Devas & Antrix Dispute: Fraud as a ground of winding-up, Did Supreme Court unbolted a pandora’s box?

The Supreme Court has brought an end to an 11-year-long court battle between the Indian Space Research Organization's (ISRO) commercial right limb, Antrix Corporation Private limited (Antrix), and Devas Multimedia Private Limited (Devas) by in a recent decision, upholding the orders of the National Company Law Appellate Tribunal (NCLAT) regarding the winding up of Devas writes Avnip Sharma.

Introduction

As per the decision, Devas has indeed been functioning in fraudulent misrepresentation, i.e., fraudulently, since their implementation. Since Devas' incorporation on December 17, 2004, under the previous Companies Act, i.e. 1956, they have entered into an agreement embedding the preamble as 'Devas to develop a platform capable of delivering multimedia services via satellite to mobile users by righteousness of the contract, i.e., Agreement for the tenancy of space component bandwidth of ISRO S-band spacecraft by Devas (Agreement). Antrix officially launched two satellites, the spectrum capacity of which has been subcontracted to Devas

The said matter took root between Devas and Antrix in February 2011 when Antrix abruptly rescinded the Agreement midst the 2G telecom scam. Thus according reports, the deal was component of a "Quid Pro Quo" among Antrix officials as well as the company established by ISRO former officials and a company, i.e., World Space. Due to Antrix's abrupt termination of the agreement, Devas exercised the arbitration clause in the agreement, resulting in a resolution via arbitral initiatives. On September 14, 2015, the International Chamber of Commerce (ICC) awarded Devas $562.5 million with interest for the damages sustained by Devas as a result of Antrix's abrupt termination of the contract.

1. Second Chapter of the story

With implication to the above, it was presumed that Devas has been functioning on several fraudulent metrics. Central Bureau of Investigation (CBI) and Enforcement Directorate (ED), investigated the said matter, CBI filed a FIR on March 16, 2015, against Devas as well its officers under the offence of section 420 r/w section 120B of IPC. Also under section 13 (1) (d) & 13 (2) of Prevention of Corruption Act, 1988, similarly, ED filed a report in ECIR No. 12/BGZO/2015. According to the findings of such investigations, Devas was indeed associated with illegal corporate practices.

Whilst these explorations as well as insinuations began to surface, Antrix made a plea Ministry of Corporate Affairs, GOI to precede with corporate winding-up process against Devas, with reverence to the pleading of Antrix approval was granted on January 18, 2021. While the independent inquiry into the nature of fraud and illegal activities of Devas was in motion, Antrix approached the National Law Tribunal, Bengaluru bench (NCLT) making a plea for the winding up of Devas retaining the base of the pleading as the commitment of embezzlement under section 281 (e) of Companies Act, 2013.

2. Supreme Court introduction into the story

The NCLT issued a decree admitting Antrix's petition and appointing an official liquidator who is appended to the High Court of Bangalore as the tentative liquidator on January 19, 2021, with the winding up plea as the subject matter of the issue. Antrix's main claim was that Devas Company was formed with a 'fraudulent intent.' Then began a series of litigation in which Antrix claimed that the above-mentioned Agreement engaged "components" of Devas, i.e., DEVAS2 Technology, DEVAS services, and DEVAS device, which in reality simply didn't exist, neither at the time of the company's incorporation nor on the date of the Agreement's execution.

Finally, the NCLT rationalized on passing an earlier decision May 25, 2021, instructing the winding-up procedure to be spearheaded against Devas. Devas as being disenchanted with the NCLT decision further filed an appeal with NCLAT, but the appeal was dismissed by NCLAT on September 8, 2021. An ex-director of Devas, along with many shareholders, filed an appeal with the Supreme Court against with the NCLAT order.

2.1. Contentions raised by Devas

• There is a breach of mandatory advertisement requirement, i.e. The Companies Rules, 2016
  The purpose of the advertisement is for the following two.¹
  1. It presents an opportunity to various stakeholder groups, i.e., creditors, labourers, distributors, clients as well as the public at large, to either endorse or condemns the deliberations of the winding up.
  2. It also exists to serve as a warning sign for those who are involved with the company in any bargain.
• The winding-up petition pleaded by Antrix is barred by the law of limitation
• Antrix is being estopped in terms of pleading to fraud
• There is an erroneous conclusion being formed regarding the consequences of fraud.

2.2. Contentions raised by Antrix

Antrix aimed to defend the said impugned orders, broadly on the following grounds.

