Constitution of India: Art. 226 – Power of High Courts to issue writ – Award of Concession Agreement to two companiesRMGL and RMSGL respectively by Haryana Shehri Vikas Pradhikaran-HSVP for developing metro rail – Meanwhile direction by State of Haryana that all metro projects would be handled by the first respondent – Thereafter, issuance of termination notice by RMGL and RMSGL to HSVP to bring an end to the Concession Agreement upon expiry of 90 days from delivery of the termination – Thereafter, HSVP issued their termination notices to RMGL and RMGSL, directing them to hand over the projects to HMRTC – However, since RMGL and RMGSL were entities of a group categorised in the Red category, they were to seek approval before transferring or encumbering any assets – Subsequently, RMGL and RMGSL permitted to handover possession and control of metro project to HSVP pursuant to termination of the Agreement – On the same day, writ petition u/Art. 226 by HSVP and HMRTC challenging the notice of termination on the ground that it was against public interest – High Court granted interim direction for continuance of the operation of metro project for 30 days, which was further extended and during which the debt due under the financing documents in terms of concession agreements was to be determined by the auditor and then HSVP was to deposit 80 % of the debt due as determined in an Escrow Account in terms of Concession Agreement, which would be subject to order of NCLAT or any other court – On appeal, held: Exercise of writ jurisdiction by the High Court u/Art. 226 was justified since non-interference, which would have inevitably led to the disruption of rapid metro lines for Gurgaon, would have had disastrous consequences for the general public – However, ordinarily the High Court in its jurisdiction u/Art. 226 would decline to entertain a dispute which is arbitrable – Directions contained in the High Court’s consent order makes it clear that the audit team appointed by CAG was to conduct a financial audit of the debt due and to examine the scope of the audit, the audit being completed within 30 days and 80 % of the debt due being deposited within 30 days after the receipt of the audit report; and that the rest of the disputes between the parties arising out of the audit report were to be agitated in arbitration – HSPV and HMRTC could not avoid compliance with the High Court’s Consent Order since they willingly agreed to pay 80% of the debt due as per the auditor’s findings – HSPV to deposit 80% of the amount within 3 months – Amount to be maintained in the Escrow Account subject to the orders of NCLAT or any other competent authority – RMGL and RMGSL on the one hand and HSVP on the other hand, at liberty to pursue their rights and remedies in pursuance of the arbitration clause.
Disposing of the appeals, the Court
HELD: 1.1 The expression ‘debt due’ is defined in Article
1.1 of the Concession Agreement dated 9 December 2009. The expression indicates that the term debt due comprises of three components: the principal amount of the debt provided by the senior lenders under the financing agreement; all accrued interest, financing fees and charges payable under the financing agreement; and any subordinated debt which is included in the financial package. [Para 36][682-D-H; 683-A]
1.2 Article 18 provides for an Escrow Account into which all funds, which constitute the financing package for meeting the capital cost of the concessionaire, are to be deposited. During the operational period, all fare and non-fare revenues were also to be deposited exclusively in the Escrow Account by the concessionaire. Article 18.2.1 provided for the disbursement from the Escrow Account, which included debt service payments due to the senior lenders. [Para 37][683-F-G]
1.3 Where the Concession Agreement has been terminated by HUDA on account of a default by the concessionaire, HUDA was required to take over the complete project and assets, and to pay to the lenders of the Project, as per the financing documents, TRANSPORT CORP. LTD
an amount equal to 80 per cent of the debt due as termination payment. Where on the other hand, the termination is by the concessionaire on account of a default by HUDA, the concessionaire was entitled to receive by way of a termination payment, a sum equal to: the debt due; and 110 per cent of the adjusted equity. [Para 39][686-D-E]
1.4 The directions contained in the High Court’s consent order dated 20 September 2019 makes it abundantly clear that the audit team appointed by CAG was to conduct a financial audit of the debt due and to examine the scope of the audit, the consent order is the time bound process which was envisaged, with the audit being completed within 30 days and 80 per cent of the debt due being deposited within 30 days after the receipt of the audit report; and that the final aspect which needs to be emphasized is that the rest of the disputes between the parties arising out of the audit report were to be agitated in arbitration. The parties clearly understood that once the debt due was ascertained in terms of the audit report, 80 per cent would be deposited by HSVP in the Escrow Account while the rest of the disputes in respect of the audit report would be governed by arbitration. A time of 30 days was envisaged for deposit the amount in Escrow Account, upon the receipt of the audit report. Subsequently, another order was passed by the High Court wherein clause (ii) of the earlier order was substituted and the substituted one envisaged that the auditors would also have to examine the scope of the