Introduction

 

India has been viewed as a growing market and a promising business location for many multinationals and in furtherance of the same, has endeavoured to maintain that status through its policies and development plans. An essential plan of this development route is maintaining a healthy and conducive environment for dispute resolution including but not limited to arbitration. The Arbitration Award dated 21.12.2020 rendered by the Permanent Court of Arbitration (‘PCA’) in the case of Cairn Energy Plc. and Cairn UK Holdings Limited v. The Republic of India (‘Cairn Arbitration’) along with the Award dated 25.09.2020 rendered in the arbitration between Vodafone International Holdings BV and the Government of India (‘Vodafone Arbitration’) have set the tone for other possible future decisions. As reports suggest, the Government of India has challenged the Award passed in the Vodafone Arbitration before the Hon’ble Singapore High Court and also the Award passed in the Cairn Arbitration before a Hon’ble Court in Hague, the appeal in latter one being filed in March 2021.

 

In this Article, we attempt to briefly discuss the events that gave rise to Cairn Energy invoking arbitration under the India-UK Bilateral Investment Treaty (‘BIT’), explain the strategy adopted by Cairn Energy to execute the Award passed by PCA and at the same time shred some light on probable future complications that could be faced by the Government of India in the event Cairn Energy’s execution strategy sails through.

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Summary of the Transaction

 

Cairn India Holdings Limited (“CIHL”), a “non-Indian” corporation, was founded in Jersey Channel Islands in 2006 as a wholly owned subsidiary of Cairn UK Holdings Limited (“CUHL”), a UK-based company. CUHL transferred to CIHL shares representing the whole share capital of nine of its subsidiaries, all of which were involved in the Indian oil and gas sector.

 

Cairn India Limited (“CIL”) was established in India in August 2006 as a wholly owned subsidiary of CUHL. Under Cairn’s internal group reorganisation plan, CUHL sold its shares of CIHL to CIL (an “Indian” company), in October of 2006. Subsequently, in December of 2006, CIL offered up 30% of its stock in an Initial Public Offering (IPO) in the Indian markets. The resultant effect of this divestment was that CUHL became richer by approx Rs. 6101 Crores.

 

In 2012, India brought in an amendment in the Income Tax Act, 1961 mandating retrospective tax demands over deals going back to 1962 in which shares of “non-Indian” companies were transferred to an “Indian” holding company. By virtue of this amendment, the transaction executed between CIHL and CIL by CUHL came under the scanner, even though the very same transaction was cleared way back in 2006. It is around the same time that the Hon’ble Apex Court had rendered its decision in the case of Vodafone International Holdings B.V v. Union of India &Anr. reported in (2012) 6 SCC 613, ruling against the retrospective reading of the law by tax officials, however the Parliament introduced this legislation to circumvent the decision of the Hon’ble Apex Court. On first blush this may seem to be an over-reaching decision of the Parliament, however the very same situation arose in a very recent exchange between the Ld. Attorney General of India and the Hon’ble Judges of the Hon’ble Apex Court in the midst of a case pertaining to appointment of members of tribunals. The Ld. Attorney General of India, was heard stating “it was not correct to proceed on the basis that Parliament is helpless and has to accept Supreme Court judgments. Courts can pass any number of judgments. The Parliament can always say that we will not accept it because it is not in the interest of people. Parliament is entitled to override the judgment of the Supreme Court, within the contours of what is permitted”.

 

Though quite late, this whiff of money being pocketed by CUHL reached the eyes, nose and ears of the Income Tax Department (“I-T Department”) of Government of India in January 2014. The I-T Department initiated re-assessment proceedings against CUHL under Section 147 and 148 of the Income Tax Act, 1961, which provides for re-assessment in cases where income has escaped assessment. The I-T Department sought to identify un-assessed taxable income related to the above transactions pursuant to the group restructuring and subsequent IPO in India, undertaken by Cairn Energy.

 

As a result, the I-T Department passed an order against CUHL imposing a preliminary assessment of INR 10,247 crore tax liability whilst stating that CUHL made a capital gain of INR 24,503 crore in the internal group restructuring. CUHL feeling aggrieved by the same, appealed against this imposition of tax before the Income Tax Appellate Tribunal, Delhi and the High Court of Delhi. Simultaneously, in 2015 Cairn Energy invoked the procedures under the India-UK BIT to commence international arbitration proceedings against the Government of India. These proceedings were in opposition to the abovementioned measures imposed by the I-T Department and the Government of India stating that the retrospective taxation was in breach of the BIT which had a standard clause that obligated India to treat investment from UK in a “fair and equitable manner”.

 

After extensive arguments, the Permanent Court of Arbitration (PCA) pronounced its Award on 21.12.2020, holding that India was in breach of according guarantee of “fair and equitable treatment” to Cairn Energy under the BIT, which resultantly caused them substantial loss. The operative portion of the Award is reproduced herein for ready reference:

 

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“X. DECISION

2032. For the foregoing reasons, the Tribunal:

1. Declares that it has jurisdiction over the Claimant’s claims and that the Claimant’s claims are admissible;

2. Declares that the Respondent has failed to uphold its obligations under the UK-India BIT and international law, and in particular, that it has failed to accord the Claimants’ investments fair and equitable treatment in violation of Article 3(2) of the Treaty; and finds it unnecessary to make any declaration on other issues for which the Claimants request relief under paragraph 2(a), (c) and (d) of the Claimants’ Updated Request for Relief;

3. Orders the Respondent to compensate the Claimants for the total harm suffered by the Claimants as a result of its breaches of the Treaty, in the following amounts..”

