# INDUS BIOTECH PRIVATE LIMITED v. KOTAK INDIA VENTURE (OFFSHORE) FUND (EARLIER KNOWN AS KOTAK INDIA VENTURE LIMITED) & ORS

- **Citation:** [2021] 7 S.C.R. 112
- **Court:** Supreme Court of India
- **Decided:** 2021-03-26
- **Case number:** Civil Appeal No. 1070 of 2021
- **Bench:** S. A. Bobde, A. S. Bopanna, V. Ramasubramanian
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/indus-biotech-private-limited-v-kotak-india-venture-offshore-fund-earlier-known-34891
- **Pages:** 31

## Headnote

Insolvency and Bankruptcy Code, 2016 - s. 7 - Arbitration
and Conciliation Act, 1996: s. 8 - Dispute between petitioner and
respondents as regards calculation and conversion formula to be
applied in converting the preference shares of respondent no. 1 to
4 invested in petitioner company, into equity shares - Respondents
sought certain sum, on redemption of Optionally Convertible
Redeemable Preference Shares-OCRPS, but the petitioner company
failed to redeem the OCRPS - Respondent sought initiation of
Corporate Insolvency Resolution Process u/s. 7 of the Code - In
the said petition, application u/s. 8 of the 1996 Act filed by the
petitioner seeking direction to refer the parties to the arbitration -
NCLT allowed the application filed by the appellant u/s. 8 of the
1996 Act - Justification of - Held: Justified - Dispute will be nonarbitrable when a proceeding is in rem and a IB Code proceeding
is to be considered in rem only after it is admitted - If there is default
and the debt is payable, due to which the Adjudicating Authority
proceeds to admit the application u/s. 7, the proceeding is in rem
and the arbitrability of the insolvency proceeding would not arise
- If the Adjudicating Authority is satisfied that there is no default
committed by the company, the petition u/s.7 would stand rejected
and the parties can secure appointment of the Arbitral Tribunal in
an appropriate proceedings - In the instant case, petition u/s. 7
was yet to be admitted, thus, had not assumed the status of
proceedings in rem - Conclusion reached by NCLT cannot be faulted
in view of the document produced by the petitioner indicating that
the allotment of equity shares against the OCRPS was still a matter
of discussion between the parties and no conclusion had been
arrived at so as to term it as default - Thus, since the conclusion by
[2021] 7 S.C.R. 112
112
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the NCLT is that there is no default, the dismissal of the petition u/s
7 of IB Code at this stage is justified - Though application u/s. 8 of
the Act, 1996 is allowed, subject to the consideration of the petition
filed u/s.11 of the Act, 1996 - Said disputes to be resolved by the
Arbitral tribunal consisting of same members but separately
constituted 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 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 the respondent 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 instant case
has been done by the Adjudicating Authority. [Para 20][130-F-H;
131-A]
1.2 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

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INDUS BIOTECH PRIVATE LIMITED
v.
KOTAK INDIA VENTURE (OFFSHORE) FUND (EARLIER
KNOWN AS KOTAK INDIA VENTURE LIMITED) & ORS.
(Arbitration Petition (Civil) No. 48 of 2019)
