Law Web: Under which circumstances Insolvency disputes are arbitrable?

The underlying principle, therefore, from all the above noted

decisions is that the reference to the triggering of a petition

under Section 7 of the IB Code to consider the same as a

proceedings in rem, it is necessary that the Adjudicating

Authority ought to have applied its mind, recorded a finding

of default and admitted the petition. On admission, third

party right is created in all the creditors of the corporate

debtors and will have erga omnes effect. The mere filing of

the petition and its pendency before admission, therefore,

cannot be construed as the triggering of a proceeding in

rem. Hence, the admission of the petition for consideration

of the Corporate Insolvency Resolution Process is the

relevant stage which would decide the status and the nature

of the pendency of the proceedings and the mere filing

cannot be taken as the triggering of the insolvency process.

25. As noted, the issue which is posed for our

consideration is arising in a petition filed under Section 7 of

IB Code, before it is admitted and therefore not yet an

action in rem. In such application, the course to be adopted

by the Adjudicating Authority if an application under

Section 8 of the Act, 1996 is filed seeking reference to

arbitration is what requires consideration. The position of

law that the IB Code shall override all other laws as

provided under Section 238 of the IB Code needs no

elaboration. In that view, notwithstanding the fact that the

alleged corporate debtor filed an application under Section 8

of the Act, 1996, the independent consideration of the same

dehors the application filed under Section 7 of IB Code and

materials produced therewith will not arise. In that view, even if an application under Section 8 of the Act, 1996 is filed, the

Adjudicating Authority has a duty to advert to contentions

put forth on the application filed under Section 7 of IB

Code, examine the material placed before it by the financial

creditor and record a satisfaction as to whether there is

default or not. While doing so the contention put forth by

the corporate debtor shall also be noted to determine as to

whether there is substance in the defence and to arrive at

the conclusion whether there is default. If the irresistible

conclusion by the Adjudicating Authority is that there is

default and the debt is payable, the bogey of arbitration to

delay the process would not arise despite the position that

the agreement between the parties indisputably contains an

arbitration clause.

26. That apart if the conclusion is that there is default and

the debt is payable, due to which the Adjudicating Authority

proceeds to pass the order as contemplated under subsection

5(a) of Section 7 of IB Code to admit the application,

the proceedings would then get itself transformed into a

proceeding in rem having erga omnes effect due to which the

question of arbitrability of the so called inter se dispute

sought to be put forth would not arise. On the other hand,

on such consideration made by the Adjudicating Authority if

the satisfaction recorded is that there is no default

committed by the company, the petition would stand

rejected as provided under subsection 5(b) to Section 7 of

IB Code, which would leave the field open for the parties to

secure appointment of the Arbitral Tribunal in an

appropriate proceedings as contemplated in law and the

need for the NCLT to pass any orders on such application

under Section 8 of Act, 1996 would not arise.

27. Therefore, to sum up the procedure, it is clarified that

in any proceeding which is pending before the Adjudicating

Authority under Section 7 of IB Code, if such petition is

admitted upon the Adjudicating Authority recording the

satisfaction with regard to the default and the debt being

due from the corporate debtor, any application under

Section 8 of the Act, 1996 made thereafter will not be

maintainable. In a situation where the petition under

Section 7 of IB Code is yet to be admitted and, in such

proceedings, if an application under Section 8 of the Act,

1996 is filed, the Adjudicating Authority is duty bound to

first decide the application under Section 7 of the IB Code

by recording a satisfaction with regard to there being default

or not, even if the application under Section 8 of Act, 1996

is kept along for consideration. In such event, the natural

consequence of the consideration made therein on Section 7

of IB Code application would befall on the application under

Section 8 of the Act, 1996.