 

Reports suggest that the PCA has ordered the Government of India to pay $1.2 billion (INR 8000 Crores approx.), plus interest and costs, to compensate Cairn.

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Execution of the Award by Cairn Energy

 

On one hand, it is learnt that the Award has been challenged by the Government of India since the Government believes that the dispute is fundamentally about “tax” and not about “investment”. The ground for appeal is based on India having sovereign right to tax an entity on grounds of tax avoidance. Needless to mention, the Government of India is vociferously contesting the Award since failure to do the same, will undoubtedly set a very important (bad and difficult for the Government of India; whereas good for multinational corporations) precedent in similar cases.

 

On the other hand, leaving no steps unturned, Cairn Energy has been constantly applying pressure on the Government of India since the start of 2021, to adhere to the Award. Turning their words into actions, they have reportedly proceeded to file execution applications for enforcement of the Award in various jurisdictions around the world viz. United States, United Kingdom, Canada, Singapore, Mauritius, France and the Netherlands.

 

Cairn Energy asserts that Indian assets like Air India are to be recognised as “alter ego” of India and that they should be held jointly and severally responsible for India’s debts, including from any judgment resulting from the recognition of the Award. A lawsuit filed before the US District Court for the Southern District of New York on similar lines if allowed would entitle Cairn Energy to seek the attachment of the assets of Air India in the United States, such as airplanes, immovable assets and bank accounts to recover the amount due as per the Arbitral Award.

 

Considering that the Government of India has to fight it out on foreign soil (more specifically the United States after filing of an execution application), we deem it fit to explain the position of alter ego in the United States. In the case of MCI Telecommunications v. O’Brien Mktg., reported in 913 F. Supp. 1536 (S.D. Fla. 1995), the US Court held that alter ego required three elements to be proved:

 

"(1) Control, not mere majority or complete stock control, but complete domination, not only of finances, but of policy and business practices in respect to the transaction attacked so that the corporate entity as to this transaction had at the time no separate mind, will or existence of its own; and

 

(2) Such control must have been used by the defendant to commit fraud or wrong, to perpetrate the violation of a statutory or other positive legal duty, or a dishonest and unjust act in contravention of plaintiff's legal rights; and

 

(3) The aforesaid control and breach of duty must proximately cause the injury or unjust loss complained of."

Given that the principle of alter ego can be invoked in the United States only after satisfaction is arrived at on all the above three grounds, we feel there is ample space for the Government of India to play around and curl out some arguments opposing the application of this principle.

 

Interestingly, while the execution application filed in the United States was the talk of the town and being reported the most, to everyone’s shock and surprise, it has now come to light that Cairn Energy has very recently obtained an attachment order from a French Court, wherein 20 properties of the Government of India are attached to the tune of 20 Million Euros. The Government of India denies having been served upon any such notice and/or order passed by the French Court however has stated that in the event such an order is passed, appropriate legal remedies will be resorted to.

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Conclusion

 

From the aforesaid scheme of things, we feel that the Government of India stands on a weaker footing in terms of opposing the Arbitral Award before the Court in Hague, but stands a good chance to defend attachment of India-owned properties under the principle of “alter ego”. Having said this, the recent decision of the French Court (though currently being denied by the Government of India), will help Cairn Energy put a foot in the door in all other countries where execution applications are filed or are going to be filed. A wise thing for the Government of India to do would be to file Caveats in all the respective countries where they foresee Cairn Energy filing execution applications. By doing so, at the least, the Government of India will be in a position to oppose attachment of properties, instead of getting into the rigmarole of filing applications either for vacation of attachment or filing appeal against attachment orders.

 

As much as the Government of India defends their action, the fact of the matter remains that there is an Arbitral Award passed against them to the tune to USD 1.2 Billion plus interest and costs, which as on date, is not stayed. Hence, Cairn Energy is well within its rights to seek enforcement of the said Arbitral Award.

 

Taking cue from Cairn Energy, Devas Multimedia Pvt. Ltd., has also shown its inclination to approach a Court in New York, United States for execution of an Arbitral Award passed in its favour and in furtherance thereto, attach the assets of Air India relying on the principle of “alter ego”. 

 

In wake of the foregoing, the Authors personal views are that it is best that the Government of India opts for settlement of the dispute with Cairn Energy. The reasons for the same are: (i) In the event India-owned assets start getting attached worldwide, getting the same released is not going to be easy (ii) Once any Court of Law in any country has passed an order for attachment, it is going to be fairly easy for Cairn Energy to place reliance on that Judgment/ Order and press for similar reliefs in another Country (even though persuasive) (iii) Contesting the Arbitral Award along with Execution applications spread out across the globe at the same time seems a little farfetched and difficult (iv) Considering that other companies have started following the route adopted by Cairn Energy, no sooner than later, the Government of India will be left with fighting not only one company but several companies in multiple jurisdictions (v) The Government of India would not intend to join the rather infamous group of countries such as Pakistan and Afghanistan whose assets have been attached in foreign countries (vi) The speed at which Cairn Energy is approaching Courts across the globe and also getting favourable orders, it might be too late in the day for the Government of India to enter into a golden handshake. Reports suggest that Cairn Energy has reached out to the Government of India for an amicable settlement, and same is reciprocated by the Government of India as well. If this be true, we feel that without any further delay, an amicable settlement should be worked out, saving the Government of India from facing the brunt on a larger scale and losing out on future economic opportunities with multinational corporations.