It is thus clear that O.XXXVII has suffered a change in
1976, and that change has made a difference in the law laid
down. First and foremost, it is important to remember that
Milkhiram’s case is a direct authority on the amended
O.XXXVII provision, as the amended provision in O.XXXVII
Rule 3 is the same as the Bombay amendment which this Court
was considering in the aforesaid judgment. We must hasten to
add that the two provisos to sub-rule (3) were not, however,
there in the Bombay amendment. These are new, and the effect
to be given to them is something that we will have to decide.
The position in law now is that the trial Judge is vested with a
discretion which has to result in justice being done on the facts
of each case. But Justice, like Equality, another cardinal
constitutional value, on the one hand, and arbitrariness on the
other, are sworn enemies. The discretion that a Judge
exercises under Order XXXVII to refuse leave to defend or to
grant conditional or unconditional leave to defend is a discretion
akin to Joseph’s multi-coloured coat – a large number of
baffling alternatives present themselves. The life of the law
not being logic but the experience of the trial Judge, is what
comes to the rescue in these cases; but at the same time
informed by guidelines or principles that we propose to lay
down to obviate exercise of judicial discretion in an arbitrary
manner. At one end of the spectrum is unconditional leave to
defend, granted in all cases which present a substantial
defence. At the other end of the spectrum are frivolous or
vexatious defences, leading to refusal of leave to defend. In
between these two extremes are various kinds of defences
raised which yield conditional leave to defend in most cases. It
is these defences that have to be guided by broad principles
which are ultimately applied by the trial Judge so that justice is
done on the facts of each given case.
18. Accordingly, the principles stated in paragraph 8 of
Mechelec’s case will now stand superseded, given the
amendment of O.XXXVII R.3, and the binding decision of four
judges in Milkhiram’s case, as follows:
a. If the defendant satisfies the Court that he has a
substantial defence, that is, a defence that is likely to succeed,
the plaintiff is not entitled to leave to sign judgment, and the
defendant is entitled to unconditional leave to defend the suit;
b. if the defendant raises triable issues indicating that he has
a fair or reasonable defence, although not a positively good
defence, the plaintiff is not entitled to sign judgment, and the
defendant is ordinarily entitled to unconditional leave to defend;
c. even if the defendant raises triable issues, if a doubt is left
with the trial judge about the defendant’s good faith, or the
genuineness of the triable issues, the trial judge may impose
conditions both as to time or mode of trial, as well as payment
into court or furnishing security. Care must be taken to see that
the object of the provisions to assist expeditious disposal of
commercial causes is not defeated. Care must also be taken to
see that such triable issues are not shut out by unduly severe
orders as to deposit or security;
d. if the Defendant raises a defence which is plausible but
improbable, the trial Judge may impose conditions as to time or
mode of trial, as well as payment into court, or furnishing
security. As such a defence does not raise triable issues,
conditions as to deposit or security or both can extend to the
entire principal sum together with such interest as the court
feels the justice of the case requires.
e. if the Defendant has no substantial defence and/or raises
no genuine triable issues, and the court finds such defence to
be frivolous or vexatious, then leave to defend the suit shall be
refused, and the plaintiff is entitled to judgment forthwith;
f. if any part of the amount claimed by the plaintiff is
admitted by the defendant to be due from him, leave to defend
the suit, (even if triable issues or a substantial defence is
raised), shall not be granted unless the amount so admitted to
be due is deposited by the defendant in court.
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO._10860_ of 2016
(ARISING OUT OF SLP (CIVIL) NO.31439 OF 2015)
IDBI TRUSTEESHIP SERVICES LTD
VERSUS
HUBTOWN LTD.
Dated:November 15, 2016
R.F. Nariman, J.
1. Leave granted.
2. The present appeal arises out of a Summons for
Judgment No. 39 of 2013 in a Summary Suit filed on the
original side of the Bombay High Court, by the Petitioner, a
debenture trustee, to enforce rights that arise out of a
Corporate Guarantee executed by the Respondent-defendant.
The necessary averments made in the plaint would disclose the
cause of action of the suit as well as the facts necessary to
decide this appeal. They are as follows:
“3. In 2009 and 2010, Nederlandse
Financierings-Maatschappij voor
Ontwikkelingslanden N.V. (hereinafter referred to as
“FMO”) invested in certain equity shares and
compulsorily convertible debentures (hereinafter
referred to as the “CCDs”) of Vinca Developer
Private Limited (hereinafter referred to as “Vinca”).
As a result of the said investment, FMO currently
holds (i) 10% of the equity of Vinca through Class A
shares and is entitled to 10% of the voting rights
and economic interest in Vinca by virtue thereof;
and (ii) 3 CCDs in Vinca. Further, as on date, the
Defendant owns 49% of the equity of Vinca through
Class A shares and is entitled to 49% of the voting
rights and economic interest in Vinca by virtue
thereof. The remaining 41% Class A equity shares
in Vinca are owned by the individual promoters of
the Defendant, being Hemant Shah and Vyomesh
Shah, which entitles them to 41% of the voting
rights and economic interest in Vinca. Hemant
Shah and Vyomesh Shah together also own 100%
of Class B equity shares of Vinca, which carry with
them collective voting rights and dividend
entitlement not exceeding 0.01%. Upon conversion,
the 3 CCDs in Vinca will entitle FMO to 99% of the
equity of Vinca (by allotment of additional Class A
shares), thereby entitling it to 99% of the voting and
economic rights of Vinca. The said monies invested
by FMO into Vinca were then used by Vinca to
subscribe to certain optionally partially convertible
debentures (hereinafter referred to as “OPCDs”), as
specified below.
