2021 (3) TMI 1178 - Supreme Court

Seeking appointment of Arbitrator so as to to constitute an Arbitral Tribunal to adjudicate upon the disputes.

The petition seeking the constitution of Arbitral Tribunal owes its origin to the Share Subscription and Shareholders’ Agreements (‘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.

By way of the said agreements the Respondent Nos. 1 to 4 subscribed to equity shares and Optionally Convertible Redeemable Preference Shares (‘OCRPS') in the company i.e. Indus Biotech Private Ltd.

The petitioner company in its normal business decision making made a Qualified Initial Public Offering (‘QIPO’). Regulation 5(2) of Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements), Regulations 2018 (‘SEBI Regulations'), provide that 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.

Hence the Respondents were bound to convert their respective preference shares invested in Indus Biotech Private Ltd., 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.

The formula as stated by the respondent Nos. 1 to 4, provided 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.
It involved "refund" if any thereafter too.

The parties could not resolve the said contention themselves therefore the said dispute was to be resolved through arbitration.

Respondents No. 1 to 4 herein having subscribed to the OCRPS not being disputed, however redemption of the same was to be made by the petitioner company. Respondents No. 1 to 4 alleged that on redemption of OCRPS, a sum of ₹ 367,08,56,503/( Rupees Three Hundred Sixty Seven Crore Eight Lakh Fifty Six Thousand Five Hundred Three) became due and payable. The said demand was put up to the petitioner company. The latter did not pay the aforesaid amount culminating the same into a default.

Now the debt had not been paid by the company, 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') provided under the Insolvency and Bankruptcy Code, 2016 (‘IB Code').

Respondent no. 2 filed a petition seeking appointment of a "Resolution Professional".

Held that there was no "default" thus the petition under IB stood dismissed.

On a bare reading of the arbitration agreement, held that the arbitration shall be held at Mumbai and be conducted by three arbitrators who shall appoint the third arbitrator as "Chairperson".

Indus Biotech Private Limited had nominated Mr. Justice V.N. Khare, former Chief Justice of India as an Arbitrator.

Mr. Justice R.M. Lodha, former Chief Justice of India being appointed as the second arbitrator since the respondents failed to nominate one.

The abovesaid arbitrators mutually nominated a third arbitrator to be the Chairperson of the Arbitral Tribunal.

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 present facts may be resolved by the Arbitral Tribunal consisting of same members but separately constituted in respect of each agreement. Separate proceedings in the agreement providing for "international arbitration" and in others by clubbing the "domestic disputes".

This note may have helped the readers learn the nuances involved when separate arbitration agreements exist between the same parties. As we read, the contention here was not "insolvency" but appointment of arbitrator/s to constitute an arbitral tribunal.

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2021 (3) TMI 1178 - Supreme Court