Madras HC Holds Execution Petition Over Beneficial Ownership Of Award Debtor In Shares Held Ostensibly By Third Parties Maintainable

Madras High Court has recently held that the execution petition filed by a company incorporated in the Republic of Marshall Islands, in pursuance of a foreign arbitral award in its favour, against another company with its registered office in Dubai is maintainable before it.

The single-judge bench of Justice Senthilkumar Ramamoorthy has held that the consecutive third execution petition filed by Award Holder, Pueblo Holdings Limited, seeking the enforcement of the decree against UAE based Award Debtor, Emirates Trading Agency LLC, by attaching the assets held ostensibly by third parties in the prominently Chennai based ETA Group is maintainable.

i) Whether the Award Holder has established that the other respondent parties are debtors of award debtor or hold the shares as ostensible owners for and on behalf of the Award Debtor?

ii) Whether the Madras High Court Division Bench and Supreme Court judgments in Star Health Insurance [Ahmed Abdulla Ahmed Al Ghurair & Anr. v. Star Health and Allied Insurance Company Limited & Ors.] would mean that the Award Holder should first institute proceedings before courts in the UAE to establish the existence of beneficial interest before initiating proceedings before an Indian court?

iii) Whether the prohibition under the Benami Property Transactions Act for the institution of proceedings by a person claiming to be the real owner of the property against the person in whose name the property stands will place a bar on the Award Holder in this case?

iv) Whether the specific prohibition for asserting the rights over shares by the beneficial owner or a person claiming through or on his behalf under Section 89 of Companies Act, 2013 will bring within its ambit the Award Holder in the case at hand?

v) Whether a third execution petition can be filed under Order XXI Rule 21 CPC while two previous execution petitions were filed before the same court and are still pending adjudication?

Court's Findings

On the second question, the court unequivocally held that the objection raised by the respondent parties by relying on Star Health Insurance was fallacious. The Madras High Court Division Bench judgment in Star Health Insurance essentially dealt with a fight between two groups of shareholders of a company incorporated in the UAE. Moreover, the Supreme Court judgment by Justices Ashok Bhushan and A.K. Sikri also only indicated that a derivative action cannot be maintained in India as regards a company incorporated in the UAE.

Therefore, both judgments in Star Health Insurance were pronounced in a suit filed as a derivative action by shareholders of a company incorporated in the UAE, on the basis that the company concerned failed to act to protect its interest, the court noted. Thereafter, the court elaborated upon how the issue in Star Health Insurance has a stark difference from the issue presented in this case:

"First, the Award Holder (in this case) seeks attachment and sale of the shares of an Indian company by asserting that the Award Debtor has a beneficial interest therein. Being shares of an Indian company, Companies Act 1956 or Companies Act 2013 would apply depending on when such beneficial interest was allegedly created. To put it differently, a court in the UAE cannot decide whether beneficial interest was created in the shares of an Indian company..."

Unlike in Star Health Insurance, the court here is essentially dealing with an execution proceeding by an Award Holder seeking attachment and sale of the shares of an Indian Conglomerates like ETA Group.

On the first question, the court went on to note that the third execution petition was filed by Pueblo on the basis of the consolidated financial statement of the Award Debtor, Emirates Trading Agency LLC, for the year that ended on 31.03.2013. Within that, the report of the Board of Directors mentioned the beneficial holding by Emirates in the names of certain shareholders and related parties/ certain receivables from Directors/ shareholders. According to Pueblo, the Consolidated Financial Statement asserts that these shareholders and related parties have provided the Emirates Group with an undertaking that these assets are held by them for the beneficial interest of the Group, which includes beneficial ownership by Emirates in the shares of various entities of ETA Group.

"Thus, undoubtedly, there is prima facie evidence of beneficial ownership. With this preamble, the other issues are dealt with", the court remarked at the outset.

However, the respondent parties including ETA contended that the Consolidated Financial Statement relied upon by Pueblo is outdated in the light of subsequent deconsolidation of the ETA group. By relying on a draft financial statement of ETA Star Holdings LLC, it was submitted that there has been an undisputed Deconsolidation of ETA Group and relinquishment of alleged beneficial interest of the Award Debtor in respect of shares/ partnership interest held by Directors/ shareholders of the Award Debtor. It was also submitted that such Directors/ Shareholders of the Award Debtor has not filed any declarations either under Section 187C of CA 1956 or Section 89 of CA 2013 [Declaration in respect of a beneficial interest in any share] till date.

The court observed that despite the prima facie evidence being sufficient enough to overrule the preliminary objections of respondents, a definite answer can be reached only by relegating all the parties to a trial under Order XXI, Rule 46 C of the Civil Procedure Code. The said provision talks about the garnishee (ETA Group) who is alleged to have been holding the property of the judgment debtor (Emirates), disputing the veracity of the alleged debt/ liability.

"Nonetheless, the Award Holder seeks orders in the nature of garnishment with regard to alleged debts due to the Award Debtor from third parties or by way of attaching shares or partnership interest allegedly held ostensibly in the names of third parties to the Foreign Awards and such third parties strongly deny the claims. In these circumstances, as prescribed in Order XXI, Rule 46C CPC, parties should be relegated to a trial to determine whether the Respondents are indebted to the Award Debtor and whether shares are held ostensibly by these Respondents with beneficial interest vested in the Award Debtor", the court noted.