28. In the above background, on reverting to the fact

situation in this case, a perusal of the order dated

09.06.2020 would indicate that the Adjudicating Authority,

NCLT though has taken up the application filed under

Section 8 of the Act, 1996 as the lead consideration, the

petition filed under Section 7 of the IB Code is also taken

alongside and made a part of the consideration in the said

order. A further perusal of the order would disclose that the

Adjudicating Authority was conscious of the fact that

consideration of the matter before it any further would arise

only if there is default and the debt is payable. This is

evident from the observation contained in para 5.13 of the

order. The further narration made in para 5.14 would

indicate that the Adjudicating Authority, from the material

available on record had arrived at the conclusion that the

issue involved has not led to a stage of the default having

occurred and has rightly, in that context held that the claim

of the company by invoking the arbitration clause is

justified but the Adjudicating Authority has rightly done

nothing with regard to arbitration and has left it to this

Court. Accordingly, the Adjudicating Authority in para 5.15

has categorically recorded that they are not satisfied that a

default has occurred.

REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL ORIGINAL JURISDICTION

ARBITRATION PETITION (CIVIL) NO. 48/2019

Indus Biotech Private Limited Vs Kotak India Venture (Offshore)

Fund (earlier known as Kotak India Venture Limited) & Ors

Dated: March 26, 2021

Citation: (2021) 6 SCC 436, 2021SCCONLINE SC 268

1. Leave granted in Special Leave Petition.

2. The Arbitration Petition is filed by ‘Indus Biotech

Private Limited’ under Section 11(3) read with Sections 11(4)

(a) and 11(12)(a) of the Arbitration and Conciliation Act,

1996 (‘Act, 1996’ for short) seeking the appointment of an

Arbitrator on behalf of the respondent Nos. 1 to 4 so as to

constitute an Arbitral Tribunal to adjudicate upon the

disputes that have arisen between the petitioner and the

respondent Nos. 1 to 4 herein. The petition filed before this

Court is due to the fact that the respondent No.1 is a

Mauritius based Company and the dispute qualifies as

international arbitration. The respondents No. 2 to 4

though are Indian entities, they are the sister ventures of

respondent No.1. Further, according to the petitioner the

subject matter involved is the same, though under different

agreements, the arbitration could be conducted as a single

process, by a single Arbitral Tribunal. Hence a common

petition is filed before this Court, instead of bifurcating the

causes of action and availing their remedy before the High

Court in respect of similar disputes with respondents No.2

to 4.

3. The petition seeking constitution of the Arbitral

Tribunal emanates from the Share Subscription and

Shareholders’ Agreements (‘SS and SA’ for short) dated

20.07.2007, 12.07.2007, 09.01.2008 and the Supplemental

Agreements dated 22.03.2013 and 19.07.2017. Through

the said agreements the respondent Nos. 1 to 4 subscribed

to equity shares and Optionally Convertible Redeemable

Preference Shares (‘OCRPS’ for short) in the company i.e.

Indus Biotech Private Ltd. In the process of business, a

decision was taken by the petitioner company to make a

Qualified Initial Public Offering (‘QIPO’ for short). However,

under Regulation 5(2) of Securities and Exchange Board of

India (Issue of Capital and Disclosure Requirements),

Regulations 2018 (‘SEBI Regulations’ for short), a company

which has any outstanding convertible securities or any

other right which would entitle any person with an option to

receive equity shares of the issuer is not entitled to make

QIPO.

4. In that view, it had become necessary for the

respondents No.1 to 4 to convert their respective preference

shares invested in Indus Biotech Private Ltd., into equity

shares. In that context the petitioner company proposed to

convert the OCRPS invested by the respondents No. 1 to 4,

into equity shares. In the said process of negotiation, a

dispute is stated to have arisen between the petitioner

company and the respondents No. 1 to 4, with regard to the

calculation and conversion formula to be applied in

converting the preference shares of the respondents No. 1 to

4, into equity shares. As per the formula applied by the

respondent Nos. 1 to 4, it was claimed by them that they

would be entitled to 30 per cent of the total paid up share

capital in equity shares. The petitioner company, by relying

on the reports of the auditors and valuer contended that the

respondents No. 1 to 4 would be entitled to approximately

10 per cent of the total paid up share capital paid by the

respondent as per their conversion formula.

5. The dispute in question, according to the petitioner

company is with regard to the appropriate formula to be

adopted and to arrive at the actual percentage of the paidup

share capital which would be converted into equity

shares and the refund if any thereafter. Until an amicable

decision is taken there is no liability to repay the amount.

