In a landmark verdict, the Hon’ble Madras High Court (“Madras HC”), in the case of Aapico Hitech Public Company Limited and Another v. Sakthi Auto Component Limited [Arbitration Original Petition No. 296 of 2021] (“Judgement”), in its judgment dated February 3, 2023, has rejected enforcement of a foreign arbitration award on the ground that it was passed without considering the fraud and violations of regulation of the Foreign Exchange Management Act, 1999 (“FEMA”), which were not curable.

Facts

Aapico Hitech Public Company Limited is a public listed company under the laws of Thailand (“Aapico Thailand”), Aapico Investment Private Limited is a company under the laws of Singapore (“Aapico Singapore”) (collectively, “Aapico Group”), and Sakthi Global Auto Holdings Limited (“SGAH”) is a company formed under the laws of England and Wales (collectively, “Petitioners”). Sakthi Auto Component Limited (“SACL/ Respondent”) is a public unlisted company formed under the laws of India, which is an affiliate of the Sakthi group of companies.

Around 2017, Aapico Group and SACL formed a joint venture by the name SGAH (“JV”), in which 74.9% shares were to be held by ABT Auto (“ABT”), 24.1% by Aapico Thailand, and 1% by Aapico Singapore, and SGAH was to become 70% owner SACL’s subsidiary in the U.S.A. (“SG-USA”). Initially, Aapico Group agreed to invest $100 million into the JV – $50 million in form of equity and $50 million by way of loan agreements, secured by guarantees given by Dr. Mahalingam (founder and controller of SACL) and by ABT (“Loan Agreements”). In 2018, owing to the financial crisis faced by SG-USA, Aapico Group provided another injection of funds of $65 million – $25 million in the form of equity capital, taking Aapico Group’s shareholding in SGAH to 49.99%. The said loan from Aapico Group was on the terms of an amended and restated loan agreement dated September 29, 2018 namely, shareholder’s agreement (“SHA”). ABT had also provided a charge over its shares in SGAH (around 50.01%) dated October 1, 2018 in order to secure the amounts due under the Loan Agreements.

Aapico Group alleged defaults under the Loan Agreements on June 4, 2019 and took over complete control of the board of SGAH. Subsequently, on August 15, 2019, by enforcing the charged shares, Aapico Group appropriated 50.01% shares of ABT, thereby becoming 100% equity holder of SGAH, and a 77.04% holder of SACL, indirectly. The value of appropriated shares, based on valuation report dated July 31, 2019 tendered by FIZ Consulting LLP, was around $27 million. Aapico Group and SGAH invoked the arbitration before Singapore International Arbitration Centre (“SIAC”) in terms of the SHA in respect of, inter alia, controlling and managing rights, including proportionate representation on the board of SACL, right to appoint nominee director on the board of SACL, etc. The SIAC passed its arbitration award on October 6, 2021 in favour of the Petitioners (“Award”). The Petitioners consequently approached the Madras HC, seeking enforcement of the Award in terms of Section 47 (Evidence) and Section 49 (Enforcement of foreign awards) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

Issue

Whether the Award satisfied the conditions under the Arbitration Act to be enforced as a decree in India.

Arguments

Contentions of the Petitioners:

Aapico Group contended that they had 100% shares in SGAH and also became the holder of 77.04% in SACL. However, despite its shareholding in SACL, Aapico Group was being prevented from exercising their management rights/ control of SACL under the SHA by the entities of Sakthi Group which was a breach of the SHA. Thus, the arbitration before SIAC was initiated and the Award was passed. Accordingly, the Madras HC should allow the enforcement of Award.

The Petitioners further contended that the Award was not contrary to the public policy of India and was in compliance of Section 47 and 48 (Conditions for enforcement of foreign awards) of the Arbitration Act. It was further contended that the burden of proof fell upon the party who resists the enforcement of the Award and in the present case, on the Respondent since it had resisted the enforcement of the Award. In this regard, reliance was placed on the on the judgment of the Supreme Court (“SC”) in Gemini Bay Transcription Private Limited v. Integrated Sales Service Limited [(2022) 1 SCC 753], wherein it was held that ‘unless a party is able to show that its case comes clearly within the Section 48(1) or 48(2) of the Arbitration Act, the foreign Award, must be enforced’, this court cannot refuse the enforcement of the Award.

The Petitioners argued that although the Respondent brought in some new documents and raised supplementary grounds, those documents did not form part of the records of the SIAC for passing the Award. In this regard, the Petitioners placed reliance on the judgment of the SC in LMJ International Limited v. Sleepwell Industries [(2019) 5 SCC 302] to contend that the alleged non-suppression of documents is not a fraud that can be attributed against the Petitioners and further, it fell outside the purview of Section 48 of the Arbitration Act.

