the case of a corporatedebtor who commits a default of a financial debt, the adjudicatingauthority has merely to see the records of the information utilityor other evidence produced by the financial creditor to satisfy ABC

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Aitself that a default has occurred. It is of no matter that the debt isdisputed so long as the debt is “due” i.e. payable unless interdictedby some law or has not yet become due in the sense that it ispayable at some future date. It is only when this is proved to thesatisfaction of the adjudicating authority that the adjudicatingauthority may reject an application and not otherwise.”

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(Emphasis supplied)

16. Dr. Singhvi, learned senior counsel while seeking to repel thecontention put forth on behalf of the Indus Biotech Private Limited seeksto emphasise that a proceeding under Section 7 of IB Code is to beCconsidered in a stringent manner. Referring to the Preamble to the IBCode, it is contended that the same has evolved after all the earlierprocesses like civil suit, winding up petition, SARFAESI proceeding andSICA have failed to secure the desired result. The provision under the IBCode is with the intention of making a debtor to seek the creditor. In thatregard, Dr. Singhvi has referred to the decisions in the case of SwissDRibbons Private Limited and Another vs. Union of India and Others(2019) 4 SCC 17 and Booz Allen and Hamilton INC. vs. SBI HomeFinance Limited and Others (2011) 5 SCC 532 to contend that theproceeding under Section 7 of IB Code is an action in rem. As suchinsolvency and winding up matters are non-arbitrable. In that background,Ethe nature of transaction under the SS and SA was referred. It is in thatregard contended that the agreement provides for the manner ofredemption as also the redemption value. The date of redemption is fixedas 31.12.2018. The OCRPS when redeemed is payable, within 15 daysfrom the date of redemption. In such situation, there is no other issuewhich require resolution by arbitration. Further, it is contended ClauseF5.1 and 5.2 in Schedule J to the agreement provided that the redemptionvalue shall constitute a debt outstanding by the Company to the holder.Hence the amount being debt on the redemption date, if not paid within15 days of redemption constituted default. In that background, when thepetition under Section 7 of IB Code was filed the Adjudicating AuthorityGought to have looked into that aspect alone and the consideration of anapplication filed under Section 8 of the Act, 1996 is without jurisdiction isthe contention.

17. The procedure contemplated will indicate that before theAdjudicating Authority is satisfied as to whether the default has occurredHor not, in addition to the material placed by the financial creditor, the

corporate debtor is entitled to point out that the default has not occurredand that the debt is not due, consequently to satisfy the AdjudicatingAuthority that there is no default. In such exercise undertaken by theAdjudicating Authority if it is found that there is default, the process ascontemplated under sub-Section (5) of Section 7 of IB Code is to befollowed as provided under sub-Section 5(a); or if there is no default theAdjudicating Authority shall reject the application as provided under sub-Section 5(b) to Section 7 of IB Code. In that circumstance if the findingof default is recorded and the Adjudicating Authority proceeds to admitthe application, the Corporate Insolvency Resolution Process commencesas provided under sub-section (6) and is required to be processed further.In such event, it becomes a proceeding in rem on the date of admissionand from that point onwards the matter would not be arbitrable. Theonly course to be followed thereafter is the resolution process under IBCode. Therefore, the trigger point is not the filing of the applicationunder Section 7 of IB Code but admission of the same on determiningdefault.

18. In that circumstance, though Dr. Singhvi has referred to theevolution of IB Code after all earlier legal process had failed to give therightful place to the creditor; which is sought to be achieved by the IBCode, it cannot be said that by the procedure prescribed under the IBCode it means that the claim of the creditor if made before the NCLT,more particularly under Section 7 of IB Code is sacrosanct and thecorporate debtor is denuded of putting forth its version or the contentionto show to the Adjudicating Authority that the default has not occurredand explain the circumstance for contending so. In fact, in the very decisionrelied on by both the parties in the case of Innoventive Industries Limited (supra), this court while considering the scope of the various provisionsunder the Act and while referring to the procedure contemplated in apetition under Section 7 of the IB Code, which is also extracted suprareads thus: - “It is at the stage of Section 7(5), where the Adjudicating Authorityis to be satisfied that default has occurred, that the corporatedebtor is entitled to point out that a default has not occurred in thesense that the ‘debt’, which may also include a disputed claim, isnot due. A debt may not be due if it is not payable in law or infact.”

