Bombay HC adjudicates upon enforcement of a foreign award rendered by the SIAC as a decree of the court

The Bombay High Court recently, vide its judgment dated April 30, 2020 in the case of Banyan Tree Growth Capital L.L.C. vs. Axiom Cordages Limited and ors., Commercial Arbitration Petition bearing no. 476 of 2019, has adjudicated upon the issue of enforcing an arbitral award dated January 15, 2019 titled as “Put Award”, passed by the Singapore International Arbitration Centre (“SIAC”) in SIAC ARB bearing no. 37 of 2016, as a decree of the court. Facts of the case The petitioner (“Banyan Tree”) is a company incorporated under the laws of Mauritius and is a closed-ended fund regulated by the Financial Services Commission in Mauritius having its shareholders inter-alia comprising of large global development financial institutions. The business of Banyan Tree in India is to make investments in mid-market companies with the objective of capital formation for the investee companies and long-term capital appreciation for its investors. Banyan Tree is stated to have made an investment of about USD 7.5 million and holds 11.25% of the equity shareholding in respondent no.1 i.e. Axiom Cordages Limited (“Axiom”) which is a company incorporated in India under the provisions of the Companies Act, 1956. Axiom is engaged in the business of manufacturing and export of specialised synthetic ropes. The respondent No.2 i.e. Responsive Industries Limited (“Responsive”) is an Indian company incorporated under the Companies Act, 1956 and stated to be listed on the National Stock Exchange and Bombay Stock Exchange. Responsive is engaged in the business of manufacturing polyvinyl chloride (“PVC”) based products such as PVC flooring, artificial leather cloth, rigid film, etc. Responsive owns 58% of the paid-up share capital in Axiom. The respondent no. 3 is Wellknown/business Ventures LLP (“Wellknown”). It is a Limited Liability Partnership (“LLP”) involved in inland and foreign trade, transport, infrastructure, industry and finance. Wellknown owns about 7.98% of paid up share capital in Axiom and 56% of the paid-up share capital in Responsive. Responsive and Wellknown are promoters of Axiom. Thereafter, the following incidences occurred leading to the filing of the instant matter. Date Particulars of the Event 2008 Responsive and Wellknown were seeking capital infusion in Axiom which was for development of Axiom through acquisition of certain assets from IDBI stressed Asset Rehabilitation Fund (“IDBI”) and funding of capital expenditure of Axiom. March, 2008 Banyan Tree entered negotiations with Responsive and Wellknown for possible investment in Axiom. September 12, 2008 The negotiations culminated to the effect that the parties entered into a Share Subscription Agreement (“SSA”), whereby Banyan Tree agreed to make an initial investment of USD 50 million in Axiom. In return for its investment, Banyan Tree received equity shares and convertible debentures in Axiom. Banyan Tree being a limited life company, agreed for viable time bound mode of exit for its investment, as the same was stated to be crucial to its decision to invest in Axiom, which according to Banyan Tree was at all times central to the transactions negotiated between the parties. As a condition precedent to the initial investment, an agreement titled as “Put Option Deed” was executed between the parties being the same day on which the SSA was executed. The disputes in the instant case arose under the Put Option Deed. As per clause 7.3 (e) of the Put Option Deed, stamp duty on the said document was payable by Respondent Nos. 2 and 3. Being a consolidated transaction in Clause 1.1.63 of the SSA, the parties, inter-alia, agreed that the “transaction documents” shall mean the SSA, the Put Option Deed being an agreement between the Promoters, Issuer and the Investors and the Escrow Agreement. In the SSA the promoters provided for three potential options for Banyan Tree to exit its investment. The first exit option was an initial public offering (IPO) of Axiom, allowing Banyan Tree to sell its Axiom shares on the stock exchange. The second exit option was a merger of Axiom into Responsive, whereupon Banyan Tree would receive shares in Responsive, a publicly listed company. The third exit option was that Banyan Tree would exit its investment under the Put Option Deed whereby Banyan Tree would require Responsive and Wellknown to buy its shareholding in Axiom, should the first and second exit options were not to be available to Banyan Tree. September 30, 2008 The parties entered into an Escrow Agreement, which provided that Wellknown agrees to keep the shares in Responsive or their cash equivalent in escrow, in a specified escrow account. The Escrow accounts were to be managed by a designated escrow agent, namely ILand FS Trust company Limited as appointed. By the Escrow Agreement, parties intended to ensure that the promoters i.e. Wellknown and Responsive had the requisite liquidity to meet their payment obligations under the terms of the Put Option Deed in case Banyan Tree exercises its Put Option. Accordingly, under the Escrow Agreement shares of Responsive held by Wellknown were held in a demat account to be operated by the Escrow agent. If the promoters fails to purchase the put securities in terms of the Put Option Deed, the shares of Responsive held in escrow under the Escrow agreement, were to be sold and the proceeds deposited in a designated bank account to be used to settle the Put Option. March 19, 2014 Wellknown transferred the escrow shares out of the designated demat-escrow accounts without authority or consent of Banyan Tree and/or the escrow agent to a new account operated solely by Wellknown. July 23, 2014 The cash account was closed without authority and consent of Banyan Tree and/or the escrow agent in breach of the Escrow Agreement. February 16, 2015 Banyan Tree discovered that Wellknown had closed the escrow accounts, without any authorization or knowledge of Banyan Tree or the escrow agent. Wellknown transferred the shares which were to be held in the escrow account to a new account operated fully by it. The escrow agent being confronted with this situation sought restoration under the escrow mechanism. March 31, 2015 Wellknown by its letter refused to reinstate the shares, asserting that the Escrow Agreement and the Put Option Deed were illegal under Indian Law. May 5, 2015 Banyan Tree approached the Bombay High Court by filing a petition under Section 9 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act, 1996”) praying for interim measures pending the arbitration. The court passed an order directing Responsive and Wellknown to maintain status-quo with respect to the Wellknown shares which formed the subject matter of the proceedings before it and ordered that shares be kept in a designated account. October 1, 2015 Dispute notice issued by Banyan Tree under the Put Option Deed. The promoters were notified that the dispute had arisen under the Put Option Deed. October 8, 2015 Responsive acknowledged receipt of the Dispute Notice and reiterated inter-alia its position as taken in its letter dated 30 September 2015, that the Put Option Deed is illegal, void ab initio and non-est, hence there was no question of honouring any obligation or of there being any breach. December 29, 2015 Banyan Tree issued a notice of arbitration to the SIAC, Axiom, Responsive and Wellknown, requesting that the Escrow Agreement and the Put Option Deed be performed. This notice was received by SIAC on December 29, 2015, and SIAC accordingly, commenced arbitration on December 29, 2015 as per the SIAC, 2013 Rules. January 15, 2019 After considering the pleadings, documentary and oral evidence and the arguments advanced by the parties, the arbitral tribunal allowed the claims of Banyan Tree. It was inter-alia declared by the arbitral tribunal that the Put Option was a valid and a legal contract under Indian Law and that the performance of the Put Option Deed was legal at the time when Banyan Tree exercised its right to exit under it. February 11, 2019 The respondents on February 11, 2019 filed an application before the arbitral tribunal seeking an additional award and an interpretation of the Put Award. Banyan Tree had opposed the said application, inter-alia, contending that the application is beyond the scope of the SIAC Rules. The said application is pending adjudication before the arbitral tribunal. Subsequently, Banyan Tree sought enforcement of the Put Award in the nature of a foreign award. Hence, the instant petition. Findings of the court The court observed that the scope of the present proceedings being confined to enforcement of a foreign award it would involve a limited enquiry and has to be undertaken within the parameters laid down under Section 47 to 49 of the Arbitration Act, 1996, more specifically under Section 48 of the Arbitration Act, 1996. The court thus, determined the issues raised before it, as follow Put Option Deed not being adequately stamped The court observed that conduct of a party also creates substantive legal consequences not only in law but also relevant to the adjudication and consequent reliefs in legal proceedings. As per clause 7.3 (e) of the Put Option Deed, stamp duty on the put option deed was payable by respondent nos. 2 and 3 i.e. Responsive and Wellknown respectively. Moreover, at no point of time was any issue raised by the respondents, nor any objection to that effect was ever taken before the arbitral tribunal when the parties were governed by the Indian law (clause 19.1 of the put option deed). Hence, it is incorrect that the respondents could not have raised an objection in this regard before the arbitral tribunal, merely because the proceedings were conducted at Singapore. The Court also observed that when the arbitral tribunal accepted the Put Option Deed in evidence and proceeded to adjudicate the rights of the parties arising under this document, certain legal consequences had occurred, when they had taken such a position on the document as mentioned under Section 35 of the Maharashtra Stamp Act. The court further, while placing reliance on the case of Javer Chand vs. Pukhraj Surana AIR 1961 SC 1655, held that when a document has once been admitted in evidence, such admission cannot be called in question at any stage of the suit or the proceeding on the ground that the instrument has not been duly stamped. This mandate of law would certainly be applicable even when the Court is concerned with enforcement and execution of an arbitral award. Additionally, the court while distinguishing the judgments rendered by the Supreme Court in the case of SMS Tea Estates (P) Limited versus Chandmari Tea Company (P) Limited (2011) 14 SCC 66 and Garware Wall Ropes Limited versus Coastal Marine Constructions and Engineering Limited 2019 SCC Online SC 55, held that “54.....There cannot be any dispute on the principle of law these decisions lay down, namely that in exercising jurisdiction under section 11 of the Aand C Act , when the Court is confronted with a document containing an arbitration agreement and the document is not stamped as per law, the document would be required to be held to be illegal and cannot be acted upon, to appoint an arbitral tribunal, till such defect of the document being adequately stamped is cured, by impounding the document and forwarding the same for payment of the proper stamp duty. In the present case we are concerned with enforcement of foreign award under the provisions of section 47 and 48 of the Arbitration and Conciliation Act, 1996. In exercising jurisdiction under these provisions, the Court is precluded from adjudicating any factual dispute and more particularly after the parties have take a position on a document in the arbitral proceedings.........The arbitral tribunal admitted the document in evidence, and has adjudicated the rights and obligations arising under the said document interalia by granting claims as made by the petitioner. Accepting such plea in these circumstances would mean that in exercising jurisdiction under Section 48 of the A and C Act the Court would be reopening the trial as need before the arbitral tribunal even on factual issues. This is certainly not the jurisdiction of the Court under Sections 47 to 49 of the A and C Act.” (emphasis supplied) Thus, the court went onto refute the objection of the respondents pertaining to non-enforcement of the Put Award on the ground of the Put Option Deed being inadequately stamped. Put Option Deed being unenforceable and illegal under the provisions of the Securities Contracts (Regulation) Act 1956 (SCRA) and the notifications issued thereunder. The Bombay High Court observed that the legislative intent of the SCRA is to ‘prevent undesirable transactions in securities’ and to provide a mechanism for regulating the business of dealing in securities. The emphasis and the intention of the SCRA is to prevent undesirable transactions. By a legislative exercise it was very easy to include shareholders agreement having a Put Option to be categorised as an undesirable transaction under SCRA. However, there does not appear to be any such express bar to such a transaction. Further, the court also held that from the tenor of the put option deed, it is quite apparent that the intention of the parties was provide Banayan Tree an ‘exit’ from the investment it had made towards the capital requirement of Axiom. It is not possible to conceive that the intention of the parties was to indulge into any speculation in the put securities, which is the primary factor to consider the applicability of the provisions of the SCRA and the notifications issued thereunder. Thus, even assuming that the contention of the respondent is to be accepted that the June 27, 1969 notification issued under section 16 of the SCRA, was in operation on the date the put option deed was executed, the said notification would not apply. This for the reason, that this notification was principally intended to prevent undesirable speculation on securities. Thereafter, the court observed that merely because the said notification provided that any contract for the sale or purchase of securities, inter-alia, cannot be other than spot delivery contracts under the SCRA and Rules and bylaws of a recognised stock exchange, that would not mean that the notification in any manner prohibited a put option in a share subscription agreement. This more particularly, as the intention of the parties when they enter into a share subscription agreement is to avail financial assistance from the investor and at the same time enabling the investor to secure the debt/financial assistance, by providing an agreeable form of security, by offering subscription to the shares/debentures. To categorize such an arrangement between the parties as a speculative trade in securities hit by the provisions of the SCRA and the said notification issued thereunder hence, is not well founded. Additionally, the court also observed that “73.........section 18A of the SCRA by virtue of the opening words of the provision NB “Notwithstanding anything contained in any other law for the time being in force, contracts in derivative shall be legal and valid if such contracts are....” cannot be construed to mean that it would render illegal or invalidate any contract entered between the parties containing an option to sell securities. Moreover it declares the contracts to be legal and valid in the manner as provided for in sub clauses (a) to (c). Thus this is the statutory foundation in relation to trading/transactions in securities as strictly falling under the purview of the SCRA.” The court after examining the