Therefore, there is no ‘debt’ or ‘default’, nor is the petitioner

company unable to pay. The petitioner company is a profitmaking

company and is engaged in its daytoday

activity.

Since the parties themselves had not resolved the issue, the

petitioner company contends that the said dispute is to be

resolved through Arbitration by the Arbitral Tribunal.

6. On the said issue, the respondents No. 1 to 4 would

however contend that the fact of the respondents No. 1 to 4

herein having subscribed to the OCRPS is not in dispute. In

such event, on redemption of the same, the amount is

required to be paid by the petitioner company. The

respondents No. 1 to 4 contend that on redemption of

OCRPS, a sum of Rs. 367,08,56,503/(

Rupees Three

Hundred SixtySeven

Crore Eight Lakh FiftySix

Thousand

Five Hundred Three) became due and payable. The

respondents No. 1 to 4 having demanded the said amount

and since the same had not been paid by the petitioner

company, it is contended that the same had constituted

default. It is contended that as the debt had not been paid

by the company it had given a cause of action for the

respondents No. 1 to 4 herein to invoke the jurisdiction of

the Adjudicating Authority, NCLT by initiating the Corporate

Insolvency Resolution Process (‘CIRP’ for short) provided

under the Insolvency and Bankruptcy Code, 2016 (‘IB Code’

for short).

7. Accordingly, the respondent No.2 herein filed the

petition under Section 7 of IB Code before the NCLT in IBC

No.3077/2019 dated 16.08.2019 seeking appointment of

Resolution Professional. In the said petition, the petitioner

company herein filed a Miscellaneous Application

No.3597/2019 under Section 8 of the Act, 1996 seeking a

direction to refer the parties to arbitration, for the reasons

indicated therein which is as noted above and is similar to

the contention in the arbitration petition. The respondent

No.2 herein objected to consideration of the said

application.

8. The NCLT, Mumbai BenchIV

through its order dated

09.06.2020 has taken note of the rival contentions and has

allowed the application filed by the petitioner herein under

Section 8 of the Act, 1996. As a consequence, the petition

filed by the respondent No.2 herein under Section 7 of the

IB Code is dismissed. The respondent No.2 herein claiming

to be aggrieved by the said order dated 09.06.2020 passed

by the NCLT is before this Court in the connected SLP.

9. Since the rank of the parties is different in the above

noted, two petitions, for the ease of reference and clarity,

the parties would be referred to by their name and the

respondents No. 1 to 4 in the Arbitration Petition will be

collectively referred to as ‘Kotak India Venture’.

10. In the above backdrop, we have heard Mr. Shyam

Divan, Mr. Aryama Sundaram, Mr. Mukul Rohatgi and Mr.

Ritin Rai respective learned senior counsel on behalf of

Indus Biotech Private Limited, Dr. Abhishek Manu Singhvi,

learned senior counsel on behalf of Kotak India Venture as

also Mr. Khambhatta, Mr. Neeraj Kishan Kaul, Mr. Nakul

Dewan, Mr. ANS Nadkarni for the other parties and perused

the petition papers.

11. As a matter of fact, the transaction entered into

between the parties arising out of the SS and SA dated

20.07.2007, 12.07.2007, 09.01.2008 and the supplemental

agreements dated 22.03.2013 and 19.07.2017 is not in

dispute. The further fact that the SS and SA dated

20.07.2007, 12.07.2007 and 09.01.2008 vide Clause 20.4

provides for arbitration in the event of any dispute,

controversy or claim arising out of, relating to or in

connection with the said agreement is also not in dispute.

Further the supplemental agreements vide Clause 13 and

19 respectively provides that the provision for arbitration in

Clause 20.4 of the SS and SA agreement dated 20.07.2007

shall apply to the supplemental agreement is also evident. If

in that context the matter is looked at, there would be no

need for this Court to advert to any other aspect in the

petition filed under Section 11 of the Act, 1996 since in the

normal circumstance, on constitution of the Arbitral

Tribunal all other issues are to be gone into by the Arbitral

Tribunal relating to the above noted dispute between the

parties. However, the nature of Arbitral Tribunal will have

to be considered since one is international arbitration and

the other are domestic.

