A Company founded and run to commit fraud is liable to be wound up.

Devas Multimedia vs. Antrix Corporation

The facts:

On 28.07.2003, Antrix entered into a Memorandum of Understanding with Forge Advisors, LLC, a Virginia Corporation. The intent, as spelt out in the MOU, was to make both parties
become “strong and vital partners in evaluating and implementing major new satellite applications across diverse sectors including agriculture, education, media and telecommunications”.

On 22.03.2004, Forge Advisors made a presentation proposing an Indian joint venture, to launch what came to be known as “DEVAS” (Digitally Enhanced Video and Audio Services). It was projected in the said proposal that DEVAS platform will be capable of delivering multimedia and information services via satellite to mobile devices tailored to the needs of various market segments such as (i) consumer segment, comprising of entertainment and
information services to digital multimedia consoles in cars and vehicles; (ii) commercial segment, comprising of high value information services to Commercial Information Devices in
commercial transport vehicles; and (iii) social segment, comprising of Developmental Information Services to Rural Information kiosks in underserved areas. (This platform was never created and is not in existence even today)

The proposal dated 15.04.2004 indicated that DEVAS was conceived as a new National Service, expected to be launched by the end of 2006, that would deliver video, multimedia and information services via satellite to mobile receivers in vehicles and mobile phones across India. The proposal contemplated the formation of a joint venture and an obligation on the part of ISRO and Antrix to invest in one operational S­Band satellite with a ground space segment to be leased to the joint venture. In return, ISRO and Antrix were to receive lease payments of USD 11 million annually for a period of 15 years.

On 17.12.2004 Devas Multimedia Private Limited, (hereinafter referred to as ‘Devas’ or the ‘company in liquidation’) was incorporated as a private company under the Companies Act, 1956. Immediately thereafter, Antrix entered into an Agreement with the said company on 28.01.2005. The Agreement was titled as “Agreement for the lease of space segment capacity on ISRO/Antrix SBand spacecraft by DEVAS”.

What was to be leased out by Antrix to Devas was 5 numbers of C X S transponders each of 8.1
MHz capacity and 5 numbers of S X C transponders each of 2.7 MHz capacity on the Primary Satellite 1 (PS1). The leased capacity was agreed to be delivered by Antrix to Devas from a fully operational and ready PS­1 within 30 months of the agreement, with a further grace period of six months.

It appears that Devas obtained approvals from Foreign Investment Promotion Board (FIPB) during the period May 2006 to September 2009. Pursuant to those approvals, Devas actually
brought into India, an investment of about INR 579 crores. (Most of this investment was later repatriated overseas as investment and expences.)

Devas also obtained an Internet Service Provider (ISP) License from the Department of Telecommunications on 02.05.2008. Devas then obtained permission from the Department of
Telecommunications on 31.03.2009 for providing Internet Protocol Television (IPTV) Services.

However the Agreement dated 28.01.2005 was terminated by Antrix by a Communication dated 25.02.2011, in accordance with Article 7(c) of the Agreement, which provides for termination on the ground of force majeure. It was stated in the said letter that the Government of India had taken a policy decision not to provide orbital slots in S ­Band for commercial activities.

It may be noted that S Band is rare spectrum and is used mostly for Defence communication purposes and the agreement was signed without taking Defence Department into confidence.

The termination of agreement led to Devas initiating a commercial arbitration in India before the ICC Arbitral Tribunal. Independently, the Mauritius investors initiated a BIT arbitration under the IndiaMauritius Bilateral Investment Treaty and the German Company by name Deutsche Telecom, initiated a BIT arbitration under the India-Germany BIT. ICC Arbitral Tribunal passed an Award on 14.09.2015 directing Antrix to pay Devas, a sum of USD 562.5 million with simple interest @ 18% p.a. The Government of India suffered similar awards in the other 2 BIT Arbitral proceedings also.

In the meantime, the Central Bureau of Investigation (CBI) filed a First Information Report on 16.03.2015, against the company in liquidation namely Devas, as well as the officers of Devas and Antrix, for offences under Section 420 read with Section 120B of IPC and Section 13(1)(d) read with Section 13(2) of the Prevention of Corruption Act, 1988. It was followed by a charge­sheet filed on 11.08.2016 and a supplementary charge­sheet on 08.01.2019. Similarly the Enforcement Directorate filed a report in ECIR No.12/BGZO/2015.

Therefore, Antrix made a request to the Ministry of Corporate Affairs, Government of India, on 14.01.2021 seeking authorization to initiate proceedings under Section 271(c) of the 2013 Act for winding up Devas. Authorisation was given on 18.01.2021, on the basis of which Antrix filed a petition before the National Company Law Tribunal, Bengaluru Bench on 18.01.2021
for the winding up of Devas. The Tribunal admitted the petition on 19.01.2021 which order was unsuccessfully challenged.

By a final order dated 25.05.2021, NCLT directed the winding up of Devas. The appeals against this orders were dismissed by NCLAT by an Order dated 08.09.2021. The matter was raised by way of special leave petition before Supreme Court which also dismissed the petition by an order dated January 17, 2022.

