Fraud Between Contracting Parties Does Not Bar Arbitration: Supreme Court Restores Full USD 60 Million Protection in Avitel vs HSBC Dispute
Overview of the Dispute
The Supreme Court of India delivered a significant ruling in Avitel Post Studioz Limited & Ors. vs HSBC PI Holdings (Mauritius) Limited, addressing two critical and interrelated questions: first, the scope of the so-called "fraud exception" to arbitrability under Indian law; and second, the extent of interim protection available to a foreign award-holder under Section 9 of the Arbitration and Conciliation Act, 1996 pending enforcement proceedings under Section 48.
The case arose from cross-appeals — Civil Appeal No. 5145 of 2016 filed by Avitel Post Studioz Limited ("Avitel India") and its promoters (the Jain family), and Civil Appeal No. 5158 of 2016 filed by HSBC PI Holdings (Mauritius) Limited ("HSBC") — both challenging an interlocutory order of the Bombay High Court Division Bench dated 31.07.2014.
Background Facts
On 21.04.2011, HSBC and Avitel India executed a Share Subscription Agreement ("SSA") under which HSBC invested USD 60 million in Avitel India's equity capital to acquire a 7.8% stake in its paid-up capital. The SSA incorporated a dispute resolution mechanism providing for Singapore-seated SIAC arbitration, with the following key clause:
"16.1.1. Any dispute, controversy or claim arising out of or in connection with this Agreement, including any question regarding its existence, validity, interpretation, breach or termination shall be referred to and finally resolved by binding arbitration at the Singapore International Arbitration Centre ("SIAC") in accordance with the International Arbitration Rules in force at the date of this Agreement."
A Shareholders' Agreement ("SHA") dated 06.05.2011 was subsequently executed, containing an identical arbitration clause.
HSBC's case was that the Jain family had represented that the Avitel Group was at an advanced stage of finalising a contract with the British Broadcasting Corporation ("BBC") to convert the BBC's film library from 2D to 3D — a contract expected to generate USD 300 million in its first phase and ultimately over USD 1 billion. HSBC contended that the investment of USD 60 million was specifically sought to enable Avitel Dubai (a wholly-owned subsidiary of the Avitel Group) to procure equipment for servicing this BBC contract.
In early April 2012, HSBC grew suspicious about the Avitel Group's operations and appointed Ernst & Young and KPMG Dubai to investigate. The preliminary findings indicated, inter alia, that:
- The purported BBC contract was non-existent and had been fabricated to induce HSBC's investment.
- Approximately USD 51 million out of the total USD 60 million received by Avitel Dubai appeared to have been diverted to entities connected with the Jain family rather than utilised to purchase equipment.
Initiation of Arbitral Proceedings and Emergency Relief
On 11.05.2012, HSBC issued notices of arbitration to the SIAC. An Emergency Arbitrator, Mr. Thio Shen Yi SC, was appointed on 14.05.2012. The Appellants' challenge to this appointment was rejected by the SIAC on 17.05.2012.
The Emergency Arbitrator passed two Interim Awards dated 28.05.2012 and 29.05.2012 (one each under the SSA and SHA respectively), directing the Appellants and Avitel Dubai to refrain from disposing of, dealing with, or diminishing the value of their assets up to USD 50 million, and permitting HSBC to furnish copies of the Interim Awards to financial institutions holding the Appellants' accounts to seek freezing of those accounts.
On 27.07.2012, the Emergency Arbitrator amended both Interim Awards to additionally direct that the Appellants and Avitel Dubai cease and desist from interfering with Ernst & Young's and KPMG Dubai's ongoing investigations into the financial affairs of Avitel Dubai and Avitel Mauritius.
Section 9 Proceedings Before the Bombay High Court
On 30.07.2012, HSBC filed Arbitration Petition No. 1062 of 2012 before the Bombay High Court under Section 9 of the Arbitration and Conciliation Act, 1996, seeking directions requiring the Appellants to deposit security to the extent of HSBC's claim.
On 03.08.2012, a learned Single Judge of the Bombay High Court froze a Corporation Bank account of the Appellants, permitting withdrawal of only INR 1 crore before the freeze took effect.
Meanwhile, on 17.12.2012, the three-member SIAC Arbitral Tribunal — comprising Mr. Christopher Lau SC (Chairman), Dr. Michael C. Pryles, and Justice (Retd.) Ferdino I. Rebello — passed a unanimous final partial award on jurisdiction, dismissing the Appellants' jurisdictional challenge and affirming that allegations of fraud and complex factual issues are arbitrable under Singapore law.
On 22.01.2014, the learned Single Judge of the Bombay High Court directed the Appellants to maintain a deposit of USD 60 million in their Corporation Bank account, finding on a prima facie basis that HSBC had a strong chance of success in the final arbitral proceedings.