Winding-up Devas Multimedia Ltd: Untangling the Legal Rights
Author: Varda Saxena
3rd year Student at Jindal Global Law School
The recent order of the National Company Law Tribunal on [25th May 2021](“NCLT”) in the winding-up petition filed by Antrix Corporation Ltd. against Devas Multimedia Pvt. Ltd. was based on the fraudulent incorporation of the company and the alleged fraud committed to obtaining the contract for Satellite-Based Digital Multimedia Broadcasting Services. However, the contract was terminated due to a force majeure clause way before the fraud was discovered. This article analyses how the NCLT failed to acknowledge several legal rights vested in Devas Multimedia, resulting in a hastened winding up of the company, even though several proceedings, including an arbitration dispute, were pending before various tribunals.
II. Facts and Decision
Antrix Corporation Ltd. is a government-owned company. The administrative control of the company lies with the Department of Space and is a commercial arm of the Indian Space Research Organisation (“ISRO”). Antrix promotes and markets the products and services provided by the Indian Space Programs. Whereas Devas Multimedia Pvt Ltd was incorporated to pursue digital multimedia services in 2004. In 2005, a contract was executed between Antrix and Devas to render Satellite-Based Digital Multimedia Broadcasting Services by leasing transponder capacity in the S-Band spectrum. Antrix Corporation had terminated the contract as per a force majeure clause. Thereafter, a three-member tribunal gave an arbitral award in a commercial arbitration wherein the arbitral tribunal awarded amounting to $ 562.5 million to be paid with simple interest at 18% by Antrix Corporation to Devas Multimedia.
However, Antrix alleged before the NCLT, that the contract was vitiated by fraud and corruption as Devas never had the commercial capability to execute the contract. It was formed only two months before entering into the contract for the sole purpose of utilising the S-Band spectrum, which the Government would have confiscated if left unutilised. Therefore, Antrix contends that the incorporation of the company was fraudulent as they did not have the intellectual property to execute the contract. It was argued that when Multimedia technology was unknown to the world in 2005, Devas misrepresented that they were the owners and IPR holders of the technology and it was established that the IPR for Digital Video Broadcast- Satellite Handheld (DVB-SH) technology was owned by ETSI in Europe. Further, it was submitted that the IPR was granted as late as 2007, with revisions happening in 2008, 2010 and 2011. Hence, Antrix stated that Devas did not possess the IPR for this technology. Antrix also submitted that Devas Multimedia was commercially ineligible to participate in the bid, and the articles of association were signed by graduates and clerks working under officials in ISRO, who state that the same was done on the orders of their supervisors. Antrix Corporation has contended that Devas Multimedia has laundered money, and so proceedings to adjudicate fraud, corruption and money laundering are pending before the Enforcement Directorate, PMLA Special Court of Bangalore and are being investigated by the CBI.
The petition for winding up Devas Multimedia was filed under Section 271 and 272 of the Companies Act, 2013 (“CA 2013”). As per Section 271 of the Act, the petition for winding up can only be submitted by the Registrar of Companies, Serious Fraud Investigation Office or any person authorised by the Government. However, the present case scenario does not fulfil this condition. The following analysis further indicates several points of law which the NCLT failed to acknowledge.
A. Procedure for filing a Winding up Petition
In the case of Registrar of Companies v. Apoorva Leasin, the NCLT laid down the characteristics of a valid sanction while analysing the sanction in consideration. It was stated that the sanction should have entailed specific allegations against the company, documents needed to substantiate the allegations and the fact that a reasonable opportunity was accorded to make a representation. Further, the sanctioning authority should also state that it is prima facie satisfied with the allegations against the company. The present petition fails to comply with the second proviso to Section 272(3) of the CA 2013. The sanction by Central Government was accorded without a reasonable opportunity to make representation. The proviso applies to the Registrar and any person authorised by Central Government, failing which Section 272(e) of CA 2013 has the potential to be misused to circumvent the second proviso to Section 272(3) of CA 2013.
In the case of ROC v. Suraj Bachat Yojna Pvt. Ltd., it was stated that legislative safeguards in the form of procedures had been set in place to avoid harassment through frivolous or doubtful-of-success petitions for its winding-up. These safeguards prevent the enjoining of the Registrar with the Central Government in providing a sanction unless a proper opportunity is afforded to the company for making representations. The person authorised by the Central Government must establish the true position of the company. The judgment also specifies that
“the explanations have to be considered with a judicial mind and outlook and are not to be discarded off-hand unless considered to be flimsy, fallacious or frivolous. It is not a mere formality to receive the explanations from the company and dismiss them as unsatisfactory without getting the doubts cleared.”
Further, numerous judgments specify the practice of investigation by the Serious Fraud Investigation Office, such as Guwahati v. Saradha Real Accommodation. Hence, the absence of such investigation in the present case shows that proper procedure for filing a petition for winding up has not been followed and any pre-filing opportunity of hearing was also not accorded to Devas Multimedia.
In Apoorva Leasin (supra), it was stated that the accused is
“innocent until the allegations/charges are proved beyond reasonable doubt”.
