Calcutta High Court: Courts cannot re-appreciate the evidence or substitute its view with that of the arbitrator while considering the issue of enforcement of a foreign award

The Calcutta High Court (“Calcutta HC”) has, in its judgement dated June 23, 2023, in the matter of Jaldhi Overseas Private Limited v. Steer Overseas Private Limited [(2023) SCC OnLine Cal 1628], held that courts cannot re-appreciate the evidence or substitute its view with that of the arbitrator while considering the issue of enforcement of a foreign award under Section 48 (Conditions for enforcement of foreign awards) of the Arbitration and Conciliation Act, 1996 (“Act”).

Facts

Jaldhi Overseas Private Limited, a company incorporated under the laws of Singapore (“Petitioner”), by way of its e-mail dated December 24, 2009 (“E-mail Correspondence”) addressed to Steer Overseas Private Limited (“Respondent”) offered to carry the Respondent’s cargo of iron ore fines from Haldia and Visakhapatnam ports to a main port in China, in accordance with the terms of the E-mail Correspondence. The Respondent, upon receipt of the E-mail Correspondence, altered the commercial terms therein and returned its counter offer to the Petitioner by way of a separate e-mail and also requested the Petitioner to nominate a vessel to carry the cargo.

The Petitioner prepared a fixture note in furtherance of the terms and conditions of its E-mail Correspondence (“Fixture Note 1”), although this Fixture Note 1 was circulated to the Respondent only on January 27, 2010. The Fixture Note 1 provided for an arbitration clause specifying that arbitration was to be held in Singapore and English law was to apply. The Petitioner had separately circulated a fixture note dated December 24, 2009 (“Fixture Note 2”) to Global Up International Limited, a 100% subsidiary of the Respondent (“Sister Company”) and raised succeeding invoices pertaining to Fixture Note 2 on the Sister Company.

Upon receipt of Fixture Note 1, the Respondent amended two terms pertaining to discharge and detention rates and re-circulated the modified note (“Modified Fixture Note 1”) to the Petitioner on January 29, 2010. However, prior to the Respondent circulating the Modified Fixture Note 1 to the Petitioner, the Petitioner had already nominated the vessel namely; MV Dong Jun (“Vessel”), which first arrived at Haldia on January 21, 2010, loaded the Respondent’s cargo at Haldia and then sailed for Visakhapatnam where the Respondent accepted the notice of readiness to load at Visakhapatnam. Subsequently, the Vessel reached Vishakhapatnam on February 2, 2010, for loading the remaining cargo of the Respondent, however, it did not berth at Visakhapatnam due to non-readiness of the cargo documents. Moreover, the Respondent utilized some days in excess of the lay time at the discharge port of Zhenjiang, China, which resulted in the accrual of demurrage and damages worth $299,047. Additionally, the Respondent through its Sister Company also owed funds to the Petitioner, in relation to fixtures where other vessels were appointed.

In a meeting dated January 24, 2011, the Respondent offered $200,000 to the Petitioner, as a full and final settlement of all dues, however, this settlement was not accepted by the Petitioner. The Petitioner, by way of its letter dated May 4, 2012, initiated arbitral references before the Singapore International Arbitration Centre (“SIAC”) in relation to all the fixtures between the Petitioner, the Respondent and the Sister Company. The SIAC through its letter dated June 25, 2012, informed the Petitioner and the Respondent of the appointment of Mr. Marcus Gordon as the sole arbitrator (“Arbitrator”), in all the arbitral references instituted by the Petitioner. The Petitioner had discontinued all other arbitral references, except the issue pertaining to Fixture Note 1. On January 20, 2017, the Arbitrator issued a partial award in favour of the Petitioner thereby deciding the Respondent’s liability as $12,645.83 and $299,047 on account of detention in Visakhapatnam and demurrage at Zhenjiang, China, respectively (“Award”).

The Petitioner applied to the High Court of the Republic of Singapore (“Singapore HC”) for enforcing the Award in Singapore, which application was contested by the Respondent. The Respondent also preferred an appeal before the Singapore HC to set aside the Award, however the said appeal was dismissed by the Singapore HC vide its judgement dated November 27, 2017. Further, by way of an order dated December 1, 2017, the Singapore HC granted the Petitioner with leave to enforce the Award in Singapore.