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A19. In the instant case, Dr. Singhvi, as noted earlier has referredto clause 5.1 and 5.2 contained in Schedule J to the agreement to contendthat the OCRPS would become due within 15 days from the redemptiondate and the parties are agreed that it shall constitute a debt outstandingby the company to the Holder. The question would be; whether thatalone was sufficient to come to a conclusion that there was default asBwell in the fact situation of the present nature. It is no doubt true that theoriginal period of the OCRPS was up to 31.12.2018, on which date itcould be redeemed. In that background, Mr. Shyam Divan, learned seniorcounsel for Indus Biotech Private Limited has drawn our attention toClause 4 and 6 of the very same document to indicate that it provides forCearly redemption under the circumstances stated therein. Vide clause 6thereof it has provided that the OCRPS could be converted into equityshares of the company in the circumstances provided therein, which isalso on the occurrence of QIPO or Strategic Sale, provided that theOCRPS shall be converted in the manner indicated. Regulation 5(2) ofSEBI – ICDR Regulations mandated the same. In that regard, Mr. DivanDhas also referred to the Board meeting held on 14.03.2018 wherein QIPOrelated matters were taken into consideration and the conversion of thepreference shares was discussed, to which the Nominee Directorrepresenting the Kotak India Venture Group was also a party. The saidissue was also discussed in the subsequent meeting dated 06.04.2018Eand 10.04.2018. Therefore, the said events prima facie indicate that theprocess of converting the OCRPS into equity shares and the allotmentthereof was an issue which had already commenced a while before theredemption date agreed upon i.e., 31.12.2018 had arrived.

20. Therefore, in a fact situation of the present nature when the Fprocess of conversion had commenced and certain steps were taken inthat direction, even if the redemption date is kept in view and the clausein Schedule J indicating that redemption value shall constitute a debtoutstanding is taken note; when certain transactions were discussedbetween 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 byGapplying proper formula had not reached a conclusion and thereafteragreed or disagreed, it would not have been appropriate to hold that thereis default and admit the petition merely because a claim was made byKotak Venture as per the originally agreed date and a petition was filed.In the process of consideration to be made by the Adjudicating AuthorityH

the facts in the particular case is to be taken into consideration beforearriving at a conclusion as to whether a default has occurred even ifthere is a debt in strict sense of the term, which exercise in the presentcase has been done by the Adjudicating Authority.

21. In such circumstance if the Adjudicating Authority finds fromthe material available on record that the situation is not yet ripe to call ita default, that too if it is satisfied that it is profit making company andcertain other factors which need consideration, appropriate orders inthat regard would be made; the consequence of which could be thedismissal of the petition under Section 7 of IB Code on taking note of thestance of the corporate debtor. As otherwise if in every case wherethere is debt, if default is also assumed and the process becomesautomatic, a company which is ably running its administration anddischarging its debts in planned manner may also be pushed to theCorporate Insolvency Resolution Process and get entangled in aproceeding with no point of return. Therefore, the Adjudicating Authoritycertainly would make an objective assessment of the whole situationbefore coming to a conclusion as to whether the petition under Section 7of 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 samehas not been paid the Adjudicating Authority should record default andadmit the petition. He contends that even in such situation the interest ofthe corporate debtor is not jeopardised inasmuch as the admission ordersmade by the Adjudicating Authority is appealable to the NCLAT andthereafter to the Supreme Court where the correctness of the order inany case would be tested. We note, it cannot be in dispute that so wouldbe the case even if the Adjudicating Authority takes a view that thepetition is not ripe to be entertained or does not constitute all the ingredients,more particularly default, to admit the petition, since even such orderwould remain appealable to the NCLAT and the Supreme Court wherethe correctness in that regard also will be examined.

22. In the above backdrop the question would be as to whether agrave error as contended on behalf of Kotak Venture is committed by theAdjudicating Authority by observing in the course of the order that theinvocation of arbitration in a case like this seems to be justified. In ourview, the stage of the proceedings at which the said observation wasmade will be relevant. If the case has reached the stage to the status of aproceeding in rem, then such observation would not be justified and A

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Asustainable but not otherwise. In the instant case, the petition was yet tobe admitted and, therefore had not assumed the status of a proceedingsin rem.

