Katra Holdings Ltd v Standard Chartered Bank (Mauritius) Ltd
| Jurisdiction | UK Non-devolved |
| Judge | Lord Hodge,Lord Briggs |
| Judgment Date | 09 April 2024 |
| Neutral Citation | [2024] UKPC 8 |
| Court | Privy Council |
| Docket Number | Privy Council Appeal No 0044 of 2022 |
[2024] UKPC 8
Lord Hodge
Lord Briggs
Lord Stephens
Lady Rose
Lord Richards
Privy Council Appeal No 0044 of 2022
Privy Council
Easter Term
From the Supreme Court of Mauritius
Appellant
Jonathan Crow CVO, KC
Gregory Denton-Cox
(Instructed by Mishcon de Reya LLP (London))
Respondent
David Alexander KC
Tikanand Gujadhur
(Instructed by Clifford Chance LLP (London))
Heard on 30 January 2024
Lord Hodge AND
This appeal challenges the grant by the Bankruptcy Division of the Supreme Court (“the Bankruptcy Court”) of a winding up order of a Mauritian company, Katra Holdings Ltd (“the Company”), and the judgment of the Supreme Court (Civil Appeal Division) (“the Court of Appeal”) upholding that order. The appeal involves a procedural issue (issue 1) and then three principal issues (issues 2 – 4). Issue 1 is whether the Court of Appeal erred in refusing to hear the Company's motion to introduce new evidence. Issue 2 is whether the Bankruptcy Court erred in not setting aside the statutory demand served by Standard Chartered Bank (Mauritius) Ltd (“the Bank”) on the Company on the ground that there was a substantial dispute as to whether the debt between the Company and the Bank was owing. This involves deciding whether it is reasonably arguable that the Bank is not entitled to enforce the loan contract by which the Company borrowed US $20 million on the ground of illegality. Issue 3 is whether the Bankruptcy Court erred in not setting aside the statutory demand served by the Bank on the Company on other grounds. Issue 4 is whether the Bankruptcy Court, having refused to set aside the statutory demand, erred in ordering the winding up of the Company without requiring the Bank first to present a winding up petition.
The Company, through its principal, Mr Ramesh Vangal, and an associated company registered in India, sought to profit by gaining control of and selling on to investors shares in a private Indian bank, called Tamilnad Mercantile Bank Ltd (“TMB”). This involved acquiring options (i) to purchase 95,418 shares in TMB, which represented 33.6% of the issued and paid-up equity shares in TMB and had been held in the name of a group of Indian investors called the Sterling Group, and (ii) to acquire a further 17% of TMB's shares (together “TMB shares”). It was proposed that these shares would be sold to investors who were not connected to each other, in tranches of less than 5% of the issued share capital of TMB so as to avoid breaching Indian foreign exchange and banking rules, to which the Board refers below. The agreement to assign the options provided that the placement of TMB shares with international investors was to comply with the guidelines and regulations issued by the Reserve Bank of India (“RBI”).
In an agreement between Corsair Investments LLC, a USA-based private equity fund (“Corsair”), the Company and the Bank (and initially, before amendment, two other entities) (“the Escrow Agreement”) it was agreed that TMB shares amounting to 40% of TMB's paid-up share capital would be placed into escrow with the Bank and released on sale to purchasers who were willing to purchase less than 5% stakes in TMB and whom Corsair was to identify. The TMB shares when sold on would be held by special purpose vehicles for each of the investors and the purchase funds would be deposited into escrow. The Escrow Agreement is governed by the laws of India. The escrow account into which the share certificates and executed blank transfer forms were to be deposited and two other escrow accounts to hold the proceeds of the sale of the TMB shares (one in US dollars and the other in rupees) were to be held by Standard Chartered Bank, Mumbai (“SCB Mumbai”) as sub-agent of the Bank.
Corsair undertook to obtain a legal opinion from Indian counsel that the proposed arrangement did not violate Indian laws and regulations, including relevant RBI guidelines. That opinion when obtained in relation to the early transfers of TMB shares under this arrangement in 2007 suggested that there would be no such violation and that the investments of the purchasers would not be aggregated so as to bring into being a group holding in excess of 5% of TMB's paid-up share capital.
Senior figures in the Standard Chartered Bank Group saw an opportunity to acquire an initial stake in TMB of less than 5% and the possibility of increasing involvement in TMB in future years when Indian regulations permitted.