4. The Plaintiff is India’s largest Trusteeship
Company and provides a wide spectrum of
Trusteeship Services. The Plaintiff has been
2Page 3
appointed as the Debenture Trustee under (i) the
Debenture Subscription and Debenture Trust Deed
dated 1st December, 2009 executed by Amazia
Developers Private Limited (hereinafter referred to
as “Amazia”), Vinca, Brainpoint Infotech Private
Limited (hereinafter referred to as “Brainpoint”), the
Defendant and the Plaintiff; and (ii) the Debenture
Subscription and Debenture Trust Deed dated 1st
December, 2009 executed by Rubix Trading Private
Limited (hereinafter referred to as “Rubix”), Vinca,
the Defendant and the Plaintiff as amended by
OPCD Amendment Agreement dated 8th September,
2010; (hereinafter collectively referred to as the
“Debenture Trust Deeds”) in relation to Vinca’s
investment in OPCDs issued by Amazia and Rubix.
A copy of the Debenture Trust Deeds is annexed
hereto and marked as Exhibits “A-1”, “A-2” and
“A-3”.
5. Pursuant to and in accordance with the terms
of the Debenture Trust Deeds, Vinca has
subscribed to:
i. certain secured, non marketable, transferable,
OPCDs of Rubix, of a face value of Rs.10,00,000
each aggregating to INR 1,285,000,000 in tranche
1;
ii. additional secured, non marketable,
transferable, OPCDs of Rubix, of a face value of Rs.
10,00,000 each, aggregating to INR 1,395,000,000
in tranche 2;
iii. certain secured, non marketable, transferable,
OPCDs of Amazia, of a face value of Rs.10,00,000
each, aggregating to INR 1,500,000,000.
6. The OPCDs carry a variable running coupon
and a back ended coupon to ensure an internal rate
of return of 14.75% per annum.
3Page 4
7. The Plaintiff states that the proceeds obtained
by Amazia and Rubix from the issue of the OPCD’s
to Vinca were to be applied towards inter alia
projects which are compliant with Indian foreign
direct investment law as applicable to townships,
housing, built-up infrastructure and construction
development projects, as provided more particularly
under clause I, Part C, Schedule 7 of the Debenture
Trust Deeds.
8. The Plaintiff states that in order to secure the
said OPCDs, and to ensure the due and punctual
payment by Amazia and Rubix of all dues to Vinca
under the Debenture Guarantee Deeds, the
Defendant has, inter alia vide the Corporate
Guarantee Deed, dated 9th December, 2009, issued
an unconditional, absolute and irrevocable
corporate guarantee in favour of the Plaintiff, inter
alia for the benefit of Vinca (hereinafter referred to
as the “Guarantee”). A copy of the Guarantee is
annexed hereto and marked as Exhibit “B”.
9. The Plaintiff submits that inter alia the
following defaults were committed by Amazia and
Rubix, inter alia under the said Debenture Trust
Deeds:
i. Defaults by Amazia and Rubix in payment of
interest on the OPCDs, as contemplated
under Condition 7 of Schedule 3 of the
Debenture Trust Deeds, which default has
been subsisting since 15th June, 2011, on the
interest accrued on the OPCDs since 16th
March, 2011;
ii. Defaults by Amazia and Rubix in payment of
default interest accrued on the OPCDs since
16th June, 2011;
iii. The occurrence of an event of default (cross
default) specified in Clause 21(a) of Schedule
14 of the Debenture Trust Deeds, arising inter
alia out of a default by Vinca under the CCDs;
4Page 5
iv. Failure on the part of Rubix, Amazia and the
Defendant in providing the financial
statements required to be provided as per
Entry I (Financial Statements) of Part A of
Schedule 7 (Covenants of the Obligors and
Security Providers) of the Debenture Trust
Deeds;
v. Failure on the part of the Defendant in
maintaining the Net Debt to EBITDA Ratio, the
Debt Service Cover Ratio and the Interest
Coverage Ratio as per the provisions of Part
B of Schedule 7 (Covenants of the Obligors
and Security Providers) of the Debenture
Trust Deeds, for the Ratio period from 1st April,
2011 to 30th September, 2011;
vi. Failure on the part of Rubix, Amazia and the
Defendant in complying with a number of the
Positive Covenants which were required to be
fulfilled by them as per the provisions of Part
C of Schedule 7 (Covenants of the Obligors
and Security Providers) of the Debenture
Trust Deeds, including the failure to apply the
proceeds from the issue of OPCD’s in the
manner contemplated in the abovementioned
Schedule i.e. towards projects that are
compliant with the Indian foreign direct
investment law;
vii. Failure on the part of Rubix, Amazia and the
Defendant in complying with a number of the
Negative Covenants as per the provisions of
Part D of Schedule 7 (Covenants of the
Obligors and Security Providers) of the
Debenture Trust Deeds.
