DEVAS ANTRIX CASE: FRAUD AS A GROUND FOR WINDING

UP OF A COMPANY

ABSTRACT

With the enactment of the companies act 2013 several changes were made in the existing structure
of companies act. One of them being inclusion fraud as a ground of winding up of companies.
Though there was some reference to fraud in the 1956 act but a need was felt for fraud to be
included as a direct and independent ground for winding up. The present write up deals with first
case of a company being wound on the basis of fraud. Devas antrix case makes a new space in the
domain of winding up of companies. It is a timeline of events which involves the prestigious space
organisation, ISRO. It starts a joint venture and ends being the very first company to be wound up
under section 271(c) of the companies act. This paper critically analyses the scheme of fraud in the
1956 act and the changes made in the 2013 act. Devas was incorporated as a private limited
company and was supposed to offer a bouquet of services which were named as devas services. It
was conceptualized as a service that would revolutionize social, consumer and commercial segment
through technological intervention. But, in 2011 cabinet committee on security invoked force
majeure clause to end the contract between antrix and devas. Repudiation of contract led to
litigation initiated by devas in various forums. In 2020 antrix filed a petition in NCLT for winding up of
devas and NCLT by interpreting section 271(3) and applying it to the facts of the case ordered the
winding up of devas.

KEYWORDS : Fraud, winding up, Devas, Antrix, NCLT

I. INTRODUCTION
Winding up of companies is governed by Companies Act, 2013 1 (the Act) and Insolvency and
Bankruptcy code,20162 (IBC).According to section 94(A) of the companies act, 2013,“winding up”
means winding up under this act or liquidation under the insolvency and bankruptcy code, 2016, as
applicable.”3 Winding up is “the process of settling accounts and liquidating assets in anticipation of
a partnership’s or corporation’s dissolution”. 4 Provisions regarding the winding up of the company
are mentioned in Chapter XX (Winding up) of the Act. Winding up has been subject to several
amendments. It was first incorporated in the predecessor legislation to the companies act 2013 i.e.
companies act 1956. But with changing circumstances and business environment, a need was felt to
make companies more accountable and the operation of the companies act more pervasive. In this
paper we would be dealing with one such amendment in light of the supreme court in the matter
regarding the winding up of devas multimedia private limited (Devas).5 With frauds like satyam and
sahara coming to fore, a need for more stringent laws that could deter such fraudulent behaviour
and improve compliance and at the same time remedy such offences was felt. In order to meet the
above criteria and make the Act more comprehensive and effective, fraud was introduced as a
ground for winding up of the company in the Act.
1
The Companies Act, No. 18 of 2013, Acts Of Parliament, 2013 (Ind.)

2
The Insolvency And Bankruptcy Code, No. 31 of 2016, Acts of Parliament, 2016 (Ind.)
3
The Companies Act, No. 18 of 2013, supra note 1, § (94A)
4
Winding Up, BLACK’S LAW DICTIONARY (8th ed. 2005)
5
Devas case citation
 II. BACKGROUND

Antrix corporation limited (Antrix) entered into a memorandum of understanding with Forge
advisors, LLC, a virginia corporation on 28.07.2003. The intent was supposed to be strong
and vital partners in implementing the new satellite applications in various sectors such as
agriculture, telecommunications and other vital sectors in which satellite applications can be
used as a measure to revolutionize the sector. On 22.03.2004, Forge proposed an Indian joint
venture, which came to be known as “DEVAS”(Digitally enhanced video and audio
services). It was projected that DEVAS as a platform would be able to cater to different
segments by delivering information and multimedia services via satellite to mobile devices. It
was supposed to provide various services in consumer commercial and social segments. It
was formed not only for information services but was conceptualized as an enabler of
effective developmental information of rural areas which are underserved. The proposal
indicated that devas was conceived as a new national service that would provide services
across India. The proposal was contemplated as a joint venture and as a part of the agreement
ISRO and Antrix were obligated to provide one operational S-band satellite and a ground
space segment to be leased to DEVAS. In return, devas had to pay 11 million annually for 15
years to ISRO and Antrix. Several meetings were held between the officials of forge and
antrix and a committee to evaluate the proposal under Dr. B.N. Suresh to assess all the
aspects of the contract and thereafter another committee was constituted under Dr. K.N.
Shankara, Director, Space Application Centre (SAC) was formed. Devas Multimedia Private
Limited was incorporated as a private company under companies act, 1956 on 17.12.2004.
Both the companies entered into an agreement on 28.01.2005. Devas applied for foreign
investment promotion board(FIPB) approval for bringing in investments from abroad and
Internet service provider(ISP) license. Subsequently, it was provided with both the licenses.
An investment of 579 crores was brought by devas on account of rendering the bouqet of
services it was formed to provide. It was contemplated that devas would provide the various
services by 2006 but it could not provide any of the services promised. In 2011,the cabinet
committee on security determined to terminate the agreement. As a consequence of that,
antrix terminated the agreement citing the “force majeure” clause. Thereafter, devas initiated
arbitration proceedings in the various jurisdictions outside India. On 14 th September 2015,
International court of arbitration of international chamber of commerce awarded 562.5
million to devas for the damages caused by the unilateral repudiation of contract by antrix. In
2016, CBI filed a chargesheet against the company in liquidation, devas, as well as the
officers of devas and antrix for offences under section 420 read with section 120B of the IPC
and section 13(1)(d) read with section 13(2) of the Prevention of the Corruption Act,1988. In
2021, antrix requested the Ministry of Corporate Affairs seeking the authorisation for the
winding up of devas under section 271(c) of the companies act,2013. Antrix filed a petition in
NCLT for the winding up of devas.