23. The tests to be applied to determine as to when the subjectmatter is not arbitrable and on applying such test, actions in rem is notBarbitrable is laid down by this Court in the case of Vidya Drolia andOthers Vs. Durga Trading Corporation (2021 2 SCC 1) which readsas hereunder:

“76. In view of the above discussion, we would like to propounda fourfold test for determining when the subject matter of a disputeCin an arbitration agreement is not arbitrable:

76.1 (1) when cause of action and subject matter of the disputerelates to actions in rem, that do not pertain to subordinate rightsin personam that arise from rights in rem.

76.2 (2) when cause of action and subject matter of the disputeDaffects third party rights; have erga omnes effect; requirecentralized adjudication, and mutual adjudication would not beappropriate and enforceable; 76.3 (3) when cause of action and subject matter of the disputerelates to inalienable sovereign and public interest functions ofEthe State and hence mutual adjudication would be unenforceable;and 76.4 (4) when the subject-matter of the dispute is expressly or bynecessary implication non-arbitrable as per mandatory statute(s).

76.5 (5) These tests are not watertight compartments; they dovetailFand overlap, albeit when applied holistically and pragmaticallywill help and assist in determining and ascertaining with greatdegree of certainty when as per law in India, a dispute or subjectmatter is non-arbitrable. Only when the answer is affirmative thatthe subject matter of the dispute would be non-arbitrable.

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76.6. However, the aforesaid principles have to be applied withcare and caution as observed in Olympus Superstructures (P)Ltd. [Olympus Superstructures (P) Ltd. v. Meena Vijay Khetan,(1999) 5 SCC 651] : (SCC p. 669, para 35)

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“35. … Reference is made there to certain disputes like criminaloffences of a public nature, disputes arising out of illegalagreements and disputes relating to status, such as divorce,which cannot be referred to arbitration. It has, however, beenheld that if in respect of facts relating to a criminal matter, say,physical injury, if there is a right to damages for personal injury,then such a dispute can be referred to arbitration(Keir v. Leeman [Keir v. Leeman, (1846) 9 QB 371 : 115 ER1315] ). Similarly, it has been held that a husband and a wifemay refer to arbitration the terms on which they shall separate,because they can make a valid agreement between themselveson that matter.

77. Applying the above principles to determine non-arbitrability, itis apparent that insolvency or intracompany disputes have to beaddressed by a centralised forum, be the court or a special forum,which would be more efficient and has complete jurisdiction toefficaciously and fully dispose of the entire matter. They are alsoactions in rem. Similarly, grant and issue of patents and registrationof trade marks are exclusive matters falling within the sovereignor government functions and have erga omnes effect. Such grantsconfer monopoly rights. They are non-arbitrable. Criminal casesagain are not arbitrable as they relate to sovereign functions ofthe State. Further, violations of criminal law are offences againstthe State and not just against the victim. Matrimonial disputesrelating to the dissolution of marriage, restitution of conjugal rights,etc. are not arbitrable as they fall within the ambit of sovereignfunctions and do not have any commercial and economic value.The decisions have erga omnes effect. Matters relating to probate,testamentary matter, etc. are actions in rem and are a declarationto the world at large and hence are non-arbitrable.”

In view of the exhaustive consideration made in Vidya Drolia andour clear understanding that a dispute will be non-arbitrable when aproceeding is in rem and a IB Code proceeding is to be considered in remonly after it is admitted it is seen that in the instant case the position isotherwise. The decisions relied on behalf of Kotak India Venture in thecase 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 AB

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Ajudgment since they have been referred in Vidya Drolia which also explainthe same situation.

24. In the case of Swiss Ribbons Private Limited vs. Union ofIndia (2019) 4 SCC 17 and Pioneer Urban Land and InfrastructureLimited vs. Union of India & Ors. (W.P.(C) No.43/2019) relied onBbehalf of Kotak Venture, the entire scope and ambit of the IB Code wasconsidered and the validity of the provisions were upheld. The said decisionshave also been relied on to contend that when the petition under Section7 of IB Code is triggered it becomes a proceedings in rem and even thecreditor who has triggered the process would also lose control of theproceedings as Corporate Insolvency Resolution Process is required toCbe considered through the mechanism provided under the IB Code. Theprinciples as laid down in Swiss Ribbons (supra) was also referred to indetail in the case of Pioneer Urban Land and Infrastructure (supra)wherein the observations contained in para 39 though in the case ofReal Estate Development was laid down. The relevant portion whichDhas been referred to, reads as follows:- “Thus, any allottee/home buyer who prefers an application underSection 7 of the Code takes the risks of his flat/apartment notbeing completed in the near future, in the event of there being abreach on the part of the developers. Under the Code, he mayEnever get refund of the entire principal, let alone interest. This isbecause, the moment a petition is admitted under Section 7, theresolution professional must first advertise for and find a resolutionplan by somebody, usually another developer which has then topass muster under the Code, i.e. that it must be approved by atleast 66 per cent of the Committee of Creditors and must furtherFgo through challenges before NCLT and NCLAT before the newmanagement can take over and either complete construction orpay out for refund amounts.”

