Fiat Justitia National Moot Court Competition
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Dr.Ambedkar Government Law College, Chennai
High Court Buildings, Chennai, Tamil Nadu, India
Dates of moot in 2014-15
20, 21, 22 February 2015
Moot problem in 2014-15
1. The ebb and flow of the Indian economy over thepast decade has made the fortunes of many and cast ruin upon others. One suchcompany that had to navigate the tumultuous winds of the economic downturnwhile operating its commercial airline, ‘Bel Air’ was Belladonna AirwaysPrivate Ltd. (‘BAPL’). BAPL, a private limited company incorporated under theIndian Companies Act, 1956, was widely known in the airline industry as aplayer which pushed the boundaries of competition through its flash sales andsteep discounts.
2. Indeed, BAPL had been founded in the year 2001with the vision of making air travel affordable to India’s middle class. Thisvision of opening the sector to a vast, yet untapped, segment of the populationwas shared by two young entrepreneurs, Mr. Ali Azad and Mr. Dhiren Dalmia, whosecured financing and set up BAPL to achieve the same. The whole of theshareholding in BAPL was divided equally between Mr. Azad and Mr. Dalmia, andthey also managed the business themselves although Mr. Azad was the ManagingDirector of the company. Initially, BAPL’s low fares secured it a sizeablemarket share as against more established airlines and made it a darling of themasses over the next decade.
3. However, BAPL eventually found itself introubled waters when the Competition Commission of India, in January 2011,commenced an inquiry into its ‘abnormally low fares’ under Section 19 of theCompetition Act, 2002. After six months, however, the CCI closed the said inquiryfollowing a report by the Director-General with a categorical finding thatthere was no evidence of any contravention of the law.
4. Despite perfecting the legal niceties of itsbusiness practices, however, BAPL soon began to feel the heat from the economicrepercussions of the same. Mr. Dalmia soon understood that, while BAPL remainedthe country’s fastest growing airline, they would soon require investors withdeeper pockets than theirs to fuel the growth of the airline and to keep itsustainable in the face of rising fuel prices. He also understood that hislong-time friend, Azad, no longer had the appetite to run the business and thathe would fold before the first commercially lucrative offer that was made tohim.
5. Indeed, before Mr. Dalmia could secure asuitable buyer, Azad had entered into a Letter of Intent dated 09.09.2012 withone Mr. Chengalvaraya Wadiyar to sell his entire shareholding in BAPL for a sumof Rs. 300 crores through a contract to be executed within a period of sixmonths. Although the buyer was not of Dalmia’s choosing, he did not oppose thetransaction as Wadiyar, a liquor baron with a billion dollar empire stretchingacross the world, was a client who regularly chartered private jets &helicopters from BAPL for use by him and his family members. Moreover, Wadiyarcould also procure the economic backing required to realize Dalmia’s vision ofachieving lower fares than any other airline across India.
6. Azad, on the other hand, was satisfied with asmooth exit from BAPL. Azad, however, saw the need for a sustainable source ofincome. Towards this end, he also commenced planning a helicopter rental lineof his own to make better use of his experience and contacts acquired duringhis stint at BAPL. He also understood that the ideal launch pad for his newbusiness would be to procure the contract for helicopter rentals to Wadiyar,who had currently entered into a 5-year contract for the same with BAPL.Dalmia, who wanted to have the transaction executed smoothly and also to helphis long-time friends, informally agreed to assign the same to Azad withWadiyar’s consent.
7. With the stipulated date of execution of thecontract nearing, Dalmia and Azad began preparing the necessary documents andfilings to be made in consonance with the same. In these circumstances, on01.03.2013, eight days before the execution of the proposed Shareholders’Agreement, an e-mail was received by Azad from Wadiyar stating that the entiresale consideration could not be arranged for upfront payment and, consequently,the transaction would have to be suitably modified. Azad, who had already takensteps in furtherance of the LOI, had little option but to follow the same.However, he insisted on a transfer of 18% of the total shareholding (36% ofAzad's share) to his wife Nirupama Ali, who would then transfer theshareholding to Wadiyar. Consequently, Azad, Nirupama Ali and Wadiyar enteredinto a fresh LOI dated 04.03.2013 whereby Wadiyar would purchase 25% of theshares in BAPL for a first tranche consideration of Rs.150 crores. Theremaining portion of Azad’s shareholding and that of his wife would also betransferred in the second tranche to Wadiyar for a sum of Rs. 150 crores, whichwas to be paid after a period of 3 months and which was split proportionately betweenNirupama Ali and Azad (18:7). The shares transferred in the first tranche weremortgaged by Wadiyar with Azad and his wife as security for the payment of Rs.150 crores for the second tranche.
