Insights
NCLT: Section 7 of the I&B Code can be referred to arbitrate a default between a financial creditor and corporate debtor
June 9, 2020Indus Biotech Private Limited Vs. Kotak India Venture Fund-I (Decided on 9 June 2020)
The Mumbai bench of the NCLT has held that where the dispute between a financial creditor and corporate debtor is arbitrable and has a bearing on the judicial determination of the existence of a default, a plea under section 7 of the I&B Code can be referred to arbitration. In such circumstances the provisions of the Arbitration & Conciliation Act, 1996 will prevail over the provisions of the Insolvency & Bankruptcy Act, 2016.
In the instant case, the financial creditor filed a CIRP application under section 7 of the IB Code on the ground that the Corporate Debtor had failed to redeem Optionally Convertible Redeemable Preference Shares (OCRPS) on or before 15.04.2019 in terms of the Share Subscription and Shareholders Agreement (SSSA) dated 20.07.2007. The dispute specifically pertained to : (i) The valuation of the Respondent/Financial Creditor’s OCRPS; (ii) The right of the Respondent/Financial Creditor to redeem such OCRPS when it had participated in the process to convert its OCRPS into equity shares of the Applicant/Corporate Debtor; (iii) Fixing of the QIPO date. The parties exchanged extensive correspondence from August 2018 onwards in this regard.
The Petitioner alleged that there was a default on the part of the Respondent in redeeming the OCRPS at a lower rate of return and the date of such default was 16.04.2019. The Respondent argued that it gave a notice for redemption on 31.03.2019 and filed the section 7 petition on 16.08.2019. Subsequently on 20.09.2019 it made a reference to arbitration. The application for appointment of an arbitrator is pending in the Supreme Court. Meanwhile, the Petitioner filed an interlocutory application (IA) under section 8 of the Arbitration Act before the AA for reference of parties to arbitration for settling their disputes, in a petition filed under . The Respondent alleged that the IA was only an attempt to get out of the ambit of section 7 and a diversionary tactic. The Petitioner argued that the claim of the Respondent was a ‘dressed up’ petition and merely an attempt to pressurise the CD to extortionate demands, when the claim could be determined by arbitration. The Petitioner claimed that it was a profitable, debt free company.
Read More+
NCLTs findings
The AA examined the tests for arbitrability as set forth in Booze Allen, the settled law that special law prevails over general law and the rules of interpretation in such cases. It also referred to the NCLAT judgement in Innoventive Industries Limited v ICICI Bank & Anr[1].which held that the AA should, while admitting an application under section 7 of the I&B Code, ascertain and record satisfaction as to the occurrence of default. Mere claim by the financial creditor that the default has occurred is not sufficient – the same is subject to the Adjudicating Authority’s summary adjudication, limited to ‘ascertainment’ and ‘satisfaction’. Therefore, in a section 7 petition, there has to be a judicial determination by the AA as to whether there has been a ‘default’ within the meaning of section 3(12) of the IBC.
In the instant case, the AA was not satisfied that a default had occurred. Based on the averments made by the CD, the Tribunal noted that the Applicant/CD is a solvent, debt-free and profitable company. Accepting the insolvency petition will unnecessarily push an otherwise solvent, debt-free company into insolvency, which is not a desirable result at this stage. Further, the disputes that form the subject matter of the underlying Company Petition, namely, valuation of shares, calculation and conversion formula and fixing of QIPO date are all arbitrable, Therefore, an attempt should be made to reconcile the differences between the parties. No meaningful purpose will be served by pushing the Applicant/Corporate Debtor into CIRP at this stage. Hence, the application under section 8 Arbitration Act was allowed and the underlying petition was dismissed for lack of maintainability.
Footenote
[1] 2017 SCC OnLine NCLAT 70
Read Less-