The underlying principle, therefore, from all the above noteddecisions is that the reference to the triggering of a petition under SectionG7 of the IB Code to consider the same as a proceedings in rem, it isnecessary 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 andwill have erga omnes effect. The mere filing of the petition and itsHpendency before admission, therefore, cannot be construed as the triggering of a proceeding in rem. Hence, the admission of the petitionfor consideration of the Corporate Insolvency Resolution Process is therelevant stage which would decide the status and the nature of the pendencyof the proceedings and the mere filing cannot be taken as the triggering ofthe insolvency process.

25. As noted, the issue which is posed for our consideration isarising in a petition filed under Section 7 of IB Code, before it is admittedand therefore not yet an action in rem. In such application, the course tobe adopted by the Adjudicating Authority if an application under Section8 of the Act, 1996 is filed seeking reference to arbitration is what requiresconsideration. The position of law that the IB Code shall override allother laws as provided under Section 238 of the IB Code needs noelaboration. In that view, notwithstanding the fact that the allegedcorporate debtor filed an application under Section 8 of the Act, 1996,the independent consideration of the same dehors the application filedunder Section 7 of IB Code and materials produced therewith will notarise. The Adjudicating Authority is duty bound to advert to the materialavailable before him as made available along with the application underSection 7 of IB Code by the financial creditor to indicate default alongwith the version of the corporate debtor. This is for the reason that,keeping in perspective the scope of the proceedings under the IB Codeand there being a timeline for the consideration to be made by theAdjudicating Authority, the process cannot be defeated by a corporatedebtor by raising moonshine defence only to delay the process. In thatview, even if an application under Section 8 of the Act, 1996 is filed, theAdjudicating Authority has a duty to advert to contentions put forth onthe application filed under Section 7 of IB Code, examine the materialplaced before it by the financial creditor and record a satisfaction as towhether there is default or not. While doing so the contention put forthby the corporate debtor shall also be noted to determine as to whetherthere is substance in the defence and to arrive at the conclusion whetherthere is default. If the irresistible conclusion by the Adjudicating Authorityis that there is default and the debt is payable, the bogey of arbitration todelay the process would not arise despite the position that the agreementbetween the parties indisputably contains an arbitration clause.

26. That apart if the conclusion is that there is default and thedebt is payable, due to which the Adjudicating Authority proceeds topass the order as contemplated under sub-section 5(a) of Section 7 ofIB Code to admit the application, the proceedings would then get itself A

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Atransformed into a proceeding in rem having erga omnes effect due towhich the question of arbitrability of the so-called inter se dispute soughtto be put forth would not arise. On the other hand, on such considerationmade by the Adjudicating Authority if the satisfaction recorded is thatthere is no default committed by the company, the petition would standrejected as provided under sub-section 5(b) to Section 7 of IB Code,Bwhich would leave the field open for the parties to secure appointmentof the Arbitral Tribunal in an appropriate proceedings as contemplated inlaw and the need for the NCLT to pass any orders on such applicationunder Section 8 of Act, 1996 would not arise.

27. Therefore, to sum up the procedure, it is clarified that in anyCproceeding which is pending before the Adjudicating Authority underSection 7 of IB Code, if such petition is admitted upon the AdjudicatingAuthority recording the satisfaction with regard to the default and thedebt being due from the corporate debtor, any application under Section8 of the Act, 1996 made thereafter will not be maintainable. In a situationDwhere 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 isfiled, the Adjudicating Authority is duty bound to first decide the applicationunder Section 7 of the IB Code by recording a satisfaction with regard tothere being default or not, even if the application under Section 8 of Act,1996 is kept along for consideration. In such event, the naturalEconsequence of the consideration made therein on Section 7 of IB Codeapplication would befall on the application under Section 8 of the Act,1996.

