Landmark Supreme Court Ruling: Balancing Insolvency and Arbitration in the Indus Biotech Case
A final-year BA.LLB (Hons.) student at NMIMS, School of Law, Bangalore
In the case of Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund (2021) ibclaw.in 52 SC, the Supreme Court of India (“SCI”) observed that if there is an ongoing and admitted application under Section 7 of the Insolvency and Bankruptcy Code (“IBC”) based on a finding of default and the debt owed by the corporate debtor, any subsequent application for arbitration under Section 8 of the Arbitration and Conciliation Act (“Act”) will not be permissible. However, if the Section 7 petition has not yet been admitted under IBC, the Adjudicating Authority must first decide on the Section 7 application, including the existence of a default, before considering the Section 8 arbitration application. The outcome of the Section 7 application will impact Section 8 application in such circumstances.
Facts of the Case: Dispute over Conversion of Preference Shares
Indus Biotech Private Limited issued Optionally Convertible Redeemable Preference Shares (OCRPS) to Kotak India Venture (Offshore) Fund through share subscription and shareholders agreements. When Indus opted for a Qualified Initial Public Offering (QIPO), Kotak chose to convert its preference shares into equity shares in accordance with regulation 5(2) of SEBI (ICDR) Regulations, 2018. However, a dispute emerged over the calculation and conversion formula for this transformation. Kotak claimed a 30% stake in the paid-up share capital of the equity shares upon conversion, while Indus argued for only a 10% stake.
The central issue in this dispute revolved around whether Kotak’s exercise of redemption options constituted a ‘default’ under the Insolvency and Bankruptcy Code (IBC), allowing them to initiate insolvency proceedings against Indus using a Section 7 petition as a financial creditor. Indus contended that discussions regarding the conversion of shares, rather than redemption, had taken place, and until a resolution was reached on the disagreement about the percentage of equity shares to be allocated, there was no obligation to repay, thus implying no ‘debt’ or ‘default’ under the IBC.
In response to Kotak’s Section 7 petition, Indus filed an Arbitration Application under Section 8 of the Arbitration and Conciliation Act, 1996, with the aim of resolving the dispute through arbitration. The National Company Law Tribunal (NCLT) granted this Arbitration Application, directing the parties to engage in arbitration and subsequently dismissing the Section 7 petition. Kotak, dissatisfied with the NCLT’s ruling, sought redress from the Supreme Court.
Issue before the Supreme Court
Whether is it permissible to file an application for arbitration under Section 8 of the Arbitration and Conciliation Act after an insolvency resolution petition under Section 7 of the IBC has been admitted?
Contention of the Parties
Kotak India Venture contended that the NCLT erred in entertaining an application under Section 8 of the Arbitration and Conciliation Act, given its obligation to strictly adhere to the procedure outlined in Section 7 of the Insolvency and Bankruptcy Code.
They further asserted that Indus Biotech Private Limited had indeed defaulted, which triggered the Section 7 petition under the IBC. As a result, any disputes raised should not be subject to arbitration once insolvency proceedings have been initiated.
Biotech Private Limited, contented these arguments by underlining the gravity of proceedings under Section 7 of the IBC and pointed to the IBC’s preamble, which reflects the legislative intent behind the code. Indus argued that the IBC was enacted as a last resort after all other processes, such as civil suits, winding-up petitions, SARFAESI proceedings, and the Sick Industrial Companies Act had failed to provide a satisfactory resolution. The provisions within the IBC are designed to compel debtors to repay their creditors. To support this stance, Sr. Adv. Singhvi cited legal precedents, including the Swiss Ribbons Private Limited case and Booz Allen and Hamilton INC case, to assert that Section 7 proceedings under the IBC are categorized as actions in rem, making matters related to insolvency and winding-up non-arbitrable.
Judgement of the Supreme Court
The Supreme Court’s recent ruling in the case of Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund addresses a crucial issue regarding the interplay between insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) and arbitration under the Arbitration and Conciliation Act. The Court’s judgement offers significant insights into the procedural aspects and priorities while dealing with these concurrent legal processes.
The Court held that an IBC proceeding is considered “in rem” only after it has been admitted. This means that the proceeding affects the rights and liabilities of all interested parties and has an “erga omnes” effect only after admission. Until the Adjudicating Authority evaluates the matter, records a finding of default, and formally admits the petition under Section 7 of the IBC, it does not attain the status of an action “in rem”. Mere filing and pendency of the petition before admission do not constitute the initiation of an insolvency process.
