Recently, the Supreme Court has in a case of Avitel Post Studioz Limited & Ors. Vs HSBC PI Holdings (Mauritius) Limited passed a Judgment dated 19-08-2020 and upheld the validity of the #arbitration proceedings initiated by the Respondent-#HSBC in a matter of serious allegation of #fraud and #misrepresentation committed by Avitel-Appellant Company.
In this case, Avitel Post Studioz Limited & Ors. (Avitel) and HSBC PI Holdings (Mauritius) Limited (HSBC) entered into a Share Subscription Agreement on 06-05-2011 (#Agreement) whereby, the Parties agreed that HSBC would invest in the equity capital of Avitel for a consideration of USD 60 Million. In the said Agreement, Avitel made representation to HSBC that their investment would be used for purchasing equipment and material to service a contract with British Broadcasting Corporation (#BBC). The said Agreement provided that in case of any #dispute arising out of the terms of the Agreement, the Parties would resort to arbitration as per the Singapore law at the Singapore International Arbitration Centre (#SIAC). Further, they may file a petition under Section 9 of the Arbitration and Conciliation Act 1996 (the Act) for seeking any interim relief during the pendency of such arbitral proceedings.
Around April 2012, HSBC suspected that there was no existing BBC Contract with Avitel and that Avitel had falsely and fraudulently represented facts to HSBC in order to secure investment. Thus, HSBC initiated arbitral proceedings at SIAC, where the Arbitrator passed two Interim Awards against Avitel. The said Interim Awards allowed HSBC to have Avitel’s accounts frozen in India and UAE and also, to conduct investigations into the financial affairs of Avitel through Ernst & Young and KPMG Dubai.
Thereafter, HSBC filed a Petition under Section 9 of the Act in the Bombay High Court, whereby, the Single Judge Bench of the Bombay High Court passed an Order dated 22-01-2014 and directed Avitel to deposit and maintain a balance of USD 60 Million in their Bank, as HSBC had a strong chance of success at SIAC arbitral proceedings. Further, Avitel was directed to refrain from withdrawing any amount from its account until further orders. The High Court also observed that the Parties had agreed to Singapore law as governing law and SIAC as dispute resolution forum in the said Agreement. Thus, the challenge against jurisdiction of the Arbitral Tribunal was dismissed. Aggrieved by the said Order dated 22-01-2014, Avitel filed an appeal before the Division Bench of the Bombay High Court.
In the said appeal, the Division Bench of the Bombay High Court passed an Order dated 31-07-2014 and upheld the Order dated 22-01-2014 of the Single Bench. But the Division Bench reduced the deposit amount of USD 60 Million to USD 30 Million to be maintained by Avitel in their Bank as damages to HSBC. The Division Bench further observed that the dispute pertaining to the act of fraud and misrepresentation by Avitel is civil in nature.
Meanwhile, the SIAC Arbitrator passed a Final Award dated 27-09-2014 and held Avitel guilty of inducing HSBC to invest in their Company by making false representation that their investment would be used for purchasing equipment and material to service a contract with BBC. The Arbitrator further directed Avitel to pay a total sum of USD 60 Million along with 4.25% interest for the loss of investment caused to HSBC.
Thereafter, Avitel challenged the said Final Award dated 27-09-2014 under Section 34 of the Act in the Bombay High Court, which was dismissed vide Judgment dated 28-09-2015 on the ground that it was not maintainable. Meanwhile, HSBC filed for enforcement of the Final Award dated 27-09-2014 in the Bombay High Court on 15-04-2015 under Section 48 of the Act.
While the enforcement proceedings were pending, Avitel filed an Appeal in the Supreme Court against the Order dated 22-01-2014 of the Single Bench of the Bombay High Court, whereby the Court restrained Avitel from making withdrawals and directed that its accounts are frozen until further orders. Whereas, HSBC filed a Cross Appeal in the Supreme Court against the Order dated 31-07-2014 of the Division Bench of the Bombay High Court, whereby the Court reduced the deposit amount from USD 60 Million to USD 30 Million as damages to HSBC.
The Supreme Court made the following observations in this case:
- That the act of inducing HSBC to invest USD 60 Million in Avitel on the false representation that the said investment would be used for purchasing material to service the BBC Contract amounted to fraud under Section 17 of the Contract Act. As a result, the Agreement became voidable at the instance of HSBC under Section 19 of the Contract Act.
- That generally, when an agreement becomes voidable on account of fraud or misrepresentation under Section 19 of the Contract Act, the arbitration clause in the said agreement is also vitiated. As a result, the parties are barred from invoking the arbitration clause.
- But in this case, although the Agreement had become voidable at the instance of HSBC, it did not render the arbitration clause invalid, as the Parties had agreed at the time of entering into the Agreement that the arbitration clause would be read as an independent clause. Thus, the Supreme Court held that the dispute in the present case was arbitrable and that HSBC is not barred from invoking arbitration clause in the Agreement.
- Further, based on the facts and circumstances of the case and the extent of loss suffered by HSBC due to the fraudulent acts of Avitel, the reduction of damages of USD 60 Million to USD 30 Million by the Division Bench of the Bombay High Court was not justified.
Thus, the Apex Court held Avitel liable for fraudulently inducing HSBC to invest in their Company and directed them to pay USD 60 Million that would help to reinstate HSBC in the same position as if the Agreement had never been entered into.
Senior Legal Associate
The Indian Lawyer