10. In view of the aforesaid defaults, the Plaintiff
was constrained to issue notices dated 2nd May,
2012 to Amazia and Rubix respectively, under
Clause 33.1 of the Debenture Trust Deeds, for
subsisting payment of interest on OPCDs as
contemplated under Condition 7 of Schedule 3 of
5Page 6
the Debenture Trust Deeds, setting out inter alia (i)
the payment defaults subsisting as on the said date;
(ii) the default by Amazia and Rubix in crediting the
designated account with lease rental proceeds; and
(iii) the failure to provide information, and breach of
certain identified covenants. However, no response
was forthcoming from Amazia and/or Rubix. A copy
of the notices dated 2nd May, 2012 is annexed
hereto and marked Exhibits “C-1” and “C-2”.
11. Consequently, and further to the Plaintiff’s
letters dated 2nd May, 2012, and in view of the fact
that the said defaults were not rectified by Amazia
and Rubix as required under the said letters dated
2
nd May, 2012, the Plaintiff, in exercise of its right of
early redemption under Condition 12.1(a) and
Condition 12.2 of Schedule 3 of the Debenture Trust
Deeds, has issued redemption notices to both
Amazia and Rubix on 27th June, 2012 (hereinafter
referred to as the “Redemption Notices”) for the
reasons and on the grounds contained therein, inter
alia calling upon Amazia and Rubix to fully redeem
all the OPCDs at par value on 3rd July, 2012
(hereinafter referred to as the “Early Redemption
Date”) and to credit the Principal Redemption
Amount alongwith interest accrued and unpaid
thereon, aggregating to Rs.4,843,299,862.97/- into
A/c. no.: 00600350098359 held in the name of the
Plaintiff at HDFC Bank, on the Early Redemption
Date. A copy of the Redemption Notices is annexed
hereto and marked Exhibits “D-1” and “D-2”.
12. However, despite repeated reminders to
rectify their various defaults under the Debenture
Trust Deeds, and various attempts to resolve the
issues amicably, Amazia and Rubix have failed and
neglected to pay the amounts due and payable in
terms of the Debenture Trust Deeds. Consequently,
the Plaintiff was constrained to issue a Demand
Certificate for the enforcement of the Guarantee, in
terms of the said Guarantee, to the Defendant on 3rd
6Page 7
August, 2012. A copy of the Demand Certificate
dated 3rd August, 2012 is annexed hereto and
marked Exhibit “E”.
13. No reply has been received to the
aforementioned Demand Certificate from the
Defendant till date. The Defendant therefore failed
and neglected to make payment of the amounts due
to the Plaintiff under the Guarantee.
33. The Plaintiff therefore prays:
this Hon’ble Court be pleased to order and decree
the Defendant to pay to the Plaintiff a sum of
Rs.532,11,29,364.05/- (Rupees Five Hundred and
Thirty Two Crores Eleven Lakhs Twenty Nine
Thousand Three Hundred and Sixty Four and Five
Paisa Only) as on May 6, 2013, being (i) Rs.
477,51,90,932.97/- (Rupees Four Hundred Seventy
Seven Crores Fifty One Lakhs Ninety Thousand
Nine Hundred and Thirty Two and Ninety Seven
Paisa only) as the revised principal amount, being
Rs.484,32,99,862.97/- (Rupees Four Hundred and
Eighty Four Crores Thirty Two Lakhs Ninety Nine
Thousand Eight Hundred and Sixty Two and Ninety
Seven Paise only) (hereinafter referred to as
“Principal Amount”), less an amount of
Rs.6,81,08,930/- (Rupees Six Crores Eighty One
Lakhs Eight Thousand Nine Hundred and Thirty
Only) received on March 4, 2013 under the Amazia
TRA Agreement (hereinafter referred to as “Revised
Principal Amount”); (ii) Rs.42,26,78,815.12/-
(Rupees Forty Two Crores Twenty Six Lakhs
Seventy Eight Thousand Eight Hundred and Fifteen
and Twelve Paisa only) as the default interest on
the Principal Amount, at the rate of 14.75% per
annum from August 11, 2012 till March 4, 2013 as
per Clause 3 of the Guarantee; and (iii)
Rs.12,32,59,615.96/- (Rupees Twelve Crores Thirty
Two Lakhs Fifty Nine Thousand Six Hundred and
Fifteen and Ninety Six Paise only) as the default
7Page 8
interest on the Revised Principal Amount, at the rate
of 14.75% per annum from March 5, 2013 till May 6,
2013, as per Clause 3 of the Guarantee and
thereafter, such further interest @ 14.75% per
annum on the Revised Principal Amount being Rs.
477,51,90,932.97/- (Rupees Four Hundred Seventy
Seven Crores Fifty One Lakhs Ninety Thousand
Nine Hundred and Thirty Two and Ninety Seven
Paise only), till the date of actual payment or
realization.”
