Delhi High Court Sets Aside Orders Upholding Arbitral Award In Favour of Kalanithi Maran In SpiceJet Dispute, Quashes ₹270 Crore Payment Directive

The arbitral award directed SpiceJet to refund ₹ 270 crore to Maran, with additional interest rates of 12% per annum on warrants and 18% per annum on the awarded sums if not paid timely.

On July 31, 2023, Justice Chandra Dhari Singh upheld the tribunal's award and held that SpiceJet failed to demonstrate any illegality in the arbitral decision. The court dismissed Maran's request to reinstate his 58.46% stake in SpiceJet and his demand for damages.

Thereafter, SpiceJet and Ajay Singh appealed the decision of the Justice Chandra Dhari Singh.

Brief Facts:

The claim before the Arbitral Tribunal (AT) was brought by KAL Airways Private Limited and Mr. Kalanithi Maran against the appellants, SpiceJet Limited and Mr. Ajay Singh. The AT considered the claims laid by KAL and Mr. Maran as well as the counterclaims filed by the Appellants. The dispute arose from a transaction involving the takeover of SpiceJet by Ajay Singh from KAL and Mr. Maran. The Appellants contended that at the time of the takeover, SpiceJet was burdened with debts amounting to approximately INR 2200 crore, and the transaction aimed at taking over the debt-ridden company and absolving Mr. Maran of the personal guarantees provided as security for the repayment of loans related to SpiceJet.

The Appellants submitted that in consideration of the takeover offer, the entire shareholding of KAL and Mr. Maran in SpiceJet was to be transferred to Ajay Singh for a nominal consideration of INR 2. Additionally, KAL and Mr. Maran were obligated to bring in "Committed Support" of INR 450 crore to SpiceJet. The Appellants alleged that KAL and Mr. Maran failed to fulfil their contractual obligations, ultimately infusing only INR 350 crore. The takeover, which occurred in February 2015, was based on a Share Sale and Purchase Agreement (SSPA) dated January 29, 2015. According to the Appellants, the issuance of Share Warrants and Non-Convertible Redeemable Preference Shares (CRPS) was contingent upon adjustments to loan amounts and unsecured advances totalling INR 229 crore, a Committed Support of INR 450 crore from KAL and Mr. Maran, and the final part of the Committed Support amounting to INR 100 crore, to be completed with the release of a fixed deposit of an equivalent amount in the name of Mr. Maran into Designated Account 2.

The Appellants argued that disputes arose due to KAL and Mr. Maran's failure to infuse the full INR 450 crore and the Bombay Stock Exchange's (BSE) refusal to approve the issuance of Warrants. They argued that the Warrants could not be issued despite all bona fide efforts by SpiceJet and Mr. Ajay Singh, and therefore, the non-issuance of Warrants should not be viewed as a breach of the SSPA by SpiceJet or Mr. Ajay Singh.

The Appellants also argued that the CRPS transaction could not be completed because KAL and Mr. Maran failed to pay the full consideration as per the terms of the SSPA. The Appellants' challenge in the Delhi High Court (“High Court”) focused on the AT's direction for a refund of INR 270,86,99,209 paid by KAL and Mr. Maran for the issuance of CRPS, the imposition of 12% interest pendent lite on Warrants, and post-award interest at the rate of 18% from the last due date in terms of the Arbitral Award.

The Appellants contended that the direction for a refund violated Section 65 of the Indian Contract Act, 1872, arguing that it amounted to a rewriting of the contract since the SSPA did not envisage any refund of funds received for CRPS. They further argued that AT's finding that KAL and Mr. Maran were guilty of breach made the refund unjustified. These submissions were addressed before the Single Judge of the High Court, who held that the AT provided adequate reasoning for the refund, noting that out of the total consideration of INR 220,02,93,039, KAL and Mr. Maran had failed to deposit INR 100 crore.