audit of the debt due suggested by HSVP. Hence, CAG would also examine the scope of the audit of the debt due suggested by HSVP in terms of the Concession Agreements. Moreover, it was envisaged that the rest of the dispute either arising out of the CAG report, the validity of the termination notices issued by both the parties and any past or future claims/liabilities inter se would be agitated in arbitration. On 15 October 2019, there was a further clarification by the Division Bench that CAG would examine the scope of the audit of the debt due suggested by both the parties in terms of the Concession Agreements. Thus, it was understood by both the parties that the determination of the debt due would be in terms of the Concession Agreements. CAG specifically placed before the High Court its understanding of the role to be performed by it. In its written statement before the High Court on 19 November 2019, CAG stated that it had decided to appoint an auditor “for the financial audit of debt due as on the transfer date”. [Paras 45, 46] [690-H; 691-A-G]
1.5 HMRTC and HSVP, as well as the appellants, were apprised at all material times of the work of audit being handed over by CAG to a firm appointed by it. On 24 February 2020, a draft report of the financial audit of the debt due of RMGL/RMGSL was sent to the Principal Secretary to the Government of Haryana in the Department of Town and Country Planning. HMRTC was requested to communicate its response on behalf of the State government, so that it could be incorporated in the report. On 27 February 2020, HSVP sought four weeks at the least, in view of the ongoing Session of the State Legislative Assembly. The Accountant General Audit, Haryana followed up the earlier email by subsequent communications dated 18 March 2020 and 22 April 2020. By the later communication on behalf of CAG, the response of the State government was requested to be furnished before the deadline of 29 April 2020, failing which the report would be finalized without including their response. HMRTC, HSVP and the State government, however, did not furnish their response to the draft report. Eventually, the audit reports were finalised in respect of the debt due under the Concession Agreements with RMGL/RMGSL respectively, and were placed before the High Court in sealed cover. Following the opening of the sealed cover on an application by the appellants, an objection was raised in the form of an affidavit by HMRTC on
10 October 2020. According to HMRTC, the audit report was inconclusive and incomplete, since several aspects which will have an impact on the debt due remain to be determined. The auditors stated that the scope of the audit as decided by CAG was submitted to the High Court on 19 November 2019, and it was intimated that only those issues which are relevant and related to examining the debt due under the Concession Agreements would be examined. Hence, other issues mentioned by HMRTC, such as encumbrances and liabilities on the metro project, shareholding/share in the valuation of the assets of the concessionaire, change of shareholding rights, criminal acts and liabilities, would require forensic and technical audit. Such audits TRANSPORT CORP. LTD
are ongoing independently. The audit conducted by the auditors appointed by the CAG herein, was limited to examining the debt due as defined in the Concession Agreements. While arriving at the principal and interest component of the debt due, the auditors indicated that other matters had come to their attention, which can have a significant impact on the debt due, and that the report was subject to the outcome of such matters. [Para 47][692-E-H; 693-A-E]
1.6 Clause (ii) of the order dated 20 September 2019 makes it abundantly clear that the basic purpose underlying the entrustment of the reference to the CAG was the determination of the debt due “as defined under the Concession Contract”. The High Court was seized of a proceeding under Article 226 of the Constitution, and its writ jurisdiction had been invoked to challenge the notices of termination issued by RMGL and RMGSL, and for ensuring that the consequence which would emanate on the expiry of the notice period of 90 days by the cessation of the metro operations could be prevented by the judicial intervention in the course of the public law jurisdiction. The issuance of a notice of termination, the consequences which would ensue, and the resolution of disputes is specifically provided in the arbitration agreement between the parties, which is an intrinsic part of the Concession Agreements. Hence, there was an evident interface between this element of public interest on the one hand and the contractual rights of the parties to the Concession Agreements on the other. However, when HMRTC and HSVP moved the High Court under Article 226, they did so in view of the impending threat which was looming large on the horizon of the rapid metro operations being brought to a standstill as a result of the proximate expiry of the notice of 90 days preceding termination. In the instant case, the High Court was evidently concerned over a fundamental issue of public interest, which was the hardship that would be caused to commuters who use the rapid metro as a vehicle for mass transport in Gurgaon. As such, the High Court’s exercise of its writ jurisdiction under Article 226 in the instant case was justified since non-interference, which would have inevitably led to the disruption of rapid metro lines for Gurgaon, would have had disastrous consequences for the general public. However, as a measure of abundant caution, it is clarified that ordinarily the High Court in its jurisdiction under Article 226 would decline to entertain a dispute which is arbitrable. Moreover, remedies are available under the Arbitration and Conciliation Act, 1996 for seeking interim directions either under Section 9 before the Court vested with jurisdiction or under Section 17 before the arbitral tribunal itself. [Para 49][694-G-H; 695-A-C; 696-B-D]
