Analysis of NCLT Mumbai Judgment in Indus BioTech (P) Ltd. V/s Kotak Venture Fund -1 dated 9th June, 2020
Case: Indus BioTech (P) Ltd. V/s Kotak Venture Fund -1
Decided on 9th June, 2020
Judgement analysed by: Adv. Partho Sarkar
The dispute centres around three things – (1) The valuation of Kotak Venture Fund OCRPS; (2) The right of Kotak Venture Fund to redeem such OCRPS when it had participated in the process to convert its OCRPS into equity shares of Indus Biotech/Corporate Debtor; and (3) Fixing of the QIPO date. All are determinants in coming to a judicial conclusion whether or not a default has occurred, the facts don’t conjure that a default has occurred. The invocation of arbitration thus was held to be justified. It was also adjudicated – Indus Biotech is a solvent, debt-free and profitable company. It will unnecessarily push an otherwise solvent, debt-free company into CIRP, not a desirable result at this stage. (The author in the Epilogue has explained the incorrect premise adopted in arriving at the ruling).
The Epilogue also discusses a per incuriam order, by NCLT Bengaluru, suggesting the Applicant under I & B Code to proceed under Arbitration Law in the matter of Harish P V/s Chemizol Additives  ibclaw.in 24 NCLT.
Back Ground Facts/Rival Submissions
- An Interlocutory Application (IA) came to be filed by Indus Biotech/Corporate Debtor, relying on section 8 of the Arbitration & Conciliation Act, 1996 (Arbitration Act) on a limited point of NCLT to refer the captioned contestant parties in the main CP (IB) No.3077/2019 to arbitration, vide Section 8 (1) of Arbitration Act – A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.
- It is the case of Kotak Venture Fund, that Indus Biotech failed to redeem the Optionally Convertible Redeemable Preference Shares (OCRPS) on or before 15th April, 2019 in terms of the Share Subscription and Shareholders Agreement (SSSA). Thus date of default commenced on 16th April, 2019.
- Kotak Venture Fund claimed around INR 367.09 Crores as redemption value of the OCRPS held by it in Indus Biotech/ Corporate Debtor. To counter the same, the line of argument tendered by Indus Biotech was flavoured of an Arbitration Law perspective, in stating to summarise the dispute – (a) The valuation of OCRPS; the conversion of the outstanding preference shares was to take place according to the defined conversion formula, depending on the valuation, the converted stake would range between ten to thirty percent of the equity share capital of Indus Biotech post conversion, the dispute pertains to the calculation and conversion formula to be followed. (b) The right of Kotak Venture Fund to be redeemed of the OCRPS when it had participated in the process to convert its OCRPS into equity shares of the Indus Biotech; (c) Fixing of the Qualified Initial Public Offering (QIPO) date – the QIPO process itself was stalled as a result of this dispute.
- It is the case of Kotak Venture Fund, that Indus Biotech – to get out of the clutches of IBC Code, is canvassing of it’s being a solvent & debt-free company, effectually not calling for CIRP. In counter, it was argued, Kotak Venture Fund on 31st March, 2019 issued a Redemption Notice to Indus Biotech, calling upon the latter to pay a sum of around INR 367.09 Crores basis which Section 7 application came to be filed; therefore, there exists, more than one bona fide and substantial dispute between the parties under the Share Subscription and Shareholders Agreement (SSSA) since August 2018; in substance the dispute is in the nature of a commercial dispute and that courts should lean in favour of enforcing arbitration agreements.
- Rival parties submitted multiple rulings –
- Pioneer Urban Land and Infrastructure V/s UOI  ibclaw.in 13 SC; Haryana Telecom V/s Sterlite Industries (1999) 5 SCC 688. It was culled of the said ruling(s), matters in rem are inherently incapable of being referred to Arbitration and while deciding the scope of a section 8 petition under the Arbitration & Conciliation Act, 1996, only such disputes or matters should be referred to Arbitration, which an arbitrator is competent or empowered to decide. Section 7 of the Code is a litigation not amenable to arbitration.
- Booz Allen and Hamilton V/s SBI Home Finance (2011) 5 SCC 532 that if there are some matters which are arbitrable and some matters which are non-arbitrable, even in those cases, it should not be referred to arbitration. Booz Allen ruling quotes the view in Sukanya Holdings (P) Ltd V/s Jayesh H. Pandya (2003) 5 SCC 531, that bifurcation of the subject matter of an action brought before a judicial authority is not allowed.
- In Rakesh Malhotra V/s Rajinder Kumar Malhotra 2014 SCC OnLine Bom 1146 Bombay High Court created a window and after considering the same, the only question is whether the case of Indus Biotech falls within that window.
