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Indus Biotech Private Limited v. Kotak India Venture (Offshore) Fund & Ors.

Arbitration Petition (Civil) · 2021 INSC 216Decided 26 Mar 2021
Arbitration Petition (Civil) No. 48 of 2019
Chief Justice S.A. Bobde · Justice A.S. Bopanna · Justice V. Ramasubramanian

Background

Investors (collectively "Kotak India Venture") had invested in Indus Biotech Private Limited through optionally convertible redeemable preference shares (OCRPS) under share subscription agreements. A dispute arose over the formula for converting these preference shares into equity shares before the company's planned public offering: the investors claimed about 30% of paid-up capital while the company offered about 10%. The investors treated the redemption amount as an unpaid debt and filed a Section 7 insolvency petition before the NCLT to trigger a corporate insolvency resolution process, while the company applied under Section 8 of the Arbitration Act to have the dispute referred to arbitration instead. The NCLT allowed the arbitration request and dismissed the insolvency petition, and separately the company also approached the Supreme Court directly under Section 11 of the Arbitration Act to get an Arbitral Tribunal constituted.

Decision Breakdown

The Supreme Court held that once a financial creditor's Section 7 insolvency application is found by the NCLT to disclose no actual debt and default, the insolvency petition must be dismissed on that finding alone, and the NCLT need not additionally decide a Section 8 application for reference to arbitration in that same order: the NCLT's own finding of "no default" was itself sufficient to dismiss the insolvency case, which the Court treated as having reached the correct result even though its reasoning path (allowing the Section 8 application) was not strictly necessary. Since the conversion formula dispute was genuinely unresolved and no determined amount was shown to be due and unpaid, it was premature to treat anything as a "default" for insolvency purposes. Because the NCLT proceedings had ended, arbitration was the only remaining remedy, so the Court constituted a three-member Arbitral Tribunal (headed by a former Chief Justice of India as the mutually-worked-out arrangement) to resolve the share-conversion dispute, while leaving all merits of that dispute to the Tribunal. The connected civil appeal challenging the NCLT's order was dismissed, and the arbitration petition was allowed.

Lesson Learnt

A company's genuine, unresolved dispute over how much it actually owes (such as a share-conversion formula) is not automatically a "debt in default" that can trigger insolvency proceedings, only once a clear, undisputed and quantified sum remains unpaid does default under the Insolvency and Bankruptcy Code arise, and until then a contractual arbitration clause remains the proper route to resolve the underlying dispute.

Official source (sci.gov.in)View Judgment (PDF)

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