12. Despite the said position, before concluding on the

Arbitration Petition filed by Indus Biotech Private Limited,

keeping in perspective the objection raised by the Kotak

India Venture relating to the petition having already been

instituted before the NCLT under Section 7 of the IBC and

also keeping in perspective the order dated 09.06.2020

passed by NCLT disposing of the application filed under

Section 8 of the Act, 1996; the matter requires deeper

consideration on that aspect since Dr. Abhishek Manu

Singhvi, the learned senior counsel for the Kotak India

Venture has contended with regard to a serious error said to

have been committed by the NCLT in entertaining an

application under Section 8 of the Act, 1996 in the backdrop

of the legal duty cast on NCLT to proceed strictly in

accordance with the procedure contemplated under Section

7 of IB Code. It is further contented that Indus Biotech

Private Limited having defaulted, the event enabling the

petition under Section 7 of IB Code has occurred and the

dispute sought to be raised is not arbitrable after the

insolvency proceeding is commenced.

13. Before adverting to the contentions in this regard, it is

to be taken note that against the order dated 09.06.2020

assailed in the special leave petition, Kotak India Venture in

the normal course if aggrieved, ought to have availed the

remedy of appeal by filing an appeal in the NCLAT as

provided under Section 61 of IB Code. Having not done so,

in a normal circumstance we would have chosen to relegate

Kotak India Venture to avail the alternate remedy of appeal.

The contention on behalf of Kotak India Venture that they

do not have the remedy of appeal as it is an order disposing

an application filed under Act, 1996 and not an order under

the part as provided in Section 61 of IB Code is noted only

to be rejected. The order dated 09.06.2020 is certainly an

order passed by the Adjudicating Authority under IB Code

and petition under Section 7 of that Code is also disposed.

However, as noted from the narration made above, the order

dated 09.06.2020 passed by the NCLT is while taking note

of petition under Section 7 of IB Code, in the backdrop of

Indus Biotech seeking for the resolution of dispute through

arbitration and the Arbitration Petition to that effect was

already pending before this Court as on the date the order

was passed by the NCLT. It is only in this special

circumstance we have proceeded to entertain the petition

and examine the matter on merits.

14. In order to arrive at a conclusion on the correctness

or otherwise of the impugned order, at the outset it is

necessary for us to take note of the scope of the proceedings

under Section 7 of the IB Code to which detail reference is

made with reference to the definitions in Section 3(6), 3(8),

3(11), 3(12) and 5(7) of the Code. It provides for the

‘financial creditor’ to file an application for initiating

Corporate Insolvency Resolution Process against a

‘corporate debtor’ before the Adjudicating Authority when

‘default’ has occurred. The provision, therefore,

contemplates that in order to trigger an application there

should be in existence four factors: (i) there should be a

‘debt’ (ii) ‘default’ should have occurred (iii) debt should be

due to ‘financial creditor’ and (iv) such default which has

occurred should be by a ‘corporate debtor’: On such

application being filed with the compliance required under

subSection

(1) to (3) of Section 7 of IB Code, a duty is cast

on the Adjudicating Authority to ascertain the existence of a

default if shown from the records or on the basis of other

evidence furnished by the financial creditor, as

contemplated under subSection

(4) to Section 7 of IB Code.

15. This Court had the occasion to consider exhaustively

the scheme and working of the IB Code in the case of

Innoventive Industries Limited vs. ICICI Bank and

Another (2018) 1 SCC 407. The proceeding under Section 7

of the IB Code and the scope thereof is articulated in paras

27 to 30 which read hereunder,

“27. The scheme of the Code is to ensure that when a

default takes place, in the sense that a debt becomes due

and is not paid, the insolvency resolution process begins.