III. FRAUD
Fraud can be defined as an intentional perversion of truth for the purpose of inducing another in
reliance upon it to part with some valuable thing belonging to him or surrender a legal right; a false
representation of a matter of fact whether by words or by conduct, by false or misleading
allegations, or by concealment of that which should have been disclosed, which deceives or is
intended to deceive another so that he shall act upon it to his legal injury. 6 Fraud ,though difficult to
define, can be associated with some elements that would be present in all the instances of fraud.
Certain elements that are essential for an act of fraud are:

1) the means used should be successful in deceiving.

2) There must be an intention to deceive
3) There must be a damage to the party deceived 7

But fraud in public law cannot be applied to private law. So, ingredients which establishes fraud in a
commercial transaction cannot be applied in administrative law. It is dangerous to introduce maxims
of common law as to the effect of fraud while determining the fraud in relation to statutory law. A
provision that seeks to define fraud in the Indian context is section 17 of the Indian contract act.

Fraud as defined under section 17 of the Indian Contract Act,1872: “Fraud” means and includes any
of the following acts committed by a party to a contract, or with his connivance, or by his agent, with
intent to deceive another party thereto of his agent, or to induce him to enter into the contract :-

1) The suggestion as a fact, of that which is not true, by one who does not believe it to be
true;
2) The active concealment of the fact by one having knowledge or belief of the fact;
3) A promise made without any intention of performing it;
4) Any other act fitted to deceive;
5) Any other act or omission which the act declares to be fraudulent.
The abovementioned provision gives an exhaustive definition of the term fraud. Though it
lists several grounds for fraud, it also recognises the need to give the lawmakers flexibility to
declare some act as fraudulent or add some new grounds to the definition. It recognises the
possibility of a situation that may arise with the passage of time and the advancement of
society and would need to be dealt with accordingly. The fertility of man’s invention in
devising new schemes of fraud is so great that the courts have always declined to define it, or
to define undue influence, which is one of its many varieties, reserving to themselves the
liberty to deal with it under whatever form it may present itself.8

IV. FRAUD AS PER COMPANIES ACT 2013

As far as companies act is concerned fraud as a ground for winding is a novel concept introduced
with the new act itself. Though 1956 act had some provisions for fraud but it did not contain any
specific process of dealing with fraud. Winding up ,in companies act 1956, was under two heads -
voluntary winding up and winding up by the tribunal, which were enlisted in section 433 of the
companies act 1956. Though section 433 does not include fraud as a ground directly but there is still
some reference to winding up on the basis of fraud. Section 439(1) of the companies act 1956 listed
the persons who were entitled to file an application for winding up of the company. Clause (f) of
section 439(1) provides that an application for the winding up of the company may be presented by
“any person authorized by the central government in their behalf” in a case falling under section
243. Section 243 of the 1956 act empowered the central government to cause a petition for winding
up to be presented, in cases covered by subclause (i) or (ii) of clause (b) of section 237. Section 237 is
as follows-

6
Blacks law dictionary
7
Kerr on fraud pg 43
8
kerr
“243. Application for winding up of company or an order under section 397 or 398. – If any such
company or other body corporate is liable to be wound up under this act and it appears to the
central government from any such report as aforesaid that it is expedient so to do by reason of any
such circumstances as are referred to in sub-clause (i) or (ii) of clause (b) of section 237, the central
government may, unless the company, or body corporate is already being wound up by the tribunal,
cause to be presented to the tribunal by any person authorised by the central government in this
behalf –

a) A petition for the winding up of the company, or body corporate on the ground that it is just
and equitable that it should be wound up;
b) An application for an order under section 397 or 398,
c) Both a petition and an application as aforesaid.” 9