28. In the above background, on reverting to the fact situation inthis case, a perusal of the order dated 09.06.2020 would indicate that theFAdjudicating Authority, NCLT though has taken up the application filedunder Section 8 of the Act, 1996 as the lead consideration, the petitionfiled under Section 7 of the IB Code is also taken alongside and made apart of the consideration in the said order. A further perusal of the orderwould disclose that the Adjudicating Authority was conscious of the factGthat consideration of the matter before it any further would arise only ifthere is default and the debt is payable. This is evident from the observationcontained in para 5.13 of the order. The further narration made in para5.14 would indicate that the Adjudicating Authority, from the materialavailable on record had arrived at the conclusion that the issue involvedhas not led to a stage of the default having occurred and has rightly, inHthat context held that the claim of the company by invoking the arbitration clause is justified but the Adjudicating Authority has rightly done nothingwith regard to arbitration and has left it to this Court. Accordingly, theAdjudicating Authority in para 5.15 has categorically recorded that theyare not satisfied that a default has occurred.

29. It would be appropriate to extract the relevant findings recordedby the NCLT which demonstrates that NCLT was conscious that thereshould be judicial determination by the Adjudicating Authority as towhether there has been a default within the meaning of Section 3(12)while considering a petition under Section 7 of the IB Code. The relevantfinding taken note above read as hereunder: - “5.13 Therefore, in a section 7 petition, there has to be a judicialdetermination by the Adjudicating Authority as to whether therehas been a ‘default’ within the meaning of section 3(12) of theIBC.

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 suchOCRPS when it had participated in the process to convert itsOCRPS into equity shares of the Applicant/Corporate Debtor;and (3) Fixing of the QIPO date. All of these things are importantdeterminants in coming to a judicial conclusion that a default hasoccurred. The invocation of arbitration in a case like this seems tobe justified.

5.15 Looking at the contention raised, and that the facts are not indispute, we are not satisfied that a default has occurred. We noteMr. Mustafa Doctor’s statements that the Applicant/CorporateDebtor is a solvent, debt-free and profitable company. It willunnecessarily push an otherwise solvent, debt-free company intoinsolvency, which is not a very desirable result at this stage. Thedisputes that form the subject matter of the underlying CompanyPetition, viz., valuation of shares, calculation and conversion formulaand fixing of QIPO date are all arbitrable, since they involvevaluation of the shares and fixing of the QIPO date. Therefore,we feel that an attempt must be made to reconcile the differencebetween the parties and their respective perceptions. Also, nomeaningful purpose will be served by pushing the Applicant/Corporate Debtor into CIRP at this stage.”

(emphasis supplied)

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138SUPREME COURT REPORTS

AThe NCLT after having recorded such finding has taken note ofthe arbitration petition pending before this court and has accordinglyconcluded the proceedings.

30. The conclusion reached by the Adjudicating Authority, NCLTin the instant case cannot be faulted if reference is made to the documentsBproduced by Indus Biotech Private Limited along with an application andreferred to by Mr. Shyam Divan, learned senior counsel are noted. Itindicates that the allotment of equity shares against the OCRPS in viewof the QIPO was still a matter of discussion between the parties and noconclusion had been arrived at so as to term it as default. The said issuewas initiated in the 121st meeting of the Board of Directors wherein theCNominee Director representing Kotak India Venture Fund was alsopresent. The IPO related matters were discussed as item No.6 and at6(c). The discussion and decision that the conversion of the outstandingpreference shares would take place after issuance of bonus shares asper the provisions of the Shareholders Agreement was recorded. In theD122nd meeting of the Board of Directors wherein the Non-ExecutiveDirector and Nominee Director representing Kotak India Venture werealso present, the issue was considered at item No.7. It was resolved thatthe Board has accorded approval to the allocation of such percentage ofthe offer as may be determined by the Board to any category. Further,though in the Extraordinary General Body meeting dated 10.04.2018,Ethe Representative Directors of the Kotak India Venture had obtainedleave of absence, the resolution adopted in the said meeting had indicatedthat the equity shares of the company proposed to be issued and allottedas bonus equity shares shall be subject to the provisions of thememorandum of association and articles of association of the company.FThe Company Secretary was authorised to do all such acts in that regard.