On the third question, the respondents had contended that the Award Holder claims that the Award Debtor is the real owner of assets in the form of shares/ partnership interest, which means that the Award Holder is claiming through the Award Debtor, and such action is hence barred under the Benami Act. For this, the respondents relied on the case-law of Greaves Cotton and Company v. J.Jamal Mohammed Abdulla (1992) where the court apparently held that the prohibition in Section 4 of the Benami Act would apply to a decree-holder who contends that the judgment debtor is the real owner of the property.

Therefore, the court endeavoured to answer if Section 4 of the Benami Act would apply even in execution proceedings by a decree-holder who seeks to proceed against an asset on the basis that the real owner thereof is the judgment debtor. The court observed that the execution petition has alleged that  ETA Group is the ostensible owner of the shares for which Emirates LLC has been averred as the beneficial owner. By distinguishing the judgment in Greaves Cotton and other judgments relied on by the respondents, the court held that:

"...It should be noticed that Greaves Cotton did not deal with shares. In addition, it is evident from paragraph 4 of Greaves Cotton that the learned single Judge concluded that the person in whose name the property stood was the real and not ostensible owner, and this factual position was endorsed by the Division Bench...Although Sabita Rajesh Narang dealt with shares, as is evident,... the conclusion therein was drawn on the basis of lack of evidence. The creation of beneficial ownership over shares is recognized and permitted both under CA 1956 and CA 2013..."

Therefore, the court opined that the prima facie evidence about beneficial ownership and refuting contentions about deconsolidation and relinquishment of beneficial interest must be tested in a trial to reach a suitable conclusion. The bench refused to reject the execution petition at the threshold on the ground that the Benami Act creates a bar on the Award Holder.\

On the fourth question, the court observed that Section 89 of the Companies Act does not place any obligation on the Award Holder. The obligation to declare a financial interest is cast upon three persons, i.e, i) the person in whose name the shares are held, ii} the person in whose favour beneficial interest is created and iii) the company concerned, as per Section 89. Stating the same, the court underlined that the petitioner is merely an Award Holder which claims that shares held by some of the Respondents are beneficially owned by the Award Debtor. With the above reasoning, the court concluded that the Award Holder, Pueblo Holdings Limited, is not burdened by the obligation under Section 89.

The court also made it clear that the Respondents' contention that the Award Holder was claiming the ownership through the award debtor which is barred under Section 89(8) is illogical since the interest of the Award Holder is in conflict with and not aligned with that of the Award Debtor.

"This may be compared and contrasted with a purchaser from an award/judgment debtor who would clearly be a person claiming through the latter. Consequently, the Award Holder cannot be said to be claiming through or on behalf of the Award Debtor... On this issue, it should be noticed that the Division Bench of this Court in its order in the Second EP also arrived at the same conclusion in paragraph 52 thereof."

On the fifth and final question, the bench observed that the court may exercise its power to refuse simultaneous execution against the person and property of the Award Debtor in its discretion, as laid down in Order XXI Rule 21 of CPC. The court clarified that Pueblo Holdings Limited has not initiated simultaneous execution in the instant case and Order XXI Rule 21 will not apply as laid down in Ram Narayan Bhattad v. Krishna Bai Jhaver & Ors. (2004).

"...Moreover, the said provision not only uses the permissive expression 'may' but underscores the non-mandatory nature of the expression 'may' by also using the expression 'in its discretion'. However, whether the institution of multiple execution petitions constitutes an abuse of process is a distinct matter that warrants scrutiny...", the bench inferred.

Respondents had contended that the third execution petition is an abuse of the process of law when two execution petitions are already pending. It is pertinent to note that Pueblo Holdings Limited was unable to even realise a portion of the debts owed in the earlier execution petitions.

Before parting, the court added that all the three execution petitions were filed before the same court and the 'likelihood of injustice' laid down in Ram Narayan Bhattad is not applicable in the current case. In Ram Narayan Bhattad, the Supreme Court held that there is a 'likelihood of injustice' by recovering amounts in excess of the decree when multiple execution petitions are before different courts.

"In Ram Narayan Bhattad, a Division Bench of this Court held that leave should be obtained to simultaneously prosecute two execution petitions: one by the court issuing the decree and the other by the court to which the decree was transferred for execution. However, the said judgment turned on the fact that two courts were involved and, without following the process of obtaining leave, there is the likelihood of injustice unless it is clear that the value of the asset, which is within the jurisdiction of the court to which the decree was transferred, was insufficient..."

With the above, the court said it was discernible that the filing of multiple execution petitions by Pueblo cannot be construed as an abuse of the process of law.

After addressing all the issues, the single judge bench allowed to prosecute the third execution petition. Consequently, the preliminary objections against the maintainability of the execution petition were ruled out. However, the court clarified that Pueblo Holdings Limited and the Respondents should address the issues of garnishee claim and alleged beneficial ownership of the Award Debtor during the trial.

Case Title: Pueblo Holdings Limited v. Emirates Trading Agency LLC & Ors.

Case No: E.P..No.52 of 2021

Citation: 2022 LiveLaw (Mad) 95

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