TMI Blog2020 (6) TMI 747X X X X Extracts X X X X X X X X Extracts X X X X ..... re 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 - In the present case, the dispute centres around three things (1) The valuation of the Respondent/Financial Creditor s OCRPS; (2) The right of the Respondent/Financial Creditor to redeem such OCRPS when it had participated in the process to convert its OCRPS into equity shares of the Applicant/Corporate Debtor; and (3) Fixing of the QIPO date. All of these things are important determinants in coming to a judicial conclusion that a default has occurred. The invocation of arbitration in a case like this seems to be justified. The default has not occurred. It is noted that Mr Mustafa Doctor s statements that the Applicant/Corporate Debtor is a solvent, debt-free and profitable company. It will unnecessarily push an otherwise solvent, debt-free company into insolvency, which is not a very desirable result at this stage. 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 valuati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er herein); (2) Kotak India Venture (Offshore) Fund; (3) Kotak Mahindra Investments Limited whose shares were subsequently transferred to Kotak Securities Limited; and (4) Kotak Employees Investment Trust. (b) The Respondent entered into separate Share Subscription Shareholders Agreements (SSSAs), with each of the four Kotak Group entities, as follows: - (1) Agreement dated 20.07.2007 with Kotak India Venture Fund-I; (2) Agreement dated 20.07.2007 with Kotak India Venture (Offshore) Fund; (3) Agreement dated 12.07.2007 with Kotak Mahindra Investments Limited, whose shares were subsequently transferred to Kotak Securities Limited; and (4) Agreement dated 09.01.2008 with Kotak Employee Investment Trust. Although there were four SSSAs, the terms and conditions were materially identical to one another. In all, the Kotak Group have subscribed to a share capital of ₹27,00,00,000/- (Rupees twenty-seven crore only), including both equity and preference share capital. (c) In 2007, under the said SSSAs, the Petitioner subscribed to equity shares and Optionally Convertible Redeemable Preference Shares (OCRPS) issued by Respondent. (d) Under regulation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n clause. A reading of the arbitration clause of the Agreement reveals that the parties bound themselves to settle any dispute, controversy or claim arising out of, relating to or in connection with the agreement to be finally settled by arbitration. The arbitration was to be conducted in accordance with the international arbitration rules of the Arbitration Conciliation Act, 1996. The seat of arbitration was to be Mumbai, and the arbitral tribunal was to consist of three arbitrators, one each to be nominated by the Applicant/Corporate Debtor and the Respondent/Financial Creditors Group, and the third to be selected by the two party-appointed arbitrators. In case either of the parties failed to nominate an arbitrator within fifteen days of receipt of notice in writing from the other party, then the arbitrators were to be appointed by a court of competent jurisdiction. 2.2. Mr Mustafa Doctor submitted that the Respondent/Financial Creditor has claimed a sum of approximately ₹367.09 crore as redemption value of the OCRPS held by it in the Applicant/Corporate Debtor. The dispute in essence pertains to (a) The valuation of the Respondent/Financial Creditor s OCRPS; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the redemption of the OCRPS. This was on the basis that the option to exercise their option to redeem the OCRPS was available from 2011 onwards but was exercised only in 2019. 2.6. On 31.03.2019, the Respondent/Financial Creditor issued a Redemption Notice to the Applicant/Corporate Debtor, inter alia calling upon the latter to pay a sum of approximately ₹367.09 crore to the Respondent/Financial Creditor. Mr Mustafa Doctor contends that this is the basis on which the underlying CP has been filed. Therefore, there exits more than one bona fide and substantial dispute between the parties under the SSSA since August 2018. 2.7. Mr Mustafa Doctor further submitted that the Applicant/Corporate Debtor is a highly profitable, debt-free company. The Respondent/ Financial Creditor has itself benefited from the Applicant/Corporate Debtor by receiving dividends in excess of ₹13 crore on an investment of approximately ₹19 crore. Hence, the Applicant/ Corporate Debtor is clearly not in need of resolution in the first place. 2.8. Mr Mustafa Doctor further submitted that the investment by the Respondent/ Financial Creditor was in the share capital of the company, by way ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the present is this: Are the reliefs claimed in the petition capable of being referred to arbitration or being granted by an arbitral tribunal? If the answer is no, then the present IA should be dismissed, and the underlying Company Petition should be heard on merits. 3.2. Mr Fredun E DeVitre submitted that a section 7 IBC petition belongs to that class of litigation which are incapable of being referred to arbitration. These are matters in rem, as stated by the Hon ble Supreme Court in Pioneer Urban Land and Infrastructure Limited another v Union of India others . 