Supreme Court Holds Reliance Companies in Contempt for Breaching Undertakings: Ericsson vs. State Bank of India (20 February 2019)

Introduction

Date of the Judgment: 20 February 2019

Citation: Not Available

Judges: R.F. Nariman, J., Vineet Saran, J.

Can a company be held in contempt of court for not honoring an undertaking given to the Supreme Court? The Supreme Court of India recently addressed this question in a case involving Reliance Communications and Ericsson. The core issue was whether Reliance had deliberately failed to comply with its commitment to pay Ericsson a sum of ₹550 crore, leading to contempt proceedings. The judgment was delivered by a two-judge bench comprising Justice R.F. Nariman and Justice Vineet Saran, with Justice Nariman authoring the opinion.

Case Background

The dispute originated from a Managed Service Agreement between Ericsson India Pvt. Ltd. (Ericsson) and Reliance Communications Ltd. (RCom), Reliance Telecom Ltd. (RTL), and Reliance Infratel Ltd. (RITL) (collectively, the Reliance Companies). Ericsson was to provide managed services to RCom’s network. After disputes arose regarding payments, Ericsson issued notices under the Insolvency and Bankruptcy Code, 2016 (Insolvency Code) for non-payment of ₹9.78 crore. Following unsuccessful discussions, Ericsson terminated the agreement on 07 September 2017 and filed applications under Section 9 of the Insolvency Code as an operational creditor on 08 September 2017.

The National Company Law Tribunal (NCLT) admitted Ericsson’s petitions on 15 May 2018, initiating the corporate insolvency resolution process (CIRP). The Reliance Companies appealed, and on 30 May 2018, the National Company Law Appellate Tribunal (NCLAT) stayed the NCLT’s order after the Reliance Companies agreed to settle with Ericsson for ₹550 crore, to be paid within 120 days. Both parties were to file affidavits of undertaking. The Reliance Companies then filed a writ petition in the Supreme Court on 17 July 2018, seeking to quash the CIRP due to the settlement. On 03 August 2018, the Supreme Court ordered that the ₹550 crore payment be made by 30 September 2018, with undertakings to be filed by the Chairmen of the Companies.

The Chairmen’s undertakings, dated 09 August 2018, stated that the payment would be made “upon sale of assets of the company,” which Ericsson contested as not being in line with the Supreme Court’s order. Ericsson filed a contempt petition on 01 October 2018. The Reliance Companies sought an extension of time, which was initially granted until 15 December 2018, with 12% interest on delayed payments. A subsequent request for an extension was dismissed on 13 December 2018. On 21 January 2019, the Reliance Companies stated they would pay the outstanding amount by 31 January 2019, conditional on the withdrawal of contempt petitions and arbitration proceedings. However, on 01 February 2019, the Reliance Companies announced they would no longer resist the CIRP, leading to further contempt petitions.

Timeline

Course of Proceedings

The National Company Law Tribunal (NCLT) initially admitted the insolvency petitions filed by Ericsson on 15 May 2018, leading to the appointment of Interim Resolution Professionals. This decision was appealed by the Reliance Companies before the National Company Law Appellate Tribunal (NCLAT). The NCLAT stayed the NCLT order on 30 May 2018, based on a settlement agreement where the Reliance Companies agreed to pay ₹550 crore to Ericsson within 120 days. The NCLAT also allowed the sale of assets of the corporate debtors. The matter then reached the Supreme Court through a writ petition filed by the Reliance Companies seeking to quash the CIRP. The Supreme Court initially directed adherence to the 120-day timeline and later extended it, but ultimately found the Reliance Companies in contempt for not complying with their undertakings.

