(i<\/em>) Should the adjudicating authority first decide the application under Section 8 of the Arbitration and Conciliation Act, 1996[2]<\/a> (the A&C Act), before deciding the application under Section 7 of the Insolvency and Bankruptcy Code, 2016[3]<\/a> (IBC)?<\/p>\n
(iii<\/em>) Was the procedure for appointment of Arbitral Tribunal followed?<\/p>\n
(i<\/em>) Existence of arbitration clause is not relevant, not a factor and cannot affect proceedings under Section 7 IBC;<\/p>\n
ii<\/em>) Section 7 IBC deals with subject-matter of insolvency which is non-arbitrable and in rem; and<\/p>\n
(iii<\/em>) Non-payment of redemption value of OCRPS is a default in payment of debt by Indus and, therefore, NCLT should admit the application under Section 7 IBC.<\/p>\n
(i<\/em>) Dispute pertains to valuation of Kotak\u2019s OCRPS, which is arbitrable;<\/p>\n
(ii<\/em>) Indus is a debt-free, profitable company and is not in need of resolution; and<\/p>\n
(iii<\/em>) Investment of Kotak was in the share capital of Indus, by preference shares and Kotak is not a financial creditor.<\/p>\n
(i<\/em>) Indus is a solvent, debt-free and profitable company and pushing a solvent company into insolvency is neither meaningful nor desirable at that stage;<\/p>\n
(ii<\/em>) Dispute between the parties is regarding the valuation of OCRPS and parties must make an attempt to reconcile the differences and invocation of arbitration is justified; and<\/p>\n
(iii<\/em>) Petition for appointment of arbitrator filed by Indus is pending before the SC.<\/p>\n
(i<\/em>) Mere filing of an application under Section 7 IBC does not make the proceeding in rem. It becomes in rem only on the date of admission; and<\/p>\n
(ii<\/em>) IBC overrides all other laws.<\/p>\n
Should adjudicating authority first decide the application under Section 8 of the A&C Act, before deciding Section 7 IBC application? <\/strong><\/p>\n
(a<\/em>) NCLT recorded submissions of Indus in the Section 8 application first, followed by submissions of Kotak\u2019s counsel.<\/p>\n
(b<\/em>) In para 3.1 of NCLT order[11]<\/a>, Kotak submitted that if Section 8 application is dismissed, Section 7 IBC matter should be heard on merits.<\/p>\n
(c<\/em>) In para 3.8[12]<\/a>, the order states \u201cthe principal argument in the present IA\u2026.<\/em>\u201d<\/p>\n
(d<\/em>) In para 5.2[13]<\/a> where NCLT records its findings, \u201c[a]t the outset, we must say that the subject-matter of this IA \u2013 seeking a reference to arbitration in a petition filed under Section 7 of the IBC \u2013 is something that is res integra\u201d.<\/p>\n
(e<\/em>) In para 5.5.[14]<\/a>, the question framed was \u201c[W]ill the provisions of the Arbitration and Conciliation Act, 1996 prevail over the provisions of Insolvency and Bankruptcy Code, 2016?\u201d.<\/p>\n
What should be the inquiry of NCLT under Section 7 IBC? <\/strong><\/p>\n
(i<\/em>) Is Kotak a financial creditor?<\/p>\n
(ii<\/em>) Whether OCRPS constitute financial debt?<\/p>\n
(a<\/em>) Whether OCPRS issued with IRR of 30% constitute disbursal against consideration for time value of money as per Section 5(8)[16]<\/a>IBC?<\/p>\n
(c<\/em>) Whether a shareholder can be a debtor and what is the nature of OCRPS?<\/p>\n
\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (iii<\/em>) Whether there is a default?<\/p>\n
\n36<\/em>…\u201c[t]he contention as to whether payment of investment in preferential shares can be construed as financial debt was raised in the written submissions. However, we have not adverted to that aspect since the same was not the basis of the impugned order passed by the adjudicating authority.\u201d<\/p>\n<\/blockquote>\n
\n
- This issue should have formed the basis of the proceedings before NCLT. However, in para 5.5, the question framed by NCLT was \u201c[W]ill the provisions of the Arbitration and Conciliation Act, 1996 prevail over the provisions of Insolvency and Bankruptcy Code, 2016?\u201d.<\/li>\n
