In an arbitration commenced by an Indian Entity against a US-incorporated Mining Company, an Arbitral Tribunal held the Mining Company and its Executive Director liable for fraudulent misrepresenting the company’s capability to produce concentrated rock phosphate using its Australian Phosphate Assets. The arbitration was conducted under the auspices of the Singapore International Arbitration Centre. Shook Lin & Bok LLP (“SLB”) represented the Indian Entity, which was granted an award of USD 28.05 million against the Executive Director and USD 12.35 million against the Mining Company.
Following from the Tribunal’s decision, the Indian Entity sought to enforce the award in Australia, where the Mining Company held its main assets and ran its business. The Executive Director, who had been residing in Singapore, also relocated to Australia. SLB continued to act for the Indian Entity and instructed Australian lawyer in enforcement proceedings against the Mining Company and its Executive Director.
The recovery efforts were initially frustrated when the Mining Company transferred its Phosphate Assets, which were its sole significant asset, to a newly-incorporated company. Simultaneously, the Mining Company sought to resist liquidation in Australia, on the basis of the Award debt, by commencing Chapter 11 proceedings in the US. However, following a series of favourable appellate decisions in the Supreme Court of Victoria, the Indian Entity successfully placed the Mining Company into liquidation and obtained a declaration that the transfer of the Phosphate Assets was void. After a long drawn process, the liquidators undertook a sale of the Phosphate Assets, resulting in dividends being paid to the Indian Entity, the main creditor of the Mining Company.
Facts
The claim arose out of what was initially an anticipated long-term collaboration between the Indian Entity and its UAE-incorporated subsidiary (collectively, the “Indian Entity”), and a US-incorporated mining company (the “Mining Company”). The Mining Company controlled significant deposits of rock phosphates in Queensland, Australia (the “Phosphate Assets”). The company’s executive director (the “Executive Director”), along with the Mining Company, made numerous representations to the Indian Entity on a long term off-take agreement
concentrated rock phosphate, to be mined from the Phosphate Assets. In the agreement which was reached, the Indian Entity took an equity stake in the Mining Company to facilitate such an agreement. The Indian Entity’s intent was to use the rock phosphate for the production of fertiliser in its plant in India.
The Mining Company and its Executive Director represented that production of concentrated rock phosphate would begin within around two years, and that all regulatory, environmental, and licensing issues were under control. On the basis of these representations, the Indian Entity entered into (i) a Shareholder Agreement with the Executive Director and (ii) a Share Options Agreement with the Mining Company. The Indian Entity paid (i) USD 28.05 million to the Executive Director personally and (ii) USD 12.35 million to the Mining Company for its
equity stake.
It transpired that the representations made regarding the viability and timely completion of the project were false. The mining company did not have a genuine, workable plan as to the production of rock phosphate; the rock phosphate could not have been delivered within the anticipated timeframe, and was in fact not delivered to the Indian Entity even after around 5 years
The Phosphate Assets, which comprised the bulk of the Mining Company’s assets, were then transferred to the Mining Company’s wholly-owned subsidiary (the “Subsidiary”)
Arbitral Proceedings
SLB represented the Indian Entity before the SIAC. The Indian Entity argued that the Mining Company and the Executive Director had made fraudulent representations as to the viability and timely completion of the project. Its position was that it had entered the Share Options Agreement and Shareholder Agreement on the basis of these fraudulent misrepresentations, and sought, among other things, damages and/or rescission of the agreements. The Tribunal accepted the Indian Entity’s arguments:
(a) It was clear to parties that the Indian Entity’s sole interest in entering the Share Options Agreement and Shareholder Agreement was to purchase concentrated rock phosphate. The Mining Company and Executive Director had made the representations to the Indian Entity despite knowing they were false and having no workable plan as to the production of concentrated rock phosphate.
(b) The Mining Company argued that the representations were mere estimates, rather than guarantees or warranties, and were subject to third party risks which were expressly highlighted to the Indian Entity.
They further argued that parties had not in fact entered into the anticipated long-term agreement which would have governed the Indian Entity’s purchase of the concentrated rock phosphate; therefore, parties had allegedly not intended to be bound by the representations. The Tribunal dismissed these arguments. Even if it were to accept that the representations made were not in themselves statements of fact, they would still be actionable as misrepresentations; where a person states as his opinion something which he does not in fact believe, he makes a false statement of fact. The Tribunal therefore ordered that the Shareholders Agreement and Share Options Agreement be rescinded, that the Executive Director pay the Indian Entity USD 28.05 million and that the Mining Company pay the Indian
Entity USD 12.35 million. Interest was ordered from the date of the initial payment by the Indian Entity to the date of the award.
Enforcement of Arbitral Award
After succeeding before the SIAC, the Indian Entity applied to the Singapore High Court for leave to enforce the award in the same manner as a judgment of Court. However, as the Executive director relocated to Australia following the Award, the Indian Entity had to look to Australia to enforce the Award.
