SUPREME COURT REMANDS CASE PERTAINING TO SPICEJET TAKEOVER TRANSACTION BACK TO DELHI HIGH COURT FOR PROPER ADJUDICATION OF VALIDITY OF ARBITRAL AWARD

In a recent case of Kalanithi Maran Vs Ajay Singh & Anr. SLP (C) No. 14936 / 2024 along with connected petition: S.L.P.(C) No.14741/2024, a three Judge Bench of the Hon’ble Supreme Court comprising of the Chief Justice of India, DY Chandrachud, Justice JB Pardiwala and Justice Manoj Misra passed a Judgment dated 26-07-2024 and observed that though the scope of interference by a Court with an arbitral award under Section 34 of the Arbitration and Conciliation Act 1996 (Application for setting aside arbitral awards) is limited to the grounds that are mentioned thereunder, however, the Court has to apply its mind to the grounds of challenge and then evaluate if any case for interference has been made out and thereby, give reasons for upholding or setting aside the arbitral award. In this case, the Division Bench of the Delhi High Court as well as the Apex Court found that the Single Judge Bench of the High Court failed to assign any reasons for upholding the Arbitral Award that directed the Respondent-Mr. Ajay Singh to refund the partly paid amounts to the Appellant- Mr. Kalanithi Maran, despite holding that it was the Appellant who breached the terms of the Agreement pertaining to SpiceJet takeover transaction.

Facts

(i) That the case pertained to a transaction involving one, Mr. Ajay Singh’s (the Respondent herein) takeover of a debt-ridden airline company, namely, SpiceJet Ltd. in which KAL Airways Pvt. Ltd. (KAL) and one, Mr. Kalanithi Maran (the Appellant herein), were shareholders. At the time of takeover, SpiceJet was mired in debt of approximately Rs. 2200 Crores. The Appellant- Mr. Maran had given personal guarantees as securities for repayment of loans taken with respect to SpiceJet Ltd.

(ii) That as per the terms of takeover in Share Sale and Purchase Agreement dated 29-01-2015 (Agreement), the Appellant and KAL had to transfer their entire shareholding in SpiceJet to the Respondent- Mr Singh for a nominal amount of Rs. 2/-. Additionally, they had to infuse Rs. 450 Crores in SpiceJet, but the Appellant and KAL only infused Rs. 350 Crores. The Respondent was aggrieved of the fact that the Appellant and KAL failed to fulfil their part of contractual obligation under the Agreement.

(iii)  That as per the terms of the Agreement, the Respondent had to issue Share Warrants to the Appellant and KAL which can get converted into equity shares, subject to necessary approvals. However, the Respondent alleged that as Bombay Stock Exchange (BSE) did not grant approval for issue of Share Warrants, hence, the same could not be issued to the Appellant and KAL.

(iv) Thus, the Parties resorted to arbitration proceedings, wherein the Arbitral Tribunal, vide Award dated 20-07-2018 as corrected on 20-09-2018 (Arbitral Award), held that the Appellant and KAL breached the terms of the Agreement by failing to infuse the balance Rs. 100 Crores, yet the Tribunal directed the Respondent to refund the amount already paid to him by the Appellant and KAL, as it was the deliberate inaction on the part of the Respondent that led to the BSE’s closure of the application for issue of Share Warrants to the Appellant and KAL. In fact, the Tribunal held that “the SSPA (Agreement) did not get frustrated or rendered impossibility by way of operation of law but because of in-action of the Respondents in pursuing the application as highlighted above. What is presently being styled as frustration or impossibility in law is a voluntary breach of contract which is self-induced by the Respondents and they cannot be allowed to take advantage of their own wrong.”

(v)  Aggrieved by the Arbitral Award, the Respondent filed a Petition under Section 34 of the Arbitration and Conciliation Act 1996 (Application for setting aside arbitral awards) before the Delhi High Court on the ground that when the Tribunal held that it was the Appellant and KAL who breached the Agreement, then it cannot direct the Respondent to refund the amount to them. The Single Judge Bench of the High Court, vide Order dated 31-07-2023, upheld the Arbitral Award on the following ground:

“83. To test the validity and legality of the impugned Award and the observations made therein the test of fundamental policy of law was also before this Court, however, upon a perusal of the Award, this Court does not find that the Award suffers from non-application of mind. Not only did the Tribunal go into elaborate details of the claims raised and submissions thereto made by the parties, it also appreciated the material on record and passed an Award which is supported by reasons. The inference drawn by the Tribunal based on the reasons provided by it do not constitute an interference which on the face of it is untenable or unreasonable. Under the scope of Section 34 of the Arbitration Act, this Court is to be concerned only about the aforementioned considerations to make an observation qua the impugned Award, without entering the merits of the case and the evidence in the matter, and in view of the findings of the Arbitral Tribunal with respect to the claims raised against refund of the amount, this Court is of the opinion that there is nothing perverse in the impugned Award to say that it is against the fundamental policy of law.”

