BEWARE INVESTORS _SHARE PURCHASE AGREEMENT

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 Perfect Judgment to justify why an Investor must have an indemnification clause in a share purchase agreement: Investor got indemnification of entire liability of 82 Lakh from seller which the investor has to pay to the income tax department

Shubham Budhiraja[1]




There is a Share Purchase agreement between parties Mr. A & Mr. B and seller represented to the buyer/ investor that it warranties that all tax liability is paid. However during the subsequent years, the pending tax liability arose and that Mr. A being the buyer/ Investor who has Invested the heavy amount has to pay the tax liability out of company funds. He invoked representation and warranty clause against Mr. B through arbitration and arbitrator has awarded in his favor because seller/ Mr. B has breached the promise and now it has to indemnify.  The HC in Section 34 upheld the award while refusing the contention of Mr. B that no actual loss occurred to Mr. A due to payment of tax liability because these liabilities were paid out of Company fund. The court held that how funds were arrange by Mr. A to pay tax liability is not relevant

(I)         The Supreme Court in Delhi Airport Metro Express Pvt. Ltd. v. Delhi Metro Rail Corporation Ltd.: 2021 SCC OnLine SC 695 has authoritatively held that the approach of the courts to evaluate and re-appreciate evidence to determine whether an arbitral award is vitiated on the ground of patent illegality is impermissible.

 

(II)        In the present case, there is ample material on record to establish that Agros was being funded by Frost; Frost was in management and control of Agros; and the liability of ₹82,73,709/- was not disclosed in the accounts of Agros; Frost had paid the consideration of ₹10 crores for purchasing the shares of Agros as held by the petitioners on the basis of the representation that all liabilities were disclosed and accounted for in the books of Agros; and undisclosed liability towards the income tax and penalty quantified at ₹82,73,709/- was discharged. Any further inquiry as to how and in what manner Frost had provided funds for discharge of the said liability is neither necessary nor warranted in these proceedings.

 

(III)     In the given facts, the manner in which Frost had funded the discharge of the liability assessed on Agros – whether by making direct payments to the Income Tax Department or by funding Agros to pay the same, is not material.


[1] CS, LLB (Delhi University), BCOM(H), Shubham Budhiraja02@gmail.com , 9654055315

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