Karnataka High Court
Airis Pharma Pvt Ltd vs Biocon Pharma Ltd on 27 September, 2023
Author: B M Shyam Prasad
Bench: B M Shyam Prasad
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NC: 2023:KHC:35214
CMP No. 107 of 2023
IN THE HIGH COURT OF KARNATAKA AT BENGALURU
DATED THIS THE 27TH DAY OF SEPTEMBER, 2023
BEFORE
THE HON'BLE MR JUSTICE B M SHYAM PRASAD
CIVIL MISC. PETITION NO. 107 OF 2023
BETWEEN:
AIRIS PHARMA PVT LTD
PLOT NO.64 AND 65,
ALEAP IE, GAJULARAMAM,
QUTHBULLAPUR MANDAL,
HYDERABAD-500078
REPRESENTED BY ITS
CHIEF EXECUTIVE OFFICER,
AND AUTHORISED SIGNATORY,
MR KISHORE GANJI.
...PETITIONER
(BY SRI. ROHAN KOTHARI.,ADVOCATE)
AND:
Digitally BIOCON PHARMA LTD
signed by 20TH KM HOSUR ROAD,
NARASIMHA
MURTHY ELECTRONIC CITY,
VANAMALA BANGALORE-560100.
Location:
HIGH
COURT OF ...RESPONDENT
KARNATAKA
(BY SRI. PERIKAL K.ARJUN P K.,ADVOCATE)
THIS CIVIL MISC. PETITION UNDER SEC.11(5) OF
THE ARBITRATION AND CONCILIATION ACT 1996,
PRAYING TO APPOINT THE SOLE ARBITRATOR IN
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NC: 2023:KHC:35214
CMP No. 107 of 2023
TERMS OF CLAUSE 27 OF THE LICENSING AND SUPPLY
AGREEMENT DATED 22.04.2021 AT ANNEXURE A FOR
ADJUDICATING/RESOLVING THE CLAIMS, DISPUTES
AND DIFFERENCES BETWEEN THE PETITIONER AND
THE RESPONDENT.
THIS PETITION, COMING ON FOR ADMISSION,
THIS DAY, THE COURT MADE THE FOLLOWING:
ORDER
This petition under Section 11[5] of the Arbitration and Conciliation Act, 1996 [for short, 'the Arbitration Act'] is for the appointment of a sole Arbitrator. The petitioner and the respondent have entered into "Licensing and Supply Agreement" dated 22.04.2021 [the Agreement], and the respondent has agreed to provide Risk Evaluation and Mitigation Strategy [REMS] - a document required to be filed with the United States Food and Drug Administration [FDA] along with the First Application for approval of Mycophenolate Mofetil for Oral Suspension [the subject Drug].
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NC: 2023:KHC:35214 CMP No. 107 of 2023
2. The respondent has paid US $ 945,000 to the petitioner in consideration of the license to commercialize the use of the subject drug upon issuance of the FDA's approval with the petitioner agreeing to ensure that the FDA approval is obtained within a period of ten months from the date of receipt of REMS. The petitioner and the respondent have agreed for extension of this timeline by a further two months. The petitioner and respondent do not dispute that the FDA has refused approval, and thereafter there is exchange of legal Notices and emails between the petitioner and the respondent.
3. The respondent has addressed letter dated 21.04.2022 to the petitioner stating that both have mutually agreed to terminate the Agreement with the petitioner agreeing to refund the license fee of US $ 9,45,000 in the schedule as indicated in such letter1. 1 The Schedule of Payment indicated is as follows: -4-
NC: 2023:KHC:35214 CMP No. 107 of 2023 The respondent has later issued a demand dated 30.08.2022 for refund in a sum of Rs.8,32,97,970/-, and the respondent, after exchange of E-mails with the petitioner's representative, has issued demand on 21.10.2022 for the aforesaid amount in the prescribed form for the purposes of Section 8 of Insolvency and Bankruptcy Code, 2016 [IBC 2016].
The petitioner on 11.11.2022 has responded to such demand asserting that the FDA has refused approval because of the petitioner's failure to perform according to the terms of the Agreement.
4. The respondent, on 14.12.2022, has filed an application under Section 9 of IBC 2016 with National Company Law Tribunal, Hyderabad Bench
1. First Installment of US $500,000 within thirty days from receipt of this letter;
2. Second Installment of US $225,000 within thirty days from date of payment of the first installment above; and
3. Third Installment of US $220,000 within thirty days from the date of payment of the second installment above.
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NC: 2023:KHC:35214 CMP No. 107 of 2023 [NCLT - the Adjudication Authority under IBC 2016], and the petitioner is served with the notice of such application. The NCLT, on the petitioner's request, has granted multiple adjournments to file Statement of Objections. As of today, the respondent's application is listed before the NCLT on 05.10.2023 and the petitioner is yet to file Statement of Objections.
