By: Amay Bahri (National Law University, Delhi)
The Cairn Energy Plc. (Cairn) tax dispute with the Indian government has attracted a lot of attention the world over. The dispute arose from a tax demand made by Indian tax authorities under the 2012 retrospective Amendment to the Income Tax Act, on the instance of restructuring undertaken by Cairn. Having no resolve before the Indian courts; Cairn initiated arbitration before the Permanent Court of Arbitration under the dispute mechanism of the UK-India Investment Treaty. The Permanent Court of Arbitration ruled in the favour of Cairn; however the Indian government did not comply with the award and filed an appeal against the same. With the appeal pending and there being no stay on the arbitral award. Cairn has started the process of enforcement of the award against the Indian Government. Cairn has identified assets of about USD 70 billion to claim the amount of USD 1.72 billion due from the Indian government, and has filed a claim in US District Court for the Southern District of New York for seizure of assets of Air India Limited (Air India), arguing that Air India is an alter ego of the Indian Government.
UNDERSTANDING THE ALTER EGO GROUND
Cairn’s claim for seizure of Air India assets is based on their argument that Air India is an alter ego of the Indian Government. This ground of an entity being an alter ego of a government is an accepted ground for enforcement of arbitral awards against assets of a government; however the burden of proof to satisfy that an entity is an alter ego of a government is very high. The decisions of US courts in the enforcement claims against Republic of Tajikistan (Tajikistan), and against Republic of Venezuela (Venezuela) are helpful to understand the scope and burden under the alter ego ground. Under the Venezuela case, an award creditor successfully obtained a decision for enforcement of an arbitral award, which was originally made against the Republic of Venezuela, against a state owned entity. On the other hand, in the Tajikistan case the US District Court restrained the enforcement of foreign award against a state owned entity because the award creditor did not establish that the control of State over entity was such that it could rebut the presumption of separateness.
Analysing both the decisions, it is understood that the presumption is in favour of the separateness of entities from their government. Thus, US Courts presume that the instrumentalities and its owners are separate from each other, having their own independent status. This principle has also been affirmed by the US Supreme Court in the case of First National City Bank v Banco para el Comercio Exterior de Cuba (Bancec). The principle of separateness raises a rebuttable presumption that the government of a State does not control the instrumentality, and that the instrumentality exists independent of government control. The State does not decide how the instrumentality conducts its day to day business, and does not decide with whom or in what way to carry business. This principle of separateness, charted in the Bancec case, assumes further importance at the present times where it is common for governments to engage in commercial dealings by owning companies. The Bancec’s principle, by creating a presumption of independent existence, allows instrumentalities to exist and function without the fear of being liable for the acts that state does in dealings independent and unrelated to it; however, this presumption is not absolute and can be rebutted by establishing that the instrumentality is extensively controlled by the owner (State) so that a relationship of principal-agent can be established.
Extensive control here means that the government should be involved in the day-to-day operations and business decisions of the instrumentality. So in the claim against assets of Air India, the standard to be satisfied for enforcing award against Air India would be that the government exercises such control over Air India that it can be said that the Indian Government is involved in day-to-day administration of the Company.
In the case relating to the Republic of Tajikistan, it was explained that the control by the state shall exceed the normal supervisory control such that it can be said that the entity does not have a distinct identity from the government. The court here considered various factors like the Tajikistan government having a 100% shareholding in the entity, Tajikistan financing the entity, the Government’s authority over acquisition by the entity etc; and concluded that these factors do not by themselves satisfy the burden to establish that the entity was an alter ego of the government. The court explained that these activities are normal for a government owned company and do not make the company an alter ego of the government. Hence we see that the courts further narrow the scope of intervention by distinguishing between day-to-day control, and normal activities undertaken by a government company.
ANALYSING AIR INDIA VIS-À-VIS ALTER EGO DOCTRINE
Air India was made a state owned entity via The Air Corporations Act, 1953, and is now a 100% state owned company. It is also a “State” as per Article 12 of the Constitution and the government prescribes rules of conduct for working of the entity. This is an important factor to establish the alter ego ground because it suggests that there is some degree of overlap in a few factors being considered; however, the burden to establish that an entity is the alter ego of a government is greater than the burden to prove that an entity is a State under Article 12 of the Indian Constitution. Article 12 covers situations where the majority is controlled by the government, or where the government has the authority to take major decisions. As per the Supreme Court Decision of Ajay Hasia, an entity where the government has financial, functional, administrative and deep pervasive control is covered under Article 12 of the Constitution. Relying on the cases against Republic of Venezuela, and Republic of Tajikistan , we can see that this control required under Article 12 is not the same as the burden needed to establish alter ego for enforcing an arbitral award.
In the author’s opinion, in light of the findings by the US Court, we can safely say that Air India will not satisfy the burden of being the alter ego of the Indian Government. Even with the Government of India owning 100% shares of Air India, it will not in itself mean that the government is involved in day-to-day operations of Air India. The court in the case against Tajikistan was dealing with the same factor where the entity was a wholly state owned company, and the court in its analysis clarified that merely being a wholly state owned entity will not mean that the entity is instrumentality of state. Further, the board of directors of Air India is not controlled by the government as there are only nominee directors appointed by the government in the board. Hence, the government fails to satisfy the extensive control in Air India, required to enforce arbitral award of governance against assets of Air India.
The above analysis shows that it is highly unlikely that proceedings instituted by Cairn against assets of Air India, to enforce an arbitral award against the Indian Government, will be successful. This alter ego ground has been used repeatedly to enforce awards against States; however the analysis of the ground with respect to Air India has attained greater significance due to both Cairn and Devas Multimedia Pvt Ltd trying to go after Air India assets. Even with the unlikely success of both these entities, the dispute with the Indian Government is no longer just about the assets and arbitral award; it has now also put India’s reputation into question. Moreover, these repeated instances of the government not respecting arbitration awards deters foreign investors and companies from investing in India.
(The author is a fifth-year law student at National Law University, Delhi. They can be contacted at firstname.lastname@example.org.)