3. The affidavit-in-reply to the aforesaid Summons for
Judgment raised the following defence, as recorded by the Ld.
Single Judge in the impugned judgment dated 8th May, 2015.
“16. Since according to the Defendant, the above
submission is their main submission in the present
matter, the same is elaborated as follows:
16.1 That the FDI Policy and the statutory FEMA
Regulations (which incorporate the FDI Policy as a
Schedule thereto), permit FDI in townships,
construction of houses, only by way of equity
investments (which is defined to also include
debentures which are compulsorily required to be
converted into equity: CCDs). The FDI Policy and
the FEMA Regulations prohibit any other form of
investment (non equity) in the said sector with an
assured return/rate of return.
16.2 That FMO, a foreign entity wanted to invest a
substantial sum by way of FDI in a slum
rehabilitation project being undertaken in Mumbai
by Rubix and an Industrial Park being undertaken/
owned by Amazia. FMO was however only willing to
8Page 9
invest in the said projects on the basis of an
assured/fixed return, which was and is not
permissible under the FEMA Regulations/FDI
Policy. To enable FMO to bypass/circumvent the
said FEMA/FDI prohibitions and get a fixed return of
14.5% per annum on its investment of Rs. 418
crores, the investment structure (i.e investment by
way of CCDs in Vinca and Vinca purporting to invest
the said amounts in OPCDs of Amazia and Rubix)
was devised/adopted as follows:
i) Vinca was interposed as the Holding Company of
Amazia and Rubix and Vinca was the nominal
recipient of the FDI of Rs. 418 crores from FMO by
way of equity investment and CCDs (in apparent
compliance with the FDI/FEMA Regulations).
ii) The documents executed for the FDI investment
(Subscription Agreement and Debenture Trust Deed
annexed as Schedule 13 thereto), however
establish that the FDI received from FMO, was not
intended for/could not be used by Vinca for any
project of its own but was specifically required to be
immediately invested by/through Vinca in OPCDs of
Rubix & Amazia, bearing a fixed rate of return of
13.5%.
iii) Under the FEMA/FDI regulations/policy FMO
could not have invested the said amounts in Amazia
and Rubix through OPCDs bearing a fixed rate of
return. By interposing Vinca (an Indian Company)
the amounts received from FMO were invested in
OPCDs of Amazia and Rubix bearing the fixed
14.5% rate of return.
iv) At the same time it was provided (a) that on
conversion of the CCDs FMO would own 99% of the
equity of Vinca and further that (b) the Articles of
Vinca were amended to provide that any decision
regarding the OPCDs/investment could only be
9Page 10
taken by FMO nominees on the Board of Vinca. (c)
the DTDs for the Amazia and Rubix OPCDs
provided that the Debenture Trustee/the Petitioner
would only act on the instructions of the Nominee
Directors of FMO.
v) Accordingly though Vinca was an “Indian
Company” and the nominal recipient of the FDI, the
transaction was so structured that:
(a) the FDI amount would be immediately routed by
Vinca to Amazia & Rubix against issue by them of
OPCDs bearing a return of 14.5%.
(b) FMO/its Nominee Directors could exclusively
deal with the OPCDs and the Debenture
Trustee/IDBI.
(c) after receipt by Vinca of the fixed rate of return
(14.5 per cent per annum) from Amazia and Rubix
under the OPCDs, FMO would on conversion of the
CCDs, become the owner of Vinca and thereby
receive/become entitled to the amounts received by
Vinca by way of the fixed rate of return from Amazia
and Rubix.
vi) The Deed of Guarantee was contemporaneously
executed by the Respondents on 9th December,
2009 in favour of the Debenture Trustee (the
Petitioner herein) for securing the “due and punctual
payment” of the principal and the interest by Amazia
and Rubix to Vinca, actually to FMO and was part of
the structure devised to ensure the receipt by FMO
at the fixed rate of return of 14.5%.
16.3 That, if the entire transaction is looked at as a
whole, it is clear that the interposing of Vinca as the
nominal recipient of the FDI (against issuance of
equity shares and CCDs) was a colourable and
artificially structured transaction, the object and
10Page 11
purpose of which was to enable FMO to secure a
fixed rate of return on its FDI investments in
townships/construction of housing, notwithstanding
the FEMA Regulations/FDI Policy which permit only
an equity investment without any fixed/agreed rate
of return in the said sector. The said structure was
and is not lawful and was and is opposed to public
policy as it was designed to defeat and would defeat
the provisions of law, the FEMA Regulations read
with the FDI Policy.
16.4 That, the present Petition has been filed to
effectuate the said illegal object of securing the said
fixed rate of return for FMO. Although IDBI, the
Petitioner, claims to be nominally acting on behalf of
Vinca, it is in fact admittedly acting only at the
instance of FMO/FMO's Nominee Directors on the
Board of Vinca. FMO through its Nominee Directors
on the Board of Vinca has instructed IDBI to
demand the said sums (principal and agreed rate of
return) from Amazia and Rubix and has further
instructed/required IDBI to invoke the said
Guarantee and file the present Petition. (sic –
actually, Plaint). This is apparent from the
correspondence annexed as Exhibits-C to V to the
Petition.
xxx
16.6 That, by the present Petition, the Petitioner,
acting at the instance of FMO, is seeking to utilise
the process of this Court to secure for FMO a 14.5
per cent fixed rate of return on its FDI investment,
contrary to the statutory stipulation/prohibition
contained in the FEMA Regulations (which
incorporate/embody the FDI Policy), which require
FDI in townships/housing/construction development
projects to be made only by equity participation
(including compulsorily convertible debentures) and
prohibits/precludes any assured return/rate of
11Page 12
return. It is submitted that this would be contrary to
law, public policy and public interest.”