In the case of Devas Multimedia, the criminal proceedings were pending under PMLA Special Court, amongst others, and that the management of the company, including Dr. K.N. Shankara, Mr. V.R. Katti and Mr. MYS Prasad, who had recommended to contract with Devas Multimedia, have not been accused of any wrongdoings. Hence, no adverse inference can be drawn before the allegations reach finality.
Also, the Supreme Court of India (“SCI”) in Devas Multimedia Pvt. Ltd. vs. Antrix Corporation Limited had ordered Antrix to deposit the sum awarded from the Delhi High Court in proceedings, and such proceedings are still pending adjudication before the High Court. By filing the petition and getting a provisional liquidator appointed, who suspended the powers of all the lawyers of Devas Multimedia to be their sole representative in all proceedings, including the proceedings relating to the ICC arbitration[i], Antrix has jeopardised Devas Multimedia as it has not been able to defend itself effectively, for the enforcement of its legal rights.
In R. Kemka v. Deccan Enterprises (P.) Ltd., the [Andhra High Court] stated that the alternate remedy of winding-up should be considered only after all possible remedies are exhausted and considered by the NCLT before an action for winding-up is considered in terms of Section 273(2) of the CA 2013. After consideration of the powers entailed under Section 242(2) of the CA 2013, the winding up of a company could be avoided. A similar solution was provided in Apoorva Leasin (supra), where a fresh Board of Directors was nominated to do away with the management charged with misfeasance. Hence, similar remedies could be equipped to uphold the rights of Devas Multimedia and all its stakeholders.
B. Biased Provisional Liquidator
The NCLT has not allocated enough attention towards the issue of a biased Provisional Liquidator appointed for Devas Multimedia. The ex-Director of the company filed an affidavit stating that the liquidator was acting against the interests of the company and was buttressing the case of Antrix Corporation. The liquidator refused to file an application for deferment of arguments which could have helped Devas. In Babulal Rukmanand v. Official Liquidator, the Court had stated that the liquidator needs to act in a fair and honourable manner while considering the claims of persons against the company. Precedent has been established in various other cases that the liquidator needs to be impartial and act towards the interests of the creditors.[i]
In Nitin Hasmukhlal Parikh, Resolution Professional of Bhatia Global Trading Limited v. IDBI Bank Limited IDBI[ii], the NCLT considered the grievance made regarding the impartiality and independence of the liquidator. The NCLT stated that,
“without expressing our view on merits of such allegation/contention, we feel appropriate to consider the paramount interest of the corporate debtor company proposed for liquidation and about the smooth conduct of its liquidation process.”
Therefore, they ordered the appointment of another liquidator to ensure transparency and fairness to rule out the possibility of any alleged partiality or discrimination with any claimant/stakeholder. Hence, the NCLT stated that the CoC is legally expected to reconsider its decision for the appointment of the proposed liquidator.
C. Negating Limitations: a far-fetched argument
According to Section 3 of the Limitation Act 1963, irrespective of whether limitation has been raised as a defence, the NCLT has to pass the adequate order. Section 433 of CA 2013 states that the Limitations Act, 1963 applies to proceedings before the NCLT. Hence, the limitation on fraud under Section 17 of the Limitation Act, 1963 would bar its adjudication. Further, the limitation to file a winding-up application is three years from the time when the right to file accrues. This right arose in 2016 when the fraud was first discovered. However, the NCLT dismissed the argument based on the premise that as the incorporation of Devas Multimedia is fraudulent in itself, the cause of action is of continuing. Hence, the NCLT disregarded the limitation period.
“It is the very essence of a continuing wrong that it is an act which creates a continuing source of injury and renders the doer of the act responsible and liable for the continuance of the said injury. If the wrongful act causes an injury which is complete, there is no continuing wrong even though the damage resulting from the act may continue.”
The contract in the present case had been frustrated due to a force majeure clause, and hence the injury caused was not of a continuing nature. Even if the company management was found to cause fraud and misfeasance, the SCI stated that it is important to distinguish between the injury resulting from a wrong and the effect of the injury. If the effect of the injury is still harming the parties, it will not result in a continuing cause of action. Hence, the NCLT erred in its hasty rejection of the bar due to limitation.
In conclusion, the author(s) would like to state that the NCLT’s order of winding up Devas Multimedia was a hurried decision, taken without considering the proper mode of presentation of a petition under Section 271 and 272 of the CA 2013. The decision does not consider alternative remedies instead of winding up a company, which courts have usually preferred. This has been done because a company is a separate legal entity and could be relieved of fraudulent management by revamping it. The disregard towards the partiality of the liquidator and the limitation period abrogated the company's legal rights even before an order of winding up was reasonably passed. Even though proceedings were pending in the PMLA Special Court, Delhi High Court, etc, the NCLT adjudicated on issues of money laundering and fraud, which disregards the efficacy and special nature of such allegations, requiring special legal professionals to decide the matter. Hence, instead of ordering the winding-up of the company, the NCLT should have relied on alternate solutions and the cases which are pending in the Special Courts, post their decision. The existence of the company is separate from that of the management, hence, it is well within the powers of the NCLT to preserve that existence while eradicating fraudulent activities.