The Single Judge found that the Tribunal's decision did not contravene the Arbitration Act or any substantive law and that the Tribunal had provided sufficient reasons for its findings. The court observed that the Tribunal's conclusions were not perverse and did not violate the fundamental policy of law, and thus, the Award could not be deemed patently illegal. Feeling aggrieved, Spice Jet and Mr. Ajay Singh appealed the decision of the Single Judge.

Contentions of the parties:

The Appellants challenged the arbitral award on several grounds, arguing that the direction for a refund violated the SSPA and improperly altered its terms. They contended that the award effectively rewrote the SSPA by mandating a premature refund of amounts paid towards CRPS, which was not stipulated in the original contract. They emphasized that the CRPS was a debt instrument designed to be redeemable after eight years, with dividends payable only if SpiceJet had a surplus profit.

They further argued that since Mr. Maran failed to infuse the agreed INR 450 crores into SpiceJet, directing a refund was even more unjustifiable. They noted that the interest burden under the SSPA for the CRPS would have been approximately INR 130.10 crores over eight years, but the award imposed a liability exceeding INR 184.64 crores in interest alone.

Additionally, they challenged the award of pendent lite interest at 12% on the refunded amount for Warrants, arguing it was unjustifiable as neither SpiceJet nor Ajay Singh had breached the contract, and the inability to issue Warrants was beyond their control.

Finally, they contended that the AT failed to provide reasoning for awarding 18% interest post-award, which contradicted the amendments in Section 31 of the Arbitration and Conciliation Act, of 1996. They argued that the AT did not consider the "current rate of interest" as mandated by the amended law, making the interest rate arbitrary and excessive.

On the other hand, the Respondent argued that the scope of appeal under Section 37 of the Arbitration Act is limited, focusing only on patent illegality and perversity in the award, not on the merits of the case. It argued that the Appellants did not contest the refund of INR 308.21 crores for Warrants but focused on the refund related to CRPS and the interest rates.

Observations by the High Court:

The High Court considered the primary contention regarding the direction for the refund of INR 270,86,99,209/-. The Appellants argued that this directive must be scrutinized under Section 65 of the Indian Contract Act, of 1872, which deals with the restitution of benefits when an agreement is discovered to be void or becomes void. They contended that the refund direction violated the SSPA, under which there was no stipulation for such repayment, and any repayment obligation was intended to arise only after eight years.

The Appellants maintained that, in the absence of any breach on their part, compelling them to repay the received amounts was unjustifiable. The Single Judge's judgment noted this argument, particularly highlighting the Appellants' stance that the AT's order for refund was unjustifiable, given that the AT had found KAL and Mr. Maran to be in breach of their obligations under the SSPA.

The Single Judge's judgment, however, did not thoroughly address these specific contentions. Instead, it relied heavily on excerpts from the Award, which justified the refund of INR 270,86,99,209/-. The Single Judge noted that the AT observed that KAL and Mr. Maran's alternative plea based on Section 65 merited consideration despite the contractual arrangements not being void.

The High Court noted that an award is perverse if it fails to address contentions that could significantly impact its foundation. If a party argues that an AT's directive contradicts the contractual terms, this contention deserves thorough scrutiny unless deemed fallacious by the Section 34 Court. It held that the judgment must reflect a careful consideration of such challenges, which the Single Judge's judgment did not adequately provide. Thus, the High Court found merit in the Appellants' arguments.

The High Court noted that the Single Judge did not substantively address these arguments. The Appellants consistently maintained that without a breach on their part, the refund was unjustified, especially given AT's findings that KAL and Mr. Maran were in breach of their contractual obligations. It noted that the Single Judge merely summarized these contentions and concluded that the procedure adopted by the AT did not contravene any substantive law, without a detailed examination of the applicability of Section 65 or addressing the specific breaches by KAL and Mr. Maran.

The High Court noted that there was a failure to engage with the arguments pertaining to Section 65 and the contractual breaches. The Single Judge contention that the AT provided "adequate reasoning" for the refund lacked an exploration of whether the reasoning aligned with the principles of Section 65 and whether the AT's directions resulted in a de facto rewriting of the contract.