Default is defined in Section 3(12) in very wide terms as

meaning nonpayment

of a debt once it becomes due and

payable, which includes nonpayment

of even part thereof

or an instalment amount. For the meaning of “debt”, we

have to go to Section 3(11), which in turn tells us that a

debt means a liability of obligation in respect of a “claim”

and for the meaning of “claim”, we have to go back to

Section 3(6) which defines “claim” to mean a right to

payment even if it is disputed. The Code gets triggered the

moment default is of rupees one lakh or more (Section 4).

The corporate insolvency resolution process may be

triggered by the corporate debtor itself or a financial

creditor or operational creditor. A distinction is made by the

Code between debts owed to financial creditors and

operational creditors. A financial creditor has been defined

under Section 5(7) as a person to whom a financial debt is

owed and a financial debt is defined in Section 5(8) to mean

a debt which is disbursed against consideration for the time

value of money. As opposed to this, an operational creditor

means a person to whom an operational debt is owed and

an operational debt under Section 5(21) means a claim in

respect of provision of goods or services.

28. When it comes to a financial creditor triggering the

process, Section 7 becomes relevant. Under the Explanation

to Section 7(1), a default is in respect of a financial debt

owed to any financial creditor of the corporate debtor — it

need not be a debt owed to the applicant financial creditor.

Under Section 7(2), an application is to be made under subsection

(1) in such form and manner as is prescribed,

which takes us to the Insolvency and Bankruptcy

(Application to Adjudicating Authority) Rules, 2016. Under

Rule 4, the application is made by a financial creditor in

Form 1 accompanied by documents and records required

therein. Form 1 is a detailed form in 5 parts, which requires

particulars of the applicant in Part I, particulars of the

corporate debtor in Part II, particulars of the proposed

interim resolution professional in Part III, particulars of the

financial debt in Part IV and documents, records and

evidence of default in Part V. Under Rule 4(3), the applicant

is to dispatch a copy of the application filed with the

adjudicating authority by registered post or speed post to

the registered office of the corporate debtor. The speed,

within which the adjudicating authority is to ascertain the

existence of a default from the records of the information

utility or on the basis of evidence furnished by the financial

creditor, is important. This it must do within 14 days of the

receipt of the application. It is at the stage of Section 7(5),

where the adjudicating authority is to be satisfied that a

default has occurred, that the corporate debtor is entitled to

point out that a default has not occurred in the sense that

the “debt”, which may also include a disputed claim, is not

due. A debt may not be due if it is not payable in law or in

fact. The moment the adjudicating authority is satisfied

that a default has occurred, the application must be

admitted unless it is incomplete, in which case it may give

notice to the applicant to rectify the defect within 7 days of

receipt of a notice from the adjudicating authority. Under

subsection

(7), the adjudicating authority shall then

communicate the order passed to the financial creditor and

corporate debtor within 7 days of admission or rejection of

such application, as the case may be.

29. The scheme of Section 7 stands in contrast with the

scheme under Section 8 where an operational creditor is,

on the occurrence of a default, to first deliver a demand

notice of the unpaid debt to the operational debtor in the

manner provided in Section 8(1) of the Code. Under Section

8(2), the corporate debtor can, within a period of 10 days of

receipt of the demand notice or copy of the invoice

mentioned in subsection

(1), bring to the notice of the

operational creditor the existence of a dispute or the record

of the pendency of a suit or arbitration proceedings, which

is preexisting—

i.e. before such notice or invoice was

received by the corporate debtor. The moment there is

existence of such a dispute, the operational creditor gets

out of the clutches of the Code.

30. On the other hand, as we have seen, in the case of a

corporate debtor who commits a default of a financial debt,

the adjudicating authority has merely to see the records of

the information utility or other evidence produced by the

financial creditor to satisfy itself that a default has

occurred. It is of no matter that the debt is disputed so long

as the debt is “due” i.e. payable unless interdicted by some

law or has not yet become due in the sense that it is

payable at some future date. It is only when this is proved

to the satisfaction of the adjudicating authority that the

adjudicating authority may reject an application and not

otherwise.”