SLB instructed Australian lawyers to undertake enforcement efforts in Australia. An application to recognise the Award was successfully made to the Supreme Court of Victoria in Melbourne.
Around this time, a new company was incorporated by the Executive Director’s family members and relatives (the “New Company”). The New Company entered into a Bond Deed with the Mining Company and the Subsidiary which owned the Phosphate Assets, pursuant to which the Mining Company received around AUD 400,000. The Bond Deed contained a General Security Deed which granted the New Company security over all the assets of the Mining Company and the Subsidiary upon an event of default.
The Indian Entity issued a statutory demand to the Mining Company, and the Mining Company failed to comply with the demand. The Indian Entity therefore applied to wind up the Mining Company in Australia through instructed Australian counsel. However, the winding up proceedings were complicated by the following events:
(a) First, the Mining Company, which was incorporated in Delaware and listed in the US, filed for Chapter 11 bankruptcy proceedings in the US shortly after the commencement of winding up proceedings in Australia.
(b) Second, upon the expiry of the time for compliance with the statutory demand, the New Company had immediately appointed a receiver to the Mining Company and the Subsidiary on the basis that an event of default had occurred. The receiver caused the Mining Company to sell its shares in the Subsidiary to the New Company for a consideration of $1. As a result, the Phosphate Assets (which were the main assets owned by the Mining Company and the Subsidiary) were transferred to the New Company.
Winding up Proceedings
The Mining Company resisted the winding up proceedings in Australia on the basis that the Australian liquidation was incompatible with the US Chapter 11 proceedings, whose goal was to restructure rather than wind up the company. In doing so, it argued that its centre of main interests was in the US, rather than Australia.
The Mining Company’s arguments were dismissed by both at first instance by the Supreme Court of Victoria’s Commercial Court, and on appeal in the Court of Appeal in Victoria. The Courts accepted Australian counsel’s arguments that the Mining Company’s centre of main interests (taking into account its main place of business, major assets, and its major creditors) was in Australia, and that the Chapter 11 proceedings were in early stages with no restructuring proposed as yet. In the premises, the Court had the power to wind up the Mining Company, and exercised its discretion to do so.
The Mining Company therefore entered liquidation, with the Indian Entity being one of its main creditors.
Claiming and Disposing of the Phosphate Assets
Despite successfully winding up the Mining Company, there were limited assets for distribution to creditors because the Phosphate Assets had been transferred to the New Company. Funded by the Indian Entity, the liquidators of the Mining Company applied to the Supreme Court of Victoria for
(i) a declaration that the Bond Deed and General Security Deed were void and unenforceable, and
(ii) the Subsidiary, which owed more than AUD 18 million to the Mining Company, to be wound up. The liquidators succeeded both at first instance in the
Supreme Court of Victoria’s Commercial Court and on appeal in the Court of Appeal.
(a) The Courts held that the Mining Company was insolvent at the time it entered into the Bond Deed as it did not have realisable assets that it could use to pay its debts at the time.
(b) The Bond Deed was found to be uncommercial and voidable. It was almost inevitable that the event of default clause in the Bond Deed would be triggered and automatically grant the New Company security over all the assets of the Mining Company and the Subsidiary. The clause included final judgment in excess of AUD 1 million as an “event of default”. At the time of the Bond Deed, the Indian Entity had already obtained the arbitral award in Singapore, and the Mining Company was not challenging the award.
(c) The Court rejected the New Company’s claim that the Bond Deed was a good faith transaction entered into for the purpose of funding the Mining Company’s litigation. The transaction placed assets worth approximately USD 20 million beyond the reach of unsecured creditors, in exchange for an advance of AUD 400,000. The Courts held that a reasonable person in the circumstances would not have entered into this transaction.
(d) The Subsidiary was unable to pay its debts when they fell due and was therefore wound up. Further, given the Subsidiary’s attempt to frustrate the Mining Company’s creditors, it would also be just and equitable to wind it up.
An application for leave to appeal to the apex court, the High Court of Australia, was denied.
Following from the Court’s decision, the Phosphate Assets were finally placed in the hands of the liquidators, who then undertook a sale process. The asset was realised, resulting in dividends being paid to the Indian Entity, the main creditor of the Mining Company.
Significance
This case serves as an example of how enforcement, especially cross-border enforcement, may involve complex and long drawn legal proceedings, even after a party obtains an arbitral award or judgment. In such cases, the cross-jurisdictional nature of the proceedings often raises novel points of law that necessitate protracted appellate proceedings in multiple jurisdictions. Cases like this greatly benefit from a cradle-to-grave approach in managing proceedings, and often proceed more smoothly where a firm has a network of international partners readily available to assist in enforcement efforts.
SLB acted for the claimant Indian Entity in the arbitral proceedings before the SIAC and coordinated international enforcement efforts. SLB also represented the Indian Entity’s interests as a creditor of the Mining Company, and the main funder of the liquidators
For further information, please contact:
Sarjit Singh Gill, Partner, Shooklin & Bok
sarjit.gill@shooklin.com
