Can Financial Creditor and Corporate Debtor be referred to arbitration while deciding plea under Section 7 IBC? NCLT answers

The National Company Law Tribunal, Mumbai has held that a Financial Creditor and a Corporate Debtor can be referred to arbitration while deciding a plea under Section 7 IBC if the dispute between them is arbitrable and has a bearing on the judicial determination of the existence of a default. (Kotak India Venture Fund-I vs Indus Biotech Private Limited).The order was passed by a Bench of Member (Judicial) Rajasekhar VK and Member (Technical) Ravikumar Duraisamy..Kotak India Venture Fund-I (Financial Creditor) had moved a plea under section 7 of the Insolvency & Bankruptcy Code, 2016 (IBC) to initiate Corporate Insolvency Resolution Process (CIRP) against the Corporate Debtor, Indus Biotech Private Limited..The insolvency plea was filed on the ground that the Corporate Debtor had failed to redeem the Optionally Convertible Redeemable Preference Shares (OCRPS) on or before April 15, 2019, in terms of the Share Subscription and Shareholders Agreement (SSSA)..The PE Fund alleged that there was thus a default of Rs 367 crores..In response, Indus filed an application under section 8 of the Arbitration & Conciliation Act, 1996 to refer the parties to arbitration on the ground that there existed a bona fide and substantial dispute between the parties under the SSSA since August 2018..Indus argued that SSSA contained a specific and detailed arbitration clause which governed the dispute at hand..It was explained that the dispute, in essence, pertains to the valuation of the OCRPS, the right of the Financial Creditor to redeem such OCRPS when it had participated in the process to convert its OCRPS into equity shares of the Corporate Debtor etc..Indus stated that the fact that Kotak chose to convert the OCRPS into equity shares of the Company was not disputed, the only bone of contention was the calculation and conversion formula to be followed..It was claimed that while the parties engaged in correspondence with regard to the dispute pertaining to conversion, in December 2018, the Financial Creditor unilaterally proposed to fix a new closing date of December 31, 2018 for the OCRPS and called upon the Corporate Debtor to provide an exit on the same date..The demand was disputed by Corporate Debtor, Indus. .In March 2019, the Kotak issued a Redemption Notice which was the basis for the insolvency plea, it was saids said. .Indus stated that it was a highly profitable, debt-free company which did not need any resolution and the purpose of this Section 7 IBC plea was to pressurize it into succumbing to the demands of the Financial Creditor..Fredun E DeVitre appearing for Kotak argued:“Are the reliefs claimed in the petition capable of being referred to arbitration or being granted by an arbitral tribunal?”Section 7 IBC pleas belonged to that class of litigation which are incapable of being referred to arbitration as they were matters in rem.Existence of an arbitration clause did not affect a section 7 application which has to be decided independently by the Adjudicating Authority on the basis of the existence of a default.Refers to Booz Allen, in support of his line of argument that if there are some matters which are arbitrable and some matters which are nonarbitrable, even in those cases, it should not be referred to arbitration..NCLT Order:.After recording the "tests of arbitrability" as explained by the Supreme Court in Booz Allen and Hamilton Inc v SBI Home Finance Limited & others, the NCLT observed that where an arbitration clause existed, the court had a mandatory duty to refer the dispute to arbitrator..The NCLT thereafter referred to the NCLAT's decision in Innoventive Industries Limited v ICICI Bank & another to state the admission or rejection of an application of a financial creditor under Section 7 by the Adjudicating Authority depended on its satisfaction with the documents to show a default.."..the statute mandates the Adjudicating Authority to ascertain and record satisfaction as to the occurrence of default before admitting the application. Mere claim by the financial creditor that the default has occurred is not sufficient.. Therefore, in a section 7 petition, there has to be a judicial determination by the Adjudicating Authority as to whether there has been a ‘default’ within the meaning of section 3(12) of the IBC.", NCLT noted..In the present case, the NCLT stated that the dispute centred around things which were important determinants in coming to a judicial conclusion that a default had occurred and such disputes were arbitrable in nature..The disputes that form the subject matter of the underlying Company Petition, viz., valuation of shares, calculation and conversion formula and fixing of QIPO date are all arbitrable, since they involve valuation of the shares and fixing of the QIPO date. Therefore, we feel that an attempt must be made to reconcile the differences between the parties and their respective perceptions.NCLT concluded..Observing that the Indus was a debt-free company, the NCLT opined that no meaningful purpose would be served by pushing it to insolvency at this stage.In view of the above, the NCLT held that the Section 7 plea was incapable of being admitted at this stage and the parties were, accordingly, referred to arbitration..The Corporate Debtor Indus was represented by Senior Advocate Mustafa Doctor with Advocates Chaitanya D Mehta, Sonali Aggarwal, Sairica Raju of Dhruve Liladhar & Co..Financial Creditor Kotak was represented by Senior Advocate Fredun E DeVitre with Advocates Sharan Jagtiani, Jatin Pore, Ankita Agrawal of DSK Legal..Read the Order: