India: Winding-up In Pendency Of Arbitration And Criminal Proceedings: NCLT Orders For Winding Up Of Devas Multimedia For Operating Fraudulently Since Incorporation

In the recent decision of Antrix Corporation Ltd. v. Devas Multimedia Pvt. Ltd. and Anr.¹ the Bengaluru Bench of the National Company Law Tribunal (NCLT) passed an order for the winding-up of Devas Multimedia Pvt. Ltd. (Devas). The NCLT concluded that Devas had been operating fraudulently since its inception while passing an order under Section 273 of the Companies Act, 2013 (Companies Act). The present article briefly examines the findings of the NCLT in the matter mentioned above.

Brief Facts:

Antrix Corporation Ltd. (Antrix) is a wholly-owned company of the Government of India under the administrative control of the Department of Space. Antrix is the commercial limb of the Indian Space Research Organization (ISRO), which provides a host of products and services. Devas, i.e., the first respondent in the instant matter, is a company purportedly formed to pursue digital multimedia services. Antrix and Devas entered into a written agreement (Agreement) on 28 January 2005. Under the Agreement, Antrix had agreed to build, operate and launch two satellites and lease spectrum capacity on those satellites to Devas.

On the other hand, Devas promised to use such satellites and spectrum to offer multimedia broadband casting services across India. The Agreement was terminated on 25 February 2011 by Antrix due to certain disputes and revised policy decisions of the Central Government. Aggrieved by the termination, Devas invoked the arbitration clause contained in the Agreement. Ultimately, the International Chamber of Commerce (ICC) on 14 September 2015 awarded Devas USD 562.5 million with interest for the damages caused by Antrix's wrongful repudiation of the Agreement.

Since the matter would have serious ramifications and Devas was suspected of committing various fraudulent activities, the Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED) investigated the matter. It was discovered that Devas was indeed involved in various illegal activities. While the investigations into the nature of frauds committed by Devas and other litigation were pending, Antrix arrived before the NCLT praying for Devas to be wound up on account of committing fraud under Section 271(e) of the Companies Act, 2013.

Contentions of the Parties

Antrix, at the outset, contended that Devas was a sham company that never deserved to be in an Agreement with the government in the first place. It was pointed out that the performance of the obligations set out in the Agreement required ample financial capability running into millions of dollars along with the requisite technology and know-how. However, such a prestigious contract was callously awarded to Devas without following the due process.

Antrix highlighted several lapses and procedural impropriety in the entire process of awarding the contract that was mired with fraud and corruption. It was stated that no attempt was made to invite any tenders/ bids or publish the technical qualifications.

Devas, on the other hand, argued that the instant petition could not be maintained for it failed to comply with the requirement posed under the second proviso to Section 272(3) of the Companies Act, which mandated that a company must be given a reasonable opportunity of making a representation before being wound up. Devas contended that the instant matter could be dealt with properly only if the pending investigations and proceedings before the CBI Court, PMLA Court or the ED were concluded. In addition, Devas submitted that the ICC award for a sum of USD 562.5 million with interest made the Antrix a debtor of Devas. Devas contended that it was inconceivable in law that a debtor is allowed to seek a winding up of its creditor.

Held

The NCLT held that the facts clearly established that Devas was incorporated with fraudulent intention to grab a prestigious contract in collusion with a few corrupt officials of Antrix. Devas was incorporated on 17 December 2004 and obtained the Agreement on 28 January 2005, i.e., in a span of less than 45 days from the date of inception. The NCLT observed that it was a matter of fundamental economics, rather common sense that a sophisticated contract like the one in question should be given to a company with appropriate technical expertise and a proven track record. In the present matter, the NCLT opined that it was not a dispute that Devas did not possess minimum experience even to qualify to participate in the process of awarding the Agreement, much less obtaining it.

The NCLT held that it was a settled position in law that the misdeeds and illegal acts committed by the corrupt officials of Antrix would not bind the State, and those actions being void-ab-initio would not result in any legal or civil consequences. It was observed that Devas devised the Agreement to bring foreign funds into India and then siphon off the same by diverting those funds into suspicious accounts.

Thus, despite the pendency of the challenge to the arbitral award, and matters initiated by CBI and ED, the NCLT concluded that the Agreement did not create any legal rights, much less civil rights favouring Devas. Consequently, the NCLT was convinced that the requisite conditions mentioned under Section 271(e) of the Companies Act were fulfilled to order the winding up of Devas.

Comments

The instant judgment holds key for two reasons. Firstly, the NCLT held that it would not be obliged to await the result of the pending criminal proceedings. The rationale for such a decision was that criminal proceedings would lead either to exoneration or conviction, depending on the case's merits. However, it will never lead to the winding-up of Devas Company. The appropriate forum to wind up a company acting fraudulently under Section 271 was only NCLT as the jurisdiction of other civil courts has been ousted by Section 430 of the Companies Act.

Secondly, the findings of the NCLT also hold that the Agreement in the instant matter was void-ab-initio and did not create any legal rights. These findings would play a significant role in the challenge to the arbitral award made by Antrix pending before the City Civil Court, Bangalore. It would be interesting to see how the challenge to the arbitral award pans out in view of the instant order.

* The author would like to acknowledge the research and assistance rendered by Harshvardhan Korada, a student of Amity Law School, Delhi.

Footnote

1 Antrix Corporation Ltd. v. Devas Multimedia Pvt. Ltd. and Ors., C.P.No.06/BB/2021.

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