Analysis of NCLT Mumbai Judgment in Indus BioTech (P) Ltd. V/s Kotak Venture Fund -1 dated 9th June, 2020
Case: Indus BioTech (P) Ltd. V/s Kotak Venture Fund -1
Decided on 9th  June, 2020
Judgement analysed by:  Adv. Partho Sarkar
Case Citation  : [2020] 29 NCLT

The dispute centres around three things – (1) The valuation of Kotak Venture Fund OCRPS; (2) The right of Kotak Venture Fund to redeem such OCRPS when it had participated in the process to convert its OCRPS into equity shares of Indus Biotech/Corporate  Debtor; and (3) Fixing of the QIPO date. All are determinants in coming to a judicial conclusion whether or not a default has occurred, the facts don’t conjure that a default has occurred. The invocation of arbitration thus was held to be justified. It was also adjudicated – Indus Biotech is a solvent, debt-free and profitable company. It will unnecessarily push an otherwise solvent, debt-free company into CIRP, not a desirable result at this stage. (The author in the Epilogue has explained the incorrect premise adopted in arriving at the ruling).

The Epilogue also discusses  a per incuriam order, by NCLT Bengaluru, suggesting the Applicant under I & B Code to proceed  under Arbitration Law in the matter  of Harish P V/s Chemizol Additives  [2020] 24NCLT.

 Back Ground Facts/Rival Submissions 

  1. An Interlocutory Application (IA) came  to be filed by Indus Biotech/Corporate Debtor, relying on section  8 of the Arbitration & Conciliation Act, 1996  (Arbitration Act) on a limited point of NCLT to refer the captioned contestant parties  in the main CP (IB) No.3077/2019 to arbitration, vide Section 8 (1) of Arbitration Act – A judicial authority before which an action is brought in a matter which is the subject of an arbitration agreement shall, if a party so applies not later than when submitting his first statement on the substance of the dispute, refer the parties to arbitration.
  1. It is the case of Kotak Venture Fund, that Indus Biotech failed to redeem the Optionally Convertible Redeemable Preference   Shares  (OCRPS)  on  or  before  15th   April, 2019  in terms  of the  Share Subscription  and Shareholders Agreement (SSSA). Thus date of default  commenced  on 16th   April, 2019.
  1. Kotak Venture Fund claimed around INR 367.09 Crores as redemption value of the OCRPS held by it in Indus Biotech/ Corporate Debtor. To counter the same, the line of argument tendered by Indus Biotech was flavoured of an Arbitration Law perspective, in stating  to summarise  the  dispute  – (a) The valuation  of OCRPS; the conversion of the outstanding preference shares was to take place according to the defined conversion formula, depending on the valuation, the converted stake would range between ten to thirty percent of the equity share capital of Indus Biotech post conversion, the dispute pertains to the calculation and conversion formula to be followed. (b) The right of Kotak Venture Fund to be redeemed of the OCRPS when it had participated in the process  to convert its OCRPS into equity shares  of the Indus Biotech; (c) Fixing of the Qualified Initial Public Offering (QIPO) date  – the QIPO process itself was stalled as a result of this dispute.
  2. It is the case of Kotak Venture Fund, that Indus Biotech – to get out of the clutches of IBC Code, is canvassing  of it’s being a solvent  & debt-free company, effectually  not calling for CIRP. In counter,  it was argued,  Kotak Venture Fund on 31st   March, 2019  issued a Redemption  Notice to Indus Biotech, calling upon the latter  to pay a sum of around  INR 367.09 Crores basis which Section  7 application came to be filed; therefore, there  exists, more than one bona fide and substantial dispute  between the parties  under  the  Share  Subscription  and  Shareholders Agreement  (SSSA) since  August 2018;  in substance the dispute is in the nature of a commercial dispute and that courts should lean in favour of enforcing arbitration agreements.

  3. Rival parties submitted multiple rulings –

 i. Pioneer  Urban Land and Infrastructure V/s UOI  [2019] 13 SC; Haryana Telecom V/s Sterlite  Industries  (1999)  5 SCC 688.  It        was culled  of the  said ruling(s), matters  in rem are inherently  incapable of being referred  to Arbitration and while deciding the scope of a                      section  8 petition  under the Arbitration & Conciliation Act, 1996, only such disputes  or matters  should be referred  to Arbitration, which an                  arbitrator  is competent or empowered to decide. Section 7 of the Code is a litigation not amenable to arbitration.

 ii. Booz Allen and Hamilton V/s SBI Home Finance (2011) 5 SCC 532 that if there  are some matters which are arbitrable and some matters  which are non-arbitrable, even in those  cases, it should not be referred  to arbitration. Booz Allen ruling quotes  the view in Sukanya Holdings (P) Ltd V/s Jayesh H. Pandya (2003)  5 SCC 531,  that bifurcation of the subject matter of an action brought before a judicial authority is not allowed.

iii. In Rakesh Malhotra  V/s Rajinder Kumar Malhotra  2014  SCC OnLine  Bom 1146  Bombay High Court created  a window and after considering  the same, the only question is whether  the case of Indus Biotech falls within that window.