• It has been evident that NCLT has prepared detailed findings on eight (8) different types of fraud, in sum and substance they revolve around the following, i.e. (1) offer of non-existent technology, (2) misrepresentation pertaining to the (1)possession of intellectual property rights over the set or sets of the device, (3) clear violation of SATCOM policy, (4) fraudulently procuring experimental license, (5) manipulation of the board minutes, (6) money trails found that has been brought through FIPB approvals.², both in the formation of the company and also in the manner Devas was conducting their company affairs, which being said cannot be assailed in an appeal under section 423 of Companies Act, 2013.
• The Agreement executed between the parties dated January 28, 2005, involved three components namely ‘DEVAS technology’, ‘DEVAS services’, ‘DEVAS device’ which was and is non-existent neither at the time of formation of Devas nor at the termination of the Agreement and the said components are also non-existent at the process of winding up of Devas.
• The grievous nature of the fraud committed by Devas.

3. Supreme Court held the following

The Hon'ble Supreme Court began with Deva's contention about the lack of advertisement, the apex court reasoned that they did not perceive the failure of advertisement publication as an pathway to automatically dismissing Antrix's petition for winding up. In addition, the apex court rationalized that the NCLT Rules, 2016 (Rules) offer NCLT the authority to waive any prior or subsequent advertisement obligation for the winding-up process. The Supreme Court also held that, as of the current position, there are no current Devas stakeholders who are parties to this suit or are a subject matter of this suit who are or will be prejudiced by NCLT's non-advertisement requirement fulfilment. Aside from the foregoing, the Supreme Court rationalized and agreed partially with the Devas' contention that the NCLT is not entirely correct in asserting the 'useless formality theory’³. Apex court also held that the test of prejudice particularly could have been applied in the light of the accusations of misconduct, in concurrence of this, the Hon’ble Supreme Court was held unable to maintain the argument of Devas pertaining to failure to advertisement to be recognised as an impermissible procedure.

The apex court happened to come to the second assertion that the present suit proffered before NCLAT was prohibited by limitation, the apex court coincides with NCLAT pertaining the judgement on the same, and also held the same was a plausible view. NCLAT believed that the fraud committed by Devas and reported by Antrix following a thorough investigation by the CBI and ED was transaction-specific rather than a single act. NCLAT also reasoned that the procedure of winding up was based on a series of frauds committed by Devas that came to light over time.

Further, attaching to NCLAT rationale, the apex court held that, the stipulation was next to never is too akin with the illuminated matchstick headed to a carriage of black powder. With, the highest court declared that the date of initiation of the limitation period is not to be considered a static term and is variable and depends on the acts, omissions, and kind of wrongdoing in this case against whom the action is initiated. In the aforementioned case, the affairs of Devas, i.e., fraud, are continuous, and the right to apply grows recurring.

The Supreme Court proceeded on to the next issue, Antrix being barred from pleading fraud and seeking Devas's dissolution. According to Devas on estoppel, the termination of the abovementioned agreement was not founded on fraud, but rather on force majeure. Furthermore, Devas contended that no ground relevant to fraud was mentioned throughout their arbitral procedures, and that Antrix's auditors reports also do not offer any mention of any form of fraud perpetrated by Devas to Antrix or any effect on Antrix in terms of any fraud.

The Apex court dusted of the above said submissions of Devas asserting, that such assertions does not lead Devas anyplace, but rather the hon’ble supreme court noted that, Antrix, as well as public officials, were also suspected of being involved in the FIR imbedded by CBI against Devas under the Prevention of Corruption Act, 1988. As the apex court that, the arbitral proceedings initiated in 2013, and the award was awarded in 2015, accordingly, the Hon’ble Supreme Court contended that Antrix would be in no situation to acquire the wisdom of fraud at the time of arbitral proceeding. Hence according to the above, it was ascertained that NCLT was correct to reject the argumentation of Devas especially with regard to the estoppel of Antrix from pleading fraud.

Special emphasis was given by the apex court pertaining to the auditor’s report, the court observed that Chartered Accountants (CAs) and auditors are not to be considered as an expert in the criminal proceedings and not in the machinery that was molded as the subject matter of the Agreement. Thus, their failure to report fraud will not be a ground to estoppel against Antrix. The SC explained that the reports or statements by CAs or auditors are needed to be supported by written declarations like “based on the details and justifications provided to us over the course of our audit” or “the facts and justifications provided to us, and to the best of our ability and belief”⁴ hereby portraying that auditors report are based solely on the basis of information provided by the company or as per the information which has been culled out by the auditors themselves stating “to the best of our ability”. Given the aforesaid, the apex court opinioned that auditors reports are not considered as gospel truth neither shall act as estoppel against the company.⁵

Lastly, it was asserted by Devas that the underlying motive in behind Antrix windup up plead seemed to be to denude Devas from the benefits accumulated by the award awarded by ICC arbitral tribunal which was headed over by a former Chief Justice of India and two other BIT awards. It also was contented by Devas such endeavours by the wholly-owned subsidiary of government, i.e. Antrix subsidiary of ISRO while articulate wrong message to the global investors.

