The Supreme court on March 26, 2021 settled the most debatable issue among the
legal fraternity regarding the relationship between arbitration and insolvency
in the case of Indus Biotech Private Limited v Kotak India Venture (Offshore)
Fund & Or  and held on an application under 7 of IBC brought before NCLT, it
must first ascertain the presence of "default" within IBC and it is only after
such default is proven, that the issue cannot be referred to arbitration.
Indus Biotech Pvt. Ltd. (hereinafter referred as Indus
) filed an application
in the Supreme Court under 11 of the Arbitration and Conciliation Act, 1996
for appointment of the arbitral tribunal against Kotak India Venture
(hereinafter referred as Kotak
) as per Share Subscription and Shareholder
agreement (hereinafter referred as SSSA) signed between the parties in 2017
which included the included the arbitration clause.. Under SSSA, Kotak India
subscribed to Optionally Convertible Redeemable Preference Shares (hereinafter
referred to as OCRPS) issued by Indus
In 2018 , Kotak decided to convert OCRPS into equity shares in order to make
Qualified Initial Public Offering (QIPO). However, during the conversion
process, a dispute arose between the parties w.r.t., calculation and conversion
formula used for the conversion of OCRPS into Equity share.
According to the
formula sought to be applied by Kotak , they were to be given approximately 30%
of the paid-up share capital of Indus, whereas, according to the formula sought
to be applied by Indus, Kotak would get 10% of the total paid-up share capital
of Indus Thereinafter, Indus refused to pay the redemption amount to Kotak
giving rise to the dispute. Kotak thereby filed a petition with the National
Company Law Tribunal , Mumbai ("NCLT") under 7 of IBC to initiate the corporate
insolvency process against Indus
Subsequently, in response, Indus filed an interlocutory application before NCLT
requesting the matter to be referred to arbitration by invoking the
arbitration clause in the SSSA, contending that the application filed by Kotak
be dismissed and the parties be referred to arbitration.
The NCLT observed that for an application filed under 7 of IBC, the tribunal
must first determine whether there has been a "default" within the meaning of 3(12) of the IBC. The tribunal further observed that Indus was a solvent,
financially sound and profitable company and that no default had occurred in the
instant case since, the dispute between the parties was purely of contractual
nature .Therefore the parties should be referred to arbitration, henceforth,
dismissing the Insolvency application.
In response to the NCLT's decision, Kotak petitioned the Supreme Court by SPL
u/a 136 of the Constitution arguing that the subject matter of the dispute in
the instant case was a matter in rem and, as such, not arbitrable. Indus, on the
other hand affirming to NCLT's approach asserted that since there was no default
under the Code as per 3(12) of the Insolvency and Bankruptcy Code, the dispute
should be referred to arbitration.
Supreme Court's Decision
At the outset before proceeding, the Court clarified that under normal
circumstances appeal for order passed by NCLT under 7 of the IBC would have
been heard by NCLT but since 11 petition was already pending before the Court
at the time the NCLT made its order, the Court is hearing the matter on merits.
- Whether the NCLT was justified in issuing an order u/s 8 of Arbitration act
for petition filed under 7 of the IBC?
Reliance was laced by Court on the case of Vidya Drolia v. Durga Trading
Corporation and upholding the decision of NCLT, it was held that a mere
existence of a debt is not a determining factor for the establishment of a
A proceeding under 7 petition of the Insolvency and Bankruptcy Code
becomes a proceeding in rem only after the adjudicating authority has determined
the existence of a "default" as per 3(12) of IBC which then leads to the
creation of third party rights in favour of all creditors of the corporate
debtor, thus having an erga omnes effect on the admission of which the dispute
Accordingly, in the instant case, the Supreme Court held
that since that primary dispute between the parties was regarding the conversion
formula to be adopted for the conversion of the preference shares to equity
shares was potentially a contractual matter and at the given stage it was
premature to determine if default had actually occurred as per 3(12) of IBC.