Section 237(b) provides for the government to order an investigation ,if , in its opinion or in the
opinion of the tribunal-

i. That the business of the company is being conducted with intent to defraud its creditors,
members or any other persons, or otherwise for a fraudulent or unlawful purpose or in a
manner oppressive of any of its members, or that the company was formed for any
fraudulent or unlawful purpose;
ii. That persons concerned in the formation of the company or the management of its affairs
have in connection therewith been guilty of fraud, misfeasance or other misconduct towards
the company or towards any of its members; or
iii. That the members of the company have not been given all the information with respect to
its affairs which they might reasonably expect, including information relating to the
calculation of the commission payable to a managing or other director, or the manager, of
the company”10

Therefore, a combined reading of section 439(1)(f), 243 and 237(b) of the 1956 act would lead to the
winding up of the company on the ground of fraudulent or unlawful purpose. So, even though it is
difficult to wind up a company directly on the basis of fraud, there is still a process available to deal
with fraudulent practices. But, there is a caveat in winding up a company through the above-
mentioned process. Section 243(a) mandates that a petition for winding up in terms of section
439(1)(f) read with section 237(b)(i) and (ii), has to be on “just and equitable” ground. Just and
equitable ground is a very profound concept which has its roots in the judgement in Re Suburban
Hotel Co.11 in this case it was stated that a company may be wound up if it becomes incapable of
achieving the purpose for which it was formed. Another term involved in the application of the
principle is the “substratum” of the company. In the landmark case of In re Suburban Hotel
Company.,12 it was held that “If it were shown to the court that whole substratum of the
partnership, the whole of the business which the company was incorporated to carry on has become
impossible, I apprehend that the court might, either under the Act of Parliament or on general
principles, order the company to be wound up.” Substratum can be said to be the foundation or
object for which a company is brought into existence and when that purpose is extinguished, then, it
is just and equitable to wind up the company. Whether some circumstances are so extraordinary
that it is appropriate for the company to be wound up is to be determined by the courts, thus, it

10

11

12
 confers a wide discretionary power on the court. 13 But this does not mean that judicial decisions
would be based on the whim and fancies of the courts. It is important that the internal affairs and
management of those affairs is interfered only when there exists a strong case of violations of the
assumptions on which the company was formed or it has become impossible to carry on the daily
affairs of the company or there is a fraud committed. 14 As we have seen that “just and equitable”
clause has led to *litigation and *judicial decisions have developed a jurisprudence based on
examination and justification of circumstances. But this could also prove to be a incongruous in the
case of fraud because of the discretion of the court. Section 443(2) of the 1956 act mandated that
court could refuse to order the winding up of the company if any other remedy was available to the
person who is seeking to wind up the company. Thus, despite the fact that fraud was available as an
indirect circumstance for the winding up of the company, it was a little problematic in the 1956 act
due to section 443 of the act.

In the 2013 act, most of the provisions were same as the 1956 act but the main departure was the
specific inclusion of fraud, listed under section 271(3) of the 2013 act.

V. MISCELLANEOUS GROUNDS OF ATTACK

V.1 ADVERTISEMENT
Rule 5 and 6 of the companies(Winding up)Rules,2020 speak about advertisement. Advertisement is
a way to inform all the interested parties about the filing of the prtition of the winding up
proceedings. The court dismissed the contention of the appellants by citing rule 35 of the national
company law tribunal rules, which confer the tribunal with the powers to even dispense with the
petitions.

V.2 LIMITATION
It was contended that the suit was barred by limitation because a period of 3 years had passed since
the registration of FIR by CBI. Court again dismissed the contention by bringing to fore the point that
fraud was of a continuing nature and as result of the continuous offence, the application of
provisions becomes recurring

V.3 ESTOPPEL
Another contention raised by the appellants was that antrix was estopped from pleading fraud as a
ground of winding up because termination of the contract was done by invoking force majeure and
the same was never mentioned before approaching NCLT. section 19 was invoked to say that
contract vitiated by fraud was voidable not void. To this court opined that fraud was not limited to
the agreement itself but was deeply ingrained right from the formation of devas to the management
of the affairs of the company.

VI. CONCLUSION
As we have seen that just and equitable despite having a significant and comprehensive application,
proved to be problematic in some particular circumstances. It was principally used by shareholders
as a tool to get back the capital invested in the company. In devas-Antrix case, it was the
government which initiated the litigation in the NCLT. Fraud was introduced as a ground for winding
in the 2013 act only and devas multimedia is the first company wound up on the basis of fraud. Since
this is the first case, winding up on the basis of fraud is still an evolving space. Supreme court, with

13
Re wondoflex Textiles Ltd.
14
upholding the order of winding up of devas has added a new aspect to the already cluttered winding
up domain. It remains to be seen whether it would help in curbing the formation and running of the
companies for fraudulent purpose.