- Question framed by NCLT: Will the provisions of the Arbitration & Conciliation Act, 1996 prevail over the provisions of the I & B Code? If so, in what circumstances? It is settled law that generalia specialibus non derogant – special law prevails over general law. In Consolidated Engineering Enterprises V/s Principal Secretary, Irrigation Department (2008) 7 SCC 169 it was held Arbitration & Conciliation Act is a special law. In P Anand Gajapathi Raju & Ors V/s PVG Raju (dead) & Ors. (2000) 4 SCC 539, it was held – that the language of section 8 of the Arbitration & Conciliation Act, 1996, is peremptory and the court is under an obligation to refer parties to arbitration.
- Section 238 of the I & B Code states, the provisions of I & B Code shall have overriding effect vis-à-vis anything inconsistent therewith contained in any other law. In Innoventive Industries V/s ICICI  ibclaw.in 128 NCLAT, NCLAT ruled the statute mandates NCLT to ascertain and record satisfaction as to the occurrence of default before admitting the application. The ‘default’ to be understood within the meaning of section 3(12) of the Code.
- In the present case, the dispute centres around three things – (1) The valuation of the Kotak Venture Fund OCRPS; (2) The right of Kotak Venture Fund to redeem such OCRPS when it had participated in the process to convert its OCRPS into equity shares of Indus Biotech/Corporate Debtor; and (3) Fixing of the QIPO date. All of these things are important determinants in coming to a judicial conclusion whether or not a default has occurred, the facts don’t conjure that a default has occurred. The invocation of arbitration thus was held to be justified. It was also held that Indus Biotech is a solvent, debt-free and profitable company. It will unnecessarily push an otherwise solvent, debt-free company into CIRP, which is not a very desirable result at this stage.
The IA praying for seeking Arbitration is allowed, as a corollary the application under Section 7 of I & B Code is rejected.
- The above order is correct, though the contesting parties premised their arguments missing out the core legal issue(s) qua I & B Code and the Companies Act. Kotak Venture Fund rested its case – “Are the reliefs claimed in the petition capable of being referred to arbitration or being granted by an arbitral tribunal?” In the given traverse of facts of the case, the ruling by NCLT in rejecting Kotak’s Section 7 application is certainly correct, but to reiterate was overlooked of the core question of law, given the somewhat aliunde rival submissions tendered. Defragmenting the facts, the preliminary issue which should have been determined, does optionally Convertible Redeemable Preference Shares – by its inherent definition can in any circumstances metamorphose into a debt. Bare reading of Section 80 of the Companies Act, 1956 (or Section 55 of Companies Act 2013), no way impresses such metamorphosis of Kotak Venture Fund to become a Financial Creditor of Indus Biotech, however the agreement, between the contestants provide ‘… provided that the range of conversion would be between ten to thirty percent, dependent on the valuation which the agreement itself provides. The agreement further provides that if the QIPO does not take place by the QIPO date, then a fifteen-day notice period shall be given. At the end of this fifteen-day period, the investment will be redeemable at the Internal Rate of Return (IRR) of thirty percent. If not redeemed, then it will be treated as a debt’. [Can an agreement between the parties, extrapolating a contractual obligation not-conceivable in the law be enforceable!! Under Section 2 (g) of the Contract Act, such agreements are void contract]. Bombay High Court in Aditya Prakash Entertainment V/s Magikwand Media Pvt. Ltd 2018 SCC OnLine Bom 551 had ruled – The shareholders of redeemable preference shares of the company do not become creditors of the company in case their shares are not redeemed by the company at the appropriate time. If they do not become the creditors of the company, they cannot apply for winding up of the company under Section 433(e) of the Companies Act, 1956.
- In terms of the preceding para, the claim of Kotak Venture Fund having not met the test of Section 3 (11) of the I & B Code; it was an in-determinant issue to pursue Section 3 (12) of the Code in adjudicating to a conclusion – ‘the facts don’t conjure that a default has occurred. The invocation of arbitration thus was held to be justified’.
- The NCLT in the captioned judgment held ‘that Indus Biotech is a solvent, debt-free and profitable company. It will unnecessarily push an otherwise solvent, debt-free company into CIRP, not very desirable result at this stage’. The determinant applied by NCLT runs in conflict with the Supreme Court ruling in Swiss Ribbons V/s UoI,  ibclaw.in 03 SC; evidently reiterated of NCLAT ruling in (Monotrone Leasing V/s P M Cold Storage)  ibclaw.in 21 NCLAT –
“We are bound to emphasize that a presumption cannot be drawn merely on the basis that a company, being solvent, cannot commit any default. As observed in financial and economic parlance, the inability to payoff debts and committing default are two different aspects which are required to be adjudged on equally different parameters. Inability to pay debt has no relevance for admitting or rejecting an application for initiation of CIRP under the IBC.”