MARCH 26, 2021
[S. A. BOBDE, CJI, A. S. BOPANNA AND
V. RAMASUBRAMANIAN, JJ.]
Insolvency and Bankruptcy Code, 2016 - s. 7 - Arbitration
and Conciliation Act, 1996: s. 8 - Dispute between petitioner and
respondents as regards calculation and conversion formula to be
applied in converting the preference shares of respondent no. 1 to
4 invested in petitioner company, into equity shares - Respondents
sought certain sum, on redemption of Optionally Convertible
Redeemable Preference Shares-OCRPS, but the petitioner company
failed to redeem the OCRPS - Respondent sought initiation of
Corporate Insolvency Resolution Process u/s. 7 of the Code - In
the said petition, application u/s. 8 of the 1996 Act filed by the
petitioner seeking direction to refer the parties to the arbitration -
NCLT allowed the application filed by the appellant u/s. 8 of the
1996 Act - Justification of - Held: Justified - Dispute will be nonarbitrable when a proceeding is in rem and a IB Code proceeding
is to be considered in rem only after it is admitted - If there is default
and the debt is payable, due to which the Adjudicating Authority
proceeds to admit the application u/s. 7, the proceeding is in rem
and the arbitrability of the insolvency proceeding would not arise
- If the Adjudicating Authority is satisfied that there is no default
committed by the company, the petition u/s.7 would stand rejected
and the parties can secure appointment of the Arbitral Tribunal in
an appropriate proceedings - In the instant case, petition u/s. 7
was yet to be admitted, thus, had not assumed the status of
proceedings in rem - Conclusion reached by NCLT cannot be faulted
in view of the document produced by the petitioner indicating that
the allotment of equity shares against the OCRPS was still a matter
of discussion between the parties and no conclusion had been
arrived at so as to term it as default - Thus, since the conclusion by
[2021] 7 S.C.R. 112
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the NCLT is that there is no default, the dismissal of the petition u/s
7 of IB Code at this stage is justified - Though application u/s. 8 of
the Act, 1996 is allowed, subject to the consideration of the petition
filed u/s.11 of the Act, 1996 - Said disputes to be resolved by the
Arbitral tribunal consisting of same members but separately
constituted 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 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 the respondent 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 instant case
has been done by the Adjudicating Authority. [Para 20][130-F-H;
131-A]
1.2 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,
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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. It was submitted 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; 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. 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. [Para 21][131-B-F]
1.3 The question would be as to whether a grave error as
contended on behalf of respondent is committed by the Adjudicating
Authority by observing in the course of the order that the invocation
of arbitration in a case like this seems to be justified. The stage of
the proceedings at which the said observation was made will be
relevant. If the case has reached the stage to the status of a
proceeding in rem, then such observation would not be justified
and sustainable but not otherwise. In the instant case, the petition
was yet to be admitted and, therefore had not assumed the status of
a proceedings in rem. [Para 22][131-G-H; 132-A]
1.4 The tests to be applied to determine as to when the
subject matter is not arbitrable and on applying such test, actions
in rem is not arbitrable. A dispute will be non-arbitrable when a
proceeding is in rem and a IB Code proceeding is to be considered
in rem only after it is admitted. In the instant case the position is
otherwise. [Para 23][132-B; 133-G]
Vidya Drolia and Others vs. Durga Trading Corporation
(2021) 2 SCC 1 - relied on.
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1.5 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. [Para 24][134-G-H;
135-A-B]
1.6 The issue which is posed for consideration is arising in
a petition filed under Section 7 of IB Code, before it is admitted
and therefore not yet an action in rem. In such application, the
course to be adopted by the Adjudicating Authority if an application
under Section 8 of the Act, 1996 is filed seeking reference to
arbitration is what requires consideration. The position of law
that the IB Code shall override all other laws as provided under
Section 238 of the IB Code needs no elaboration. In that view,
notwithstanding the fact that the alleged corporate debtor filed
an application under Section 8 of the Act, 1996, the independent
consideration of the same dehors the application filed under
Section 7 of IB Code and materials produced therewith would
not arise. The Adjudicating Authority is duty bound to advert to
the material available before him as made available along with
the application under Section 7 of IB Code by the financial creditor
to indicate default along with the version of the corporate debtor.
This is for the reason that, keeping in perspective the scope of
the proceedings under the IB Code and there being a timeline
for the consideration to be made by the Adjudicating Authority,
the process cannot be defeated by a corporate debtor by raising
moonshine defence only to delay the process. In that view, even
if an application under Section 8 of the Act, 1996 is filed, the
Adjudicating Authority has a duty to advert to contentions put
forth on the application filed under Section 7 of IB Code, examine
the material placed before it by the financial creditor and record
INDUS BIOTECH PVT LTD v. KOTAK INDIA VENTURE (OFFSHORE)
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a satisfaction as to whether there is default or not. While doing
so the contention put forth by the corporate debtor shall also be
noted to determine as to whether there is substance in the defence
and to arrive at the conclusion whether there is default. If the
irresistible conclusion by the Adjudicating Authority is that there
is default and the debt is payable, the bogey of arbitration to delay
the process would not arise despite the position that the
agreement between the parties indisputably contains an arbitration
clause. That apart if the conclusion is that there is default and the
debt is payable, due to which the Adjudicating Authority proceeds
to pass the order as contemplated under sub-section 5(a) of Section
7 of IB Code to admit the application, the proceedings would then
get itself transformed into a proceeding in rem having erga omnes
effect due to which the question of arbitrability of the so-called
inter se dispute sought to be put forth would not arise. On the other
hand, on such consideration made by the Adjudicating Authority if
the satisfaction recorded is that there is no default committed by
the company, the petition would stand rejected as provided under
sub-section 5(b) to Section 7 of IB Code, which would leave the
field open for the parties to secure appointment of the Arbitral
Tribunal in an appropriate proceedings as contemplated in law and
the need for the NCLT to pass any orders on such application under
Section 8 of 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 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
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IB Code application would befall on the application under Section
8 of the Act, 1996. [Para 27][136-C-E]
1.8 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 material 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. [Para
28][136-F-H; 137-A]
1.9 NCLT was conscious that there should be judicial
determination by the Adjudicating Authority as to whether there
has been a default within the meaning of Section 3(12) while
considering a petition under Section 7 of the IB Code. The NCLT
after having recorded such finding took note of the arbitration
petition pending before this Court and, accordingly concluded the
proceedings. [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 to
the documents produced by the petitioner along with an application.