In light of the above, the Petitioner approached the Calcutta HC seeking enforcement of the Award in India, by filing an application under Section 46 (When foreign award binding) of the Act (“Application”).

Issue

Whether a court can re-appreciate the evidence or substitute its view with that of the arbitrator while considering the issue of enforcement of a foreign award.

Arguments

Contentions of the Petitioner:

The Petitioner submitted that the Award had been passed in terms of the (Singaporean) International Arbitration Act, 1994 with the arbitral proceedings conducted in consonance with the SIAC rules. Both, India and Singapore, being signatories to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York Convention) would make Chapter I (New York Convention Awards) of Part II (Enforcement of certain foreign awards) of the Act relevant, and as such the Petitioner had complied with Section 47 (Evidence) of the Act, by providing the original Award as an annexure to its Application, along with a duly certified copy of the arbitration agreement, the validity of which had not be disputed.

The Petitioner further submitted that foreign awards could not be challenged under the Act, except in the country in which it was made. Further, the Respondent had sought to strike out the leave granted to the Petitioner by the Singapore HC, wherein the Award had been elevated to a decree. However, the Respondent had not made an application to set aside the Award in itself. Moreover, the Respondent sought to challenge the Award under Section 48 of the Act on the same grounds that were put forth by the Respondent before the Singapore HC, albeit already arguing at length before the Arbitrator who had issued a well-reasoned Award after considering oral and documentary evidence submitted by both the Petitioner and the Respondent. Furthermore, the Respondent was seeking to challenge the Award on grounds of merits which was not permissible under the Act.

In order to support its submissions, the Petitioner placed reliance on the judgement passed by the Hon’ble Supreme Court (“SC”) in the case of Shri Lal Mahal Limited v. Progetto Grano Spa [(2014) 2 SCC 433], wherein it was held that Indian courts cannot have a second look at foreign awards at the enforcement stage. Further, reliance was placed by the Petitioner on the judgement passed by the SC in the case of Gemini Bay Transcription Private Limited v. Integrated Sales Service Limited and Another [(2022) 1 SCC 753] (“Gemini Bay Case”), wherein it was held that Indian courts cannot refuse the enforcement of a foreign award when it was found to be contrary to the substantive law agreed to amongst the parties.

The Petitioner concluded its arguments by submitting that while it had on the direction of the Respondent raised invoices pertaining to Fixture Note 2 on the Sister Company and although all arbitral references except the one relating to Fixture Note 1 stood settled, the existence of Fixture Note 2 could not act as an impediment to the enforcement of the Award.

Contentions of the Respondent:

The Respondent submitted that Section 47(1)(b) of the Act requires submission of a duly certified copy of the original arbitration agreement in order to enforce a foreign arbitral award. In relation to this, the Respondent submitted that while the Arbitrator had identified Fixture Note 1 as an arbitration agreement, the certified copy attested by the Petitioner was based on the Modified Fixture Note 1, which did not constitute an arbitration agreement according to the Arbitrator. Since a duly certified copy of Fixture Note 1 has not been provided by the Petitioner, it had not complied with the statutory mandate of Section 47(1)(b) of the Act and therefore the Application filed by the Petitioner was liable to be dismissed.

The Respondent contended that the Petitioner and the Respondent were unable to reach a consensus with respect to certain terms as evidenced by the exchange of Fixture Note 1 and Modified Fixture Note 1 amongst themselves. Hence, there was no valid contract based on the fundamental principles of contract law and consequently, no valid arbitration agreement.

Furthermore, the Petitioner had approached the Sister Company with Fixture Note 2, which was accepted by the Sister Company. Thus, there was consensus ad idem between the Petitioner and the Sister Company and as such there was no privity of contract between the Respondent and the Petitioner, and therefore, an arbitration agreement did not exist between the Respondent and the Petitioner. Hence, the Award could not have been enforced under Section 48(2)(a) of the Act.