Legal Framework

The case primarily revolves around the interpretation and application of the Insolvency and Bankruptcy Code, 2016, specifically Section 9, which deals with the initiation of corporate insolvency resolution process by an operational creditor. The core issue is not about the Insolvency Code but about the breach of undertakings given to the Supreme Court. The Supreme Court also refers to Section 12(4) of the Contempt of Courts Act, 1971, which deals with the punishment for contempt of court when the contemnor is a company. The section states:

“12. Punishment for contempt of court.—
(4) Where the person found guilty of contempt of court in respect of any undertaking given to a court is a company, every person who, at the time the contempt was committed, was in charge of, and was responsible to, the company for the conduct of the business of the company, as well as the company, shall be deemed to be guilty of the contempt and the punishment may be enforced with the leave of the court, by the detention in civil prison of each such person:
Provided that nothing contained in this sub-section shall render any such person liable to such punishment if he proves that the contempt was committed without his knowledge or that he exercised all due diligence to prevent its commission.”

The Supreme Court’s authority to address the matter stems from Article 142 of the Constitution of India, which allows it to pass orders necessary for doing complete justice.

Arguments

Arguments on behalf of Ericsson:

• The payment of ₹550 crore was not conditional on the sale of spectrum, as evidenced by the NCLAT order and the initial undertakings filed by the Reliance Companies’ directors. The undertakings filed pursuant to the Supreme Court’s order dated 03 August 2018, which introduced the condition of payment upon the sale of assets, were a deliberate misrepresentation.

• The Reliance Companies made no genuine effort to pay the ₹550 crore, and their claim of inability to pay was contradicted by their advocates’ letter dated 21 January 2019, which stated that the full payment would be made within ten days.

• The Reliance Companies interfered with the administration of justice by providing false undertakings and willfully breaching the court’s orders.

Arguments on behalf of Reliance Companies:

• The NCLAT order dated 30 May 2018, which was referred to by the Supreme Court, indicated that the ₹550 crore was to be paid from the sale of assets of the corporate debtor. The undertakings given by the Chairmen on 09 August 2018 were in accordance with this understanding.

• Ericsson did not object to the undertakings initially and went along with them. The Reliance Companies did their best to pay the ₹550 crore, as evidenced by their conduct and correspondence. The deposit of ₹118 crore on 09 January 2019 further demonstrated their good faith.

• The Department of Telecommunications (DoT) did not provide the necessary No-Objection Certificate (NOC) for the sale of spectrum, making it impossible for the Reliance Companies to pay the full amount. Their decision to allow the corporate insolvency resolution process to proceed demonstrated their bona fides.

• They are still ready and willing to pay whatever they can, by way of income tax refunds and other refunds.

Arguments on behalf of SBI:

• The Joint Lenders’ Forum’s sale of assets outside the corporate insolvency resolution process was independent of the Ericsson transaction. The reliefs sought in the contempt petition against the Chairman of SBI were not appropriate.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the central issues that the court addressed were:

1. Whether the Reliance Companies were in contempt of court for breaching the undertakings given to the Supreme Court.
2. Whether the undertakings given by the Chairmen of the Reliance Companies were in accordance with the orders of the NCLAT and the Supreme Court.
3. Whether the Reliance Companies made genuine efforts to pay the agreed amount to Ericsson.
4. Whether the contempt petition against the Chairman of SBI was maintainable.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered various authorities to arrive at its decision. These authorities are categorized below based on the legal points they address:

On the nature of contempt of court:

• Attorney-General v. British Broadcasting Corporation, [1980] 3 All ER 161 (House of Lords) – This case was cited to emphasize that the object of contempt proceedings is to protect the administration of justice, not the dignity of courts or judges.
• Attorney-General v. Leveller Magazine Ltd. and Ors., [1979] 1 All ER 745 (House of Lords) – This case was cited to highlight that contempt of court flouts justice itself, not the individual court or judge.

On the interpretation of court orders and undertakings:

• Lakshman Prasad Agarwal v. Syed Mohammad Kareem, 2009 (6) SCALE 413 – This case was cited to emphasize that the court must consider the letter and spirit of the order, as well as the contemnor’s bona fide belief regarding the order.