It indicates that the allotment of equity shares against the OCRPS
in view of the QIPO was still a matter of discussion between the
parties and no conclusion had been arrived at so as to term it as
default. [Para 30][138-B-C]
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1.11 In the letter dated 21.11.2018 addressed by the
petitioner to respondent no.4, it was mentioned with regard to
the fundamental issue that needs to be addressed regarding
conversion and convertible securities into equity shares since
the exist process initiated cannot move forward without such
conversion. The letter dated 17.12.2018 addressed to the
petitioner by respondent no.4 in fact refers to the stake in
conversion and the dispute being as to whether it should be 10
per cent of the share capital of the company as offered by the
petitioner 30 per cent as claimed by KIVF. It is that aspect of the
matter, which is still contended to be in dispute between
the parties regarding which the arbitration is sought by the
petitioner 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 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
the petitioner to respondent no.4 with reference to equity shares
being issued is determined. In the process, if such determined
amount is not paid it would 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 the petitioner 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. [Para 32][139-A-D]
1.13 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 instant 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 would be subject to the consideration of the petition
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filed under Section 11 of the Act, 1996 before this Court. [Para
33][139-D-F]
1.14 In the present position the parties would be left with
no remedy if the process of arbitration is not initiated and the
dispute between the parties are not resolved in that manner as
the proceedings before the NCLT has terminated. In the
circumstance the only remedy for the parties being resolution of
their dispute through arbitration, it is considered appropriate to
take note of the substance of the arbitration clause and constitute
an appropriate Tribunal. [Para 34][139-G-H; 140-C-D]
1.15 A perusal of the arbitration agreement indicates that
the arbitration shall be held at Mumbai and be conducted by three
arbitrators. For the purpose of appointment KIVF I, KEIT and KIVL
are to jointly appoint one arbitrator and the promoters of petitioner
company, 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 fourth
agreement it has the same clause as in the first agreement. The two
arbitrators who are thus, appointed shall appoint the third arbitrator
who shall be the Chairperson. The recital (c) in the different
agreements though refers to each of the entity in the KIV and
amount invested in shares is referred to, it is provided therein that
the equity shares and preference shares subscribed by KMIL, KIVF
I, KEIT and KIVL are collectively referred to as the 'Financial
Investors Shares'. If the said aspect is taken into consideration
keeping in view the nature of the issues involved being mainly with
regard to the conversion of preference shares into equity shares and
the formula to be worked thereunder, such consideration in the
instant facts can be resolved by the Arbitral Tribunal consisting of
same members but separately constituted in respect of each
agreement. It will be open for the Arbitral Tribunal to work out the
modalities to conduct the proceedings by holding separate
proceedings in the agreement providing for international arbitration
and by clubbing the domestic disputes. [Para 36][141-E-H;
142-A-B]
1.16 Since petitioner company had nominated Mr. Justice
V.N. Khare, former Chief Justice of India through their letter the
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said Arbitrator is treated as having been proposed jointly by the
Company and the promoters. Mr. Justice R.M. Lodha, former
Chief Justice of India is appointed as the second arbitrator since
the respondents had failed to nominate. The said arbitrators shall
mutually nominate a third arbitrator to be the Chairperson of the
Arbitral Tribunal. [Para 37][142-C-D]
Innoventive Industries Limited vs. ICICI Bank and
Another (2018) 1 SCC 407: [2017] 8 SCR 33; Swiss
Ribbons Private Limited and Another vs. Union of India
and Others (2019) 4 SCC 17: [2019] 3 SCR 535; Booz
Allen and Hamilton INC. vs. SBI Home Finance Limited
and Others (2011) 5 SCC 532:[2011] 7 SCR 310; Booz
Allen 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 Infrastructure
Limited vs. Union of India & Ors. [2019] 10 SCR 381;
M/S Duro Felguera S.A vs. M/S. Gangavaram Port
Limited (2017) 9 SCC 729 : [2017] 10 SCR 285 -
referred to.