1.7 The termination of the Concession Agreements had consequences in terms of the provisions contained in the Agreement requiring a deposit of 80 per cent of the debt due under Article 24.4. The contesting parties agreed to an independent third-party determination of this amount by a neutral entity, namely the CAG. The primary function of CAG was to appoint a team of auditors for conducting a financial audit of the debt due and in that process of also examine the scope of the audit. The orders dated 4 October 2019 and 15 October 2019 issued by the High Court also envisaged that CAG would examine the scope of the audit. While the earlier order of 4 October 2019 required CAG to examine the scope of the audit of the debt due suggested by HSVP, the subsequent order dated 15 October 2019 required the examination by CAG on the scope of the audit after bearing in mind the suggestions by both the parties “in terms of the Concession Agreement”. The expression “in terms of the Concession Agreement” indicates that the basis of the audit was to be what was envisaged in the Concession Agreements, which specifically defines the expression “debt due”. Pertinently, the original order of 20 September 2019 specifies a strict time schedule within which, on a determination being made by the auditor, 80 per cent of the debt due would be deposited by HSVP in the Escrow Account. This was however subject to the safeguard that it would be subject to any order that may be passed by NCLAT or by a competent statutory authority. However, it was further clarified that the rest of the disputes between the parties to the lis arising out of the audit report were to be agitated in arbitration proceedings. [Para 50][696-E-H; 697-A-B]
1.8 The provision, embodied in clause (v) of the operative directions of the High Court’s consent order dated 20 September 2019, is capable of a reasonable interpretation that once a TRANSPORT CORP. LTD
determination was made in the audit report, 80 per cent would be deposited in the Escrow Account by HSVP and if any dispute arising out of the audit report remained, that would be resolved in arbitration. As a matter of fact, the subsequent order of 4 October 2019 replaced clause (v) by envisaging that the rest of the disputes between the parties arising out of: the CAG report; the validity of the termination notices issued by both the parties; and any past or future inter se claims/liabilities; shall be agitated and decided in arbitration proceedings. [Para 51][697-C-E]
1.9 HSVP and HMRTC on the one hand, and RMGL/RMGSL on the other, were in discussion at arm’s length when they invited the High Court to pass its order dated 20 September 2019, and agreed to the modifications which have been made by the orders dated 4 October 2019 and 15 October 2019. In the face of the clear stipulations contained in the order of the High Court, it would be impermissible to interdict the consequences emanating from the working out of the directions contained in the above orders of the High Court upon the submission of the CAG report. [Para 52][697-E-F; 698-B]
1.10 CAG in the course of its affidavit filed before this Court and High Court by the Deputy Accountant General, clarified that it was decided, after examining the scope of the financial audit of the debt due suggested by both the parties, that CAG would examine only those issues which are related and relevant to examining the debt due under the Concession Agreements. CAG followed a process which is fair by making a statement on the scope of the audit before the High Court in advance; examining the scope of the audit as suggested by the parties before making its determination; appointing a firm of chartered accountants for conducting an audit as was envisaged in the order of the High Court; furnishing the contesting parities with a copy of the draft report; allowing the parties to submit their response to the draft report; granting an extension of time to the State of Haryana to submit its comments; and placing the State on notice that it would have to file its objections finally by a prescribed deadline, failing which the report would be finalized. [Para 53][698-C-G]
1.11 HMRTC and HSVP are themselves to blame if they did not submit their responses. CAG has specifically rebutted the objections to the audit report submitted by HMRTC on the ground that as a constitutional authority, CAG decided upon the scope of the audit of the debt in terms of the Concession Agreements, which it submitted to the High Court. Moreover, it has clarified that this was a financial audit of the debt due and the auditors reported their findings in terms of the Concession Agreements. The FIR lodged by the Economic Offences Wing, the Income Tax Department notice, investigation by the SFIO and Forensic Audit did not form a part of the financial audit conducted by the CAG . CAG has submitted that a financial audit of the debt due is complete and conclusive under the scope of audit as decided by CAG, and submitted to the High Court. [Para 54][698-G-H; 699-A-B]