notification dated October 3, 2013 (“said notification”) issued by Securities and Exchange Board of India (“SEBI”) under Section 16 and 28 of SCRA, held that it is quite clear that there is a complete statutory recognition in regard to shareholders contracts for purchase or sale of securities, containing a put option and permitting an exercise of option under such agreement. Such an agreement can even be an agreement entered prior to the issuance of the said notification. The rights of the parties under any such agreement as the said notification says shall remain undisturbed notwithstanding the issuance of the said notification. It is quite clear, that the said notification never intended to either invalidate any existing shareholders agreement containing an option in securities nor it in any manner intends to dilute the rights of the parties under any such agreement. Thus, as per the court “75...To read this notification in the manner as suggested by the respondents, namely, to construe that it invalidates the put option deed, would in fact amount to doing violence to the plain language of the notification. In any event in issuing this notification it can never be an intention that two classes of shareholders agreements, namely those agreements entered prior to the issuance of the notification and others after issuance of the notification, be created. This would lead to an anomalous position. In any event there was never an express statutory bar pointed out by the respondents to prohibit Put Options in Shareholders agreement.” The Bombay High Court also reiterated the position of law enumerated by a Co-ordinate Bench of the court in the case of Edelweiss Financial Services Limited Versus Percept Finserve Private Limited and anr., Arbitration Petition No. 220 of 2014, wherein the court had held that merely because the contract contains a put option in respect of securities, the contract cannot be termed as a contract in derivatives and illegal under the provisions of Section 18A of the SCRA and refuted the arguments of the respondents that the aforesaid judgment in any manner misinterprets the notifications and/or provisions of the SCRA and/or is contrary to the law laid down by the Supreme Court in the case of Bhagwati Developers Private Limited versus Peerless General Finance and Investment Company Limited and anr., (2013) 9 SCC 584. The Bombay High Court, in the instant case, thus, held that “83...there is nothing illegal when the arbitral tribunal holds that section 18 A of the SCRA does not absolutely prohibit put options in the Put Option Deed and that the contract between two shareholders, containing an option in the nature as contained in the put option deed is completely different from options contract or derivatives contemplated by section 18A of the SCRA. In any event it cannot be held that that tribunal’s view on this question, which is arrived at, on interpretation of the terms and conditions of the put option deed, is an impossible view nay illegal.” (emphasis supplied) Put Option Deed is unenforceable and illegal under the provisions of the Foreign Exchange Management Act (FEMA) and the notifications issued thereunder. The Bombay High Court held that it certainly cannot be accepted as a legal proposition that the provisions of FEMA or the regulations made thereunder would invalidate or render void a contract like the Put Option Deed. Moreover, considering the legislative scheme under FEMA, it cannot be conceived, that any violation of the provisions of FEMA can either render the Put Option Deed to be illegal or/or the foreign award in question would be rendered unenforceable. The court thus, rejected the contention of the respondents on enforceability of the arbitral award on the ground of violation of FEMA and/or regulations made thereunder by placing reliance upon the judgment rendered by the Supreme Court in the case of Vijay Karia and ors. vs. Prysmian Cavi E Sistemi SRL and ors. (2020) SCC OnLine SC 177, wherein the Apex Court had categorically held that a court would not refuse enforcement of a foreign award on the ground of violation of a FEMA regulation and that for any such violation the arbitral award cannot be said to be void. Objection on the ground that the Put Award is contrary to the Fundamental Public Policy of India The Bombay High Court while placing reliance on the judgment of the Supreme Court in the case of Renusagar Power Company Limited vs. General Electric Co., (1994) Supp. (1) SCC 644 (“Renusagar”) and confirmed in the Shrish Lal Mahal Limited vs. Progetto Grano SPA (2014) 2 SCC 433, stated that the objections by the respondents do not fall under any of the three categories enumerated in the Renusagar judgment, so as to hold that the Put Award is against the public policy of India and thus, the Put Award satisfies all the legal requirements in law so as to be enforced as a decree of the court. The court thus, declared the Put Award dated January 15, 2019 passed in SIAC ARB bearing no. 37 of 2016 to be binding under section 46 of the Arbitration Act, 1996 and enforceable as a decree of the Court under Part II of the Arbitration Act, 1996. This update has been contributed by Jonathan Jose and Kunal Dey (Associates). Download Pdf