- Ruling of NCLT Bengaluru in the matter of Harish P V/s Chemizol Additives  ibclaw.in 24 NCLT discussed hereunder:
NCLT has a mandate of either accepting or rejecting the Insolvency Petition vide a speaking order. NCLT being a creature of a special statute is to discharge certain specific functions… can exercise only such powers within the contours of jurisdiction as prescribed by the Statute, the law in respect of which, it is called to administer (Embassy Properties V/s State of Karnataka  ibclaw.in 12 SC). NCLT Bengaluru however in the matter of Harish P V/s Chemizol Additives in its ruling dated 8th June, 2020 overstepped itself, excerpted hereunder, basis copy of order –  ibclaw.in 24 NCLT:
(1) The Respondent is directed to settle the issue amicable, failing which, the Petitioner is at liberty to invoke the arbitration clause as available under Clause-6 of the Employment Agreement dated 01.09.2015, and the Respondent is directed to participate in such Arbitration, as per law, in order to resolve the issue rather than to aggravate the issue…(The Code doesn’t envisage in pushing litigants to Arbitration Proceedings, it can only accept or reject the Insolvency Application, as per the contours of law).
(2) The Petitioner is also granted liberty to invoke appropriate remedy, as per law, in case, the Petitioner is aggrieved by the proceedings passed during Arbitration to be invoked in pursuance to this order… (NCLT has no power or jurisdiction to grant or revoke liberty for proceedings arising out of Arbitration – since NCLT is not the competent authority).
(3) For an aggrieved party, knocking at the doors of Judiciary would be last resort. Such party should exhaust alternative remedy available by virtue of Agreement(s) they themselves have voluntarily executed and the terms and conditions in those Agreement(s) would bind them. In the instant case, as stated supra, approaching this Adjudicating Authority is not only the remedy available for the Petitioner as per the terms of agreement. In terms of Clause 6 of the Agreement, as stated supra, both the parties agreed to settle the issue by resorting to Indian Arbitration and Conciliation Act 1996. Therefore, the Petitioner can also avail alternative remedy available in the Agreement, which is binding on both the parties. Since the Petitioner has relied upon the very terms and conditions of the Agreement in support of its claim, it cannot selectively choose to insist payment in terms of the agreement, without making/invoking provisions of alternative remedy… (NCLT has no role to advise in seeking exhaustion of alternative remedy by the applicant, it is mandated to confine itself within the contours of the Code to either accept or reject an application).
(4) It is a settled position of law that the provisions of the Code cannot be invoked to settle the dispute(s) or to recover the alleged outstanding amount. Admittedly the Petitioner has not invoked other remedies available except the provisions of the code by issuing demand notice. The mere acceptance of the debt in question by the Respondent would not automatically entitle the Petitioner to invoke the provisions of the Code, unless the debt and default is undisputed and proved it to the satisfaction of the Adjudicating Authority. As per the copy of Annual Returns for the Financial year 2017-18, filed by the Petitioner in respect of the Respondent Company, its turnover and net worth are Rs. 103,322,162 and Rs. 1,325,365,853/- respectively. Therefore, the Respondent Company prima facie appears to be solvent Company so as to resolve the issue of outstanding amount in question. The NCLT is conferred power, even to refer the matter pending before it, to Mediation and Conciliation. U/s 442 of the Companies Act, 2013. The Adjudicating Authority, being NCLT, U/ s 60(1) of the Code, can suo motto refer the matter to either Mediation and Conciliation or to Arbitration to settle the dispute…(Section 60 (1) of the Code is about the territorial jurisdiction of NCLT & nothing to do with Mediation and Conciliation).
Read with the afore-stated excerpts of order by NCLAT in Monotrone Leasing (  ibclaw.in 21 NCLAT); with greatest respect to the concerned Judicial Officer(s) of NCLT Bengaluru, the author humbly submits, a per incuriam order came to be passed, in Harish P V/s Chemizol Additives, an ex-facie instance of miscomprehending nay misstating the law.
Respectfully submitted of the Supreme Court’s Observations –
- Supdt. of Central Excise V/s Somabhai Patel AIR 2001 SC 1975 – In case of miscomprehension of law – same constitutes contempt.
- RR Parekh V/s High Court of Gujarat, AIR 2016 SC 3356 – A judge passing an order against the provisions of law is actuated of an oblique motive or corrupt practice – No direct evidence is necessary – Punishment for compulsory retirement directed.
The author is of the firm believer of the Doctrine – ‘Actus Curiae Neminem Gravabit’ – The court shall prejudice none.
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