2026 (1) TMI 2 - HC - FEMA

Foreign arbitral award enforcement and execution against affiliated non-signatories after asset diversion; limitation challenge barred; execution partly allowed.

Res judicata barred reopening the limitation issue because an earlier enforcement order holding the petition within Article 137 involved at least a mixed ... Seeking recognition and enforcement of foreign arbitral awards - prescribed period of limitation - Applicability of res judicata - violation of India's public policy. - lift the corporate veil - impleadment of the 2nd, 3rd and 4th Respondents and levy of execution against them - Whether a third party could be made personally liable to satisfy a decree or a foreign award, even though it was not a party to the arbitration proceedings and no award had been made against it. - HELD THAT:- In the present case, E-City or the other Respondents never challenged this Court’s jurisdiction to entertain a Petition to enforce or execute a foreign award. There were no grounds for such a challenge. The only objection to IMAX’s Petition was that it was filed after the prescribed period of limitation. Therefore, even if the learned Single Judge of this Court (Kulkarni, J.) mistakenly held that IMAX’s Petition was within the three-year limitation period prescribed under Article 137 of the Limitation Act, that decision cannot be regarded as a nullity that could have been disregarded at the final hearing of the same Enforcement or Execution Petition. Besides, there is no ground to hold that the reasoning or finding in Kulkarni J’s order about IMAX’s petition being within the three-year limitation period prescribed under Article 137 of the Limitation Act was erroneous. The first precondition for the exception to the application of the doctrine of res judicata, namely that the issue decided involved a pure question of law and not a question of fact or a mixed question of law and fact, is not fulfilled in the present case. Secondly, the expression “jurisdiction” referred to in Mathura Prasad Jaiswal. [1970 (2) TMI 139 - SUPREME COURT] and explained in N.G. Subbaraya Setty [2018 (4) TMI 1901 - SUPREME COURT], refers to the inherent jurisdiction of a Court or the legal competency of the Court to entertain a suit or a proceeding of a particular nature. The examples given in N.G. Subbaraya Setty’s (supra) case bring home this point very clearly. However, the impropriety is evident, as properties and assets valued at Rs.210 Crores held by E-City (1st Respondent) were diverted solely to defeat execution of the liability award. Secondly, in the present case, there is both control of the Company by the wrongdoers and the impropriety, i.e., the Company's use and misuse of them as a device or façade to conceal their wrongdoings. In fact, the wrongdoers have managed to retain complete control over the diverted properties while, at the same time, attempting to render them immune from execution proceedings to defeat the enforcement and execution of the foreign awards. This is not a case in which IMAX is challenging the orders of this Court that sanction the Schemes of Arrangement. Therefore, the arguments that such orders operate in rem rather than merely in personam need not detain us. Even if such orders were made in compliance with the validly prescribed procedures, that by itself would not prevent the enforcing/executing Court from lifting the corporate veil and addressing the impropriety of diverted properties and assets, given the facts in the present case. There are undoubtedly different considerations that apply in the doctrine of lis pendens. Still, the reference is only to show that a transaction may be legal, in the sense that the statutory formalities have been complied with. However, there may still be impropriety, which will entitle the Court to lift the corporate veil, as was held in Balwant Rai Saluja and Anr. [2014 (8) TMI 1084 - SUPREME COURT] There is a distinction between illegality and impropriety that cannot be ignored. Impropriety may not always overemphasise the form but would stress the substance, the motives, the intentions and the final effect of the disputed transaction. That there was nothing wrong in impleading the 2nd to 4th Respondents in IMAX’s Petition. Besides, execution can be levied against those of E-City’s (1st Respondent’s) properties and assets that were diverted to the 2nd and 3rd Respondents for satisfaction of the foreign awards. However, such execution can be only qua the diverted properties and assets presently held by the 2nd and 3rd Respondents, and not against the 2nd and 3rd Respondents independently. It is clarified that there can be no execution against any other properties or assets independently held by the 2nd and 3rd Respondents’ Companies to satisfy the foreign awards. Insofar as the 4th Respondent is concerned, though there was nothing wrong in its impleadment to IMAX’s Petition, since no properties or assets of E-City (1st Respondent) were diverted to the 4th Respondent, there is no question of levying any execution on the 4th Respondent, its properties or assets. IMAX’s petition is held to have been filed within the prescribed period of limitation. IMAX’s petition for enforcement of the foreign awards could not have been refused on any