Therefore, the Supreme Court upholding the decision of NCLT citing that default
could not be established, dismissed the petition under 7 IBC and allowed the
application under 8 of the Act.
- If there are different arbitration agreements and one of the
respondents is a foreign corporation, can a single arbitral panel be
The Supreme Court held that since the petition under � 7 of the IBC was
correctly dismissed, the petition under � 11 of the Arbitration Act is
maintainable . The Court taking into consideration the M/s Duro Felguera v. M/s
Gangavaram Port Ltd., case held that a single arbitral tribunal cannot be
constituted when the parties have entered into separate arbitration agreements.
However, taking into consideration the fact and circumstances of the case and
resemblance in the nature of disputes among different arbitration agreements,
the court held that different arbitral tribunals should be constituted , however
the members of the tribunal can be the same. But for the international
arbitration proceedings a separate tribunal should be constituted.
- The absence of a "default" and its impact on a � 8 application
The Court in the case of Indus Biotech correctly observed that the decision
taken by NCLT and held that the court must prima facia decide on the question of
default in an application filed under 7 of IBC taking into consideration the
facts and circumstances of the case and material placed on record and if the
NCLT determines that no default exists as per 3(12) , the parties are free to
secure the appointment of the Arbitral Tribunal through an appropriate legal
- Arbitrability of dispute
Initially before Indus Biotech case , the arbitarbility and non-arbitrability of
dispute has been dealt in detail in Booz Allen and Hamilton Inc. v. SBI Home
Finance Ltd. which was a celebrated judgement of the time for determing the
arbitrability of the dispute wherein the Supreme Court distinguished using the
right-based formula approach between the rights as rights in personam which were
held to be arbitrable and rights in rem which were characterized as being
The court thereafter in the case of Vidya Drolia II laid down the following
test to determine as to when a dispute becomes inarbitrable:
- i. It relates to actions in rem or actions that do not pertain to subordinate rights in personam that arise from rights in rem; or
- ii. It relates to actions that do not pertain to subordinate rights in personam that arise from rights in rem. It affects third-party rights; has erga omnes effect; necessitates centralized adjudication, and mutual adjudication would be ineffective and unenforceable.
- iii. It relates to the state's inalienable sovereign and public interest functions; and
- iv. It is expressly or impliedly non-arbitrable under mandatory statute.
Recently, the court in the Indus Biotech case placing reliance upon the
exhaustive test laid down in Vidya Drolia II recognised the dispute does not
become inarbitrable merely by filing an application , it is only when there is
admission of default on the part of the corporate debtor as per 3(12) of IBC
that the third party rights are created which have an erga omnes effect due to
which the dispute becomes inarbitrable and not due to the mere involvement of
rights in rem.
- Avoiding unnecessary delay in proceedings by forum shopping
By holding that an insolvency proceeding becomes in rem only upon admission, the
Court in Indus Biotech arguably established a system that would prevent
forum shopping and help in avoiding unnecessary delay in arbitration
proceedings due to frivolous applications.
Therefore, by the clarification given by the court in Indus Biotech case , an
insolvency application would no longer allow a financial/operational creditor to
avoid arbitration. The NCLT would have to first determine whether there is a
default under 3(12) IBC , and if there isn't, the dispute could be referred to
Written By: Sehar Sharma
- Indus Biotech Private Limited v Kotak India Venture (Offshore) Fund and Or, MANU/SC/0231/2021
- 8 of the Arbitration and Conciliation Act, 1996
- Vidya Drolia and Or v Durga Trading Corporation, MANU/SCOR/25691/2018
- (2017) 9 SCC 729
- Booz Allen & Hamilton v. SBI Home Finance Ltd, MANU/SC/0533/2011
- Vidya Drolia and Or v Durga Trading Corporation, MANU/SCOR/25691/2018
, LL.M student at Mahrashtra National Law University,