8. Pursuant to the amended LOI, Azad, Nirupama,Wadiyar and Dalmia (on behalf of BAPL) executed a Shareholders’ Agreement dated09.03.2013 (‘SHA’) whereby the transfer of Mrs. and Mr. Ali’s shares in BAPLwas effected as stipulated in the amended LOI. The LOI, which was dulyregistered and also stamped for an amount of Rs.100, also stipulated theassignment of the Helicopter Rental Agreement by BAPL to Azad as a conditionprecedent to be completed within 30 days and as a corollary of which, Azadresigned as Managing Director, before closing the transaction. BAPL was to paya sum of Rs. 10 crores to Azad in the event of a failure to assign the HRA toAzad within a period of 3 months. The SHA stipulated arbitration as the disputeresolution mechanism. Pursuant to a consequential side letter issued on10.03.2013, Wadiyar mortgaged 25% of the total shareholding transferred to himunder the Agreement with Azad and his wife as security for payment of Rs.150crores. Pursuant to the SHA, Azad resigned as the Managing Director of BAPL.Subsequent thereto, a board meeting was also convened by Dalmia to appointDalmia as the Managing Director.
9. Much to Dalmia’s shock, he realized thatWadiyar was himself not in a position to procure funding for BAPL and, despitebeing aware of the same, Azad had continued with the transaction withoutinforming him of the same. Angered by what he saw as a fraudulent conduct byhis erstwhile business partner, Dalmia refused to assign the contract to Azad.When Azad sent a notice of winding up to BAPL for the payment of thecontractual amount of Rs. 10 crore, (after the stipulated period of 3 monthshad passed) BAPL replied refusing to pay the said amount, despite admittingthat, the same was due strictly as per the contract between the parties.
10. Wadiyar, also realizing that BAPL would notremain sustainable for much longer, refused to pay the amounts payable by himfor the second tranche to Azad alleging that the transaction itself wasunenforceable. Azad and Nirupama Ali, who required the HRA as well as theremaining consideration or some form of security to obtain a loan and begin hisproposed business, hastily issued notices seeking arbitration in accordancewith the SHA and, thereafter, as there was no reply issued by BAPL or Wadiyar,approached the Madras High Court by way of an Application filed under Section11 of the Arbitration and Conciliation Act, 1996 on 06.08.2013, to appoint anarbitral tribunal as stipulated thereunder.
11. Wadiyar promptly entered appearance in thiscase of Azad Ali and anr. v. BAPL & anr., O.P. No. 9180 of 2013, and opposedthe appointment of an arbitrator, challenging the very arbitrability of thetransaction. However, the Honorable High Court, vide its order dated26.09.2013, constituted an arbitral tribunal in accordance with the terms ofthe SHA and referred the dispute, including the objections to jurisdictionraised by Wadiyar, to the said Tribunal.
12. The Tribunal, which convened its first sittingon 09.11.2013, worked at a pace which rivaled arbitrations before the bestinstitutional tribunals in the world, and after a detailed hearing of allparties, including BAPL, which had entered appearance, passed an award on02.03.2014 (‘Award’) in favour of Mr. and Mrs. Azad Ali, directing as follows:
“i. 25% of Mr. Wadiyar’s shareholding shall beliable to be brought to sale by the Claimants (Mr. and Mrs. Ali) as stipulatedin the SHA & the side letter dated 10.03.2013, to appropriate the proceedsof the same towards recovery of Rs. 150 crore and that Mr. Wadiyar shall beliable for any balance sum payable after the above sale and the Respondentsshall take all necessary steps to effectuate such transfer of the shares to thethird party purchaser. Mr. and Mrs. Ali are also given permission to purchase theshares themselves.
ii. As the 2nd Respondent had not assigned the HRAin favour of the Claimant as stipulated in the SHA, the 2nd Respondent shall beliable to pay the sum of Rs. 10 crore to Mr. Azad Ali.”