Contentions of the Respondent:

The Respondent contended that the enforcement of the Award was opposed to the basic notions and justice of India and was against the public policy of India. The Respondent contended that the Petitioners had suppressed various important documents, despite being asked by the SIAC tribunal, vide its procedural order dated June 20, 2022. The Respondent also contended that the Award was obtained by fraud on account of suppression of vital documents and on this ground only the Madras HC should reject the enforcement of the Award. In this regard, the Respondent placed its reliance on the various judgments of the SC wherein it was held that an enforcement of an Award obtained by fraud was liable to be rejected and set aside. The Respondent also contended that the Petitioners had, in the guise of being JV partners, colluded behind its back with the Portuguese executives to topple and purchase its step-down subsidiary in Portugal, thus orchestrating fraud on the Respondent, causing it a loss of around INR 1000 crores.

Observations of the Madras HC

At the outset, the Madras HC observed that generally the court will not interfere with the enforcement of a foreign award unless the same is hit by Section 48 of the Arbitration Act.

The Madras HC observed that the Respondent had borrowed a sum of INR 22,353 Lakhs from Kotak Mahindra Bank (“KMB”) and KMB had issued a sanction letter dated September 11, 2018 (“Sanction Letter”) which clearly stated that “…Any change in the shareholding/ Directorship/ partnership/ ownership shall be undertaken with the prior permission of the bank…” The said Sanction Letter was also approved by the board of SACL. No prior permission was obtained for the change of the directorship and the shareholding pattern of SACL and further that the Petitioner had suppressed this fact before the SIAC. The Award, which had the effect of allowing complete change of the directorship and the shareholding pattern of SACL, was therefore in breach and in conflict with the notion of justice in India. Thus, Madras HC observed that the Award was liable to be rejected on this ground itself and could not be allowed to be enforced under the Arbitration Act. The Madras HC also observed that it would not in blind-fold manner grant the enforcement of the Award when a plea of fraud has been brought to the notice of the court. The Madras HC observed that Aapico Group was one of the JV partners of the Respondent, and in that capacity, they had purchased the share of the step-down subsidiary of the Respondent in Portugal. The Madras HC observed that such action of the Petitioner was clearly a fraud within the meaning of Section 48(2)(b) of the Arbitration Act.

The Madras HC also observed that there were serious violations of FEMA and the Foreign Exchange Management Transfer or Issue of any Foreign Security Regulations, 2004 (“Transfer Regulations”), which were not curable. The Madras HC observed that Regulations 16 (Transfer by way of sale of shares of a JV/WOS outside India) and 18 (Pledge of shares of Joint Ventures (JV), and Wholly Owned Subsidiary (WOS) and step down Subsidiary (SDS)) of the Transfer Regulations, inter alia¸ mandated prior approval of the Reserve Bank of India before enforcement of any rights of transfer of shares by virtue of pledge. In this regard, reliance was placed on the judgment of the SC in the case of Vijay Karia v. Prysmian [(2020) 11 SCC 1] wherein it was, inter alia, observed that any loss of foreign exchange to the country affected the public and economy at large and amounted to breach of fundamental policy of India, when the violations of FEMA was not curable. The Madras HC observed the Petitioners had caused the exchequer a loss of sum of around INR 822 Crores.

Decision of the Madras HC

The Madras HC held that the enforcement of the Award was liable to be rejected under Section 48 of the Arbitration Act for the reason that it was orchestrated and also there was violations of FEMA and Transfer Regulations coupled with the commission of fraud on the part of the Petitioner in valuing the SGAH shares, which was not curable in nature and the Award was passed without taking in consideration the said commission of fraud and violations of FEMA and the related regulations.

VA View

The Madras HC refused to allow the enforcement of the Award as a decree since it was against the public policy of India. Madras HC has categorically demonstra ted as to how the Petitioners orchestrated fraud against the Respondent and how the Petitioners also flouted the provisions of the FEMA, which was incurable in nature. The SIAC tribunal had failed to consider the fraud coupled with the violations of the FE MA.

The Madras HC has rightly given primacy to public interest over private interest. Whenever, there is loss of foreign exchange to the nation due to fraud , there is a dent on the economy which in turn hampers the public interest of the nation. Where su ch violations are incurable, such Award which are passed without considering such violations should not be allowed to be enforced as a decree in India.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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