4. Based on this defence, the Ld. Single Judge in the
impugned judgment arrived at the following conclusions:
“31. According to the Plaintiff, the doctrine of Pari
Delicto is not applicable, that IDBI is not a party to
the conspiracy and IDBI is not acting on behalf of
FMO. Even if IDBI is acting on behalf of FMO, the
doctrine of Pari Delicto would not be applicable as
the Defendant had induced FMO to make the
FDI/Investment by representing that the transaction
was FDI/FEMA complaint.
31.1 The above submission of the Plaintiff cannot
be accepted. The conduct of FMO in routing its FDI
nominally through Vinca to Amazia and Rubix
against issuance by them of OPCDs and the
amendments/provisions made in Vinca’s Articles of
Association, establishes that FMO was fully aware
that it could not under the FDI policy and FEMA
Regulations directly invest in the OPCDs, or require
that its FDI amount/investment be returned back
to it with a fixed rate of return after a
stipulated period i.e. without bearing an equity
investment risk. The complex structure devised
for FMO’s FDI investment establishes that all
parties (including FMO) were aware that the
transaction which was premised on return back of
the FDI amount along with a fixed rate of return
thereon, was not permissible under/in violation of
the FDI policy and the FEMA Regulations. It is clear
that in claiming the amount and initiating the present
proceedings, the Plaintiff is acting at the instance of
FMO/FMO nominees on the Board of Directors of
Vinca. This is the stipulation in Vinca’s articles and
under the DTD. In any event, inasmuch as the
12Page 13
transaction (based on return of the FDI/principal
amount invested along with a fixed rate of return
thereon) is not permissible/prohibited under the FDI
policy and the FEMA Regulations, neither IDBI
nor FMO can seek the assistance of the Court
to effectuate/implement/enforce such a
prohibited/illegal transaction.
32. The Plaintiff has lastly contended that the
alleged illegal purpose of securing a fixed return has
not been carried out and that if the proceedings are
allowed, the money will go to Vinca and not to FMO.
It has been contended that FMO cannot receive the
sums without complying with the FDI Regulations
for sale of shares and repatriation.
32.1 This submission too of the Plaintiff cannot be
accepted. The present claim has been made and
the present proceeding has been initiated/filed by
the Plaintiff at the instance of FMO/FMO nominees
on Vinca’s Board of Directors, in order to secure
repayment/return of the FDI amount invested along
with a fixed rate of return thereon i.e. for seeking
the active assistance of this Court to
implement/effectuate/enforce a transaction
prohibited by the FDI policy and the FEMA
Regulations. The contractual documents (SSA &
DTD) establish that it was always agreed and
understood that Vinca was only the nominal
recipient of the FDI amount received from FMO and
was also only nominally the recipient of the FDI
amount and interest thereon at 14.5 per cent per
annum to be received back from Amazia and Rubix.
On receipt back by Vinca of the FDI amount and
14.5 per cent interest thereon, FMO can and will by
conversion of the three CCDs become the 99%
shareholder of Vinca. Under the FDI policy/FEMA
Regulations, FMO can thereafter sell the shares of
Vinca at the fair value, which will necessarily include
13Page 14
the value/benefit of the FDI amount and interest at
14.5 per cent thereon.
33. However, I must also state that I do not find
substance qua the following defences raised by the
Defendant:
33.1 That the Suit deserves to be dismissed on the
ground that the guarantee as well as trusteeship of
IDBI has been discharged/terminated;
33.2 That under the provisions of the FDI Policy, an
Indian Company which has received foreign direct
investment can utilise its funds downstream only for
making investment by way of equity instruments
(i.e. in the form of equity capital or compulsorily and
mandatorily convertible preference shares or
debentures);
33.3 That Investment by an Indian Company in
OPCDs issued by subsidiary (also an Indian
Company) would amount to an external commercial
borrowing.
xxx
37.2 In the case in hand, I am prima facie of the
view that the structure/device of routing FMO's FDI
amount of Rs. 418 crores to Amazia and Rubix
through the newly interposed Vinca (as the nominal
recipient of the FDI) was a colourable device
structured only to enable FMO to secure repayment
(through Vinca) of its FDI amount and interest
thereon at 14.75%, contrary to the statutory FEMA
Regulations and the FDI policy embodied
therein, which only permit FDI investment in
townships/real estate development sector to
be made in the form of equity (including
Compulsorily Convertible Debentures) and preclude
any assured return. I am also prima facie of the
14Page 15
view that the Defendant's guarantee (which is the
basis of the Company Petition No. 644 of 2013)
though ostensibly in favour of Vinca, an Indian
Company, was part of the aforesaid illegal
structure/scheme and was given to ensure that
FMO received back its FDI amount with interest as
aforesaid through Vinca. The Guarantee was
therefore part of the aforesaid illegal
structures/scheme and therefore prima facie illegal
and unenforceable.
37.3 Further the question of the Defendant not
being allowed to plead its own wrong also does not
arise in the facts of the present case. Through the
present Petition, the Plaintiff (who is admittedly
acting at the instance of FMO/FMO's nominees) is
in effect seeking the assistance of this Court to
enable/enforce recovery by FMO of its FDI amount
and interest thereon (through Vinca), contrary to the
provisions of the FEMA Regulations and FDI policy
embodied therein. As has been held by the Hon'ble
Supreme Court in the case of Immami Appa Rao
vs. G. Ramalingamurthi (supra), the Plaintiff who
wants orders in his favour, is actually seeking the
active assistance of the Court to achieve what the
law prohibits/declares illegal and that is clearly and
patently inconsistent with public interest.
Moreover, as has been held by the Supreme Court i
n the above case, in such a case there can be no
question of estoppel and the paramount
consideration of public interest requires that the
plea be allowed to be raised and tried.”
xxx
40.2 In my view, the Plaintiff is also not correct
when they state/submit that the judgment supports
the Plaintiff in contending that the Defendant had
not “brought on record a shred of material to show
how the facts of the present dispute would mandate
15Page 16
lifting of the corporate veil...” Even if it is assumed
that the corporate veil is not to be lifted or Vinca,
Amazia and Rubix are to be treated as one
Company, as has been mentioned hereinabove,
Vinca interposed as the holding Company of
Amazia and Rubix only for the purpose of
structuring FMO's FDI investment into Amazia and
Rubix, through Vinca as the nominal recipient.
The SSA and the annexed Debenture Trust Deed,
specifically provided that the FDI amount to be
received by Vinca from FMO against issuance of
CCDs and equity shares by Vinca, was not to be
retained by Vinca or used by Vinca in its own
projects. The SSA and Trust Deed in fact expressly
stipulated that the FDI amount received by Vinca
from FMO, was to be immediately passed on by
Vinca to Amazia and Rubix, against issuance by
them of OPCDs. Accordingly the SSA and
the Trust Deed itself established that Vinca had
been interposed only to provide a facade of
compliance with the FEMA Regulations/FDI policy
and was only a nominal recipient of the FDI and that
Vinca was immediately required to route the entire
amount received from FMO to Amazia and Rubix,
against issuance by them of OPCDs.”
xxx
42. In the circumstances I am of the view that the
Defendant has raised triable issues which require
adjudication on further evidence at the time of final
disposal of the suit. Hence the following order:
(i) Unconditional leave is granted to the Defendant
to defend the above suit;
(ii) The suit is transferred to the list of commercial
causes and the Defendant is directed to file its
written statement on or before 15th June, 2015;
16Page 17
(iii) The hearing of the suit is expedited and the
Court will endeavour to dispose of the suit within a
period of one year from the date of this order. It is
clarified that the Suit shall be decided without being
influenced by any of the observations made in the
present order.
(iv) Place the suit for framing of issues on 29th
June, 2015.”
5. Since the summary suit is filed on a Corporate
Guarantee, and since this document has been heavily relied
upon by Dr. Abhishek Manu Singhvi, Ld. Senior Counsel on
behalf of the appellant, it is necessary to set out some of the
clauses of this Guarantee. It may first be noticed that the deed
of Corporate Guarantee cum Mortgage, dated 9th December,
2009, was made by Ackruti City Ltd. as guarantor. Ackruti City
Ltd. has since become Hubtown Ltd., the
Respondent-defendant. IDBI Trusteeship Services Ltd. is
described as the debenture trustee for the benefit of Vinca
Developer Pvt. Ltd., for the Amazia Optional Partially
Convertible Debentures (hereinafter referred to as “OPCDs”)
and the Rubix OPCDs, and appointed pursuant to the Amazia
OPCD subscription and debenture trust deed and the Rubix
17Page 18
OPCD subscription and debenture trust deed. The very opening
clause of the Deed of Corporate Guarantee states as follows:
“A. GUARANTEE
In consideration of the premises, the Surety hereby
unconditionally, absolutely and irrevocably
guarantees to and agrees with the Debenture
Trustee for the benefit of the Debenture Holder and
the Security Trustee, for the benefit of the Lender,
respectively, that:
1. It shall ensure that Amazia shall duly and
punctually pay or repay the Amazia Secured
Obligations and Rubix shall duly and punctually pay
or repay the Rubix Secured Obligations and Rubix
Facility Secured Obligations, including but not
limited to the Principal Amount under the Amazia
OPCD Subscription and Debenture Trust Deed and
the Rubix OPCD Subscription and Debenture Trust
Deed, respectively and the Facility, together with all
interest, liquidated damages, commitment charges,
premia on prepayment or on redemption, costs,
expenses, and other monies due to (i) the
Debenture Holder and the Debenture Trustee and
any remuneration and charges that and (ii) the
Lender and the Security Trustee and any
remuneration and charges that might be payable to
the Security Trustee, in accordance with the Facility
Agreement and perform and comply with all the
other terms, conditions and covenants contained in
the OPCD Subscription and Debenture Trust Deeds
and the Facility Agreement.
