Shantanu Singh [i]
In mid-May, news broke out that UK’s Cairn Energy had filed a declaratory suit in a US District Court against Air India, India’s flag carrier airline. This news came amid Indian government’s renewed attempt at privatizing the airline, which, as the Aviation minister announced, remained the only viable option besides a complete shutdown. It was certainly an odd situation with the government’s attention split between selling off a loss-making entity and a rather large outstanding award owed to Cairn since 2020.
The Cairn award stems from the Indian Government’s adventurism with tax demands slapped on Cairn for capital gains tax owed on a 2006 transaction which was outside the purview of the tax statutes but was retrospective enabled in 2012. It amounts to USD 1.2 billion plus costs and interest, all of which stood at a total of USD 1.725 billion at the time of the announcement of the award.
For now, India’s writ for annulment of the award remains pending before a Dutch Court of Appeal. Meanwhile, Cairn has also approached the US District Court for Columbia with a petition to have the award confirmed. Frustrated with the ongoing jousting, Cairn filed a declaratory suit in May 2021, which meant that it was seeking a legal declaration that Air India is nothing but an ‘alter ego’ of the Indian government itself. Such a declaration, coupled with a ruling which confirms the award, would mean that Cairn could theoretically enforce the award against Air India by seizing its US-based assets.
This intriguing maze of laws, courts, jurisdictions, and liabilities is only accessible if a long-standing concept of law – the legal distinction between a foreign sovereign and its instrumentality – is breached. We are aware of the “lifting of the corporate veil” when the legal distinction between a private company and its shareholders is to be undone. The conundrum at the heart of the declaratory suit presents the same problem but with different actors: how can the liabilities of a foreign sovereign nation be settled against the assets of its government instrumentality?
This post explores the principles at play in the dispute. By briefly delving into the law on the issues argued by Cairn, I will attempt to map Air India’s prospects in defeating Cairn’s declaratory suit.
A comment on the legal status of Air India
Air India’s birth was marked by the enactment of the Air Corporation Act, 1953, which nationalized India’s nascent aviation industry and created two airlines. This move was not unusual. Many ‘global south’ nations were pursuing similar development strategies by creating large government entities for the improvement of public services. But with the advent of liberalization in 1991, India’s aviation industry began to change. The old 1953 law was repealed and the undertakings were transferred to entities incorporated under the Companies Act, 1956. These two entities were merged into Air India in 2007. It now operates as a wholly-owned government company incorporated under Indian law and enjoys a juridical status distinct from the Indian government.
With this recalled, a very obvious query arises: how is Cairn able to propose the diversion of Air India’s assets to satisfy the arbitration award when the responsibility to honour it lies with a distinct sovereign entity i.e., the Indian government?
The ‘Bancec Presumption’
The query’s answer lies in the US Supreme Court’s decision in First National City Bank v. Banco Para El Comercio Exterior de Cuba (“Bancec”). Indeed, as subsequent rulings have remarked, Bancec provides the “conceptual framework” for claims made against government instrumentalities for the liabilities of their sovereigns. In Bancec, the eponymous Cuban bank had approached the US courts to enforce dues on a letter of credit issued by Citibank in its favour in 1960. Incidentally, Citibank had very recently lost its Cuban properties during the nationalization. Naturally, it filed a counterclaim before the court, claiming a right to set-off the value of its lost assets against the dues it owed. While a lower court confirmed the counterclaim, its decision was reversed by the appellate court. Eventually, the dispute reached the US Supreme court.
The Supreme Court reversed the appellate court’s findings and held that “government instrumentalities established as juridical entities distinct and independent from their sovereign should normally be treated as such”.[i] Today, this general rule is known as the ‘Bancec presumption’. The Court observed that such parastatals or government instrumentalities, typically established as distinct from the sovereign government, had been created world over to pursue different tasks, including the pursuit of development strategies. These entities offered a certain degree of flexibility and were not bound by the kind of budgetary and political constraints that might hamper other creations of the state. To pierce the metaphorical veil of these entities in such cases would be unwise, more so when the principle of comity of nations and the usual deference towards the acts of sovereign nations suggested otherwise.
The Court, however, recalled that adherence to this rule of ‘corporate form’ was not absolute in either domestic or international law. This presumption of legal separation would not be available, the court ruled, in cases where adherence to it leads to ‘fraud or injustice’ or where a sovereign ‘abuses’[ii] the corporate form. Thus, the presumption of juridical separation had to be determined on a case-to-case basis and the “corporate form” of each government instrumentality became the sole determining factor. It is due of this belief that Bancec did not offer a “mechanical formula” for determining when the presumption of legal distinction could be overcome. However, with time, US courts have distilled a set of five factors to determine whether an instrumentality of a foreign sovereign functions as its ‘alter ego’.
It's a Bird? It's a Plane? It's the State!
Still, US courts have reiterated time and again that the presumption at the heart of this relationship between a sovereign and its instrumentalities is not to be overcome lightly. Indeed, post-Bancec, US courts have delved deeply into the Congressional history of the FISA, to reiterate that this presumption must be maintained not only for the reasons set out in the Bancec ruling but also to ensure a degree of respect and reciprocity from other sovereign countries when, say, a case concerning the US government and its instrumentalities occurs in a foreign jurisdiction.
It is a strange situation then that Cairn’s declaratory suit relies so strictly on these five so-called ‘Bancec factors’. Cairn, for example, argues that Air India “was established as, and has always been, an alter ego of India”. It is true that Air India was established as nothing more than the Indian government itself operating an airline under the 1953 Act. But after the repeal of the 1953 Act, the legal status of Air India evolved. Today, the juridical distinction between the Indian government and Air India is well set out in Indian law. If anything, these facts only strengthen the general presumption set out in Bancec.
Elsewhere, Cairn’s claims that India “maintains control through economic ownership” and appoints its officials to the board of Air India. This too is true, since the government owns 100% of Air India. But how does this fact of Air India’s existence – like the others set out in the declaratory suit – make it any less likely that the Bancec presumption would be accorded to it? US courts have repeatedly accorded the presumption of legal separation even when the instrumentality is a wholly-owned entity of the sovereign or when a sovereign has the right to appoint members to the instrumentality’s governing board. Take, for example, a US Court of Appeals’ ruling in Transamerica Leasing v. Venezuela (“Transamerica Leasing”), where it observed that the control exercised by a sovereign may only be relevant in situations where it exceeds the normal supervisory control exercised by a corporate parent or when a principal-agent relation is established. Neither case seems to exist here, given the high standards set out in the Transamerica Leasing ruling.
A similar conclusion was arrived at by the District Court for Columbia in UAB Skyroad Leasing v. OJSC Tajik Air (“Skyroad”). In Skyroad, the petitioner had filed an action to enforce an arbitration award against Tajikistan’s flag carrier airline. In answering the question of whether the Bancec presumption separating the sovereign and the airline company had been overcome, the court ruled in negative. The Court recognized that the sovereign had the right to disburse dividends or grant approvals for acquisition and other matters conducted by its wholly-owned airline due to its sole ownership status. However, the Court negated the petitioners’ claim that the presumption of legal separation could be overcome because Tajikistan provided funding or even used state action to manage the debt of the national airline. Much like Air India, Tajik Airline had long been a loss-making burden upon Tajikistan. And much like India, Tajikistan tried to manage the airline’s losses by resorting to state action. The Court noted that “such governmental action to prop up a wholly-owned instrumentality’s financial position is not at all unusual”. Citing Transamerica Leasing, the Court held that rather than help overcome the presumption, these facts were proof of the normal relations between the government and a government-owned company.