Why Cairn moved to seize assets everywhere but India

In 2012, India amended the Income Tax Act to tax the income from the transfer of shares of a company incorporated outside India, if the shares of the company derived their substantial value from assets located in India. In 2016, India raised a tax demand of $4.4 billion on Cairn for tax payable on its 2006 corporate restructuring on the basis of the 2012 amendment.

When Cairn did not pay, India seized various of assets of Cairn. On December 21, 2020, an international arbitral Tribunal seated in the Netherlands ruled that these actions of India breached the 1994 India-UK Bilateral Investment Treaty (BIT).

FET & BIT

The central argument of Cairn was that India’s retroactive application of income tax, i.e., taxes on transactions that were not taxable at the time the transactions occurred, violated the Fair and Equitable Treatment standard (FET) in the BIT. The Tribunal looked at ‘general principles of law’ to determine the meaning of FET. Tribunal found that retroactive amendments violate FET unless there is a compelling ‘public policy objective’ that warrants not only the regulatory change in general but also the retroactive application of that change. Tribunal then ruled, on evidence, that India had failed to prove its averments that public policy objective was found in curbing the use of tax havens and plugging loopholes.

India had also argued that claim was premature and thus inadmissible. Cairn had not exhausted local remedies such as a constitutional challenge to the 2012 amendments in Indian courts. The Tribunal rejected this contention noting that there was no requirement of exhaustion of local remedies in the BIT. Thus, the BIT provided protections to foreign investors that were independent of, and parallel to, local remedies.

The Tribunal ordered the Indian government to pay Cairn damages of $1.2 billion plus interest and costs, taking the award amount to over $1.7 billion (Award). India has filed an appeal in a Dutch Court of Appeal to set aside this Award principally on the ground that taxation related matters are not covered by the BIT. That is not unusual as such appeals are almost always filed by losing parties.

Meanwhile, as per news reports, Cairn has initiated proceedings in courts of the US, the UK, France, Quebec, the Netherlands and Singapore to enforce the Award. Since the Award is recognised by the New York Convention, Cairn can identify and seize Indian assets located in various countries that are party to the Convention. These assets may include bank accounts and properties of Indian state-owned companies (public sector banks, Air India, etc.), apart from assets of the Indian government itself. These enforcement proceedings generally argue that the Indian government owned entities are legally not distinct from the State, and this argument has significant merit in various countries. Moreover, pending recovery of the Award amount, Cairn may seek interim injunction against these entities preventing them from alienating assets located abroad.

A significant chunk of PSUs are publicly listed companies that have thousands of investors, even if government owns majority stake. It is therefore open to these PSUs to resist enforcement on the ground that they have existence distinct from the government. Government may also well argue that foreign courts cannot injunct assets of a sovereign, and the government is immune from civil proceedings. Only time will tell if the foreign courts buy these arguments.

Enforcement proceedings

Whatever be the outcome, the strategy adopted by Cairn is interesting. Enforcement proceedings have been initiated in several jurisdictions except India. This is rather unusual as India is the natural and obvious jurisdiction for enforcement, given most Indian government assets are located in India.

One reason for this strategy may be that larger sums can be realised through Western courts. The courts there tend to award punitive damages and interest, and various costs (such as fees of lawyers and arbitrators), which an Indian court may hold to be against public policy and refuse enforcement.

Second reason may be the cautionary tale of the $1.2 billion award in favour of Devas Multimedia in its dispute with Antrix Corporation and ISRO. Apart from the Supreme Court staying the enforcement of the Devas award, the Central government took the unprecedented step of winding up Devas, a move that the NCLT upheld recently. Simply put, Devas would cease to exist as an entity and there may be no one left to collect the award.

Third reason may be that Indian Arbitration Act can be amended by decree to frustrate any enforcement proceedings. One may look at the Arbitration and Conciliation (Amendment) Ordinance, 2020, for example. It was neither preceded by stakeholder consultation nor did it emanate from any judicial precedent. Rather, it was arguably tailored to free the government from any deposit of award amount in Devas enforcement proceedings. This does not inspire confidence in seeking recourse to Indian courts that are bound by such amendments.

In conclusion, the Statement of Objects and Reasons to the Arbitration and Conciliation (Amendment) Act, 2015 said “India has been ranked at 178 out of 189 nations in the world in contract enforcement, it is high time that urgent steps are taken to facilitate quick enforcement of contracts, easy recovery of monetary claims and award of just compensation for damages suffered and reduce the pendency of cases in courts and hasten the process of dispute resolution through arbitration, so as to encourage investment and economic activity.” It appears little has changed since.

(The authors are Managing Partner and Associate respectively of Advaya Legal, a law firm)

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