The Supreme Court passed the final order on 17 January for liquidating Devas India, but it is just another twist in a convoluted saga that poses a threat to India’s investment legal regime, the centrality of arbitration as a dispute resolution mechanism, and respect for the Indian judicial system in the US, the UK and European courts.
The government of India’s focus clearly is to use the Supreme Court’s decision to score political points against its charges of corruption under UPA II, as is evident from the Finance Minister’s press conference and an article by the former Law Minister, rather than take a strategic, long-term view of its policy on international investment treaties, enforcement of arbitral awards, while also launching an effective defence to the enforcement actions being undertaken by Devas shareholders and funds now stepping into Devas’s shoes. The bill owed by Antrix, and by extension the Indian state, is over $1 billion, and it is likely to go up.
A Long Saga
Some context is necessary. Devas was set up as a special purpose vehicle pursuant to an agreement in 2004 for exploring commercial telecom deployment of Indian space assets with Antrix, the commercial arm of India’s space agency, the Indian Space Research Organisation (ISRO). It signed a commercial agreement with Antrix in 2005 valued at Rs 579 crores. Devas’s foreign investment was approved, and money was pumped in. In 2011, pursuant to a decision by the government of India, in a media storm about allegations of corruptions, the DN Suresh Report and a note by financial advisor Gopalan Balakrishnan, the agreement was terminated by Antrix on grounds of force majeure, as the S-band spectrum to be utilised by Devas was for restricted defence usage.
Devas initiated International Chamber of Commerce (ICC) arbitration in Delhi, which led to an award of approximately half a billion dollars with interest being given in favour of Devas in 2015. In addition, investors in Devas initiated a Bilateral Investment Treaty (BIT) arbitration using both the Mauritius-India and Germany-India BITs and secured additional awards, holding the government of India directly liable.
The CBI registered an FIR in 2015 on allegations of cheating and corruption by former officers of Antrix and ISRO, a chargesheet was filed in 2016, and a supplementary chargesheet was filed in 2019. The Enforcement Directorate also got into action in 2018. In 2021, the Indian government’s strategy became more aggressive, with an application for winding up being filed in the NCLT – a litigation that has reached its finality in unprecedented haste with the Supreme Court’s rejecting the shareholder’s appeal.
Floodgates of Litigation May Be Opened
The road to hell is paved with good intentions. The Supreme Court’s steamrolling of legal rules is explicitly driven by equitable considerations, not for the investment climate in India but that “Devas and its shareholders” should not “reap the benefits of their fraudulent actions”. I do not wish to dwell into the technical objections of limitation, notice, and even whether fraud to a third party (Antrix) should be the basis of winding up an Indian Company under the Companies Act, 2013 and the Insolvency and Bankruptcy Code – all of which have been given the stamp of approval by the Supreme Court.
However, it is entirely likely that the floodgates of litigation shall be opened as contractual disputes are often accompanied by criminal complaints and investigations of fraud, and that commercial partners will seek winding up on the basis of fraud to third parties.
To date, there is no finding by a criminal or civil court, under tort or contract act, that the actions around setting up Devas were in fact fraudulent. The Supreme Court’s judgment dealt with this aspect curiously, holding, without reliance on any section of the evidence code or any precedent, that a pleading of the non-existence of a fact relied upon (in this case the ownership of intellectual property by Devas investors) reversed the burden of proof on the party which claims its exists (i.e., Devas), and then extending the concept to hold that no evidentiary hearings and findings, and thus evidence with cross-examination, was required in such a case.
Supreme Court precedents clearly hold to the contrary– not only that where pleadings allege fraud, proof is necessary, but also that where there is a dispute of facts, summary proceedings such as those before the company courts should be relegated to civil courts. In fact, the Supreme Court held that the standard required by the NCLT is low, and the existence of a chargesheet and averments of the government were sufficient to reach a finding of fraud, and hand over the company to Devas.
India On a Collision Course
That this was seemingly done to frustrate the ICC award in favour of Devas is clear from the ordinance moved in 2020 and the amendment of the Arbitration Act in 2021, which allows parties to seek an unconditional stay on the enforcement of an arbitration award where the court finds that the underlying agreement or the making of an award was induced by fraud or corruption. Irrespective of the strong public policy arguments in favour of such an amendment, it is blatantly targeted at the challenge to the ICC arbitral award, now pending before the Delhi High Court. This challenge will of course now be defended by the Official Liquidator, as Devas has been ordered to be wound up and its assets liquidated.
The effect of this pending litigation, if in favour of the government, will be that it would put it on an obstacle course with foreign courts.
Courts in numerous jurisdictions, ie., the US, UK, and France, have confirmed the foreign arbitral award and allowed Devas to begin attaching Indian assets in these jurisdictions. After the NCLT order of wimdimg up, the UK and US courts have allowed Devas investors to be impleaded, and the Washington U.S. District Court has restrained the official liquidator from any actions that would jeopardise the award. This puts the Indian winding-up jurisdiction and the US court’s long-arm jurisdiction not just in conflict, but on a collision course. Given that fraud was not even a defence before the ICC arbitration, it remains to be seen whether the apparent strategy to use the Supreme Court judgment as a defensive shield to enforcement actions in other jurisdictions will have any effect, particularly given its shaky legal foundations.
Withdrawal from BITs
The winding-up can also create a new cause of action, even after the withdrawal of India unilaterally from all BITs, if a case is filed for expropriation of the arbitral award. India’s withdrawal from BITs was a valid policy statement given the problematic granting of international law rights to investors, which allow for government policy decisions to be challenged; a right neither available in contract law nor in domestic courts.
However, the forceful winding up will put a spanner in the acceptance of a new Model BIT being proposed by the Indian government. It proposes an exhaustion of domestic remedies before any resort to the BITs arbitration mechanism.
The renegotiation of a BIT continues to be a sticking point for signing a new trade agreement, and the Devas action will have the unintended consequence of deterring their conclusion.
The government's actions also do nothing to resolve the BIT awards currently against India.
India Must Launch an Effective Defence
The government of India has a duty to launch an effective defence to the Devas transnational litigations, as well as maintain its policy of having a robust arbitration code, and protection of shareholders in companies, both domestic as well as investments. Changing laws to give oneself a leg-up in litigation is never a good strategy – as the retrospective taxation fiasco has demonstrated – and India would have been well-advised to use tort actions to prove fraud and create alternate claims against Devas investors through appropriate judicial findings. We may now be in the worst of both worlds, and the bill keeps racking up.
The lawyer for Devas has already stated that the “flimsy obligations of fraud will never stand in courts outside of India”. Lawyer bravado aside, the unholy mess of Devas has not only got messier, but is likely to cause collateral damage to the entire edifice of commercial rule of law in India.
(Avi Singh is an advocate who specialises in transnational law and is visiting professor at the International University College, Turin. This is an opinion piece and the views expressed are the author's own. The Quint neither endorses nor is responsible for them.)
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