5. The petitioner has filed the present petition on 07.03.2023 for the appointment of a sole Arbitrator relying upon the agreement for arbitration in the Agreement, and the agreement for arbitration as incorporated in the Agreement reads as under:
"27. Governing Law and Arbitration This Agreement shall be governed by and construed in accordance with the laws of India (without regard to the conflict of laws principles of such state), including all matters of construction, validity and performance. In event of dispute arising out of or in relation to this Agreement, the Parties shall try and settle -6- NC: 2023:KHC:35214 CMP No. 107 of 2023 the issue amicably, failing which, the Parties shall submit the dispute for arbitration under Indian Arbitration and Conciliation Act, 1996 and the rules framed there under as amended from time to time ("Rules"). The arbitration shall be held in Bangalore, India and shall be conducted in English by one arbitrator, appointed by both the Parties in accordance with said Rules. The decision of such arbitrator shall be written, reasoned, final, binding and conclusive on the Parties, and award thereon may be enforced in any court having jurisdiction over the Parties and the subject matter hereof."
6. Sri Rohan Kothari, the learned counsel for the petitioner, submits that the agreement for arbitration is not disputed, and the petitioner is bonafide in raising an arbitrable dispute on the alleged liability to refund. Thus, the petitioner has established the necessary circumstances for the appointment of a sole arbitrator. He argues that the respondent's objection that this petition is filed to scuttle the proceedings under Section 9 of IBC 2016 -7- NC: 2023:KHC:35214 CMP No. 107 of 2023 and that the moratorium under Section 14 thereof would apply is wholly misplaced.
7. Sri Rohan Kothari argues that it would be open to the respondent to establish in the proceedings before the NCLT that the petitioner's contention that the Agreement has failed because of the petitioner's failure to furnish REMS and that the petitioner is not liable to refund the amount received are 'moonshine defenses', and if the respondent succeeds in establishing the same, the NCLT will admit the application under Section 9 of the IBC. If the application is admitted, given the provisions of Section 14[1][a] of IBC 2016, there will be moratorium even as against the continuation of the arbitration proceedings.
8. Sri Rohan Kothari also argues that the appointment of a sole Arbitrator by this Court would not eclipse the jurisdiction of the NCLT to decide whether the respondent's application under Section 9 -8- NC: 2023:KHC:35214 CMP No. 107 of 2023 of IBC 2016 must be admitted or not. He submits that the Hon'ble Supreme Court in 'Indus Biotech India Pvt. Ltd. v,. Kotak India [Offshore] Funds and Others'2, where an application under Section 8 of the Arbitration Act was filed in the proceedings under Section 7 of IBC 2016 and the concerned NCLT had allowed the application under Section 8 of the Arbitration Act rejecting the application under Section 7 of the IBC, has opined that the NCLT should have decided on the application under Section 7 of IBC 2016 and the outcome of such decision would befall on the application under Section 8 of the Arbitration Act.
9. Sri Rohan Kothari emphasizes that the Delhi High Court in 'Millenium Education Foundation v. EDUCOM Infrastructure and School Management Limited'3, in view of the aforesaid 2 2021 [6] SCC 436 3 This decision is in ARB.P.326/2022, which is decided on 13.05.2022.
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NC: 2023:KHC:35214 CMP No. 107 of 2023 decision of the Hon'ble Supreme Court, has appointed a learned Arbitrator observing as follows:
"16. In view of the judgment in Indus Biotech Private Ltd., (supra), the proceedings under Insolvency and Bankruptcy Code would take precedence and any moratorium issued therein would automatically bind the proceedings under the Arbitration Act.
17. In case the petition filed before the NCLT is admitted and moratorium comes into play, the legal consequences of the same would automatically apply to the proceedings under the Arbitration Act."
Further, relying upon the observations as aforesaid, Sri. Rohan Kothari contends that the moratorium under Section 14(1) of IBC will commence not from the date of issuance of notice under Section 8 of IBC or filing of a petition under section 9 thereof but from the Insolvency Commenced Date - the date of admission of an application under Section 9 [or an application under Section 7 or 10] as defined under
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NC: 2023:KHC:35214 CMP No. 107 of 2023 Section 5[12] of IBC 2016, and as such, there cannot be any impediment to allow the application.