(Emphasis supplied)

16. Dr. Singhvi, learned senior counsel while seeking to

repel the contention put forth on behalf of the Indus

Biotech Private Limited seeks to emphasise that a

proceeding under Section 7 of IB Code is to be considered

in a stringent manner. Referring to the Preamble to the IB

Code, it is contended that the same has evolved after all the

earlier processes like civil suit, winding up petition,

SARFAESI proceeding and SICA have failed to secure the

desired result. The provision under the IB Code is with the

intention of making a debtor to seek the creditor. In that

regard, Dr. Singhvi has referred to the decisions in the case

of Swiss Ribbons Private Limited and Another vs. Union

of India and Others (2019) 4 SCC 17 and Booz Allen and

Hamilton INC. vs. SBI Home Finance Limited and

Others (2011) 5 SCC 532 to contend that the proceeding

under Section 7 of IB Code is an action in rem. As such

insolvency and winding up matters are nonarbitrable.

that background, the nature of transaction under the SS

and SA was referred. It is in that regard contended that the

agreement provides for the manner of redemption as also

the redemption value. The date of redemption is fixed as

31.12.2018. The OCRPS when redeemed is payable, within

15 days from the date of redemption. In such situation,

there is no other issue which require resolution by

arbitration. Further, it is contended Clause 5.1 and 5.2 in

Schedule J to the agreement provided that the redemption

value shall constitute a debt outstanding by the Company

to the holder. Hence the amount being debt on the

redemption date, if not paid within 15 days of redemption

constituted default. In that background, when the petition

under Section 7 of IB Code was filed the Adjudicating

Authority ought to have looked into that aspect alone and

the consideration of an application filed under Section 8 of

the Act, 1996 is without jurisdiction is the contention.

17. The procedure contemplated will indicate that before

the Adjudicating Authority is satisfied as to whether the

default has occurred or not, in addition to the material

placed by the financial creditor, the corporate debtor is

entitled to point out that the default has not occurred and

that the debt is not due, consequently to satisfy the

Adjudicating Authority that there is no default. In such

exercise undertaken by the Adjudicating Authority if it is

found that there is default, the process as contemplated

under subSection

(5) of Section 7 of IB Code is to be

followed as provided under subSection

5(a); or if there is

no default the Adjudicating Authority shall reject the

application as provided under subSection

5(b) to Section 7

of IB Code. In that circumstance if the finding of default is

recorded and the Adjudicating Authority proceeds to admit

the application, the Corporate Insolvency Resolution

Process commences as provided under subsection

(6) and

is required to be processed further. In such event, it

becomes a proceeding in rem on the date of admission and

from that point onwards the matter would not be

arbitrable. The only course to be followed thereafter is the

resolution process under IB Code. Therefore, the trigger

point is not the filing of the application under Section 7 of

IB Code but admission of the same on determining default.

18. In that circumstance, though Dr. Singhvi has referred

to the evolution of IB Code after all earlier legal process had

failed to give the rightful place to the creditor; which is

sought to be achieved by the IB Code, it cannot be said that

by the procedure prescribed under the IB Code it means

that the claim of the creditor if made before the NCLT, more

particularly under Section 7 of IB Code is sacrosanct and

the corporate debtor is denuded of putting forth its version

or the contention to show to the Adjudicating Authority

that the default has not occurred and explain the

circumstance for contending so. In fact, in the very decision

relied on by both the parties in the case of Innoventive

Industries Limited (supra), this court while considering

the scope of the various provisions under the Act and while

referring to the procedure contemplated in a petition under

Section 7 of the IB Code, which is also extracted supra

reads thus: “

It is at the stage of Section 7(5), where the Adjudicating

Authority is to be satisfied that default has occurred, that

the corporate debtor is entitled to point out that a default

has not occurred in the sense that the ‘debt’, which may

also include a disputed claim, is not due. A debt may not

be due if it is not payable in law or in fact.”

19. In the instant case, Dr. Singhvi, as noted earlier has

referred to clause 5.1 and 5.2 contained in Schedule J to

the agreement to contend that the OCRPS would become

due within 15 days from the redemption date and the

parties are agreed that it shall constitute a debt

outstanding by the company to the Holder. The question

would be; whether that alone was sufficient to come to a

conclusion that there was default as well in the fact

situation of the present nature. It is no doubt true that the

original period of the OCRPS was up to 31.12.2018, on

which date it could be redeemed. In that background, Mr.

