In a recent judgment in Devas Multimedia Pvt. Ltd. v. Antrix Corporation Ltd. & Anr.1, the Hon'ble Supreme Court has upheld the order of National Company Law Appellate Tribunal (NCLAT) for winding up of Devas Multimedia Pvt. Ltd. (Devas). The Hon'ble Supreme Court concluded that Devas had been operating fraudulently since its inception.

The decision is important for many reasons. Firstly, the decision is the first case of winding up on the ground of fraud under the present company law regime. Secondly, the matter deals with winding up proceedings when a company is parallelly involved in arbitral and criminal proceedings. In this article, we briefly examine the facts of the case and findings of the Hon'ble Supreme Court.

Brief Facts

Antrix Corporation Ltd. (Antrix), incorporated on 28 September 1992 under the Companies Act, 1956 (1956 Act), 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.

On 17 December 2004 Devas was incorporated as a private company under the 1956 Act purportedly to pursue digital multimedia services. Antrix and Devas entered into a written agreement (Agreement) on 28 January 2005. The preamble of the Agreement stated that Devas was developing a platform capable of delivering multimedia and information services via satellite and terrestrial system to mobile receivers. Under the Agreement, Antrix had agreed to build, operate and launch two satellites and lease spectrum capacity on those satellites to Devas.

Devas promised to use such satellites and spectrum to offer multimedia broadband services across India. The Agreement was terminated in accordance with the force majeure clause 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.

In the meantime, Devas was suspected of committing various fraudulent activities. Accordingly, the Central Bureau of Investigation (CBI) and the Enforcement Directorate (ED) investigated the matter. The CBI filed a First Information Report (FIR) on 16 March 2015 against Devas as well as its officers for offences under Section 420 read with Section 120B of the IPC, and Sections 13(1)(d) read with Section 13(2) of the Prevention of Corruption Act, 1988. Similarly, the ED filed a report in ECIR No.12/BGZO/2015. It was discovered that Devas was indeed involved in various illegal activities. Therefore, Antrix made a request to the Ministry of Corporate Affairs, Government of India seeking authorization to initiate proceedings for winding up of Devas. The authorization was given on 18 January 2021. While the investigations into the nature of frauds committed by Devas and other litigation were pending, Antrix arrived before the National Company Law Tribunal, Bengaluru Bench (NCLT) praying for Devas to be wound up on account of committing fraud under Section 271(e) of the Companies Act, 2013 (2013 Act).

On 19 January 2021, after hearing the parties, the NCLT passed a reasoned order admitting the petition and appointing an official liquidator attached to the High Court of Bangalore as the provisional liquidator. Following a series of litigation, a final order was passed by NCLT dated 25 May 2021 which directed winding up of Devas. Aggrieved by the order of winding up, Devas filed an appeal before the NCLAT. The appeal before NCLAT was dismissed vide an order dared 08 September 2021. Against the NCLAT order, an ex-director of Devas along with a shareholder filed an appeal before the Hon'ble Supreme Court.

Contentions of Devas

Devas assailed the impugned order of NCLT and NCLAT, amongst other things, broadly on the following grounds:

  1. Breach of the mandatory requirement of advertisement before ordering winding up.

  2. Winding up petition being barred by limitation.

  3. Antrix being estopped from pleading fraud.

  4. Erroneous conclusions regarding the consequences of fraud.

Contentions of Antrix

Antrix, sought to defend the impugned orders, amongst other things, broadly on the following grounds:

  1. Detailed findings recorded by the NCLT on 8 (eight) different types of fraud committed by Devas, both in the formation of the company and in the manner in which the affairs of the company were carrier out, which cannot be assailed in an appeal under Section 423 of the Companies Act.

  2. The Agreement dated 28 January 2005 entered into between Antrix and Devas spoke about three components, namely 'Devas Technology', 'Devas Services' and 'Devas Device' none of which existed either on the date of formation of Devas, or on the date of execution of the Agreement, or on the date of winding up the company.