The Company funded the purchase of the options by obtaining a short-term loan in August 2006 from the Galleon Group in New York which was due to expire on 31 December 2006 (the “Galleon loan”). Under an agreement, dated 29 December 2006 (the “Facility Agreement”), the Company obtained from the Bank a three-month loan facility (“the Facility”) of US $20 million to re-finance the existing borrowing. The Company used the Facility and its own funds to repay the Galleon loan and the Bank became the lender which funded the acquisition of the TMB shares from the Sterling group of investors. The Facility Agreement, which is governed by the laws of Mauritius, was extended several times and expired on 15 November 2009. By then the Company had repaid part of the sums borrowed under the Facility by selling on TMB shares to investors. In 2007 the Company also borrowed further sums from the Bank which were repaid in 2008 through the Company's sale of 10,364 TMB shares which it held in its name. That second loan is not relevant to the issues on this appeal.
Since 2009 the Company has failed to repay the sums due under the expired Facility. On 13 October 2015, the Bank served a statutory demand on the Company claiming payment of US $19,225,911.32 (comprising US $15,080,690 of principal and US $4,145,221.32 representing accrued interest as at 30 September 2015).
The Facility Agreement provided that the security for the Bank's lending would include (a) the deposit of the title deeds to 62 acres of land in Bangalore owned by Mr Vangal and Arudrama Developments Private Ltd, an Indian development company under his control, “along with an undertaking that in the event of default [the Bank] would have the right to create equitable mortgage and sell the property”, and (b) the deposit of the share certificates and blank transfer deeds of TMB shares, which were not registered in the Company's name, representing 40% of TMB's paid-up share capital. Further security was provided in the form of pledges of shares in other companies, but it is no longer suggested that by the date of the winding up order they provided any security for the Facility. Accordingly, the assets which the Company has asserted are available as security for the Facility are the deposit of the title deeds of the land in Bangalore and the deposit into escrow of the TMB shares and the blank transfer forms to facilitate the transfer of those shares.
The Facility Agreement contained covenants that the Company would enter into an agreement with Corsair to arrange for the purchase of TMB shares comprising 40% of TMB's paid-up capital on behalf of independent investors who satisfied the guidelines set by the RBI and that the Company would enter into the Escrow Agreement. The covenants in the Facility Agreement included the following:
“7. Receipt of all necessary governmental and regulatory approvals and third party consents, if required. …
10. No law or regulation shall be applicable in the judgment of the Lender that restrains, prevents or imposes materially adverse conditions upon the transactions contemplated hereby.”
The conditions precedent to drawdown included (i) the placing into the escrow account of the share certificates and blank transfer deeds of TMB shares and (ii) the delivery to SCB Mumbai of the title deeds to 62 acres of land in Bangalore. Failure by the Company to enter into the Escrow Agreement within 15 days for the date of the Facility Agreement was one of the specified events of default. The Company warranted on a continuing basis that its entry into and performance of the transactions under the Facility “will not and do not violate … any law or regulation.” The relevance of this warranty, along with the provisions in the Escrow Agreement (para 3 above) and in the Facility Agreement (para 9 above), is that it is evidence of the attempts by the Bank to make sure that the transactions which it was funding were lawful and the subject of regulatory consent.
The allegation by the Company that the Facility Agreement is unenforceable on the ground of illegality arises out of the following events. In March 2011 the Deputy Governor of the RBI made an order declining to acknowledge the holding of 5% or more of the paid-up capital of TMB by a group of investors including the Company, and stated that the holding in aggregate should be below 5% of the paid-up capital. The legal basis for this was the following. Regulations made under the Indian Foreign Exchange Management Act 1999 (“FEMA”) required the approval of the RBI for transfers of shares in any Indian company between a resident of India and a non-resident. The RBI issued guidelines under the Banking Regulation Act 1949 which made the allotment or transfer of shares in a private sector Indian bank subject to the approval of the RBI if the allotment or transfer took the shareholding of an individual or group to or above 5% of the paid-up share capital of the bank. This banking approval regime was placed on a statutory basis by the Banking Laws ( Amendment) Act 2012.
On 17 December 2014 the Enforcement Directorate for the Ministry of Finance in India (“the ED”) sent out notices to 26 addressees based in India, including SCB Mumbai and one of its directors, alleging contraventions of regulations made...
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