Shyam Divan, learned senior counsel for Indus Biotech

Private Limited has drawn our attention to Clause 4 and 6

of the very same document to indicate that it provides for

early redemption under the circumstances stated therein.

Vide clause 6 thereof it has provided that the OCRPS could

be converted into equity shares of the company in the

circumstances provided therein, which is also on the

occurrence of QIPO or Strategic Sale, provided that the

OCRPS shall be converted in the manner indicated.

Regulation 5(2) of SEBI – ICDR Regulations mandated the

same. In that regard, Mr. Divan has also referred to the

Board meeting held on 14.03.2018 wherein QIPO related

matters were taken into consideration and the conversion

of the preference shares was discussed, to which the

Nominee Director representing the Kotak India Venture

Group was also a party. The said issue was also discussed

in the subsequent meeting dated 06.04.2018 and

10.04.2018. Therefore, the said events prima facie indicate

that the process of converting the OCRPS into equity shares

and the allotment thereof was an issue which had already

commenced a while before the redemption date agreed

upon i.e., 31.12.2018 had arrived.

20. Therefore, in a fact situation of the present nature

when the process of conversion had commenced and

certain steps were taken in that direction, even if the

redemption date is kept in view and the clause in Schedule

J indicating that redemption value shall constitute a debt

outstanding is taken note; when certain transactions were

discussed between the parties and had not concluded since

the point as to whether it was 30 per cent of the equity

shares in the company or 10 per cent by applying proper

formula had not reached a conclusion and thereafter

agreed or disagreed, it would not have been appropriate to

hold that there is default and admit the petition merely

because a claim was made by Kotak Venture as per the

originally agreed date and a petition was filed. In the

process of consideration to be made by the Adjudicating

Authority the facts in the particular case is to be taken into

consideration before arriving at a conclusion as to whether

a default has occurred even if there is a debt in strict sense

of the term, which exercise in the present case has been

done by the Adjudicating Authority.

21. In 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.

22. In the above backdrop the question would be as to

whether a grave error as contended on behalf of Kotak

Venture is committed by the Adjudicating Authority by

observing in the course of the order that the invocation of

arbitration in a case like this seems to be justified. In our

view, the stage of the proceedings at which the said

observation was made will be relevant. If the case has

reached the stage to the status of a proceeding in rem, then

such observation would not be justified and sustainable

but not otherwise. In the instant case, the petition was yet

to be admitted and, therefore had not assumed the status

of a proceedings in rem.

23. The tests to be applied to determine as to when the

subject matter is not arbitrable and on applying such test,

actions in rem is not arbitrable is laid down by this Court in

the case of Vidya Drolia and Others Vs. Durga Trading

Corporation (2021 2 SCC 1) which reads as hereunder:

“76. In view of the above discussion, we would like to

propound a fourfold test for determining when the subject

matter of a dispute in an arbitration agreement is not

arbitrable:

76.1 (1) when cause of action and subject matter of the

dispute relates to actions in rem, that do not pertain to

subordinate rights in personam that arise from rights in

rem.

76.2 (2) when cause of action and subject matter of the

dispute affects third party rights; have erga omnes effect;

require centralized adjudication, and mutual adjudication

would not be appropriate and enforceable;

76.3 (3) when cause of action and subject matter of the

dispute relates to inalienable sovereign and public interest

functions of the State and hence mutual adjudication would

be unenforceable; and

76.4 (4) when the subjectmatter

of the dispute is

expressly or by necessary implication nonarbitrable

as per

mandatory statute(s).

76.5 (5) These tests are not watertight compartments; they

dovetail and overlap, albeit when applied holistically and

pragmatically will help and assist in determining and

ascertaining with great degree of certainty when as per law

in India, a dispute or subject matter is nonarbitrable.

Only

when the answer is affirmative that the subject matter of

the dispute would be nonarbitrable.