  3. The shocking nature of the financial frauds involved in the matter.

Held

The Hon'ble Supreme Court on the Devas' argument on the requirement of advertisement observed that the Apex Court did not look at failure of publication of advertisement as something that would lead to the automatic dismissal of the petition for winding up. Further, the Apex Court also held that the NCLT Rules, 2016 (Rules) confers the powers upon the NCLT to dispense with the requirement to put up an advertisement. On facts, the Apex court held that there are no stakeholders in the instant matter who are prejudiced by the failure of NCLT to order the publication of advertisement of petition. Though technically the NCLT may not be correct in invoking 'useless formality theory', the Apex Court held that the test of prejudice especially could be applied in light of the allegations of fraud involved. Therefore, the Hon'ble Supreme Court was unable to sustain the argument that the failure of the NCLT to order the publication of advertisement was unlawful.

On the argument, that the matter was hopelessly barred by limitation, the Apex Court agreed with the decision of NCLAT and held that the same was a plausible view. The NCLAT while dealing with the question of limitation held that the fraud alleged by Antrix was not a singular act which was transaction-specific. Further, the NCLAT had noted that the winding up was based on a series of acts of fraud, unearthed over a long period of time.

Adding to the understanding of NCLAT, the Apex Court held that limitation was not always akin to a lighted matchstick to a train of gun powder. The date of commencement of the limitation period need not be static and may keep changing depending upon the acts and omissions of the party against whom the action is initiated. If the conduct of the affairs of a company in a fraudulent manner is a continuing process, the right to apply becomes recurring.

The Hon'ble Supreme Court then moved to the next ground where Devas argued that Antrix is estopped from pleading fraud and seeking winding up of Devas. On estoppel, Devas argued that the termination letter of the Agreement was not issued on the ground of fraud but on ground of force majeure. Further, in the arbitral proceedings, no allegations of fraud were ever raised. Lastly, the Auditor's report of Antrix for all years contained a statement that no fraud was committed on Antrix.

The Apex Court observed that above submissions of Devas would not take it anywhere. It was observed that Antrix as well as officials of the government were also implicated in the FIR for the offences under the Prevention of Corruption Act, 1988. The Apex Court noted that arbitration proceedings commenced in the year 2013 and the award was passed in September 2015. Accordingly, the Hon'ble Supreme Court opined that Antrix could not have been expected to plead fraud in the arbitration even before the discovery of fraud. Hence the Hon'ble Supreme Court concluded that the contention that Antrix was estopped from pleading fraud, was rightly rejected by the NCLT. Similarly, the Hon'ble Supreme Court rejected all other arguments of Devas.

Lastly, it was contended that the actual motive behind Antrix seeking winding up of Devas was to deprive Devas of the benefits of a unanimous award passed by the ICC arbitral tribunal presided over by a former Chief Justice of India and two other BIT awards. It was argued by Devas that such attempts on part of a company wholly by the government of India would send a wrong message to international investors.

The Apex Court held that it did not find any merit on the submission relating to the arbitral proceedings. It was observed that if the seeds of a commercial relationship between Antrix and Devas were a product of fraud perpetrated by Devas, every part of the plant that grew out of those seeds such as the Agreement, and the arbitral awards are infect with the poison of fraud. The Hon'ble Supreme Court stated that allowing Devas and its shareholders to reap the benefits of their fraudulent action would send another wrong message to the world at large.

Based on these findings, the Apex Court observed that all grounds of attack to the orders of NCLT and NCLAT were unsustainable. Therefore, the appeals were dismissed without any costs.

Comments

The Apex Court has rightly upheld the concurrent orders of NCLT and NCLAT. As observed in the judgment, all fruits emerging out of the commercial dealings of Devas were mired in the poison of fraud. In such circumstances, given the extent of fraud and criminal activities involved, it was only appropriate that the company was wound up as per the law. Further, the Hon'ble Supreme Court at several occasions has made it abundantly clear that criminal matters which attracted penal consequences and criminal sanctions were non-arbitrable and could only be adjudicated by a court of law since it may result in a conviction which falls in the realm of public law. Hence, the argument that the decision may send a wrong message on arbitral jurisprudence may not be entirely correct as criminal elements permeated the very foundation of the dispute.

Footnote

1Devas Multimedia Private Ltd. v. Antrix Corporation & Anr., Civil Appeal No. 5766 of 2021.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.