Case Law Reference
[2017] 8 SCR 33
referred to
Para 15
[2019] 3 SCR 535
referred to
Para 16
[2011] 7 SCR 310
referred to
Para 16
(2021) 2 SCC 1
relied on
Para 23
[2011] 7 SCR 310
referred to
Para 23
[2016] 11 SCR 521
referred to
Para 23
[2019] 3 SCR 535
referred to
Para 24
[2019] 10 SCR 381
referred to
Para 24
[2017] 10 SCR 285
referred to
Para 35
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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) and
11(12)(a) of the Arbitration and Conciliation Act, 1996 seeking the
appointment 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. Kritika
Bhardwaj, Advs. for the Petitioner.
Dr. Abhishek Manu Singhvi, Darius Khambata, Atmaram NS
Nadkarni, Neeraj Kishan Kaul, Nakul Dewan, Iqbal Chagla, Sr. Advs.,
Avishkar Singhvi, Jatin Pore, Ms. Ankita Agrawal, Chandra Prakash for
M/S. DSK Legal, Vineet Malhotra, Mohit Paul, Abhishek Srinivasan,
Vishal Gohri, S.S. Rebello, Ms. Sunaina Phul, Aditdya Dewan, Ms. Udita
Singh, Somesh Chandra Jha, Salim M. Saiyed, Praveen Chandra, Rahul
Narang, Nitin Mishra, Ms. Mitali Gupta, Pawan Jit Bindra, Ms. Aastha
Mehta, Ms. Vishakha, Ms. Deepanwita Priyanka, Advs. for the
Respondents.
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 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
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their remedy before the High Court in respect of similar disputes with
respondents No.2 to 4.
3. The petition seeking constitution of the Arbitral Tribunal
emanates from the Share Subscription and Shareholders' Agreements
('SS and SA' for short) dated 20.07.2007, 12.07.2007, 09.01.2008 and
the Supplemental Agreements dated 22.03.2013 and 19.07.2017. Through
the said agreements the respondent Nos. 1 to 4 subscribed to equity
shares and Optionally Convertible Redeemable Preference Shares
('OCRPS' for short) in the company i.e. Indus Biotech Private Ltd. In
the process of business, a decision was taken by the petitioner company
to make a Qualified Initial Public Offering ('QIPO' for short). However,
under Regulation 5(2) of Securities and Exchange Board of India (Issue
of Capital and Disclosure Requirements), Regulations 2018 ('SEBI
Regulations' for short), a company which has any outstanding convertible
securities or any other right which would entitle any person with an
option to receive equity shares of the issuer is not entitled to make QIPO.
4. In that view, it had become necessary for the respondents No.1
to 4 to convert their respective preference shares invested in Indus Biotech
Private Ltd., into equity shares. In that context the petitioner company
proposed to convert the OCRPS invested by the respondents No. 1 to 4,
into equity shares. In the said process of negotiation, a dispute is stated
to have arisen between the petitioner company and the respondents No.
1 to 4, with regard to the calculation and conversion formula to be applied
in converting the preference shares of the respondents No. 1 to 4, into
equity 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 the
total paid up share capital in equity shares. The petitioner company, by
relying on the reports of the auditors and valuer contended that the
respondents No. 1 to 4 would be entitled to approximately 10 per cent of
the total paid up share capital paid by the respondent as per their
conversion formula.
5. The dispute in question, according to the petitioner company is
with regard to the appropriate formula to be adopted and to arrive at the
actual percentage of the paid-up share capital which would be converted
into equity shares and the refund if any thereafter. Until an amicable
decision is taken there is no liability to repay the amount. Therefore,
there is no 'debt' or 'default', nor is the petitioner company unable to
pay. The petitioner company is a profit-making company and is engaged
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in its day-to-day activity. Since the parties themselves had not resolved
the issue, the petitioner company contends that the said dispute is to be
resolved through Arbitration by the Arbitral Tribunal.
