Delhi High Court Orders MTNL to Deposit Rs 160 Crore Arbitral Award Amount with Interest in FD as Condition to Stay the Award

Delhi High Court Orders MTNL to Deposit Rs 160 Crore Arbitral Award Amount with Interest in FD as Condition to Stay the Award

The Delhi High Court by its single Judge Justice Prateek Jalan passed an order staying the arbitral award ordering Mahanagar Telephone Nigam Limited (MTNL) to refund Rs. 160 crores along with interest to CanBank Financial Services Limited (CanFina), with subject to the condition, that MTNL deposits security covering the entire refund amount, which is approximately Rs. 442.69 crores, in a Fixed Deposit.

The background of the case was that an application was filed by the petitioner MTNL for stay of enforcement of an arbitral award dated 3 March, 2022. The transactions between the parties relate back to the period 1991-92. Pursuant to guidelines issued by the Government of India regarding flotation of bonds issued by Public Sector Undertakings [hereinafter, “PSUs”] in the telecommunications and power sectors, MTNL was granted permission for issuance of bonds on 17 December, 1991.

MTNL and CanBank Financial Services Ltd. [respondent No. 2, hereinafter “CanFina”] had entered into a Memorandum of Understanding dated 10 February, 1992, under which Letters of Allotment [“LoAs”] were to be issued and CanFina was to subscribe to bonds issued by MTNL. It was provided that the consideration would not be paid by CanFina to MTNL immediately, but be invested with CanFina. The dispute between the parties revolved around the nature of the investment.

According to MTNL, the transactions were affected by a wide-ranging scam in the Indian Stock Market and that the arbitral award should be stayed as there was a fraud at play on the part of CanFina, a subsidiary of Canara Bank.

The MTNL disputed the transaction and thereafter asserted that CanFina was liable to pay in terms of the arrangement between the parties, to IDBI and the balance amount to MTNL. By a communication dated 9 February, 1993, CanFina expressed its inability to do so.

Therefore, MTNL cancelled the LoAs on 20 October, 1993, which led to considerable correspondence between the parties, including efforts to resolve the matter administratively. Writ proceedings were instituted by the Bank before the Court, wherein the High Court ultimately referred the parties to arbitration by an order dated 21 October, 2011.

The learned arbitrator had allowed the claims of the Bank and granted a declaration that the cancellation of the bonds by MTNL was illegal. MTNL was consequently directed to refund a sum of Rs. 160 crore to the Bank with interest at the rate of 6 per cent per annum from 20 October, 1993 until realization. Costs were also assessed against MTNL.

Before the Court, while the validity of the impugned award still remains to be examined in the proceedings filed by MTNL under Section 34 of the Arbitration and Conciliation Act, 1996 [hereinafter, “the Act”], the question for determination at this stage was whether MTNL was entitled to an unconditional stay on enforcement of the impugned award.

The Court stated that it was not convinced of the contentions of MTNL and rejected its plea for an unconditional stay and was of the view that, MTNL had failed to establish prima facie that the contract which was the basis of the award, was induced by fraud or corruption.

On noting various documents, and the bank statement of CanFina, showing cross-transactions of Rs. 200 crores between MTNL and CanFina on the same day (10 February, 1992), the Judge opined that this displayed prima facie consistent view with the respondents’ position that CanFina paid for the bonds on allotment, but invested the amount in securities on behalf of MTNL, as part of its PMS.

The Court placed reliance on the judgment of the Supreme Court in Sepco Electric Power Construction Corpn. vs. Power Mech Projects Ltd. (2022), which provides guidance on the tests to be employed while considering an application of this nature. The case arose out of a post-award application under Section 9 of the Act. The appellant therein had filed an application for stay of the award and the respondent had filed an application under Section 9 of the Act for security to be furnished in respect of the awarded amount. The Court had directed deposit of the entire principal amount of the award, upon which the enforcement would remain stayed.

The Court after referring to catena of judgments passed by Supreme Court observed, “having regard to these judgments, and the facts of the present case, I do not consider this an appropriate case to record a prima facie finding of fraud having induced or effected the transactions.”

The application for an unconditional stay was disposed of subject to the condition that MTNL deposits the arbitral award amount in a fixed deposit account until the plea moved by it under Section 34 of the Act is decided. The Court issued the following directions:

1. MTNL must deposit an amount of Rs. 160 crore and interest rate of 6 per cent per annum from 20 October, 1993, until 31 March, 2023 with the Registrar General of the High Court by 15 April, 2023.

2. The amount deposited must be kept in fixed deposit for the first 1 year, and be extended from time to time during the pendency of the petition under Section 34 of the Act.

3. MTNL has been further directed to deposit further interest accrued in terms of the award every six months thereafter. The first supplementary deposit will cover the interest liability under the award for the period from 1 April, 2023, to 30 September, 2023 and must be made by 15 April and 15 October of each succeeding year.

The Court further clarified that the observations were made prima facie for the purpose of disposal of the application and not intended to prejudice the rights and contentions of the parties at the final hearing of the Section 34 proceedings.