A Scottish company with only 180 employees seizing the planes of India’s national airline may seem an unlikely scenario.

But Cairn Energy is seeking authority to do just that in the latest twist to a legal fight against the Indian government that spans three continents and has lasted seven years.

The oil and gas company launched legal proceedings against Air India in New York last month in an effort to enforce an international arbitration tribunal’s ruling that New Delhi should pay the company $1.2bn plus interest to settle the historic tax dispute.

As it seeks to secure a sum now worth $1.7bn, Cairn is trying to prove Air India is an “alter ego” of India’s government and is “therefore jointly . . . liable for the debts and obligations of India itself”, a move that could pave the way for US marshals to seize the carrier’s jets.

The Edinburgh-based company has even hired lawyer Dennis Hranitzky, who in 2012 helped seize an Argentine naval vessel in Ghana as part of a long battle between US hedge fund Elliott Capital Management and Buenos Aires.

The dispute has its roots in Cairn’s 2006 restructuring of its lucrative Indian operations, establishing Cairn India as a separate subsidiary that floated on the Bombay Stock Exchange the following year. The Scottish company sold most of its stake in Cairn India to Vedanta for $6.5bn in 2011.

But in 2012 New Delhi introduced a law allowing it to levy taxes retrospectively on cross-border transactions in which the underlying assets were in India, and in 2014 it accused Cairn of not paying tax related to the 2006 restructuring.

Pending an investigation, the Scottish company was barred from selling its residual 10 per cent stake in Cairn India, then worth roughly $1bn, and in 2015 it was slapped with a $1.6bn tax bill.

Cairn raised dispute proceedings under the UK-India bilateral investment treaty in an effort to force the withdrawal of the tax demand and seek compensation for financial losses. Most of its remaining shares in Cairn India were seized by Indian tax authorities and then sold.

An international tribunal in the Netherlands ruled in Cairn’s favour in December. If enforced, the award could trigger handsome returns to Cairn shareholders and reinvigorate its business.

Cairn has been held back for years by the tussle, which has forced it to shed assets, lay off staff and limit investments. Its shares, worth more than £8 each in 2012, now trade at about 165p, although the drop also reflects other factors such as the oil price crashes of 2014 and 2020.

But five months on, Indian prime minister Narendra Modi’s government has shown no sign it plans to pay up.

Cairn Energy’s performance and key moments in its Indian legal saga

The case is one of several between western companies and New Delhi. Vodafone also became embroiled in a wrangle with India’s tax authorities, which demanded €3bn in back-payments.

It comes at a sensitive time in UK-India relations, providing a test of Prime Minister Boris Johnson’s willingness to stand up for British companies while he seeks to strike post-Brexit trade deals.

The countries last month outlined a “2030 road map” to strengthen ties in areas such as trade and defence. London hopes to start negotiations on a full trade agreement this autumn.

Johnson did not mention the dispute during a call last month with Modi. The UK line is that it does not get involved in investor-state legal proceedings to which it is not a party, although people familiar with the matter said previous administrations have raised Cairn’s case.

“We cannot be in a position where Boris Johnson is failing to stand up for the interests of British firms . . . just in the hope it may smooth the path to a future trade deal,” said Emily Thornberry, Labour’s shadow trade secretary.

The Scottish government said it would ensure “Scottish economic and other interests are made clear to the UK government before and during any future discussions with the Indian government about a free trade agreement”.

Cairn, which has identified $70bn of Indian assets globally that could be pursued, insists it remains “open to continuing constructive dialogue with the government of India”.

International arbitration experts suggest other Indian-owned assets such as shares and bank accounts might be easier targets, and that the manoeuvre against Air India — which Modi’s government is trying to privatise — was designed to have maximum impact.

“They are trying to get a settlement,” said one international arbitration lawyer, who described Cairn’s action as “aggressive”.

Satvik Varma, a New Delhi-based lawyer, said Cairn had few options because Indian courts do not recognise international arbitration awards granted under bilateral investment treaties. “Cairn is also answerable to its shareholders and after it has an award it has to do everything to seek enforcement,” he said.

A top-15 Cairn shareholder said: “It’s a lot of money — at the end of the day maybe you have to be aggressive.”

Rasmi Ranjan Das, a joint secretary in the finance ministry, told the Financial Times that New Delhi remained in dialogue with Cairn. “The government is open to an amicable settlement” but it had to be “within the Indian legal framework”, he said. “The government position is that the tax is . . . a sovereign function.”

He noted that Cairn was still participating in legal proceedings over the tax dispute in India. And he said Air India was a legally independent entity that had “no responsibility to pay amounts under the Cairn arbitral award or any other of India’s alleged debts or obligations”.

Cairn said it had “full confidence” in its position.

A Cairn rig in Senegal

Enforcement of the award made by a tribunal in the Netherlands could trigger handsome returns to Cairn shareholders and reinvigorate the business

Lawyers suggest a logical next step would be for India to apply in New York to “stay” the Air India proceedings pending a challenge to the tribunal process in The Hague.

Aside from cutting staff and selling assets in the early years of the dispute, observers said uncertainty over the award has limited Cairn’s ability to compete for assets. Size is increasingly important for independent oil and gas companies that are out of fashion with equity markets.

“Everyone knows that [London-listed] Harbour Energy and Energean and these [larger independent oil and gas companies] are going to be the winners because they are going to be big enough for investors to care about,” said Nathan Piper, analyst at Investec.

Cairn “has tried to move the business forward since 2015 . . . but they haven’t really been able to go for it because of the uncertainty or not of whether you have got $1bn”.

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