alleged violation of India's public policy. This appeal was maintainable as against all the Respondents. There was no error in impleading the 2nd to 4th Respondents as parties to IMAX’s petition. The foreign awards are recognised and can be executed unreservedly against the 1st Respondent and against the 2nd and 3rd Respondents to the extent of the properties and assets diverted from E-City [1st Respondent] to them under the schemes of arrangements dated 20.06.2007 and 31.08.2007. However, no execution can be levied against the 4th Respondent. To this extent, Dangre, J’s order will have to be set aside or modified. Now that the foreign awards are recognised, they shall have the status of deemed decrees and be executed in accordance with what is set out above. However, this would require constant monitoring and the timely issuance of directions in execution proceedings, such as the attachment and sale of properties. Such an exercise could be best undertaken by the executing Court, i.e., the learned Single Judge. The 1st Respondent has succeeded in frustrating the enforcement of the foreign awards made between 2006 and 2008. Full advantage was taken of the Master Agreement entered into in 2000, and by taking undue advantage of the pressure on the Indian court’s dockets, payments have been successfully resisted for all these years. During the pendency of the arbitral proceedings, the 1st Respondent improperly diverted its properties and assets worth Rs. 210 crores to the associated companies, i.e. the 2nd and 3rd Respondents, with the sole objective of frustrating the execution of the awards or, in any event, further delaying the matters. To borrow the words of the Hon’ble Supreme Court in Vijay Karia [2020 (2) TMI 628 - SUPREME COURT], the first Respondent is “indulging in speculative litigation with the fond hope that by flinging mud on a foreign tribunal award, some of the mud so flung would stick”. For all these reasons, we impose a cost of Rs 5 lakhs on the 1st Respondent, payable within 4 weeks to the Appellant, IMAX. The parties are directed to appear before the learned Single Judge. - Appeal and the pending applications therein are disposed of in the above terms. 1. ISSUES PRESENTED AND CONSIDERED (i) Whether the enforcement petition for recognition/enforcement of the foreign arbitral awards was barred by limitation, and whether an earlier final determination on limitation bound the parties at the final stage by res judicata. (ii) Whether enforcement of the foreign awards was liable to be refused under Section 48(2)(b) on the ground that enforcement would be contrary to the public policy of India, based on alleged FEMA contravention and alleged procedural unfairness in the arbitral process. (iii) Whether the appeal under Section 50 was maintainable against non-award-debtors who were impleaded in the enforcement petition, when the impugned order also refused enforcement/execution against them. (iv) Whether non-signatory affiliated companies could be impleaded in the enforcement/execution proceedings and whether execution could be levied against them, including on the basis of lifting the corporate veil, and if so, to what extent. 2. ISSUE-WISE DETAILED ANALYSIS A. Limitation and res judicata effect of the earlier limitation order Legal framework (as discussed by the Court): The Court treated the bar of limitation as an issue already decided at an earlier stage in the same proceeding and examined whether the doctrine of res judicata applies between two stages of the same litigation. It also considered and rejected the proposition that an erroneous limitation finding renders the earlier order a 'nullity' for want of jurisdiction. Interpretation and reasoning: The Court held that the earlier order rejecting the limitation objection had attained finality (including after dismissal of challenge and review) and therefore operated as res judicata at the final stage. The limitation determination was not a mere incidental observation: it was directly and substantially in issue and was conclusively decided, including on an alternative basis. The Court rejected the contention that subsequent overruling of legal propositions relied upon in the earlier order permitted the limitation issue to be reopened inter partes. It emphasized the distinction between overruling a precedent and reversing a judgment between the same parties. It further held that limitation findings do not go to inherent jurisdiction so as to defeat res judicata; an incorrect limitation decision by a competent court is, at most, an error within jurisdiction and remains binding unless set aside in appropriate appellate proceedings. Conclusions: The enforcement petition was held to be within limitation, and the limitation issue could not lawfully be revisited at the final stage. The impugned refusal of enforcement on limitation was set aside. B. Public policy under Section 48(2)(b): alleged FEMA violation and alleged unfairness Legal framework (as discussed by the Court): The Court proceeded on the basis that Section 48 permits only limited refusal of enforcement and does not allow a merits review. It treated 'public policy' in the foreign award enforcement context as narrow, and examined whether the pleaded grounds truly reached the threshold