31. In the letter dated 21.11.2018 addressed by Indus BiotechPrivate Limited to Kotak India Venture, it was mentioned with regard tothe fundamental issue that needs to be addressed regarding conversionand convertible securities into equity shares since the exist process initiatedGcannot move forward without such conversion. The letter dated17.12.2018 addressed to Indus Biotech Private Limited by Kotak IndiaVenture in fact refers to the stake in conversion and the dispute being asto whether it should be 10 per cent of the share capital of the company asoffered by Indus Biotech Private Limited or 30 per cent as claimed byKotak India Venture Fund. It is that aspect of the matter, which is stillHcontended to be in dispute between the parties regarding which the arbitration is sought by Indus Biotech Private Limited, which was alsonoted by Adjudicating Authority. We express no opinion on the merits ofthe rival contention relating to the dispute.

32. In such situation, in our opinion, it would be premature at thispoint to arrive at a conclusion that there was default in payment of anydebt until the said issue is resolved and the amount repayable by IndusBiotech Private Limited to Kotak India Venture with reference to equityshares being issued is determined. In the process, if such determinedamount is not paid it will amount to default at that stage. Therefore, ifthe matter is viewed from any angle, not only the conclusion reached bythe Adjudicating Authority, NCLT insofar as the order on the petitionunder Section 7 of the IB Code at this juncture based on the factualbackground is justified but also the prayer made by Indus Biotech PrivateLimited for constitution of the Arbitral Tribunal as made in the petitionfiled by them under Section 11 of the Act, 1996 before this Court isjustified.

33. In that circumstance though in the operative portion of theorder 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 IBCode is dismissed; in the facts and circumstances of the present case itcan be construed in the reverse. Hence, since the conclusion by theAdjudicating Authority is that there is no default, the dismissal of thepetition under Section 7 of IB Code at this stage is justified. Though theapplication under Section 8 of the Act, 1996 is allowed, the same in anyevent will be subject to the consideration of the petition filed under Section11 of the Act, 1996 before this Court. The contention as to whetherpayment of investment in preferential shares can be construed as financialdebt was raised in the written submissions. However, we have not advertedto that aspect since the same was not the basis of the impugned orderpassed by the Adjudicating Authority.

34. Since we have arrived at the above conclusion, the next aspectrelates to the appointment of the Arbitral Tribunal as sought in the petition.Essentially the main contention that has been urged is with regard to theproceedings before the NCLT and, therefore, the dispute not beingarbitrable. However, in the present position the parties would be left withno remedy if the process of arbitration is not initiated and the disputebetween the parties are not resolved in that manner as the proceedingsbefore the NCLT has terminated. Mr. Shyam Divan, learned senior counsel AB

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Afor Indus Biotech Private Limited has contended that the transactionbetween the parties is a common one and as such it would be efficient ifthe dispute is resolved by a single Arbitral Tribunal. Further in view ofthe objection raised on behalf of the respondent No.4 (Kotak IndiaVenture) that the arbitration clause has not been invoked in accordancewith the requirement therein, since the promoters have to suggest oneBarbitrator and not the Company, Mr. ANS Nadkarni, learned seniorcounsel representing the promoters who are arrayed as respondent Nos.5to 11 in the arbitration petition has pointed out that the affidavit has beenfiled supporting the petition seeking arbitration and, therefore, the Tribunalbe constituted. Though Mr. Neeraj Kishan Kaul, learned senior counselCand Mr. Nitin Mishra, learned counsel had in their argument opposed thereference to arbitration by pointing out lacunae in the manner the clausewas invoked and the name of the arbitrator was suggested, in thecircumstance the only remedy for the parties being resolution of theirdispute through arbitration as indicated above, we consider it appropriate to take note of the substance of the arbitration clause and constitute anDappropriate Tribunal.