 Court’s Observation

  1. Question framed by NCLT: Will the provisions of the Arbitration & Conciliation Act, 1996 prevail over the provisions of the I & B Code? If so, in what circumstances? It is settled law that generalia specialibus non derogant – special law prevails over general law. In Consolidated Engineering Enterprises  V/s Principal Secretary, Irrigation Department (2008)  7 SCC 169 it was held Arbitration & Conciliation Act is a special law. In P Anand Gajapathi Raju & Ors V/s PVG Raju (dead) & Ors. (2000)  4 SCC 539, it was held – that the language of section 8 of the Arbitration & Conciliation Act, 1996, is peremptory and the court is under an obligation  to refer parties  to arbitration.
  2. Section 238 of the I & B Code states, the provisions of I & B Code shall have overriding effect vis-à-vis anything inconsistent therewith contained in any other law. In Innoventive  Industries  V/s ICICI  [2018] 128 NCLAT, NCLAT ruled the statute mandates NCLT to ascertain  and record satisfaction as to the occurrence  of default  before  admitting the application.  The ‘default’ to be understood within the meaning  of section 3(12) of the Code.
  3. In the present case, the dispute centres around three  things – (1) The valuation  of the Kotak Venture Fund OCRPS; (2) The right of Kotak Venture Fund to redeem  such OCRPS when it had participated in the process  to convert its OCRPS into equity shares  of Indus Biotech/Corporate Debtor; and (3) Fixing of the QIPO date.  All of these  things  are important determinants in coming to a judicial conclusion whether  or not  a default  has  occurred,  the facts don’t conjure that a default has occurred. The invocation of arbitration thus was held to be justified. It was also held that Indus Biotech is a solvent, debt-free and profitable  company. It will unnecessarily push an otherwise solvent, debt-free company into CIRP, which is not a very desirable  result at this stage.


 The IA praying for seeking  Arbitration is allowed,  as a corollary the application under  Section  7 of I & B Code is rejected.


  1. The above order is correct, though the contesting parties premised  their arguments missing out the core legal issue(s) qua I & B Code and the Companies Act. Kotak Venture Fund rested  its case – “Are the reliefs claimed in the petition capable of being referred to arbitration or being granted by an arbitral tribunal?” In the given traverse  of facts of the case, the ruling by NCLT in rejecting  Kotak’s Section 7 application is certainly  correct, but to reiterate was overlooked  of the core question of law, given the somewhat aliunde rival submissions  tendered. Defragmenting the  facts, the preliminary issue which should have been determined, does optionally Convertible Redeemable Preference Shares – by its inherent definition can in any circumstances metamorphose into a debt. Bare reading of Section 80 of the  Companies  Act, 1956  (or Section  55  of  Companies  Act 2013),  no  way  impresses   such metamorphosis of Kotak Venture Fund to become  a Financial Creditor of Indus Biotech, however the agreement, between the contestants provide ‘… provided that the range of conversion would be between ten to thirty percent, dependent  on the valuation which the agreement itself provides. The agreement further provides that if the QIPO does not take place by the QIPO date, then a fifteen-day notice period shall be given. At the end of this fifteen-day period, the investment will be redeemable at the Internal Rate of Return (IRR) of thirty percent. If not redeemed, then it will be treated as a debt’. [Can an agreement between the  parties,  extrapolating a  contractual obligation   not-conceivable  in  the  law  be enforceable!! Under Section  2 (g) of the  Contract  Act, such agreements are void contract].  Bombay High Court in Aditya Prakash Entertainment V/s Magikwand Media Pvt. Ltd 2018  SCC OnLine  Bom 551 had ruled – The shareholders of redeemable preference shares of the company do not become creditors of the company in case their shares are not redeemed by the company at the appropriate time. If they do not become the creditors of the company, they cannot apply for winding up of the company under Section 433(e) of the Companies Act, 1956.

  2. In terms of the preceding para, the claim of Kotak Venture Fund having not met the test of Section 3 (11) of the  I & B Code; it was an in-determinant issue  to pursue  Section  3 (12) of the  Code in adjudicating to a conclusion  – ‘the facts don’t conjure that a default has occurred. The invocation of arbitration thus was held to be justified’.

  3. The NCLT in the captioned judgment held ‘that Indus Biotech is a solvent, debt-free and profitable company. It will unnecessarily push  an otherwise solvent,  debt-free company  into CIRP, not  very desirable  result  at this stage’. The determinant applied  by NCLT runs in conflict with the  Supreme Court ruling in Swiss Ribbons V/s UoI,  [2019] 03 SC; evidently  reiterated of NCLAT ruling in (Monotrone Leasing V/s P M Cold Storage)  [2020] 21 NCLAT –“We are bound to emphasize that a presumption cannot be drawn merely on the basis that a company, being solvent, cannot commit any default. As observed in financial and economic parlance, the inability to payoff debts and committing default are two different aspects which are required to be adjudged on equally different parameters. Inability to pay debt has no relevance for admitting or rejecting an application for initiation of CIRP under the IBC.”