2. The Surety guarantees to the Debenture
Trustee acting for the benefit of the Debenture
18Page 19
Holder and the Security Trustee acting for the
benefit of the Lender, jointly and severally, the due
and punctual payment by Amazia of the Amaxia
Secured Obligations and by Rubix of the Rubix
Secured Obligation and Rubix Facility Secured
Obligations, which are due but unpaid, and
irrevocably and unconditionally agrees and
undertakes (as primary obligor and not only as (sic.)
to pay to the Debenture Trustee and/or the Security
Trustee forthwith on demand (which demand shall
be made in terms of the Transaction Documents) as
stated in Clause 31 herein (and in any event within
five (5) Business Days of the demand) and
indemnify and keep indemnified the Debenture
Trustee acting for the benefit of the Debenture
Holder and the Security Trustee acting for the
benefit of the Lender against all losses, damages,
claims, charges, fees and expenses whatsoever
which the Debenture Trustee/Security Trustee may
incur by reason of or in connection with any default
on the part of the Guarantor or on the part of the
Issuers in making such payment and including in
connection with legal proceedings taken against the
Issuers and/or the Guarantor for recovery of the
moneys referred to in this Guarantee. In this regard
the Debenture Trustee’s and/or the Security
Trustee’s independent opinion of default of the
Issuers and the amounts comprising shortfall
amounts, as indicated in the Demand Certificate (as
defined hereinafter in Clause 31) shall be final and
binding on the Guarantor and the Guarantor shall
not dispute the same. This Guarantee shall be
continuing and shall remain in full force and effect
until all the Secured Obligations have been
discharged in full to the satisfaction of the
19Page 20
Debenture Approved Instructions) and the Security
Trustee certify the same in writing.
3. If the Guarantor delays in making payments in
full pursuant to the demand being made on it, then it
shall pay interest at the rate of 14.75% per annum
(“Default Interest Rate”) on the outstanding amount,
till the same is discharged in full to the satisfaction
of the Debenture Trustee (acting on Approved
Instructions) or the Security Trustee and the
Guarantor agrees that the Default Interest Rate
agreed, is a genuine pre-estimate of the loss likely
to be suffered by the Debenture Holder, Debenture
Trustees, Security Trustee and/or the Lender on
account of any default by the Guarantor in
discharging its obligations as agreed herein.
14. Notwithstanding the Debenture Holder’s/the
Debenture Trustee’s and the Security Trustee’s/
Lender’s rights under any security which the
Debenture Holder/ the Trustee (acting on Approved
Instructions) and the Security Trustee, jointly and
severally, shall have the fullest liberty to call upon
the Guarantor to pay all or part of the monies for the
time being due to the Debenture Holder/ the
debenture Trustee and/or the Security Trustee/ the
Lender (as the case may be) in respect of the
Secured Obligations without requiring the
Debenture Trustee/ the debenture Holder and/or the
Security Trustee/ the Lender to realize from the
Issuers the amount outstanding to the Debenture
Holder/ the Debenture Trustee and/or the Security
Trustee/ the Lender pursuant to the Debentures/
Facility and/or requiring the Debenture Trustee/ the
Debenture Holder and/or the Security Trustee/ the
Lender to enforce any remedies or securities
20Page 21
available to the Debenture Trustee/ the Debenture
Holder and/or the Security Trustee/ the Lender.
31. The Guarantor agrees that the amount hereby
guaranteed shall be payable to the Debenture
Trustee and/or the Security Trustee immediately
upon the Debenture Trustee and/or the Security
Trustee/ Lender serving the Guarantor with a notice
requiring payment of the amount due (the “Demand
Certificate”), in the form and manner set out in
Schedule I hereto, at the address and details
specified in Clause 34 below. Save and except as
provided above, prior to making any demand
hereunder, the Debenture Trustee/ the Debenture
Holder and/or the Security Trustee/ the Lender shall
not be required to take any step, make any demand
upon, exercise any remedies or obtain any
judgment against any of the Obligors, give notice to
the Obligors or any other person under the
Transaction Documents or otherwise and
howsoever arising, or make or file any claim or
proof in the dissolution or winding-up of any of the
Obligors or enforce or seek to enforce any Security
now or hereafter held by any of the Debenture
Trustee/Debenture Holder and/or the Security
Trustee/ Lender in respect of the when sent (with
the correct answerback), (ii) if sent by fax, when
sent (on receipt of a confirmation to the correct fax
number), (iii) if sent by person, when delivered, (iv)
if sent by courier, one (1) Business Day after
deposit with an overnight courier, and (v) if sent by
registered letter, when the registered letter would, in
the ordinary course of post, be delivered whether
actually delivered or not. An original of each notice
and communication sent by telex or telecopy shall
21Page 22
be dispatched by person or overnight courier and, if
such person or courier service is not available, by
registered first class mail with postage prepaid,
provided that the effective date of any such notice
shall be determined in accordance with paragraphs
(i) or (ii) of this Clause 31, as the case may be,
without regard to the dispatch of such original.