The Apex court yet again dusted off the contentions brought up by Devas, stating that there seems to be no merits corresponding to the submission of arbitral proceedings. The Supreme Court observed that if the seeds of the relationship, i.e. commercial relationship, that Antrix and Devas formulated are based on fraud committed by Devas, then every part of the branch, trunk, or fruits that sprout from that seed will be a fraud, inferring that all agreements and arbitral awards are tainted with the poison of fraud. The Supreme Court reasoned in their decision that "allowing Devas and their stakeholders to reap the profit of their fraudulent and illegal conduct relative to the incorporation and affairs of the firm will undoubtedly result in communicating an absolutely erroneous message".⁶

Based on the foregoing findings, the Hon'ble Supreme Court concluded that all of Devas's arguments about the NCLT and NCLAT orders are unsustainable. Thus the, the appeals were quashed.

4. Is the judgment opening a pandora box?

The instant judgment is the first of its kind, setting up a landmark pedestrian that ‘fraud can be considered as a ground for winding-up of a company, given the nature of fraud, i.e. in this case Devas was incorporated on fraudulent foundations and also hereby was operating in a fraudulent manner right from the incorporation to the windup of the company’. This judgment is crucial for two main reasons.

First, the NCLT was of the perception and held the same that, they are not compelled to await the results of the criminal investigation directly relating to fraud reported by CBI and ED. The argument behind such reasoning is that criminal proceedings decisions would only result in the conviction or exoneration of Devas stakeholders based on the merits of the case. However, the criminal prosecution would never have resulted in the winding up of Devas company because the appropriate venue to determine the fate of the company pertaining to winding up was NCLT on the grounds of fraudulent activities under section 271, as the jurisdiction of other civil courts has been eliminated by section 430 of the Companies Act.

Second, the NCLT findings ruled that the Contract in the present issue was void-ab-initio and so does not constitute any legal duty on Antrix or any legal rights in favour of Devas, which is easily corroborated by section 19 of the Indian Contracts Act, 1872.⁷ These NCLT conclusions are important in contesting the arbitral verdict made in favour of Devas.

Given the Supreme Court's ruling in this instance, the SC's decision to uphold the NCLT and NCLAT decisions is correct in the spirit of the law. According to the verdict of the Hon'ble Supreme Court, all of the fruits of the existing commercial arrangement between Antrix and Devas were tainted by the poison of fraud. Given the current conditions of the case, the level of fraud and criminal, unlawful activities involved, it was the correct choice to dissolve the Devas firm in accordance with legal procedure.

Furthermore, the Hon'ble Supreme Court has made it abundantly clear on numerous occasions that criminal matters attracting criminal sanctions and penal consequences are non-arbitral and it can only be adjudged by the appropriate court, as they may result in a conviction that falls within the realm of public law. However, it is only in exceptional circumstances that the contract containing the arbitration clause would be deemed void, as an allegation of 'fraud' by one of the parties solely renders the contract is voidable under Section 17 of the Indian Contract Act, 1872, and thus applying the principle of severability, the agreement can be set aside, and parties cannot be said to have avoided the obligation of arbitration.

Given the facts of the case, if the series of allegations of fraud have public implications, convincing the court that it will be just and in the best interests of all parties to avoid arbitration and pursue litigation in an appropriate court, the court may demote the parties to civil courts then instead of arbitration, as is adequately done in this case.

Given the arguments presented and the judgement granted by NCLT, NCLAT, and Hon’ble Supreme Court it is reasonable to state that the apex court has not errored in the present case and thus this landmark decision will not result into opening up any pandora’s box.

5. Learning for India from the instant case

The Antrix-Devas case offers two key learnings for India.

First, India should have followed the due process of law and must have exercised its regulatory power in transparent manner. The Devas case is an emblem of wrong regulation and poor governance in the country, despite the incongruousness in the Antrix-Devas deal becoming apparent within a few years after the said Agreement was signed, the government in power at the time of the Agreement signing did not disclose these issues to repudiate the Agreement. Instead, they hid behind the argument of ‘national security’ to whitewash their mistakes. India reacquired the S-band spectrum without following the proper procedures or being entirely clear about why it was being handled so. India did not foresee that these acts would subsequently be contested worldwide by BIT arbitration tribunals. India must immediately put into place a transparent, understandable, and predictable regulatory framework built upon the complete internalization of the obligations under international law inherent in BITs.

When defending its interests in front of international arbitration forums, India must have adopted a precise and strict litigation approach. The NDA administration says that as the BIT claims progress, it would become clear that India made a mistake in its legal strategy by failing to raise the jurisdictional objection of fraud and corruption before the BIT arbitration panels. India also ought to have sped up the criminal investigative process. The involvement of numerous ministries and agencies may be in part to blame for the failure to bring up the corruption and fraud issue. Therefore, it is necessary to remedy the improper lack of cooperation between these entities.