  4. Ruling of NCLT Bengaluru in the matter of Harish P V/s Chemizol Additives [2020] 24 NCLT discussed  here under: NCLT has a mandate of either  accepting or rejecting  the  Insolvency Petition  vide a speaking order. NCLT being a creature of a special statute is to discharge certain specific functions… can exercise only such powers within the contours of jurisdiction as prescribed by the Statute, the law in respect of which, it is called to administer (Embassy Properties V/s State of Karnataka [2020] 12 SC). NCLT Bengaluru however in the matter  of Harish P V/s Chemizol Additives in its ruling dated  8th  June, 2020 overstepped itself, excerpted hereunder, basis copy of order –  [2020] 24 NCLT: 

(1) The Respondent is directed  to settle  the  issue amicable,  failing which, the  Petitioner is at liberty  to  invoke  the  arbitration clause  as  available  under  Clause-6  of the  Employment Agreement  dated  01.09.2015,  and the Respondent is directed  to participate in such Arbitration, as per law, in order to resolve  the issue rather  than  to aggravate the issue…(The Code doesn’t envisage  in pushing litigants to Arbitration Proceedings, it can only accept or reject the Insolvency Application, as per the contours of law).

(2) The Petitioner is also granted  liberty to invoke appropriate remedy, as per law, in case, the Petitioner is aggrieved  by the proceedings passed  during Arbitration to be invoked in pursuance to this order… (NCLT has no power or jurisdiction to grant or revoke liberty for proceedings arising out of Arbitration – since NCLT is not the competent authority).

(3) For an aggrieved  party, knocking at the doors of Judiciary would be last resort. Such party should  exhaust alternative remedy available  by virtue of Agreement(s)  they themselves have voluntarily executed and the terms  and conditions  in those  Agreement(s) would bind them. In the instant  case, as stated supra, approaching this Adjudicating Authority is not only the remedy available  for the  Petitioner as  per  the  terms  of agreement. In terms  of Clause  6 of the Agreement,  as stated supra, both  the  parties  agreed  to settle  the  issue by resorting  to Indian Arbitration and Conciliation Act 1996. Therefore, the Petitioner can also avail alternative remedy available  in the Agreement, which is binding on both the parties. Since the Petitioner has relied upon  the  very terms  and  conditions  of the  Agreement  in support  of its  claim,  it cannot selectively  choose  to  insist  payment  in terms  of the  agreement, without  making/invoking provisions  of alternative remedy… (NCLT  has no role to advise in seeking  exhaustion  of alternative remedy by the applicant, it is mandated to confine itself within the contours of the Code to either accept or reject an application).

(4) It is a settled position  of law that  the provisions of the Code cannot  be invoked to settle  the dispute(s)  or to recover  the  alleged  outstanding amount.  Admittedly the  Petitioner has  not invoked other  remedies  available  except  the provisions of the code by issuing demand  notice. The mere acceptance of the debt in question by the Respondent would not automatically entitle the Petitioner to invoke the provisions of the Code, unless  the debt  and default  is undisputed and proved it to the satisfaction of the Adjudicating Authority. As per the copy of Annual Returns for the Financial year 2017-18,  filed by the Petitioner in respect  of the Respondent Company, its turnover  and net worth are Rs. 103,322,162 and Rs. 1,325,365,853/- respectively.  Therefore, the Respondent Company prima facie appears  to be solvent  Company so as to resolve  the issue of outstanding amount  in question.  The NCLT is conferred  power, even to refer the matter  pending before it, to Mediation and Conciliation. U/s 442 of the Companies Act, 2013. The Adjudicating Authority, being NCLT,  U/ s 60(1)  of the Code, can suo motto refer the matter to either Mediation and Conciliation or to Arbitration to settle the dispute…(Section 60 (1) of the Code is about the territorial jurisdiction of NCLT & nothing to do with Mediation and Conciliation).

Read with the afore-stated excerpts  of order by NCLAT in Monotrone  Leasing (  [2020] 21 NCLAT); with greatest respect  to the concerned  Judicial Officer(s) of NCLT Bengaluru, the author  humbly submits,  a per incuriam order  came  to  be  passed,  in Harish  P V/s Chemizol  Additives, an  ex-facie  instance  of miscomprehending nay misstating the law.

 Respectfully submitted of the Supreme Court’s Observations  –

  1. Supdt. of Central Excise V/s Somabhai Patel AIR 2001 SC 1975 – In case of miscomprehension of law – same constitutes contempt.
  2. RR Parekh V/s High Court of Gujarat, AIR 2016 SC 3356 – A judge passing an order against the provisions of law is actuated of an oblique motive or corrupt practice – No direct evidence is necessary – Punishment for compulsory retirement directed The author  is of the  firm believer  of the  Doctrine – ‘Actus Curiae Neminem Gravabit’ – The court  shall prejudice none.