Moreover, concerning the award of interest, the Appellants argued that the AT's imposition of 12% pendente lite interest for Warrants and 18% post-award interest lacked statutory basis and sufficient reasoning. The Single Judge acknowledged the AT's discretion to award interest but did not evaluate whether this discretion was exercised correctly in light of the statutory amendments brought by the 2015 Amendment Act, which prescribed post-award interest at a rate of 2% above the prevailing "current rate of interest."

The High Court held that the statutory amendments shifted the paradigm for awarding post-award interest, yet the AT did not discuss or identify the "current rate of interest" prevailing at the time of the Award. It held that this oversight is significant and the Single Judge's judgment did not reflect a consideration of this statutory change or its implications.

The High Court referred to the decision of the Supreme Court in Gokul Chandra Kanungo and Mcdermott International Inc. v. Burn Standard Co. where it was emphasized that there is a necessity for the AT to assign reasons when exercising discretion to award interest. The High Court noted that the failure of the AT to provide such reasoning was a point raised by the Appellants but left unaddressed by the Single Judge.

The High Court referred to Morgan Securities and Credits Private Limited vs. Videocon Industries Limited where the SC addressed the discretion of arbitrators in awarding post-award interest under Section 31(7)(b) of the Arbitration Act.

The Supreme Court noted that while both clauses (a) and (b) of Section 31(7) are qualified, their qualifications differ. Clause (a) is conditioned by the arbitration agreement, and clause (b) by the arbitration award. The placement of the phrases within the clauses is pivotal. In clause (a), “unless otherwise agreed by the parties” qualifies the entire provision, while in clause (b), “unless the award otherwise directs” qualifies only the rate of post-award interest.

The purpose of granting post-award interest, as explained by the Supreme Court, is to prevent the award debtor from delaying payment. Arbitrators consider various factors, such as the financial standing of the award-debtor and the circumstances of the parties, before awarding interest. The discretion of the arbitrator, unless expressly restricted, should be exercised in good faith, considering relevant factors, and acting reasonably and rationally.

This position was reaffirmed in Vedanta Limited v. Shenzhen Shandong Nuclear Power Construction Company Ltd, where the Supreme Court emphasized that arbitrators must exercise their discretion reasonably and consider various relevant factors when granting interest. Section 31(7) is divided into two parts: clause (a) deals with interest for the pre-reference and pendente lite period, subject to the parties' agreement, while clause (b) pertains to the post-award period and is not subject to party autonomy. The statutory rate of interest for the post-award period is 2% higher than the prevailing rate on the date of the award.

In Vedanta, the Supreme Court outlined factors arbitrators should consider when awarding interest, such as the loss of use of the principal sum, the period over which interest should be awarded, prevailing international interest rates, and whether the interest rate is commercially prudent. The interest rate must be compensatory, not punitive or unconscionable.

The High Court observed that while the arbitrator's power to award interest was not in question, the discretion must be exercised with reasoned judgment and based on relevant considerations. Therefore, the High Court held that the Single Judge did not adequately consider the principal challenges raised in the Section 34 petitions.

Therefore, the High Court remanded the matter for the Section 34 petitions to be reconsidered. The appeals were allowed and the single-judge judgment was set aside.

Case Title: Ajay Singh and Anr vs Kal Airways Private Limited & Anr.

Citation: 2024 LiveLaw (Del) 612

Case Number: FAO(OS) (COMM) 179/2023

Advocates for the Appellant: Mr. Amit Sibal, Sr. Adv. with Mr. K.R. Sasiprabhu, Mr. Goutham Shivshankar, Mr. Tushar Bhardwaj, Mr. Vinayak Maini, Mr. Kartikeya Asthana, Mr. Vishnu Sharma, Mr. Manan Sishodia and Md. Ilyas, Advs.

Advocates for the Respondent: Mr. Maninder Singh, Sr. Adv. with Ms. Nandini Gore, Ms. Sonia Nigam, Mr. Prabhas Bajaj, Mr. Ajay Sabharwal, Mr. Rajat Dasgupta & Mr. Akarsh Sharma, Advs.

Date of Order:17 May 2024

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