- If there is no financial debt, Kotak could not have maintained Section 7 IBC proceedings. The application should have been rejected and there should have been no occasion to even examine Section 8 application. According to Kotak, non-payment is a default which should trigger Section 7 IBC, while according to Indus payment cannot be made till the conversion formula calculation is finalised, hence, no default. Kotak relied on Clauses 5.1 and 5.2 of Schedule J to SSSA to argue that parties had agreed that redemption value shall constitute a debt outstanding by Indus to Kotak.<\/li>\n
- NCLT in allowing the Section 8, A&C Act application was influenced by the following factors:<\/li>\n<\/ol>\n
(i<\/em>) Indus is a solvent, debt-free and profitable company and pushing a solvent company into insolvency is neither meaningful nor desirable at that stage;<\/p>\n
(ii<\/em>) Dispute between the parties is regarding the valuation of OCRPS and parties must make an attempt to reconcile the differences and invocation of arbitration is justified; and<\/p>\n
(iii<\/em>) Petition for appointment of arbitrator is pending before the SC.<\/p>\n
\n
- In paras 20 and 21[18]<\/a>, the SC agreed that NCLT\u2019s exercise of finding no default is correct. It observed that:<\/li>\n<\/ol>\n
(i<\/em>) Yes, there is a debt including a clause in the agreement providing that redemption value shall constitute a debt;<\/p>\n
(ii<\/em>) There is a redemption date;<\/p>\n
(iii<\/em>) There were inconclusive discussions between the parties on the redemption value;<\/p>\n
(iv<\/em>)It was premature to arrive at a conclusion of default in payment of debt until the amount payable is determined; and<\/p>\n
(v<\/em>) It is not appropriate to find a default merely because Kotak made a claim as per the agreed date of redemption and filed a petition under Section 7 IBC.<\/p>\n
Why is it not appropriate? Would a dispute between parties on the redemption value, postpone the trigger of default? The SC should have given reasons for its findings or the relevance of these questions.<\/p>\n
\n
- Let us test these factors \u2013 in the author\u2019s opinion, none of these are relevant for an inquiry default under Section 7 IBC proceeding:<\/li>\n<\/ol>\n
\u00a0(i<\/em>) In para 27[19]<\/a> of Monotrone Leasing (P) Ltd.<\/em>v. PM Cold Storage (P)<\/em><\/a> Ltd.<\/em>[20]<\/a>, the National Company Law Appellate Tribunal (NCLAT) held that inability to pay 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.<\/p>\n
(ii<\/em>) Similarly, the SC in para 64 of Swiss Ribbons (P) Ltd. <\/em>v. Union of India<\/em>[21]<\/a>, observed that the legislative policy is to move away from the concept of \u201cinability to pay debts\u201d to \u201cdetermination of default\u201d. The said shift enables the financial creditor to prove, based upon solid documentary evidence, that there was an obligation to pay the debt and that the debtor has failed in such obligation.<\/p>\n
\n
- This decision is a missed opportunity for the SC to develop jurisprudence for issues like \u2013 can an agreement change the nature of a security \u2013 in this case the agreement specified that OCRPS will constitute debt upon redemption; and whether preference shares\/OCRPS constitute financial debt under Section 7 IBC.<\/li>\n<\/ol>\n
Was the procedure for appointment of Arbitral Tribunal followed?<\/strong><\/p>\n
\n
- There are 2 issues here. First, Section 11 petition was filed by Indus but as per SSSA, Indus did not have a right to nominate an arbitrator. The agreed procedure had not failed, and Section 11 petition was premature. On this issue, the SC treated the affidavit by promoters (only promoters and Kotak had a right to nominate arbitrator), who had the right to nominate arbitrator, as sufficient to constitute an Arbitral Tribunal. The problem with this is that Indus had no locus standi to file Section 11 petition. Kotak argued that the arbitration notice is defective, and the petition is not in accordance with the arbitration agreement. This was an opportunity for the Court to decide whether Section 11 can be invoked by a party which does not have a right to nominate an arbitrator under the agreement. The author has not come across any decision on this issue. Additionally, such appointment of Arbitral Tribunal is contrary to settled position of law that procedure for appointment has to be followed strictly and appointment which is not in accordance with the procedure is void.<\/li>\n