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 Sixty-Seven Crore
Eight Lakh Fifty-Six 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.
9. Since the rank of the parties is different in the above noted, two
petitions, for the ease of reference and clarity, the parties would be referred
to by their name and the respondents No. 1 to 4 in the Arbitration Petition
will be collectively referred to as 'Kotak India Venture'.
INDUS BIOTECH PVT LTD v. KOTAK INDIA VENTURE (OFFSHORE)
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10. In the above backdrop, we have heard Mr. Shyam Divan, Mr.
Aryama Sundaram, Mr. Mukul Rohatgi and Mr. Ritin Rai respective
learned senior counsel on behalf of Indus Biotech Private Limited, Dr.
Abhishek Manu Singhvi, learned senior counsel on behalf of Kotak India
Venture as also Mr. Khambhatta, Mr. Neeraj Kishan Kaul, Mr. Nakul
Dewan, Mr. ANS Nadkarni for the other parties and perused the petition
papers.
11. As a matter of fact, the transaction entered into between the
parties 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 and
19.07.2017 is not in dispute. The further fact that the SS and SA dated
20.07.2007, 12.07.2007 and 09.01.2008 vide Clause 20.4 provides for
arbitration in the event of any dispute, controversy or claim arising out
of, relating to or in connection with the said agreement is also not in
dispute. Further the supplemental agreements vide Clause 13 and 19
respectively provides that the provision for arbitration in Clause 20.4 of
the SS and SA agreement dated 20.07.2007 shall apply to the supplemental
agreement is also evident. If in that context the matter is looked at, there
would be no need for this Court to advert to any other aspect in the
petition filed under Section 11 of the Act, 1996 since in the normal
circumstance, on constitution of the Arbitral Tribunal all other issues are
to be gone into by the Arbitral Tribunal relating to the above noted dispute
between the parties. However, the nature of Arbitral Tribunal will have
to be considered since one is international arbitration and the other are
domestic.
12. Despite the said position, before concluding on the Arbitration
Petition filed by Indus Biotech Private Limited, keeping in perspective
the objection raised by the Kotak India Venture relating to the petition
having already been instituted before the NCLT under Section 7 of the
IBC and also keeping in perspective the order dated 09.06.2020 passed
by NCLT disposing of the application filed under Section 8 of the Act,
1996; the matter requires deeper consideration on that aspect since Dr.
Abhishek Manu Singhvi, the learned senior counsel for the Kotak India
Venture has contended with regard to a serious error said to have been
committed by the NCLT in entertaining an application under Section 8 of
the Act, 1996 in the backdrop of the legal duty cast on NCLT to proceed
strictly in accordance with the procedure contemplated under Section 7
of IB Code. It is further contented that Indus Biotech Private Limited
having defaulted, the event enabling the petition under Section 7 of IB
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Code has occurred and the dispute sought to be raised is not arbitrable
after the insolvency proceeding is commenced.
13. Before adverting to the contentions in this regard, it is to be
taken note that against the order dated 09.06.2020 assailed in the special
leave petition, Kotak India Venture in the normal course if aggrieved,
ought to have availed the remedy of appeal by filing an appeal in the
NCLAT as provided under Section 61 of IB Code. Having not done so,
in a normal circumstance we would have chosen to relegate Kotak India
Venture to avail the alternate remedy of appeal. The contention on behalf
of Kotak India Venture that they do not have the remedy of appeal as it is
an order disposing an application filed under Act, 1996 and not an order
under the part as provided in Section 61 of IB Code is noted only to be
rejected. The order dated 09.06.2020 is certainly an order passed by the
Adjudicating Authority under IB Code and petition under Section 7 of
that Code is also disposed. However, as noted from the narration made
above, the order dated 09.06.2020 passed by the NCLT is while taking
note of petition under Section 7 of IB Code, in the backdrop of Indus
Biotech seeking for the resolution of dispute through arbitration and the
Arbitration Petition to that effect was already pending before this Court
as on the date the order was passed by the NCLT. It is only in this special
circumstance we have proceeded to entertain the petition and examine
the matter on merits.
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 sub-Section
(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 sub-Section (4) to Section 7 of IB Code.
