India: Venture-Satyam Dispute Referred To Larger Bench Due To Differing Opinions

The Division Bench of the Supreme Court of India (SC), comprising Justice Chelameshwar and Justice Sapre, differed in their ruling on the applicability of the confessional statement given by Mr Ramalinga Raju, the Chairman and founder of the erstwhile Satyam Computer Services Limited, in the arbitration proceedings between Venture Global Engineering LLC (Venture) and Tech Mahindra Limited (Satyam).

Background

• An arbitral award dated 3 April 2006 (the Award) was passed against Venture in an arbitration initiated by Satyam directing Venture to transfer its interest, i.e., 50% of the shares in a Joint Venture Company (JVC) to Satyam (the other shareholder holding 50%).
• Thereafter, Venture filed a civil suit before the City Civil Court, Secunderabad which was transferred to the City Civil Court Hyderabad (Trial Court). Venture sought a declaration that the Award was illegal and without jurisdiction, and requested an injunction restraining Satyam from enforcing the Award.
• In 2009, Mr Raju gave statements in writing, where he admitted that the balance sheets of Satyam had been manipulated to inflate its profits to the tune of INR 7,080 crores. Thereafter, Venture filed an application to bring the additional facts on record. This application was allowed by the Trial Court and also, upheld by the SC.
• Thereafter, the petition filed by Venture under Section 34 of the Arbitration and Conciliation Act, 1996 (the Act) was heard and the Trial Court set aside the Award. The award was set aside primarily on the ground that the Award was induced by "fraud" and could not be enforced in India in light of the financial irregularities committed by Satyam, including violations of numerous provisions of the Companies Act, 1956, the Foreign Exchange Management Act, 1999 (FEMA), etc.
• In the appeal filed by Satyam before the Andhra Pradesh High Court (HC), the Trial Court's decision was over-ruled and the Award was restored. The HC held that the "fraud" was yet to be proved and the Trial Court, despite having held that the Award had violated public policy, had given no finding as to how public policy had been violated. The HC also ruled that the action taken by Venture to challenge the Award in India was barred by "issue estoppel".
• Aggrieved by this Judgement, both parties filed appeals to the SC. The appeal filed by Satyam was against the finding of the HC that the Trial Court had jurisdiction to examine the legality of the Award, whereas the appeal filed by Venture was against the restoration of the Award.

CONTENTIONS OF THE PARTIES:

Venture's Arguments: The contentions put forth by Venture before the SC were as follows:

• The Award is rendered illegal by suppression of the fraud played by Mr Raju, which if known would have led Venture to terminate the agreement dated 20 October 1999 between Venture and Satyam (Contract) first and subsequently claim damages;
• Mr Raju's confessional statement was a "notorious fact" and known to the world, hence, judicial notice of it could be taken by the courts without any further evidentiary proof; and
• The Award is vitiated on account of fraud, misrepresentation and suppression of facts pertaining to Mr Raju's acts in the affairs of Satyam, all of which had a direct bearing on the case and in view of which, enforcing the Award would be in conflict with the public policy of India.

Satyam's Arguments: The contentions put forth by Satyam before the SC were as follows:

• Mr Raju's alleged crimes had not yet been proved and in view of the ongoing proceedings in relation to the same, it would not be appropriate to deem the same as proved;
• There is no causative link between the allegedly suppressed facts and the facts of the current case and accordingly, the award cannot be said to be vitiated on the grounds of fraud; and
• Mr Raju's acts were in any case only pertaining to the affairs of Satyam and had no significance when examining the legality of the arbitral proceedings and the Award under Section 34 of the Act.