- Second, the SC thought it was fit to consider the nature of Arbitral Tribunal, because one agreement will give rise to ICA and other three to domestic arbitration. However, after flagging this issue, the SC does not meaningfully address it. In para 39[22]<\/a>, the SC appointed a single Arbitral Tribunal with same members but separately constituted for each agreement and left it open to the Tribunal to work out the modalities of conducting ICA separately and clubbing the remaining domestic arbitrations.<\/li>\n
- In the author\u2019s view, the SC could have considered clarifying whether this will be a composite arbitration which will result in 1 award or 4 arbitrations under 4 agreements with 4 separate awards. In absence of this, Kotak is likely to seek 4 separate awards from the Tribunal and Indus will seek a composite common award.<\/li>\n<\/ol>\n
Conclusion<\/strong><\/span><\/h3>\n
In the author\u2019s view, the order of NCLT is not an order on merits of the Section 7 IBC application. If existence of dispute is not an inquiry for a Section 7 IBC proceeding and Section 7 IBC application has to be considered first, the SC should have considered setting aside the impugned order and remanded the matter to NCLT for deciding the Section 7 IBC proceedings on merits. The Court should, if an opportunity arises, consider clarifying that NCLT cannot decide Section 8, A&C Act application first and dismiss Section 7 IBC proceeding as a corollary or consequence.<\/p>\n
\n<\/a>*Advocate. Author can be reached at renu@renugupta.co.in<\/span><\/strong><\/p>\n
[1]<\/a> 2021 SCC OnLine SC 268<\/a>.<\/p>\n
[2]<\/a> \u00a0The Arbitration and Conciliation Act, 1996<\/a>.<\/p>\n
[3]<\/a> The Insolvency and Bankruptcy Code, 2016<\/a>.<\/p>\n
[4]<\/a> 7. Initiation of corporate insolvency resolution process by financial creditor<\/em><\/a>.\u2014<\/strong> (1) A financial creditor either by itself or jointly with other financial creditors, or any other person on behalf of the financial creditor, as may be notified by the Central Government, may file an application for initiating corporate insolvency resolution process against a corporate debtor before the adjudicating authority when a default has occurred<\/em>:<\/p>\n
[5]<\/a> Indus BioTech (P) Ltd. v. Kotak Venture Fund, 2020 SCC OnLine NCLT 1430<\/a> [NCLT Mumbai].<\/p>\n
[7]<\/a><http:\/\/www.scconline.com\/DocumentLink\/02bfnuC4<\/a>>.<\/p>\n
[8]<\/a>Indus case<\/em>, supra<\/em> Note 1.<\/p>\n
[10]<\/a><http:\/\/www.scconline.com\/DocumentLink\/09ftZIDF<\/a>>.<\/p>\n
[15]<\/a>Section 238 IBC<\/a>.<\/p>\n
[16]<\/a> Section 5(8) IBC<\/a>.<\/p>\n
[18]<\/a>Indus case<\/em>, supra<\/em> note 1, paras 20 and 21.<\/p>\n
\n
- \u00a0In 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, 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. Dr Singhvi, however contended, 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. He contends 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. We note, 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.\u201d<\/em><\/li>\n<\/ol>\n
\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0\u00a0 (emphasis supplied)<\/em><\/p>\n
[19]<\/a> 2020 SCC OnLine NCLAT 581. \u00a0\u00a0\u201c27.<\/em> We are bound to emphasise 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.\u201d<\/em><\/p>\n
[20]<\/a>2020 SCC OnLine NCLAT 581<\/a>. Civil appeal and a review both were dismissed by the Supreme Court.<\/a><\/p>\n