76.6. However, the aforesaid principles have to be applied

with care and caution as observed in Olympus

Superstructures (P) Ltd. [Olympus Superstructures (P)

Ltd. v. Meena Vijay Khetan, (1999) 5 SCC 651] : (SCC p.

669, para 35)

“35. … Reference is made there to certain

disputes like criminal offences of a public nature,

disputes arising out of illegal agreements and

disputes relating to status, such as divorce,

which cannot be referred to arbitration. It has,

however, been held that if in respect of facts

relating to a criminal matter, say, physical

injury, if there is a right to damages for personal

injury, then such a dispute can be referred to

arbitration (Keir v. Leeman [Keir v. Leeman,

(1846) 9 QB 371 : 115 ER 1315] ). Similarly, it

has been held that a husband and a wife may

refer to arbitration the terms on which they shall

separate, because they can make a valid

agreement between themselves on that matter.

77. Applying the above principles to determine nonarbitrability,

it is apparent that insolvency or intracompany

disputes have to be addressed by a centralised forum, be

the court or a special forum, which would be more efficient

and has complete jurisdiction to efficaciously and fully

dispose of the entire matter. They are also actions in rem.

Similarly, grant and issue of patents and registration of

trade marks are exclusive matters falling within the

sovereign or government functions and have erga

omnes effect. Such grants confer monopoly rights. They are

nonarbitrable.

Criminal cases again are not arbitrable as

they relate to sovereign functions of the State. Further,

violations of criminal law are offences against the State and

not just against the victim. Matrimonial disputes relating to

the dissolution of marriage, restitution of conjugal rights,

etc. are not arbitrable as they fall within the ambit of

sovereign functions and do not have any commercial and

economic value. The decisions have erga omnes effect.

Matters relating to probate, testamentary matter, etc. are

actions in rem and are a declaration to the world at large

and hence are nonarbitrable.”

In view of the exhaustive consideration made in Vidya Drolia

and our clear understanding that a dispute will be nonarbitrable

when a proceeding is in rem and a IB Code

proceeding is to be considered in rem only after it is admitted

it is seen that in the instant case the position is otherwise.

The decisions relied on behalf of Kotak India Venture in the

case of Booz Allen and Hamilton Vs. SBI Home Finance

Ltd. & Others (2011) 5 SCC 532 and A. Ayyasamy Vs. A.

Paramasivam & Others (2016) 10 SCC 386 need not be

referred in detail and overburden this judgment since they

have been referred in Vidya Drolia which also explain the

same situation.

24. In the case of Swiss Ribbons Private Limited vs.

Union of India (2019) 4 SCC 17 and Pioneer Urban Land

and Infrastructure Limited vs. Union of India & Ors.

(W.P.(C) No.43/2019) relied on behalf of Kotak Venture, the

entire scope and ambit of the IB Code was considered and

the validity of the provisions were upheld. The said

decisions have also been relied on to contend that when the

petition under Section 7 of IB Code is triggered it becomes a

proceedings in rem and even the creditor who has triggered

the process would also lose control of the proceedings as

Corporate Insolvency Resolution Process is required to be

considered through the mechanism provided under the IB

Code. The principles as laid down in Swiss Ribbons (supra)

was also referred to in detail in the case of Pioneer Urban

Land and Infrastructure (supra) wherein the observations

contained in para 39 though in the case of Real Estate

Development was laid down. The relevant portion which has

been referred to, reads as follows:“

Thus, any allottee/home buyer who prefers an application

under Section 7 of the Code takes the risks of his

flat/apartment not being completed in the near future, in

the event of there being a breach on the part of the

developers. Under the Code, he may never get refund of the

entire principal, let alone interest. This is because, the

moment a petition is admitted under Section 7, the

resolution professional must first advertise for and find a

resolution plan by somebody, usually another developer

which has then to pass muster under the Code, i.e. that it

must be approved by at least 66 per cent of the Committee

of Creditors and must further go through challenges before

NCLT and NCLAT before the new management can take

over and either complete construction or pay out for refund

amounts.”