of public policy or instead invited reappreciation of evidence and contractual interpretation. Interpretation and reasoning: On the FEMA objection, the Court found that the underlying transactions were not shown to be prohibited transactions; at most, approvals were sought/required, and the parties had restructured the arrangement when approvals were not forthcoming. The Court treated the arbitral tribunal's finding that the agreement was not a contingent contract as a factual/mixed finding not open to reassessment in Section 48 proceedings. It held that even assuming an RBI-approval requirement was not met, that did not render the arrangement void in a manner that would justify refusal of enforcement under Section 48(2)(b) as applied in foreign award enforcement. The Court held that the impugned order's reliance on authorities concerning prohibitory regimes or different statutory contexts did not justify refusal in the present FEMA context. On the alleged unfairness, the Court found that the expert evidence relied upon was tendered after the liability issue had already been determined, so the tribunal was not obliged to reopen that issue at the later stage. In any event, the complaint essentially challenged appreciation of evidence and would amount to a prohibited merits review under Section 48. The alleged non-consideration did not rise to a procedural unfairness that could justify refusal of enforcement. Conclusions: Enforcement could not be refused on public policy grounds. Neither the alleged FEMA-related objection nor the evidentiary complaint constituted a Section 48(2)(b) bar. The foreign awards were ordered to be recognised and held enforceable. C. Maintainability of the appeal against impleaded non-signatories Legal framework (as discussed by the Court): The Court analysed the scheme of Part II, Chapter I and the expression 'refusing to enforce a foreign award under Section 48' in Section 50. It accepted that recognition/enforcement and execution can proceed in a single 'rolled-up' enforcement petition and evaluated whether a refusal affecting execution against additional respondents could be appealed under Section 50. Interpretation and reasoning: The Court held that once a composite enforcement petition is maintainable, an order which (in effect) refuses enforcement/execution against certain respondents cannot be insulated from appellate scrutiny by characterising it as merely an execution-stage or deletion order. The refusal to proceed against those respondents had the net effect of refusing enforcement under the composite mechanism. The Court rejected a narrow construction that would produce truncated or fragmented remedies and would frustrate the pro-enforcement object of the scheme by forcing multiple proceedings and potentially inconsistent results. Conclusions: The appeal was maintainable against all impleaded respondents, including those who were not parties to the arbitration, because the impugned composite order refused enforcement/execution against them within the meaning and scheme of Section 50 read with Part II, Chapter I. D. Impleadment of affiliated companies and execution against diverted assets; lifting the corporate veil Legal framework (as discussed by the Court): The Court applied the principles of piercing the corporate veil in the execution/enforcement context, focusing on (a) control and (b) impropriety linked to use of the corporate structure to avoid or frustrate an existing or imminent liability. It distinguished between making a third party personally liable for the award and proceeding against specific assets of the award-debtor diverted to affiliated entities to defeat execution. Interpretation and reasoning: The Court found, on the sequence of events and corporate control structure, that substantial assets of the award-debtor were diverted to affiliated companies during the pendency of arbitration and after liability had been determined, with the effect of rendering the award-debtor 'execution proof' while control over those assets remained within the same corporate group. The transfer was effected without monetary consideration to the award-debtor, with shares being allotted to the controlling holding entity, reinforcing the inference of impropriety connected to avoidance of enforcement. The Court held that this justified lifting the corporate veil to permit execution against the diverted assets now held by the affiliated transferees. It also held that this did not amount to impermissibly challenging the court-sanctioned schemes; even if formally valid, the transactions could still be addressed in execution to remedy the impropriety of defeating enforcement. The Court limited relief against the holding company: although it could remain as a proper party, no execution could be levied against it because no award-debtor assets were shown to have been diverted to it. Conclusions: Impleadment of the affiliated companies was upheld. Execution was permitted against the award-debtor and also against the specified properties/assets diverted to two affiliated transferees, but only to the extent of the diverted award-debtor assets and not by imposing independent personal liability on those companies. No execution was permitted against the holding company's own assets.