2021 (3) TMI 1178 - SC - Companies Law

Supreme Court clarifies NCLT's role in arbitration petitions, emphasizes default determination first.

Indus Biotech Private Limited Versus Kotak India Venture (Offshore) Fund (earlier known as Kotak India Venture Limited) & Others

The Supreme Court upheld the NCLT's decision, dismissing the Section 7 IBC petition and allowing the arbitration petition. The Court clarified that the ... Seeking appointment of Arbitrator so as to to constitute an Arbitral Tribunal to adjudicate upon the disputes that have arisen between the petitioner and the respondent - HELD THAT:- 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 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 dated 20.07.2007, ‘KIVFI’ as the Investor is on the other side and in the fourth agreement dated 09.01.2008 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. Since Indus Biotech Private Limited had nominated Mr. Justice V.N. Khare, former Chief Justice of India through their letter dated 15.10.2019 the said learned 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 learned arbitrators shall mutually nominate a third arbitrator to be the Chairperson of the Arbitral Tribunal. Arbitration petition allowed. Issues Involved:1. Appointment of an Arbitrator under the Arbitration and Conciliation Act, 1996.2. Dispute regarding the conversion formula of OCRPS into equity shares.3. Jurisdiction of NCLT under Section 7 of the Insolvency and Bankruptcy Code (IBC).4. Arbitrability of disputes amidst insolvency proceedings.Detailed Analysis:1. Appointment of an Arbitrator under the Arbitration and Conciliation Act, 1996:The Arbitration Petition was 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, seeking the appointment of an Arbitrator to adjudicate disputes with the respondents. The disputes arose from Share Subscription and Shareholders’ Agreements (SS and SA) and Supplemental Agreements, involving the conversion of OCRPS into equity shares. The petitioner argued that a single Arbitral Tribunal could handle the arbitration as a single process due to the common subject matter under different agreements.2. Dispute regarding the conversion formula of OCRPS into equity shares:The core dispute involved the calculation and conversion formula for converting OCRPS into equity shares. The respondents claimed entitlement to 30% of the total paid-up share capital, while the petitioner contended it should be approximately 10% based on auditors' and valuers' reports. This disagreement led to the contention that the matter should be resolved through arbitration.3. Jurisdiction of NCLT under Section 7 of the Insolvency and Bankruptcy Code (IBC):Respondents contended that the petitioner defaulted on redeeming OCRPS, leading to a debt of Rs. 367,08,56,503. Consequently, the respondents initiated the Corporate Insolvency Resolution Process (CIRP) under Section 7 of the IBC before the NCLT. The petitioner countered by filing an application under Section 8 of the Arbitration and Conciliation Act, 1996, seeking to refer the dispute to arbitration. The NCLT, Mumbai Bench IV, allowed the application under Section 8, dismissing the Section 7 petition under IBC. The respondents challenged this order in the Supreme Court.4. Arbitrability of disputes amidst insolvency proceedings:The Supreme Court examined whether the dispute was arbitrable given the pending insolvency proceedings. It was noted that the NCLT had to ascertain the existence of default under Section 7 of the IBC. The Court emphasized that an application under Section 7 becomes a proceeding in rem only upon admission, which was not the case here. The Court held that the NCLT rightly concluded that no default had occurred, making the dispute arbitrable.Conclusion:The Supreme Court upheld the NCLT's decision, dismissing the Section 7 IBC petition and allowing the arbitration petition. The Court clarified that the NCLT must first determine the existence of default before considering an application under Section 8 of the Arbitration Act. The Court appointed Mr. Justice V.N. Khare and Mr. Justice R.M. Lodha as arbitrators, directing them to mutually appoint a third arbitrator. The decision ensures that disputes with unresolved conversion formulas and valuation issues are arbitrated, while insolvency proceedings are appropriately managed under the IBC framework.