Examining the documents relied upon by the Arbitrator, it did not appear to the Respondent that the SIAC (a private body which appoints arbitrators to adjudicate disputes) was chosen by the Petitioner and the Respondent, and that since SIAC had no jurisdiction to adjudicate the dispute, the Award was null and void. The Respondent also submitted that Section 48(2)(b) of the Act empowers courts to refuse enforcement of foreign awards that are contrary to the fundamental public policy of India. In this regard, the Respondent relied on the Delhi High Court’s judgement in the case of Cruz City 1 Mauritius Holdings v. Unitech Limited [2017 SCC OnLine Del 7810], wherein the enforcement of the foreign award was refused under Section 48(2) of the Act owing to the fact that such award was passed without jurisdiction.

Observations of the Calcutta HC

With respect to the Respondent’s contention that the Petitioner had failed to comply with the provisions of Section 47(1)(b) of the Act, the Calcutta HC observed that the procedural deficiency of non-filing of a duly certified copy of the Fixture Note 1 had been cured by the Petitioner during the hearing before the Calcutta HC, and therefore, the objection with regard to non-compliance of Section 47(1)(b) of the Act was infructuous.

The Calcutta HC relied on several judicial precedents of the SC, in order to determine the boundaries of discretion that a court could exercise while determining on enforcement of foreign awards and observed that in the Gemini Bay Case and in the case of Government of India v. Vedanta Limited [(2020) 10 SCC 1], the SC had imposed a bar on courts from (i) re-appreciating evidence; (ii) substituting its own view with that of the arbitrator; or (iii) reviewing the matter afresh.

The Calcutta HC observed that in circumstances where an arbitration agreement is evidently found lacking or there is no concluded contract between parties, the enforcement of an award must be refused under Section 48(2)(b) of the Act. Furthermore, the Calcutta HC observed that there must be consensus ad idem between the parties to an agreement, which must further include an arbitration clause. However, an agreement and an arbitration clause might not be found in a singular document and could be gathered from the correspondence between the parties, which could be further corroborated by the resulting conduct of the said parties.

With respect to the contention of the Respondent that the contract was concluded between the Petitioner and the Sister Company, the Calcutta HC observed that indisputably there was a contract that existed between the parties. Moreover, the Award shed light on which contract constituted the agreement between the Petitioner and the Respondent, rather than whether a contract existed between the said parties. The Calcutta HC observed that to refuse enforcement of an award, the evidence must expressly indicate that there was no concluded contract between the Petitioner and the Respondent and that the Arbitrator had gone completely amiss in his duty.

• The Calcutta HC further observed that the Arbitrator had passed the Award based on the following considerations:
• The conduct of the Petitioner and the Respondent indicated existence of an agreement pursuant to which actions were being undertaken even before Fixture Note 1 was circulated to the Respondent.
• The conduct of the parties indicated that the changes made in the E-mail Correspondence and the Fixture Note 1 were mutually accepted and that they went on with their respective obligations thereafter.
• The conduct of the parties indicated that several actions were undertaken pursuant to mutual understanding thereby indicating the existence of consensus ad idem, even prior to the Fixture Note 2 being circulated by the Petitioner to the Sister Company.

The Calcutta HC observed that the Arbitrator had from appreciation of the evidence concluded that there was in fact an agreement between the Petitioner and the Respondent, owing to communication and subsequent conduct of the said parties. In such a case, the Calcutta HC could not substitute its own views to replace that of the Arbitrator, unless it was manifestly evident that there existed no agreement between the parties.

Decision of the Calcutta HC

The Calcutta HC, keeping in mind the provisions of Section 48 of the Act, held that the concluded contract/ the arbitration agreement entered into between the Petitioner and the Respondent was neither incapable of settlement by arbitration in India, nor did it shock the conscience of the court in light of forceful imposition of a contract. Therefore, the Calcutta HC did not find a reason to tinker with the Award and rejected the Respondent’s objections with respect to the enforceability of the Award and rendered the Award enforceable and executable as a decree.

VA View:

The Calcutta HC has rightly summarised the principles relating to the discretion that courts must apply while deliberating on issues dealing with the enforcement of foreign arbitral awards under Section 48 of the Act. The Calcutta HC has reiterated the principle of minimal intervention over an arbitrator’s decision by emphasising that an arbitrator’s view is sacrosanct and should not be substituted with an alternate opinion that a court may possibly have on re-appreciation of the evidence, particularly in instances where the arbitrator has examined the evidence upon proper application of mind and concluded that there was consensus ad idem between the parties based on an agreement.