35. In that regard it would be necessary to consider as to whetherthe matter is to be referred to a Single Tribunal or the Tribunal be appointedin respect of each of the agreements. Mr. Nitin Mishra in his writtensubmission has contended that there cannot be composite arbitration. InEthat regard the decision in the case of M/S Duro Felguera S.A vs M/S.Gangavaram Port Limited, (2017) 9 SCC 729 is relied upon withspecific reference to paragraphs 38 and 55 therein, while Mr. Ritin Raihas pressed para 44 of the same decision into service seeking commonTribunal. In the said case there were five separate contracts each having Findependent existence with separate arbitration clauses and in that light,it was held that there cannot be a single Arbitral Tribunal for InternationalCommercial Arbitration and domestic arbitration and bifurcatedaccordingly. In the instant case also four separate agreements have beenentered into between the parties. The provision for arbitration containedin clause 20.04 is similar in all the agreements and the supplementalGagreements have also adopted the same. Clause 20.4.1 reads ashereunder:

“20.4.1 Except as provided in Section 20.4.2, the parties heretoirrevocably agree that any dispute, controversy or claim arisingout of, relating to or in connection with this Agreement (includingH

any provision of any exhibit, annex or schedule hereto) or theexistence, breach, termination or validity hereof (a “Dispute”) shallbe finally settled by arbitration. The arbitration shall be conductedin accordance with the international arbitration rules of theArbitration and Conciliation Act, 1996. The arbitration shall beheld at Mumbai and shall be conducted by three (3) arbitrators.For purpose of appointing such arbitrators, KIVF I, KEIT andKIVL shall jointly, on the one hand, and the Promoters, as a group,on the other hand, shall each appoint one arbitrator, and the thirdarbitrator, who shall be the chairperson, shall be selected by thetwo party-appointed arbitrators. In the event that any party failsto appoint an arbitrator within fifteen (15) days after receipt ofwritten notice of the other party’s intention to refer a Dispute toarbitration, or in the event of the two party-appointed arbitratorsfailing to identify the third arbitrator within fifteen (15) days afterthe two party-appointed arbitrators are selected such arbitratorshall be appointed by a Court of competent jurisdiction on anapplication initiated by any party. An arbitral tribunal thus constitutedis herein referred to as a “Tribunal”. In the event an appointedarbitrator may not continue to act as an arbitrator of a Tribunal,then the party (or the two appointed arbitrators, in the case of thethird arbitrator) that appointed such arbitrator shall have the rightto appoint a replacement arbitrator in accordance with theprovisions of this Section 20.4.1.”

36. A perusal of the arbitration agreement indicates that thearbitration shall be held at Mumbai and be conducted by three arbitrators.For the purpose of appointment KIVF I, KEIT and KIVL are to jointlyappoint one arbitrator and the promoters of Indus Biotech Private Limited,to appoint their arbitrator. In the second agreement dated 20.07.2007,‘KMIL’ as the Investor is on the other side. In the third agreement dated20.07.2007, ‘KIVFI’ as the Investor is on the other side and in the fourthagreement dated 09.01.2008 it has the same clause as in the firstagreement. The two arbitrators who are thus appointed shall appoint thethird arbitrator who shall be the Chairperson. The recital (c) in the differentagreements though refers to each of the entity in the Kotak InvestmentVenture and amount invested in shares is referred to, it is provided thereinthat the equity shares and preference shares subscribed by KMIL, KIVFI, KEIT and KIVL are hereafter collectively referred to as the ‘FinancialInvestors Shares’. If the said aspect is taken into consideration keeping AB

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Ain view the nature of the issues involved being mainly with regard to theconversion of preference shares into equity shares and the formula to beworked thereunder, such consideration in the present facts can be resolvedby the Arbitral Tribunal consisting of same members but separatelyconstituted in respect of each agreement. It will be open for the ArbitralTribunal to work out the modalities to conduct the proceedings by holdingBseparate proceedings in the agreement providing for internationalarbitration and by clubbing the domestic disputes. All other issues whichhave been raised on merits are to be considered by the Arbitral Tribunaland therefore they have not been referred to in this proceedings.

37. Since Indus Biotech Private Limited had nominated Mr. JusticeCV.N. Khare, former Chief Justice of India through their letter dated15.10.2019 the said learned Arbitrator is treated as having been proposedjointly by the Company and the promoters. Mr. Justice R.M. Lodha,former Chief Justice of India is appointed as the second arbitrator sincethe respondents had failed to nominate. The said learned arbitrators shallDmutually nominate a third arbitrator to be the Chairperson of the ArbitralTribunal.

38. In the result, the following order;

(i) Civil Appeal arising out of SLP(C)No.8120 of 2020 is dismissed.

E(ii) Arbitration Petition No.48 of 2019 is allowed.

(iii) Parties to bear their own costs in these proceedings.

Nidhi JainAppeal dismissed and Arbitration allowed.

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