Arbitral Award Executable Against SPV Members Not Party To Proceedings: Allahabad High Court

The Allahabad High Court on 9 April held that members of a special purpose vehicle (SPV) fall within the expression “persons claiming under them” under Section 35 of the Arbitration and Conciliation Act, 1996, and allowed arbitral awards to be executed against them even if they were not parties to the arbitration proceedings.

Justice Pankaj Bhatia delivered the ruling while dismissing petitions challenging execution proceedings initiated by Adani Enterprises Ltd. against shareholders of an SPV that had contracted with Adani. He held:

“a normal decree passed by a competent Court of law against a company can be executed only against the judgment debtor company and not against its shareholders/directors unless ingredients of lifting the corporate veil is established, however, an award passed under the Arbitration and Conciliation Act can be executed against the 'party' or any 'person claiming under them.”

The Ministry of Coal invited bids for allocation of coal mines. The petitioners, who acted as shareholders of a consortium, formed a special purpose vehicle company named UCM Coal Company Limited. The Ministry allocated coal mines to UCM, which later entered into a contract with Adani Enterprises.

The petitioners alleged that Adani breached the contract by issuing letters of award to other contractors and subcontractors. After the Supreme Court set aside the coal mine allocation, Adani raised claims for expenses incurred and obligations performed under the contract.

The dispute went to arbitration. The Tribunal first passed an interim award of Rs. 73.94 crores in favour of Adani and later issued a final award in its favour against UCM Coal. Appeals against the award failed at all stages.

Adani then initiated execution proceedings against UCM Coal as well as its shareholders. The Execution Court rejected the objections raised by the petitioners and directed enforcement against them. The petitioners challenged this order before the High Court, arguing that they were not parties to the arbitration proceedings.

Relying on the Supreme Court decisions in Cox & Kings Ltd. v. SAP India Private Limited and Anr. and Cheran Properties Limited v. Kasturi & Sons, the High Court held that Section 35 extends to persons whose rights or liabilities derive from the arbitral party. It stated:

“Once Section 35 and the phrase “any person claiming through or under him” has been interpreted by the Supreme Court to hold that the arbitral award binds every person whose capacity or possession is derived from and is the same as party to the proceedings, leaves no room for interpretation that the petitioners would be persons falling within the phrase “any person claiming through or under”.”

The Court also noted that the petitioners actively participated in the formation and functioning of the SPV. It observed that common officers served across entities, the company secretary was shared, and funds were transferred from the petitioners into the SPV. It further noted that representatives of the petitioners participated in the arbitral proceedings and that funds infused by them satisfied the interim award. The Bench observed:

“The argument that petitioner nos.1, 2 & 3 ought to have been made party before the arbitral Tribunal loses significance in view of the mandate of Section 35 which enables execution even against a non party but falling within the expression 'persons claiming under them'.”

Accordingly, the High Court dismissed the petitions and upheld the execution proceedings initiated by Adani Enterprises.

Counsel for Petitioner(s): Vibhanshu Srivastava, Pritish Kumar, Suyash Manjul