Therefore, while considering the issue of enforcement of a foreign award, courts must abstain from (i) re-appreciating evidence; (ii) substituting its own view with that of the arbitrator; or (iii) reviewing the matter afresh. Further, in a case where an arbitrator has rendered a finding that there existed an agreement and an arbitration clause, the court should not substitute its own view, unless it is evident that no concluded and binding contract ever came into existence between the parties.

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

NCLAT: NCLTs and NCLAT have the power to recall their Judgments

A five-member bench of the National Company Law Appellate Tribunal, Principal Bench, New Delhi (“NCLAT”) in the case of Union Bank of India v. Dinkar T. Venkatasubramanian [Company Appeal (AT) (Ins.) No. 729 of 2020], in its judgment dated May 25, 2023, held that NCLAT can recall its judgments by the virtue of inherent power vested in the NCLAT under Rule 11 (Inherent Powers) of the National Company Law Appellate Tribunal Rules, 2016 (“Rules”) in case of a procedural error while delivering the earlier judgment.

Facts

Corporate Insolvency Resolution Process (“CIRP”) was initiated against Amtek Auto Limited (“Corporate Debtor”) by an application filed by Union Bank of India (“Appellant”) under Section 7 (Initiation of corporate insolvency resolution process by financial creditor) of the Insolvency and Bankruptcy Code, 2016 (“IBC”) and thereafter a resolution plan was approved by the Committee of Creditors (“CoC”) by majority voting share of 70.07% on January 11, 2020 (“Resolution Plan”).

An interlocutory application was filed by the resolution professional seeking the approval of the Resolution Plan. Further, Appellant while praying for modification of the Resolution Plan filed an interlocutory application. The National Company Law Tribunal, Chandigarh (“NCLT”), vide an order dated July 9, 2020 (“Order”), approved the Resolution Plan by allowing the interlocutory application filed by the resolution professional and dismissed interlocutory application filed by Appellant.

Appellant filed an appeal against the Order, wherein the Appellant did not implead the CoC as one of the parties which was partly allowed by NCLAT, vide its judgement dated January 27, 2022 (“NCLAT Order”). Consequently, the financial creditors filed an appeal in the Supreme Court of India (“SC”) against the NCLAT Order, which was dismissed by the SC, vide an order dated April 1, 2022 (“SC Order”), as ‘withdrawn with liberty to file a review application’.

After the SC Order, a review application was filed by the financial creditors which was dismissed by NCLAT vide an order dated September 2, 2022, and it was held that there exists no provision under IBC for a review and thus the application is not maintainable before the NCLAT. The NCLAT also noted that the financial creditors may take recourse to its other remedy in accordance with law against the NCLAT Order. Pursuant to the aforesaid, the present appeal was filed before the NCLAT to recall the NCLAT Order (“Appeal”).

The case was first heard by a three-member bench of the NCLAT, which referred this matter to a five-member special bench. During the proceedings before the three-member bench of NCLAT, the bench relied on the judgement wherein it was held that no jurisdiction lies with NCLT and NCLAT for any review or recall of their judgments.

Issues

Whether NCLAT possesses power to entertain an application for recall of its judgment.

Whether judgment of NCLAT in the case of Agarwal Coal Corporation Private Limited v. Sun Paper Mill Limited and Another [Company Appeal (AT) (Ins.) No. 412 of 2019] (“Agarwal Coal Case”) and Rajendra Mulchand Varma and Others v. K. L. J Resources Limited and Another [Company Appeal (AT) (Ins.) No. 359 of 2020] (“Rajendra Mulchand Case”) can be read to mean that there is no power vested in NCLAT to recall a judgment and thus, lay down the correct law.

Arguments

Contentions of the Appellant:

It was contended by the Appellant that the inherent power of NCLAT is preserved by virtue of Rule 11 of the Rules. Further, NCLAT can use its inherent power to recall a judgment in appropriate case. The Appellant also submitted that a judgment delivered by NCLAT can be recalled wherein the necessary party was earlier not present before the NCLAT. Additionally, it was contended by the Appellant that an order passed without giving an opportunity of hearing to an affected party violates the principles of natural justice and thus, deserves to be recalled.