Regarding the role of the Adjudicating Authority in cases where both Section 7 of the IBC and Section 8 of the Arbitration and Conciliation Act applications are pending, the Court clarified its stance. It reiterated that the IBC prevails over other laws, as stipulated under Section 238 of the IBC. Consequently, the Adjudicating Authority is mandated to focus on the material presented within the Section 7 IBC application, including evidence provided by the financial creditor and the corporate debtor’s response. The purpose of this is to ascertain whether there exists a default.
This approach serves to prevent corporate debtors from raising frivolous defenses solely to delay the insolvency process, given the strict timelines imposed by the IBC. Even if an application under Section 8 of the Arbitration Act is submitted, it does not warrant independent consideration apart from the Section 7 IBC application. The Adjudicating Authority must evaluate the merits of the contentions put forth by both parties within the context of the insolvency application. If the Authority determines that a default exists and the debt is payable, the arbitration argument to delay the proceedings becomes irrelevant.
Further, the Court clarified that if the Adjudicating Authority concludes that there is no default, it may dismiss the Section 7 IBC petition. This dismissal opens the door for the parties to pursue arbitration through appropriate legal channels. The resolution process then proceeds in accordance with arbitration law, and there is no need for the National Company Law Tribunal (NCLT) to pass orders on the Section 8 Arbitration Act application.
The Supreme Court upheld the NCLT’s order, effectively affirming the dismissal of the Section 7 IBC petition. Although the application under Section 8 of the Arbitration Act was technically allowed stating that disputes in the present case were arbitrable, it remains contingent upon the consideration of the petition filed under Section 11 of the Arbitration Act before the Court which deals with appointment of an arbitrator.
The Supreme Court held that since there was an unresolved dispute concerning the 10% and 30% amounts, it would not be right to assume that any debt payment default had happened. Consequently, the Supreme Court ruled that the request to establish an arbitral tribunal under Section 11 of the Arbitration Act was valid.
The Supreme Court’s analysis underlines the hierarchy between the IBC and other laws, setting a clear procedural framework for handling simultaneous Section 7 IBC and Section 8 Arbitration Act applications. The Court’s stance prioritizes the determination of default within the insolvency process and ensures that legitimate insolvency proceedings are not thwarted by tactical arbitration attempts. The ruling promotes the efficient resolution of insolvency cases while safeguarding the rights of creditors and corporate debtors.
Comments and Conclusion
The recent verdict by the Supreme Court in the case of Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund provides much-needed clarity regarding the intricate interplay between insolvency proceedings under the Insolvency and Bankruptcy Code (IBC) and arbitration proceedings governed by the Arbitration and Conciliation Act. These rulings shed light on the procedural intricacies and priorities that come into play when these two legal mechanisms operate concurrently.
The Court’s emphasis on categorizing an IBC proceeding as “in rem” only after it receives formal admission is a pivotal aspect of the decision. This distinction underlines that the insolvency process significantly impacts the rights and obligations of all parties involved and carries a legal effect that binds all.
Furthermore, the Court’s clarification regarding the role of the Adjudicating Authority in cases where both Section 7 of the IBC and Section 8 of the Arbitration and Conciliation Act applications are concurrently in process holds significant importance. By reaffirming the supremacy of the IBC as articulated in Section 238 of the IBC, the Court underlines that the Authority must give precedence to the assessment of the material facts presented within Section 7 IBC application. This involves scrutinizing the evidence presented by the financial creditor and the corporate debtor’s response to establish the existence of a default.
This approach serves a dual purpose: it prevents corporate debtors from using dilatory tactics to delay insolvency proceedings, considering the strict timelines under the IBC, and ensures that the primary issue of default is addressed. Even if an application under Section 8 of the Arbitration Act is filed, it does not warrant separate consideration. The Adjudicating Authority’s duty is to evaluate the merits of the contentions raised by both parties within the context of the insolvency application. If the Authority concludes that default indeed exists and the debt is payable, the argument for arbitration to stall the proceedings becomes irrelevant.
Crucially, the Court clarifies that if the Adjudicating Authority determines there is no default, it may dismiss the Section 7 IBC petition. This decision allows the parties to explore arbitration as an alternative dispute resolution mechanism, following the appropriate legal procedures. This ensures that insolvency matters are resolved efficiently while adhering to the principles of due process.
The Supreme Court’s analysis provides a structured framework for handling simultaneous Section 7 IBC and Section 8 Arbitration Act applications. It prioritizes the determination of default within the insolvency process and safeguards against strategic attempts to delay proceedings. This ruling is a significant step towards efficient insolvency resolution while upholding the rights of creditors and corporate debtors.
 Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund, (2021) 6 SCC 436
 Supra Note. 1.
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