13. Aggrieved by the said Award, petitions were filedby Wadiyar (in ChengalvarayaWadiyar v. Azad Ali &anr., O.P. No. 121 of2014) and BAPL (BAPL v. Azad Ali and anr., O.P. No. 122 of 2014) before theMadras High Court, under Section 34 of the Arbitration and Conciliation Act,1996 challenging the validity of the same in the month of April, 2014. TheHonourable Madras High Court, taking into consideration the differentobjections which were raised in each of these petitions, heard the mattersseparately.
14. On 29.04.2014, the Honourable High Court passeda final order in O.P. No. 122 of 2014 dismissing the objections raised by BAPLas regards the stamping of the SHA as well as the validity of the assignment,and upholding the Award. However, on 30.04.2014, the High Court disposed ofO.P. No. 121 of 2014, allowing the objections raised by Wadiyar in relation tothe arbitrability of the mortgage, observing that “The enforcement of themortgage could not have been raised as an issue in the arbitration and, as thesame is severable from the remaining portion of the award, the relief grantedby the Arbitral Tribunal directing the 1st Respondent therein to transfer 25%shareholding in BAPL to the Claimant is set aside. The Claimant (1st Respondentherein) is at liberty to pursue other remedies available to him under law.”Both the orders were confirmed by the Division Bench of the Court by ordersdated 25.06.2014 and 26.06.2014 respectively.
15. In the meanwhile, Azad and Nirupama proceededto enforce the award and on 20.03.2014, Azad bought the 25% of the shares inBAPL belonging to Wadiyar, that were mortgaged. The purchase price of theshares was Rs. 25 crores. In the meanwhile, differences arose between Dalmiaand Wadiyar and hence, despite the protests of Wadiyar, BAPL, under the controlof Dalmia, registered Azad in its Register of Members as a shareholder to theextent of 25% of its equity share capital. Azad immediately proceeded to filepetitions to wind up BAPL on March 29, 2014 before the Madras High Court.However, on O.P. No. 121 of 2014 filed by Wadiyar being allowed, BAPL rectifiedits Register of Members to reflect Wadiyar as the owner of the 25% of sharecapital, which was earlier recorded as owned by Azad. On 01.06.2014, therefore,the Madras High Court, dismissed the winding up petition filed by Azad for lackof locus standi on his part, holding that he was no longer a member of thecompany as per its Register of Members and that the award, in his favour, wouldnot constitute a debt for the purposes of winding up. The Court held that, eventhough the said amount might have constituted an admitted debt dehors the award, it had now becomerecoverable only as an amount due under the award and hence, was not a debt forthe purposes of winding up. The said order was confirmed by the Division Benchof the Madras High Court on 30.06.2014. To add to the woe of the Alis, NirupamaAli moved a mortgage suit on 30.06.2014 before the Madras High Court in respectof the shares, stating that the award had been set aside for a lack ofjurisdiction and hence, she was filing the suit in pursuance of the originalcontract. However, the Court dismissed the suit on the very same day, statingthat the mortgage suit was not enforceable as the underlying transaction wasillegal and hence, dismissed the suit. This order was confirmed by the DivisionBench of the Madras High Court on 15.07.2014.
16. BAPL & Azad promptly filed Special LeavePetitions against the orders dated 25.06.2014 & 26.06.2014 respectively.Azad also filed a Special Leave Petition against the order dated 30.06.2014 ofthe Division Bench, dismissing his appeal against the order of the CompanyCourt (Madras High Court in exercise of its Company Jurisdiction). Similarly,Nirupama Ali filed a Special Leave Petition against the order of the DivisionBench of the Madras High Court passed on 15.07.2014. The Honourable SupremeCourt, while admitting all the above Petitions on 02.08.2014, observed thatthese Petitions provided the Court an opportunity for a reconsideration ofseveral questions of arbitration and company law that had vexed courts in Indiaand, as such, the same merit reference to a larger bench. Subsequently, theChief Justice of India, in exercise of his powers, constituted a bench of fivejudges to hear all the SLPs together. Some of the issues that the Court hasframed are as follows:
A. Do the provisions of the Companies Act,2013 apply in the present case or are the rights of parties to be determinedunder the 1956 Act?
B. Is the issue of mortgage of sharesarbitrable?
C. Does a sum payable under an arbitral awardconstitute a debt for the purposes of winding up a company?
NOTE: The Court has indicatedthat earlier decisions of smaller benches of the Court on the issues that ariseon the present proceedings will be reconsidered by theCourt.
TheProblem has been drafted by Mr. Arun Karthik Mohan, K. Prahalad Bhat&Subhang P Nair, Advocates, Madras High Court