1.12 The Projects in question have been funded by a consortium led by banks, among which are Canara Bank and Andhra Bank. The terms of the Concession Agreements expressly recognized that the Projects were being publicly funded through financial institutions. The audit report emphasized that the proportion between debt and equity was pegged at 70:30. The terms of the Concession Agreement dated 9 December 2009 clearly envisaged the purpose of the Escrow Account in Article
18. HUDA, the predecessor of HSVP, entered into a Concession Agreement dated 9 December 2009, which in Article 17 expressly recognizes the linkage between the financing package and the Concession Agreement. In fact, Article 17.2 emphasizes that the rights of the concessionaire would stand waived if financial closure was not to occur within six months within the cure period of six months. Further, Article 18.1 envisages that all funds constituting the financing package for meeting the concessionaire’s capital cost shall be credited to the Escrow Account during the period of operations, and all fare and non-fare revenues collected by the concessionaire shall be exclusively deposited in it. Under Article 18.2, the concessionaire was required to give to the Escrow bank irrevocable instructions while opening the Escrow Account that the deposits into the Escrow Account would be appropriated in the manner indicated in clauses (i) to (ii) of Article 18.2.1. This TRANSPORT CORP. LTD
includes provision for debt service payments. These provisions in the Concession Agreement have a vital bearing on the subject matter of the present dispute. Canara Bank in its affidavit filed before the High Court has stated that on behalf of consortium of lenders, acting as facility agent, it financed RMGSL in the aggregate of Rs 1500 crores in terms of a common loan agreement. The Escrow Account Agreement has been entered into in pursuance of the Concession Agreement, and to effectuate the funding of the Project No 2. As on 31 July 2019, the lenders of RMGSL have an outstanding of Rs 1651 crores approx. Hence, the Projects which have been executed by RMGL and RMGSL, involved an outlay of funds from Andhra Bank and Canara Bank, who have a vital stake in the financials of the Projects. [Para 55][699-C-H; 700-A]
1.13 As such, HMRTC and HSVP cannot avoid at this stage complying with the directions which were issued by the High Court in its orders dated 20 September 2019, as modified on 4 and 15 October 2019, on the plea that an FIR has been lodged on
16 December 2018 against IL&FS group in which there are allegations against RMGL and RMGSL of producing fake invoices and inflating the capital cost of the rapid metro Projects. The circumstances which have been adverted to in the affidavit filed by HMRTC in the High Court were known to it and to HSVP, when they both agreed to an order which emanated with the consent of the parties on 20 September 2019. Both HMRTC and HSVP were conscious of their obligation to deposit 80 per cent of the debt due as a consequence of the termination by the provisions contained in the Concession Agreements. They wished to lend an assurance to the determination of the debt due by seeking the involvement of the CAG. They made a solemn commitment before the High Court that within 30 days of the determination, 80 per cent of the debt due would be deposited in an Escrow Account. This amount, it must be emphasized, is not being handed over either to RMGL or RMGSL, which have been classified as “red entities” of the IL&FS group. The placement of the quantum representing 80 per cent of the debt due in Escrow Account is to abide by such directions as may be issued by NCLAT or any other competent statutory authority. Besides this provision, remedies are available either before the competent Court under Section 9 or before the Arbitral tribunal under Section
17 of the Arbitration and Conciliation Act, 1996. Hence, there being an agreement between the parties, to permit HSVP and HMRTC to obstruct or delay compliance with their obligations would be manifestly impermissible for three reasons: firstly, the obligation to deposit 80 per cent debt due as a consequence of the termination emanates from Article 24.4 of the Concession Agreement dated 9 December 2009; secondly, the obligation to deposit 80 per cent of the debt due as determined in the report of the auditor has been assumed voluntarily before the High Court by HSVP/HMRTC from which, as public bodies, they cannot be permitted to resile; and thirdly, there is a vital public interest element in ensuring that the monies which are committed by banks and financial institutions towards financing infrastructure projects are secured to them in terms of the Concession Agreements. [Para 56][700-B-H; 701-A]
1.14 The underlying wrongdoing which was allegedly conducted by the promoters in the erstwhile management of IL&FS undoubtedly needs to be investigated. The process of pursuing the forensic audit, the investigation by the SFIO and by the law enforcement machinery must follow to its logical conclusion. The NCLT is supervising the resolution process with a government appointed Board now being in charge of the management of IL&FS. Equally, financing arrangements entered into by financial institutions towards fulfilling infrastructure projects, based on the sanctity of the commercial contracts, are to be duly observed. This facet has to be emphasized since it embodies a vital element of public interest as well. Deterioration in loan recovery not only leads to higher provisions and diminished profitability but also constrains banks’ lending capacity, thus affecting the economy adversely”. Unless the dues which are assured to financial institutions as part of the arrangements which are envisaged in Concession Agreements are duly enforced, the structure of financing for infrastructure projects may well be in jeopardy. Such a consequence must be avoided by declining to accede to a request, such as that by HMRTC and HSVP, which is to allow it to resile from its obligations. These obligations arise not only in terms of the Concession Agreements, but have been TRANSPORT CORP. LTD
