The Dabhol Debacle

Updated: Apr 9 2002, 05:30am hrs
Jinx can be a synonym for Dabhol Power Company, the Indian subsidiary of the now infamous Enron Corporation in India. One of the first multinational entrants in the newly opened up power sector in India, Enron, like Cogentrix, had to face multiple rounds of litigation in Indian courts, which had ultimately laid down the bottomline that in contrast to the telecom sector, the opening up of the power sector has been an abysmal failure.

Things however had looked up with all the cases brought against DPC and the centre and state governments being dismissed by the Bombay High Court. Construction and other activities were resumed, the arbitration with the state government brought to an end and the financial documents, which had raised many doubts, were executed. But controversies reared their heads afresh in a few years time. Disputes arose with the state government, top executives resigned en masse, DPC was put up for sale, and the state government threatened to recall all loans and file a criminal complaint. Across two continents, the parent got itself involved in the biggest crisis controversy of failure of corporate governance and faulty audit in modern finance. Employees with or without options, investors, filed law suits in US courts. Andersen, the errant auditors, came under investigation. Enron had no option but to file for bankruptcy under chapter XI of the US bankruptcy code.

Chapter XI is often compared to the Indian Sick Industrial Companies Act or Sica, now to be replaced with analogous provisions in the Companies Amendment Bill, 2001. Chapter XI is essentially meant to provide breathing space to the debtor to reorganise business to meet their liabilities. As part of the package, the debtor gets immunity from creditors actions, but remains in control of its assets during this period, which in theory is three months but as under Sica, gets invariably extended. It is open to the bankruptcy court to appoint a trustee/independent administrator in case of allegations of fraud, dishonesty of gross management by the debtor. It is reported that such a motion has been made by some of Enrons creditors.

Section 1111 of chapter XI, refers to claims and interests, but other than the provisions relating to control of assets, the Code is not clear on what constitutes the assets of the debtor. In other words, there is no clarity whether the assets of DPC in India would be covered by the scope of the bankruptcy proceedings in the US. To preempt this and safeguard their secured assets in DPC, the monetary value of which is around a whopping Rs 6,192 crore, IDBI and other financial institutions filed a suit in the Bombay High Court praying for various declarations and injunctive reliefs to safeguard their security. The apprehension expressed was that Enron would include the shares and assets of DPC in their case before the Bankruptcy Court of New York which had no jurisdiction or relevance to the assets or any proceedings relating to a company registered under the Companies Act, 1956. Reference was made by the plaintiffs to an immediate threat of attachment by the US Court and the conduct of DPC in removing valuable components from the project site. Records of the US proceedings, details of which are not clear from the judgment, convinced the court about the intent of DPCs parent company. DPCs lawyer argued on the lack of jurisdiction, urging that the Debt Recovery Tribunal was the proper forum. It was further argued that the Bombay High Court had no jurisdiction over the non-resident defendants. The Court, meeting the defence on procedural grounds on the issue of forum, granted the injunction and appointed a receiver in respect of the suit properties. But it has skirted the preliminary issue of jurisdiction, deferring it to be examined on merits. The court has also directed status quo to be maintained in respect of the monies held by the foreign defendants in a bank account in the US Bank National Association in the USA.

The order of appointment of receiver is perfectly in accordance with the concept of lex situs under private international law. The House of Lords and Indian Courts have consistently held that even if both parties concerned are not residing in a particular territory, if the property is located there, only the laws of that territory would apply. In the present case where DPC is an Indian company, the secured creditors are Indian, and the property situated in India, the receivers appointment is legally unquestionable. But in the absence of details in the order, the direction for maintaining of monies as a part of status quo in the US bank lacks clarity.

Even if these monies represent parent company guarantees, the bankruptcy proceedings in the US are prior in point of time. Under the theory of priority of proceedings under private international law, the US bankruptcy court has exclusive jurisdiction over all monies and assets of Enron in the US, the concept of lex situs being the accepted exception. The doctrine of plurality on the other hand, recognises multiple proceedings in various jurisdictions, where the business of the company is located. But then, the presumption is whether the subsidiary is a distinct legal entity; if so, so is the parent, which raises doubts as to the legal effect and tenability of the order in so far as it extends to the US monies; not to speak of the jurisdiction. The decision on merits or in appeal has to deal with this aspect, which promises to be an interesting exposition of private international law in the field of bankruptcy.

Kumkum Sen is a corporate lawyer and a partner in Khaitan & Khaitan, a Delhi law firm