The acts constituting fraud:

  1. The agreement to lease out satellite was entered without same being preceded by any auction/tender process of consultations with other players. Nor any expression of interest was invited from the public.
  2. The proposal to invest in an operational S ­band satellite and the lease of nearly the entire space of such satellite to a joint venture, should have come to the public domain, to see, (a) if the technology existed; and (b) if the proposal was commercially viable. But it was not done.
  3. Even today satellite phones are beyond the reach of a common man. Mobile receivers or devices which can simply receive audio and video content are different from mobile phones, which are capable of providing a two way communication. The technology for providing the services through mobile phones was not in existence at that time. Yet the agreement was to provide these very services without any supporting technology. Thus Devas enticed Antrix/ISRO to enter into an MoU followed by an Agreement by promising to provide something that was not in existence at that time and which did not come into existence even later.
  4. A public largesse was doled out in favour of Devas, in contravention of the public policy in India.
  5. Thus Devas neither had the technology not the necessary intellectual property rights in this regard.
  6. The licenses and approvals were for completely different services and the services offered were not within the scope of SATCOM Policy.
  7. Thus the formation of the company, namely, Devas Multimedia Private Limited was for a fraudulent and unlawful purpose. Therefore, the first ingredient of Section 271(c) of the Companies Act, 2013, namely, the formation of the company for a fraudulent and unlawful purpose was clearly made out.
  8. The kind of licenses obtained such as ISP and IPTV licenses and the object for which FIPB approvals were taken but showcased as those sufficient for fulfilling the obligations under the Agreement dated 28.01.2005 demonstrated that the affairs of the company were conducted in a fraudulent manner. This is fortified by the fact that a total amount of Rs.579 crores was brought in, but almost 85% of the said amount was siphoned out of India for ostensible purposes.
  9. The manner in which a misleading note was put to the cabinet and the manner in which the minutes of the meeting of TAG sub­committee were manipulated, highlighted by the Tribunal, also shows that the affairs of the company were conducted in a fraudulent manner. Thus, the second limb of Section 271(c), namely, the conduct of the affairs of the company in a fraudulent manner, also stood established.
  10. SATCOM Policy perceived telecommunication and broadcasting services to be independent of each other and also mutually exclusive. Therefore, a combination of both was not permitted by law. Yet no consultation was made with Ministry of IT on the subject.
  11. That the officials of the Department of Space and Antrix were in collusion and that it was a case of fence eating the crop (and also allowing others to eat the crop), by joining hands with third parties, is borne out by the fact that the Note of the 104th Space Commission did not contain a reference to the Agreement. The Cabinet Note dated 17.11.2005 prepared after ten months of signing of the Agreement, did not make a mention about Devas or the Agreement, but proceeded on the basis as though ISRO received several Expressions of Interest. These materials show the complicity of the officials to allow Devas to have unjust enrichment.
  12. Since the board controlled the company, the directors were guilty of the conduct of the affairs of the company in a fraudulent manner. Since each shareholder had a representative in the board, the shareholders had to take the blame for the misdeeds of the directors.
  13. The Share Subscription Agreement discloses that shareholders were aware of the false statements contained in the Agreement dated 28.01.2005. Therefore, the shareholders, who now want to reap the fruits of a tree, fraudulently planted and unlawfully nurtured, cannot feign ignorance and escape the allegations of fraud.

Decision of Supreme Court:

In view of the fact that the claims of Devas and its shareholders are also on the property of the Government of India. The space segment in the satellite proposed to be launched by the Government of India, is the property of the Government of India. In fact, the shareholders have secured two awards against the Republic of India under BIT. Therefore, it is neither a lis between two private parties nor a private lis between a private party and a public authority. It is a case of fraud of a huge magnitude which cannot be brushed under the carpet, as a private lis.

Under the 2013 Act there are two different routes for winding up of a company on allegations of fraud. One is under Section 271(c) and the other is under the just and equitable clause in Section 271(e), read with Section 224(2) and Section 213(b). What was Section 439(1)(f) read with Section 243 and Section 237(b) of the 1956 Act, have now taken a new avatar under Section 224(2) read with Section 213(b). It is only in the second category of cases (Just and Equitable clause) that the report of the investigation should precede a petition for winding up.

Double Jeopardy argument on the basis of pendency of criminal cases:

The standard of proof required in a criminal case is different from the standard of proof required in the proceedings before NCLT. The outcome of one need not depend upon the outcome of the other, as the consequences are civil under the Companies Act, 2013 and penal in the criminal proceedings. Moreover, this argument can be reversed like the handle of a dagger. What if the company is allowed to continue to exist and also enforce the arbitration awards for amounts totalling to tens of thousands of crores of Indian Rupees (The ICC award is stated to be for INR 10,000 crores and the 2 BIT awards are stated to be for INR 5,000 crores) and eventually the Criminal Court finds all shareholders guilty of fraud? The answer to this question would be abhorring.

If the seeds of the commercial relationship between Antrix and Devas were a product of fraud perpetrated by Devas, every part of the plant that grew out of those seeds, such as the Agreement, the disputes, arbitral awards etc., are all infected with the poison of fraud. A product of fraud is in conflict with the public policy of any country including India. The basic notions of morality and justice are always in conflict with fraud and hence the motive behind the action brought by the victim of fraud can never stand as an impediment.

By allowing Devas and its shareholders to reap the benefits of their fraudulent action, may nevertheless send another wrong message namely that by adopting fraudulent means and by bringing into India an investment in a sum of INR 579 crores, the investors can hope to get tens of thousands of crores of rupees, even after siphoning off INR 488 crores.

Order of winding up affirmed. Appeals dismissed.

Read full Judgement (134 pages) at following link:

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