solemnly assumed before the High Court. Hence, on both counts, HMRTC and HSVP cannot be permitted to resile. [Para 57] [701-B-E]
1.15 The intervention of this Court under Article 136 of the Constitution was sought having regard to the manner in which the proceedings before the High Court were being derailed. On
12 October 2020, after HMRTC filed its affidavit, the High Court noted the appellant’s submission that “the matter does not brook any delay” and yet adjourned the matter to 16 October 2020. Thereafter, when the proceedings came up on 16 December 2020, and the response filed by CAG was taken on the record, the hearing of the writ petitions was again deferred to 8 April 2021. This course of events indicates that the whole object and purpose behind setting down the timelines in the order dated 20 September 2019 stood the risk of being defeated. This Court has been constrained to intervene in the process in order to ensure that the sanctity of the understanding that was arrived at before the High Court on 20 September 2019 is duly maintained. There is a vital public interest element in ensuring that monies which are liable to be deposited in the Escrow Account with a nationalised bank are duly deposited. HMRTC and HSVP, it must be emphasized, are not left without remedy. The deposit into the Escrow Account has to be maintained in that form and will abide by such orders that may be passed by NCLAT or by a competent statutory authority. Besides this, the Concession Agreements provides a clear-cut remedy for seeking reliefs under the arbitration agreement. [Para 58][701-F-G; 702-A-C]
1.16 The invocation of the writ jurisdiction of the High Court under Article 226 of the Constitution by HMRTC and HSVP was to challenge the termination notices dated 17 June 2019, and to obviate the consequence of the cessation of the rapid metro operations, which would have ensued on the expiry of the notice period. The arbitration clause of the Concession Agreements provides sufficient recourse to remedies which can be availed of. That apart, the order of the High Court dated 4 October 2019 has also clarified that the rest of the dispute that remains after the deposit of 80 per cent of the debt due, either arising out of the CAG report, the validity of the termination notices issued by both the parties and any past or future inter se claims and liabilities shall be agitated and decided in the arbitration proceedings. In view of the order which is passed, the dispute between the High Court in the writ jurisdiction under Article 226 of the Constitution shall stand worked out by granting liberty to the parties to avail of their rights and remedies in accordance with law. It is directed that HSVP shall within the stipulated period deposit into the Escrow Account 80 per cent of the debt due as determined in the reports of the auditors dated 23 June 2020, in the case of RMGL and RMGSL respectively; the deposit into the Escrow Account shall continue to be maintained in Escrow, subject to any order that may be passed by NCLAT or any competent statutory authority, and shall not be appropriated by the Escrow Bank without specific permission; RMGL and RMGSL on the one hand, and HSVP on the other, are at liberty to pursue their rights and remedies in pursuance of the arbitration clause contained in the Concession Agreements on all matters falling within the ambit of the arbitration agreement, including the validity of the notices of termination, any past or future inter se claims and liabilities as envisaged in the order of the High Court dated 20 September 2019, as modified on 4 October 2019 and 15 October 2019; in terms of clause (v) of the order of the High Court dated 20 September 2019, in the event of any dispute arising about the correctness of the CAG report, in regard to the determination of the debt due, any of the parties would be at liberty to raise a dispute in the course of arbitral proceedings; upon compliance with the directions contained in (i) RMGL and RMGSL shall execute and handover to HSVP all documents which are required for effectuating the transfer of operations, maintenance and assets to HSVP or their nominees with a view to fulfill the obligation of the concessionaires in Article 25 of the Concession Agreement dated 9 December 2009 and clause (vi) contained in the order of the High Court dated 20 September 2019, as modified on 4 October 2019 and 15 October 2019; and the writ petitions filed before the High Court by the respondents are disposed of. [Paras 59, 60][702-D-H; 703-A-G]
Sanjana M. Wig vs Hindustan Petroleum Corporation Limited (2005) 8 SCC 242 : [2005] 3 Suppl. SCR 190; Bisra Lime Stone Co. Ltd. v. Orissa SEB, (1976) 2 SCC
167 : [1976] 2 SCR 307; Manish Mohan Sharma v. TRANSPORT CORP. LTD
Ram Bahadur Thakur Limited (2006) 4 SCC 416 : [2006]
3 SCR 97 – referred to.
As published in the Supreme Court Reports, Supreme Court of India. Text from the Indian Supreme Court Judgments open data set (Dattam Labs), CC BY 4.0.
This page is for informational and research purposes only and does not constitute legal advice. Consult a qualified advocate for advice specific to your situation.