(vi)  Aggrieved by the Order dated 31-07-2023 passed by the Single Judge Bench of the High Court, the Respondent and SpiceJet filed First Appeals in FAO(OS) (COMM) 179/2023 and FAO(OS) (COMM) 180/2023 respectively before the Division Bench of the High Court.

(vii)  The Division Bench of the High Court comprising of Justice Yashwant Varma and Justice Ravinder Dudeja, vide Order dated 17-05-2024, set aside the Order dated 31-07-2023 passed by the Single Judge Bench of the High Court and remanded the case back to the Single Judge for reconsidering the Section 34 Petition. The High Court further observed as follows:

(1)  That the Single Judge Bench had merely reproduced paragraphs from the Arbitral Award which had made significant observations and failed to deal with specific contentions raised on behalf of the Respondent herein with respect to the award of refund.

(2) Further, the Single Judge Bench failed to mention any reasons for holding that the Arbitral Tribunal was justified in directing the Respondent to refund the part payments to the Appellant and KAL under Section 65 of the Contract Act 1872[1]. In fact, the Single Judge Bench did not even examine the said provision while upholding the Award in that regard.

“97. An Award would be liable to be termed as a perversity if it were to fail to deal with contentions which may potentially impact its very foundation. If a party were to assert that a direction of the AT is contrary to the terms and conditions constituting the bargain between the parties, the same would be an aspect which would clearly merit a deeper scrutiny unless, of course, the Section 34 Court were to find the same to be ex facie fallacious or unsustainable. However, even if that were the conclusion which the court were to arrive at, it would be the judgment which must speak and reflect due consideration of such challenges.”

(3)  Thus, the Division Bench held that the correctness of the Award would have to be tested on the principle of perversity and patent illegality.

“104. An Award is not liable to be upheld or affirmed based on a mere or unreasoned reluctance to intervene or a disinclination to interfere. Viewed in any other light, the remedy of correction would itself be rendered meaningless. Unless the decision on a challenge to an Award is found to have been persuasively and convincingly answered, the very purpose of the remedy would be lost. The decision on a Section 34 petition would have to, thus, answer to the aforesaid precepts and be found to be reflective of a meaningful consideration and evaluation of the Award itself. With respect, we find that the judgment impugned before us clearly fails to meet those tests.”

Supreme Court

Aggrieved by the Order dated 17-05-2024 passed by the Division Bench of the High Court, the Appellant and KAL filed SLP (C) No. 14936 / 2024 and S.L.P.(C) No.14741/2024 before the Supreme Court. The three Judge Bench of the Apex Court, vide Order dated 26-07-2024, observed as follows:

“2. Interference with an arbitral award under Section 34 must be confined to the grounds which are permissible under the statute. But equally, the Judge hearing an application under Section 34 must apply their mind to the grounds of challenge and then deduce as to whether a case for interference within the parameters of Section 34 has been made out. Reading the order of the Single Judge, we find no discernible reason which has weighed with the Single Judge. There has been no consideration of the arguments which were urged before the Single Judge.”

Thus, based on the aforesaid observations, the Supreme Court upheld the Division Bench Order dated 17-05-2024 and requested the Ld. Chief Justice of the Delhi High Court to assign the hearing of the Section 34 Petition to any other Single Judge Bench other than the Judge who heard and passed the Order dated 31-07-2023 upholding the Arbitral Award. Accordingly, the SLPs were disposed off.

 

Harini Daliparthy

Lead Senior Associate

The Indian Lawyer

[1] Section 65 of the Contract Act 1872: Obligation of person who has received advantage under void agreement, or contract that becomes void.—

When an agreement is discovered to be void, or when a contract becomes void, any person who has received any advantage under such agreement or contract is bound to restore it, or to make compensation for it to the person from whom he received it.