On the breach of undertakings and the implications:

• Rosnan Sam Boyce v. B.R. Cotton Mills Ltd., (1990) 2 SCC 636 – This case was cited to highlight that giving an undertaking based on a false implication or assumption amounts to contempt.
• Noorali Babul Thanewala v. K.M.M. Shetty, (1990) 1 SCC 259 – This case was cited to emphasize that breach of an undertaking is tantamount to breach of an injunction and is misconduct amounting to contempt.

On the requirement of wilful disobedience for contempt:

• Ashok Paper Kamgar Union v. Dharam Godha, (2003) 11 SCC 1 – This case was cited to define “wilful” as an act done voluntarily and intentionally with the specific intent to disobey or disregard the law. It also stated that the order must be capable of execution by the person charged in normal circumstances.
• Dinesh Kumar Gupta v. United India Insurance Co. Ltd., (2010) 12 SCC 770 – This case was cited to emphasize that disobedience must be wilful and not due to misapprehension or unintentional acts.

On the nature of punishment for contempt:

• Supreme Court Bar Assn. v. Union of India, (1998) 4 SCC 409 – This case was cited to highlight that the object of punishment is both curative and corrective, and that compliance may be secured without resorting to imprisonment.
• Chhaganbhai Norsinbhai v. Soni Chandubhai Gordhanbhai, (1976) 2 SCC 951 – This case was cited to show that in cases of deliberate flouting of undertakings, imprisonment is a justified punishment.
• Patel Rajnikant Dhulabhai v. Patel Chandrakant Dhulabhai, (2008) 14 SCC 561 – This case was cited to emphasize that so-called apologies should not be accepted when contemnors are in a tight corner and that a jail sentence should be awarded.

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• Attorney-General v. British Broadcasting Corporation [1980] 3 All ER 161: *Cited to highlight the purpose of contempt proceedings, i.e., to protect the administration of justice.*
• Attorney-General v. Leveller Magazine Ltd. and Ors. [1979] 1 All ER 745: *Cited to emphasize that contempt is a flouting of justice itself.*
• Lakshman Prasad Agarwal v. Syed Mohammad Kareem 2009 (6) SCALE 413: *Cited to underscore the importance of considering the spirit of court orders.*
• Rosnan Sam Boyce v. B.R. Cotton Mills Ltd. (1990) 2 SCC 636: *Cited to establish that giving false undertakings constitutes contempt.*
• Noorali Babul Thanewala v. K.M.M. Shetty (1990) 1 SCC 259: *Cited to equate breach of undertaking with breach of injunction.*
• Ashok Paper Kamgar Union v. Dharam Godha (2003) 11 SCC 1: *Cited to define “wilful” disobedience.*
• Dinesh Kumar Gupta v. United India Insurance Co. Ltd. (2010) 12 SCC 770: *Cited to highlight that disobedience must be wilful and not due to misapprehension.*
• Supreme Court Bar Assn. v. Union of India (1998) 4 SCC 409: *Cited to discuss the dual nature of punishment for contempt, both curative and corrective.*
• Chhaganbhai Norsinbhai v. Soni Chandubhai Gordhanbhai (1976) 2 SCC 951: *Cited to justify imprisonment for deliberate flouting of undertakings.*
• Patel Rajnikant Dhulabhai v. Patel Chandrakant Dhulabhai (2008) 14 SCC 561: *Cited to reject tactical apologies and justify jail sentences.*

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

• Breach of Undertakings: The court found that the undertakings given by the Reliance Companies on 09 August 2018 were not in accordance with the court’s order dated 03 August 2018 and the earlier undertakings given to the NCLAT. The undertakings were conditional upon the sale of assets, which was not the understanding of the court or the NCLAT.

• Wilful Disobedience: The court concluded that the Reliance Companies had wilfully disobeyed the court’s orders. The letter dated 21 January 2019 revealed that they were capable of paying the amount but deliberately delayed payment. This was a key factor in determining that the disobedience was not accidental or unintentional.