9 Matters in rem are inherently incapable of being referred to arbitration. Examples are probate, criminal matters, matrimonial matters, winding up etc. The initiation of CIRP cannot be granted by an arbitrator. A section 7 petition is not for recovery of debts. The IBC is a code for dealing with insolvency, either for revival or for liquidation. Once there is a debt and default based on a claim, then the court should decide to admit. It is the exclusive mandate of this court. The existence of an arbitration clause can never affect a section 7 application, which has to be decided independently by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only asking for what is due, he submitted. The investment was made in two trances on 10.08.2007 (₹17,48,08,300/-) and 13.08.2007 (₹1,50,45,900/-), 13 when the turnover was about ₹6 crore. 3.8. The third aspect of Mr Fredun DeVitre s argument centred on the QIPO date. He submitted that in terms of the SSPA, the date was to be December 2011 or a date which is approved by three investors. The principal argument in the present IA is that the Respondent/Financial Creditor has not redeemed the OCRPS by 2011. In this regard, there was an amendment made to the SSPA in 2017, in terms of which the life of the agreement was extended by another ten years. The amendment retains the QIPO definition from the original document, since all other terms and conditions were retained. Therefore, Mr Fredun DeVitre argues, a fresh right of redemption by agreement was conferred on the respondent. 3.9. Further, in March 2018, there were discussions between the parties for a QIPO. The agreement provided that the range of conversion would be between ten and thirty percent, dependent on the valuation which the agreement itself provides. The agreement further provides that if the QIPO d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onstitutional courts under other laws, and the underlying reasons in arriving at those decisions. The case law cited by both Senior Counsel is a good starting point in this quest. 5.3. Booz Allen lays down three tests of arbitrability of a dispute in para 34 of the judgment (a) Whether the disputes are capable of adjudication and settlement by arbitration? (b) Whether the disputes are covered by the arbitration agreement? (c) Whether the parties have referred the disputes to arbitration? In para 36 thereof, the well-recognised examples of non-arbitrable disputes have been laid down to be (i) disputes relating to rights and liabilities which give rise to or arise out of criminal offences; (ii) matrimonial disputes relating to divorce, judicial separation, restitution of conjugal rights, child custody; (iii) guardianship matters; (iv) insolvency and winding-up matters; (v) testamentary matters (grant of probate, letters of administration and succession certificate); and (vi) eviction or tenancy matters governed by special statutes where the tenant enjoys statutory protection against eviction and only the specified courts are conferred jurisdic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 5.9. The Preamble of the IBC reads that it is an Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons in a time-bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, available of credit and balance the interests of all the stakeholders . The Preamble of the Arbitration Conciliation Act, 1996, reads that it is an Act to consolidate and amend the law relating to domestic arbitration as also to define the law relating to conciliation . 5.10. Section 238 of the IBC reads as follows: - 238. The provisions of this Code shall have effect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument having effect by virtue of any such law. 5.11. The rules of interpretation are fairly well-settled: - (1) When a provision of law regulates a particular subject and a subsequent law contains a provision regulating the same subject, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the IBC. 5.14. In the present case, the dispute centres around three things (1) The valuation of the Respondent/Financial Creditor s OCRPS; (2) The right of the Respondent/Financial Creditor to redeem such OCRPS when it had participated in the process to convert its OCRPS into equity shares of the Applicant/Corporate Debtor; and (3) Fixing of the QIPO date. All of these things are important determinants in coming to a judicial conclusion that a default has occurred. The invocation of arbitration in a case like this seems to be justified, 5.15. Looking at the contention raised, and that the facts are not in dispute, we are not satisfied that a default has occurred. We note Mr Mustafa Doctor s statements that the Applicant/Corporate Debtor is a solvent, debt-free and profitable company. It will unnecessarily push an otherwise solvent, debt-free company into insolvency, which is not a very desirable result at this stage. 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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