It was submitted that the judgment of NCLAT in the cases of Agarwal Coal Case and Rajendra Mulchand Case, wherein it was held that NCLAT cannot exercise its jurisdiction to review or recall its judgement, does not lay down the correct law as NCLAT has jurisdiction to recall a judgment on the grounds of being satisfied that there exists a procedural error in delivery of a judgment by the NCLAT.

In order to substantiate its arguments, the Appellant relied upon the following judgements of the SC: (a) A. R. Antulay v. R. S. Nayak and Another [(1988) 2 SCC 602], wherein the SC has put forth various grounds to set-aside judgments: (i) if a party has had no notice and decree is made against him, he can approach the court for setting-aside the decision on proof of the fact that there was no service, (ii) if a judgment was rendered in ignorance of the fact that a necessary party had not been served at all and was shown as served or in ignorance of the fact that a necessary party had died and the estate was not represented, or (iii) a judgment was obtained by fraud; (b) Asit Kumar Kar v. State of West Bengal and Others [(2009) 2 SCC 703], the SC had drawn the distinction between review and recall petition. It was noted by the SC that “…while in a review petition the Court considers on merits where there is an error apparent on the face of the record, in a recall petition the Court does not go into the merits but simply recalls an order which was passed without giving an opportunity of hearing to an affected party…”; (c) Indian Bank v. M/s Satyam Fibres India Private Limited [AIR 1996 SC 2592], wherein it was held that the courts have inherent power to recall and set aside an order if it is obtained by fraud practised upon the court, or when the court is misled by a party, or when the court itself commits a mistake which prejudices a party; (d) Kapra Mazdoor Ekta Union v. Birla Cotton Spinning and Weaving Mills Limited and Another [(2005) 13 SCC 777], the SC noted the nature of power of review and held that the power of court or quasi-judicial authority to review its judgment must be conferred by law expressly; (e) SERI Infrastructure Finance Limited v. Tuff Drilling Private Limited [(2018) 11 SCC 470], wherein it was held that every tribunal has an inherent power of review where such review is sought for a procedural defect.

Contentions of the Respondent:

Mr. Dinkar T. Venkatasubramanian (“Respondent”) submitted that the Respondent was the only party impleaded in the interlocutory application filed by the Appellant before the NCLAT. Therefore, it was contended by the Respondent that when the Order was challenged by Appellant for rejecting the said interlocutory application, Appellant was not required to implead any other party to the Appeal.

It was also contended by the Respondent that the NCLAT Order which the Appellant sought to be recalled contains no error as it was delivered post hearing all the parties to the Appeal.

Observations of the NCLAT

It was observed that power to recall is not to rehear the case to find out any apparent error in the judgment. However, NCLAT while exercising its inherent jurisdiction can entertain an application for recall of judgment based on sufficient grounds of procedural errors. The NCLAT while deciding the present case took into consideration the judgements in Agarwal Coal Case and Rajendra Mulchand Case and observed that the judgments lay down an incorrect law. It was observed that the power to recall a judgment is an inherent power of the NCLAT as enshrined under Rule 11 of the Rules.

Decision of the NCLAT

In the present case, it was held by NCLAT that in case of any procedural errors, NCLAT has the power to recall its judgement.

Further, NCLAT held that the judgments of NCLAT in the Agarwal Coal Case and Rajendra Mulchand Case does not lay down the correct law and therefore, these two judgements were partly set aside by the NCLAT to the extent that NCLAT does not have the power to recall its orders/ judgments and upheld the said judgments in respect to the portion wherein it observed that the NCLAT was not vested with the power of review.

VA View

This is a positive interpretation as it would ultimately reduce litigation on account of procedural errors. The power to recall a judgement was already permitted by Rule 11 of the Rules which has been strengthened by NCLAT in the present case. This judgment would help to reduce the number of appeals filed in NCLT/ NCLAT and put an end to the review applications being filed by fraudulent litigants, masquerading as recall applications.

This judgement strengthens the power of a tribunal (NCLT as well as NCLAT) to recall its judgements.

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

Madras High Court rejects enforcement of a foreign arbitration award which was passed without considering FEMA violations and fraud in share valuations

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]