10. Sri Perikal K Arjun, the learned counsel for the respondent, on the other hand, submits that though the petitioner now proposes to dispute the letter dated 21.04.2022 and the liability to refund in terms of the Notice for refund dated 30.08.2022, but it cannot dispute that it has acknowledged the liability to refund the amount in the E-mail addressed on 21.04.2022 at 2.30 pm to '[email protected]' and also the subsequent e-mail on 27.04.2022 at 9.42 am. The E-mails relied upon by Sri Perikal K Arjun read as under:
E-mail dated 21.04.2022:
"We understand that Biocon would like to terminate the agreement.
Unfortunately we will need time to repay the amount. Once the termination happens we will discuss with other companies to enter into an agreement and post that we can pay also to help us accelerate the payment we request
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NC: 2023:KHC:35214 CMP No. 107 of 2023 you to provide LoA for REMS which was one of the reason for this delay.
Providing LOA will not cause any additional expense for Biocon and will help us to respond to CR and increase our chances of speedy approval and licensing so that we can refund.
E-mail dated 27.04.2022:
Received as discussed, we will do our best on the payment if your provide LOA it will held the payment as we need to file the response to get payments."
11. Sri Perikal K Arjun further submits that in proceedings under Section 11 of the Arbitration Act, the primary enquiry will be about the existence and validity of an arbitration agreement, and this enquiry would also include examination of who are the parties to the agreement and whether there is privity of contract. The secondary enquiry will be in respect of non-arbitrability of the dispute. In the present case, the petitioner, who in causing the aforesaid responses on 21.04.2022 and 27.04.2022 over E-
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NC: 2023:KHC:35214 CMP No. 107 of 2023 mails admitting the liability to refund the amount and requesting for time to refund the amount, is not bonafide either in raising the dispute for the first time after the demand notice dated 21.10.2022 under the provisions of Section 8 of IBC 2016. Therefore, this Court must opine that arbitrable dispute is not established.
12. Sri Perikal K Arjun canvasses that in very similar circumstances where it was demonstrated before the Hon'ble Supreme Court that the dispute raised was not bonafide even on a prima facie examination, the Hon'ble Supreme Court has refused to appoint an Arbitrator, and in this regard, he places reliance upon the decision of the Hon'ble Supreme Court in NTPC Limited v. SPML Infra Limited4.
13. In the light of the rival submissions, the point for consideration is:
4 2023 SCC Online SC 389
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NC: 2023:KHC:35214 CMP No. 107 of 2023 Whether this Court must reject the application for appointment of a sole arbitrator on the grounds [a] that the present petition is filed to scuttle the proceedings commenced by the petitioner under Section 9 of the Insolvency and Bankruptcy Code, 2016 [IBC 2016], and/or [b] that the petitioner has invoked the agreement for arbitration to project a nebulous dispute based on 'moonshine defenses'.
14. An application either under Section 7 or under Sections 9 or 10 of IBC 2016, given the Scheme under this statute, could bring about moratorium, but that will be with effect from the 'insolvency commencement date' in view of the express stipulation in Section 14[1]5 of IBC, 2016. The crucial question is what will be this Insolvency 5 14. (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following:
(a).........
(b)...........
The underlining is by this Court
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NC: 2023:KHC:35214 CMP No. 107 of 2023 Commencement Date, and this question does not require any discussion because it is defined in Section 5[12] of IBC. This provision reads as under:
5(12). "Insolvency Commencement Date"
means the date of admission of an application for initiating corporate insolvency resolution process by the Adjudicating Authority under section 7,9 or section 10, as the case may be."
It is obvious from the above that the date of admission of an application either under Sections 7, 9 or 10 of IBC 2016 would be the Insolvency Commencement Date, and insofar as an application under Section 9 or the other two provisions, the NCLT - the adjudicating authority, as contemplated under Section 9[5] will have to pass orders either to admit the application or reject the application. If the application is admitted, there will be moratorium, and the commencement of corporate insolvency
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NC: 2023:KHC:35214 CMP No. 107 of 2023 resolution process6 for the appointment of a resolution professional.
15. The Hon'ble Supreme Court in Indus Biotech Private Limited supra, after consideration of the afore provisions and the consequence of the transformation of the proceedings with the admission of an application under Section 9 of IBC, 2016 into a proceedings in rem having erga omnes effect, has opined that the question of arbitrability of an inter se dispute would not arise if the application is admitted, but on the other hand, if the adjudicating authority is satisfied that there is no default as contemplated under the provisions of IBC, the field would be left open to the parties concerned to secure constitution of an Arbitral Tribunal as contemplated in law. The 6 The provisions of Section 9[6] of IBC reads as under:
"6. The corporate insolvency resolution process shall commence from the date of admission of the application under sub- section (5) of this section."