• Contempt of Court: The court emphasized that the actions of the Reliance Companies affected the administration of justice, which is the core concern in contempt proceedings. The court noted that the Reliance Companies had attempted to mislead the court by filing false undertakings and then delaying payment.

Logical Reasoning:

The court considered alternative interpretations of the orders and undertakings, but rejected them, stating that the only reasonable interpretation was that the payment of ₹550 crore plus interest was to be made without any linkage to the sale of assets and within a fixed time limit. The court also rejected the Reliance Companies’ arguments that they were unable to pay due to the DoT’s refusal to give NOC, as the sale of spectrum was not a condition for the payment. The court also rejected the unconditional apology given by the Reliance Companies.

The court’s final decision was that the Reliance Companies were guilty of contempt of court. The court ordered the companies to pay ₹550 crore plus interest to Ericsson within four weeks, and imposed a fine of ₹1 crore on each company, to be paid to the Supreme Court Legal Services Committee. In default of payment, the Chairmen of the companies would face imprisonment.

The court’s reasoning was based on the following points:

• The undertakings given by the Reliance Companies were not in accordance with the court’s orders or the earlier undertakings.

• The Reliance Companies had wilfully disobeyed the court’s orders by deliberately delaying payment despite having the capability to pay.

• The actions of the Reliance Companies affectedthe administration of justice.

Holding

The Supreme Court held the Reliance Companies in contempt of court. The court’s orders included:

• The Reliance Companies were ordered to pay ₹550 crore plus interest to Ericsson within four weeks from the date of the judgment (20 February 2019).

• Each of the three Reliance Companies (Reliance Communications Ltd., Reliance Telecom Ltd., and Reliance Infratel Ltd.) were fined ₹1 crore, to be paid to the Supreme Court Legal Services Committee.

• In default of payment of the ₹550 crore plus interest, the Chairmen of the companies were to be imprisoned for a period of three months.

The court also dismissed the contempt petition against the Chairman of the State Bank of India.

Significance

The judgment in Ericsson vs. State Bank of India is significant for several reasons:

• Corporate Accountability: The judgment underscores the importance of corporate accountability and the need for companies to honor their undertakings to the court. It sends a strong message that companies cannot evade their commitments by providing false undertakings or delaying payments.

• Enforcement of Court Orders: The judgment highlights the Supreme Court’s commitment to enforcing its orders and ensuring that parties do not take the court’s orders lightly. It demonstrates the court’s willingness to take strict action against those who deliberately flout its orders.

• Impact on Insolvency Proceedings: The case underscores the importance of adhering to timelines in insolvency proceedings. The court’s decision to hold the Reliance Companies in contempt for not paying the agreed amount within the stipulated time had significant implications for the insolvency process.

• Precedent for Future Cases: The judgment sets a precedent for future cases involving undertakings to the court, particularly in cases where companies attempt to evade their obligations by providing false information or delaying payments. It reinforces the principle that breach of an undertaking is tantamount to breach of an injunction and is a serious matter.

• Clarity on Contempt of Court: The judgment provides clarity on the concept of contempt of court, particularly in cases involving corporate entities. It emphasizes that contempt proceedings are not about the dignity of the court but about protecting the administration of justice.

Summary

The Supreme Court’s judgment in Ericsson vs. State Bank of India is a landmark decision that reinforces the importance of corporate accountability and the sanctity of court orders. The court held the Reliance Companies in contempt for breaching their undertakings to pay Ericsson ₹550 crore plus interest, highlighting that companies cannot evade their commitments by providing false undertakings or delaying payments. The court’s decision sends a strong message to corporate entities that they must adhere to their commitments and that the court will not tolerate deliberate flouting of its orders. The judgment also provides clarity on the concept of contempt of court, particularly in cases involving corporate entities, and underscores the importance of adhering to timelines in insolvency proceedings. This case serves as a significant precedent for future cases involving undertakings to the court and reinforces the principle that breach of an undertaking is a serious matter.

Disclaimer

The information provided in this document is for educational purposes only and should not be considered legal advice. For any legal issues, please consult a qualified legal professional.