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15. This Court had the occasion to consider exhaustively the
scheme and working of the IB Code in the case of Innoventive Industries
Limited vs. ICICI Bank and Another (2018) 1 SCC 407. The
proceeding under Section 7 of the IB Code and the scope thereof is
articulated in paras 27 to 30 which read hereunder,
"27. The scheme of the Code is to ensure that when a default
takes place, in the sense that a debt becomes due and is not paid,
the insolvency resolution process begins. Default is defined in
Section 3(12) in very wide terms as meaning non-payment of a
debt once it becomes due and payable, which includes nonpayment of even part thereof or an instalment amount. For the
meaning of "debt", we have to go to Section 3(11), which in turn
tells 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 to
Section 3(6) which defines "claim" to mean a right to payment
even if it is disputed. The Code gets triggered the moment default
is of rupees one lakh or more (Section 4). The corporate insolvency
resolution process may be triggered by the corporate debtor itself
or a financial creditor or operational creditor. A distinction is made
by the Code between debts owed to financial creditors and
operational creditors. A financial creditor has been defined under
Section 5(7) as a person to whom a financial debt is owed and a
financial debt is defined in Section 5(8) to mean a debt which is
disbursed against consideration for the time value of money. As
opposed to this, an operational creditor means a person to whom
an operational debt is owed and an operational debt under Section
5(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 Section
7(1), a default is in respect of a financial debt owed to any financial
creditor of the corporate debtor - it need not be a debt owed to
the applicant financial creditor. Under Section 7(2), an application
is to be made under sub-section (1) in such form and manner as is
prescribed, which takes us to the Insolvency and Bankruptcy
(Application to Adjudicating Authority) Rules, 2016. Under Rule
4, the application is made by a financial creditor in Form 1
accompanied by documents and records required therein. Form 1
is a detailed form in 5 parts, which requires particulars of the
applicant in Part I, particulars of the corporate debtor in Part II,
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particulars of the proposed interim resolution professional in Part
III, particulars of the financial debt in Part IV and documents,
records and evidence of default in Part V. Under Rule 4(3), the
applicant is to dispatch a copy of the application filed with the
adjudicating authority by registered post or speed post to the
registered office of the corporate debtor. The speed, within which
the adjudicating authority is to ascertain the existence of a default
from the records of the information utility or on the basis of evidence
furnished by the financial creditor, is important. This it must do
within 14 days of the receipt of the application. It is at the stage of
Section 7(5), where the adjudicating authority is to be satisfied
that a default has occurred, that the corporate debtor is entitled to
point out that a default has not occurred in the sense that the
"debt", which may also include a disputed claim, is not due. A
debt may not be due if it is not payable in law or in fact. The
moment the adjudicating authority is satisfied that a default has
occurred, the application must be admitted unless it is incomplete,
in which case it may give notice to the applicant to rectify the
defect within 7 days of receipt of a notice from the adjudicating
authority. Under sub-section (7), the adjudicating authority shall
then communicate the order passed to the financial creditor and
corporate debtor within 7 days of admission or rejection of such
application, as the case may be.
29. The scheme of Section 7 stands in contrast with the scheme
under Section 8 where an operational creditor is, on the occurrence
of a default, to first deliver a demand notice of the unpaid debt to
the operational debtor in the manner provided in Section 8(1) of
the Code. Under Section 8(2), the corporate debtor can, within a
period of 10 days of receipt of the demand notice or copy of the
invoice mentioned in sub-section (1), bring to the notice of the
operational creditor the existence of a dispute or the record of the
pendency of a suit or arbitration proceedings, which is preexisting-i.e. before such notice or invoice was received by the
corporate 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 corporate
debtor who commits a default of a financial debt, the adjudicating
authority has merely to see the records of the information utility
or other evidence produced by the financial creditor to satisfy
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itself that a default has occurred. It is of no matter that the debt is
disputed so long as the debt is "due" i.e. payable unless interdicted
by some law or has not yet become due in the sense that it is
payable at some future date. It is only when this is proved to the
satisfaction of the adjudicating authority that the adjudicating
authority may reject an application and not otherwise."
(Emphasis supplied)
16. Dr. Singhvi, learned senior counsel while seeking to repel the
contention put forth on behalf of the Indus Biotech Private Limited seeks
to emphasise that a proceeding under Section 7 of IB Code is to be
considered in a stringent manner. Referring to the Preamble to the IB
Code, it is contended that the same has evolved after all the earlier
processes like civil suit, winding up petition, SARFAESI proceeding and
SICA have failed to secure the desired result. The provision under the IB
Code is with the intention of making a debtor to seek the creditor. In that
regard, Dr.