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NC: 2023:KHC:35214 CMP No. 107 of 2023 Supreme Court's decision in this regard in paragraph-28 reads as under:
"28. 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 sub-section (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 sub-section (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 NCLT to pass any orders on such
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NC: 2023:KHC:35214 CMP No. 107 of 2023 application under Section 8 of the 1996 Act would not arise."
16. It should follow from the provisions as aforesaid and the enunciation by the Hon'ble Supreme Court that there cannot be moratorium against commencement or continuance of the arbitration proceedings on mere filing of an application under Section 9 of IBC 2016, and conversely, if there is commencement of the arbitral proceedings as contemplated under Section 21 of the Arbitration Act and the appointment of an Arbitrator, or constitution of an Arbitral Tribunal, under Section 11 of the Arbitration Act, the continuance of such proceedings would be subject to an order by the NCLT to admit the application paving way for the commencement of corporate insolvency resolution process.
17. The respondent's objection is that the present petition is filed to scuttle the proceedings
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NC: 2023:KHC:35214 CMP No. 107 of 2023 under Section 9 of IBC, but in view of the above, this Court cannot opine that commencement of the proceedings under Section 21 of the Arbitration Act and filing of an application under Section 11 thereof would scuttle the proceedings under Section 9 of IBC.
18. The question whether the respondent's application under Section 9 of IBC must be admitted or not is yet to be decided by the adjudicating authority. The NCLT will have to decide whether the respondent can inter alia establish an 'operational debt' and 'occurrence of a default' and whether the petitioner, as an alleged corporate debtor, is able to establish the existence of a dispute. The NCLT will have to consider a wide range of circumstances as could be discerned from the material brought on record. On the other hand, this Court is also called upon to decide on the arbitrability of the dispute raised by the petitioner with the respondent
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NC: 2023:KHC:35214 CMP No. 107 of 2023 contending that the petitioner's case about the existence of a dispute is a 'moonshine defense'.
19. The NCLT will decide on admission of the respondent's application on consideration of the compendium of circumstances, and if the NCLT does indeed decide on admitting such application, there would be moratorium on the continuation of the arbitral proceedings even if a sole Arbitrator is appointed. Any observation at this stage by this Court would forestall a decision by the NCLT on the question of admitting the respondent's application, and as exposited by the Hon'ble Supreme Court in Indus Biotech Private Limited supra, there must be precedence to a decision under the provisions of IBC, 2016 because of the transformation of the proceedings under Section 9 of IBC into proceedings in rem.
20. If the NCLT, while considering the question of admitting the application, decides that a
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NC: 2023:KHC:35214 CMP No. 107 of 2023 corporate debt is established or that there is failure to demonstrate a dispute [as contemplated under Section 14[1][a] of IBC], the consequences of such decision will fall on the continuation of the proceedings. Therefore, this Court is of the considered view that the decision on the petition for appointment of an Arbitrator need not be deferred or an opinion expressed on the tenability of the petitioner's case about the existence of a dispute, and because the agreement for arbitration is not disputed, a sole arbitrator must be appointed leaving open the rival contentions for decision by the NCLT and the continuance of the arbitration proceedings being dependent on such decision. The question for consideration is answered accordingly.
21. Upon hearing the learned counsel for the parties on who could be appointed as the sole Arbitrator, observing that the continuation of the arbitral proceedings will be subject to the order of NCLT on the pending application by the respondents
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NC: 2023:KHC:35214 CMP No. 107 of 2023 under Section 9 of the IBC. In the light of the aforesaid the following:
ORDER [a] The petition is allowed.
[b] Hon'ble Sri. Justice V Jagannathan, a former Judge of the High Court of Karnataka, is appointed as the Sole Arbitrator to enter reference of the dispute between the petitioner and the respondent and conduct the proceeding at the Arbitration and Conciliation Centre (Domestic and International), Bengaluru according to the Rules governing the Centre.
[c] The Registry is directed to communicate
this order [through E-mail] to the
Arbitration and Conciliation Centre
(Domestic and International), Bengaluru
and the Hon'ble Sri. Justice V
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NC: 2023:KHC:35214
CMP No. 107 of 2023
Jagannathan, a former Judge, High Court of Karnataka, Address: PRIDE ENCHANTA, No.003, Ground Floor, 4th Block, Opposite to BHEL Main Gate, Mysore Road, Bengaluru - 560026 [E-mail [email protected]] as required under the Appointment of Arbitrators by the Chief Justice of Karnataka High Court Scheme, 1996.
SD/-
JUDGE AN/-, RR