HELD:

As the Bench hearing the matter had differing views, the matter was referred to a larger Bench. A brief discussion on each of their rulings is set out below:

Justice Sapre's view: Justice Sapre listed the following three questions for consideration:

• Whether the acts of Mr Raju in the affairs of Satyam, as admitted by him in his confessional statement, amounted to misrepresentation/ suppression of material facts and, if so, whether they could be made the basis of seeking quashing of the Award on the ground that it is against the public policy of India under Section 34(2)(b)(ii) read with Explanation (1)(i)(ii) and (iii) of the Act?
• Whether Mr Raju's acts had any causative link with the facts pertaining to the arbitration at hand?
• If the above questions are answered in the affirmative, whether it would constitute a ground for setting aside the Award?

Justice Sapre set aside the Award on the following grounds:

• Citing the definition of "fraud" as enumerated in Kerr on Fraud and Mistake, 7th Edn., suppression of Mr Raju's acts amounted to a fraud played in the arbitration. Relying on SC's Judgement in Onkar Nath & Ors. v Delhi Administration¹, the judicial notice of the confessional statement of Mr Raju could be taken without any more formal proof since neither the letter nor the signature on it had been disputed in any proceeding.
• In addition, since both Satyam and Venture were 50% shareholders in the JVC, any unlawful act by Mr Raju vis-à-vis Satyam's affairs would also have a direct impact on the JVC. By virtue of this, there was indeed a causative link between Mr Raju's acts and the present matter. Further, the suppression of facts by Mr Raju and ergo, Satyam, deprived Venture of their right to terminate the Contract earlier, as well as plead the same grounds before the arbitration.
• The above points vitiated the entire arbitral proceedings, rendering the Award illegal and against the public policy of India.
• Justice Sapre also accepted the Trial Court's finding that Satyam had violated the provisions of FEMA, using the finding to bolster the argument that the Award was against the public policy of India.
• On the question of whether Venture's challenge to the Award was barred by issue estoppel, Justice Sapre relied on Masud Khan v State of Uttar Pradesh² to hold that the principle of "issue estoppel" only applied in the context of criminal proceedings. Based on the fact that arbitral proceedings are in the nature of civil proceedings, it was held that the HC had erred in applying the same to dismiss Venture's Application under Section 34 of the Act.

Justice Chelameshwar's view:

In his order, Justice Chelameshwar listed the following two questions for consideration:

• Whether the Award was against the public policy of India on the ground of violation of the FEMA, etc?
• Whether the Award was vitiated by fraud / suppression of material facts by Satyam?

Justice Chelameshwar upheld the Award on the following grounds:

• Justice Chelameshwar noted that Venture had pleaded that the Award, insofar as it directed Venture to transfer shares to Satyam at book value (rather than fair value) was in violation of the Foreign Exchange Management (Transfer or Issue of Security by a Person Resident outside India) Regulations, 2000. He noted that this contention was merely accepted at face value by the Trial Court, without mention of the relevant regulation or the scheme of FEMA or any other reasoning. Further, the Trial Court had erroneously set aside the Award because there was lack of discussions on the fair value of the shares, how that fair value was to be determined or any similar relevant question, as well as lack of reasoning relating to the public policy ground.
• Even if Mr Raju's acts were relevant to the arbitration proceedings, whether the same were "material facts", the non-disclosure of which could be said to have "affected the Award by fraud", was required to have been dealt with by the Trial Court. The lack of any discussion regarding this aspect in the Trial Court's order rendered the same erroneous.
• As far as the appeal filed by Satyam was concerned, since the same was re-agitating the question of the applicability of Part- I of the Act to an international commercial arbitration, it was an indirect challenge to the decision of the constitutional bench of the SC in Bharat Aluminium Company v Kaiser Aluminium Technical Services Inc³, which could not be allowed.

Comment

Despite being inconclusive, the Judgement is a welcome addition to the Indian jurisprudence on fraud and its role in judicial proceedings. We await the larger bench's Judgement in this matter as it would shed further light on SC's view on fraud vitiating an arbitration award.

Footnotes

The content of this document do not necessarily reflect the views/position of Khaitan & Co but remain solely those of the author(s). For any further queries or follow up please contact Khaitan & Co at legalalerts@khaitanco.com