SCHEDULE I
FORM OF DEMAND CERTIFICATE
To: Ackruti City Limited [as “Guarantor”]
From: [.] [as “Debenture Trustee”/ Security Trustee”]
Dated: [.]
Dear Sirs,
Ref: Deed of Corporate Guarantee cum Mortgage
dated [.] (the “Deed”) executed by the Guarantor in
favour of the Debenture Trustee and the Security
Trustee.
[Amazia Developers Private Limited/Rubix Trading
Private Limited] has not fulfilled its obligations under
[the Amazia OPCD Subscription and Debenture
Trust Deed dated [.] and/or the Rubix OPCD
Subscription and Debenture Trust Deed dated [.]
and/or the Facility Agreement] and an amount of Rs.
[.] (Rupees [.] only) is due and payable by [Amazia
Developers Private Limited/Rubix Trading Private
Limited]. Accordingly, we hereby give you notice
pursuant to Clause 2 and Clause 31 of the Deed
that we require you to pay such amount.
All amounts due should be paid to the account
[details of account] entitled [.] under the [.]
22Page 23
immediately and in no event later than 5 Business
Days from the date hereof.
Capitalised terms used herein shall have the
meaning given to them in the Guarantee.
Yours faithfully
[Debenture Trustee]/
[Security Trustee]”
6. It is on this Corporate Guarantee that the Summary Suit is
based. Dr. Singhvi has argued before us that there has been no
violation of the FEMA Regulations, 1999, as observed by the
Ld. Single Judge. In particular, he referred to and relied upon
Regulations 4 and 5 of the FEMA Regulations, which are set
out as follows:
“Restriction on an Indian entity to issue security
to a person resident outside India or to record a
transfer of security from or to such a person in
its books :-
4. Save as otherwise provided in the Act or
Rules or Regulations made thereunder, an
Indian entity shall not issue any security to a
person resident outside India or shall not
record in its books any transfer of security
from or to such person:-
23Page 24
Provided that the Reserve Bank may, on an
application made to it and for sufficient
reasons, permit an entity to issue any security
to a person resident outside India or to record
in its books transfer of security from or to such
person, subject to such conditions as may be
considered necessary.
Permission for purchase of shares by certain
persons resident outside India :-
5. (1) (i) A person resident outside India (other
than a citizen of Bangladesh or Pakistan) or
an entity incorporated outside India (other
than an entity in Bangladesh or Pakistan),
may purchase shares or convertible
debentures or warrants of an Indian company
under Foreign Direct Investment Scheme,
subject to the terms and conditions specified
in Schedule 1.
Explanation.--- Shares or convertible
debentures containing an optionality clause
but without any option/right to exit at an
assured price shall be reckoned as eligible
instruments to be issued to a person resident
outside India by an Indian company subject to
the terms and conditions as specified in
Schedule 1.”
7. Dr. Singhvi argued that there is no breach whatsoever of
the Regulations inasmuch as the suit, based upon a Corporate
Guarantee to enforce its terms, is filed by an Indian company,
namely, the debenture trustee IDBI Trusteeship Pvt. Ltd.,
against another Indian company namely Hubtown Ltd, the
24Page 25
beneficiary being a subsidiary of Hubtown namely Vinca, which
is also an Indian company. There is therefore no question of
any funds going out of the country in violation of any FEMA
Regulation, the ultimate repose of the funds being for the
benefit of Vinca which is an Indian company. He argued before
us that admittedly 418 crores were paid by FMO, a Dutch ₹
company, and have been swallowed by the development
project that has been set up by Amazia and Rubix. He also
argued that there is no question of any infraction of the FEMA
Regulations for the reason that these funds went to purchase
equity shares of Vinca in the form of fully convertible
debentures, such debentures having to be converted into
shares after a certain period, and that, therefore, there was no
question of any illegality in the said transaction. He further
submitted that it is only in 2011 that defaults were made in
payment, as a result of which the Corporate Guarantee was
invoked. The said Corporate Guarantee is unconditional and
not a word has been stated against its invocation, namely, that
it has not been alleged to have been invoked wrongly.
According to him, there is no defence whatsoever to the
25Page 26
suit, and the defence being entirely frivolous and
vexatious, leave to defend ought to have been refused
altogether. But, he stated as an alternative argument, that in
any case the Appellant-plaintiff should be fully secured for the
amount claimed in the plaint. He also submitted before us that
the test laid down in Mechelec Engineers & Manufacturers v.
Basic Equipment Corporation, (1976) 4 SCC 687 is no longer
good law in view of the fact that O.XXXVII of the Code of Civil
Procedure, 1908 (“CPC”) was amended in 1976, and it is the
amended provision that has to be looked at. He cited certain
judgments before us to show that this court has taken the view
that the amended provision makes a sea change in the law, as
a result of which it is open to the court, even if it thinks that a
triable issue is made out, to secure the plaintiff in monetary
terms as a condition for leave to defend the suit.
8. Shri Aspi Chinoy, Ld. senior counsel appearing on behalf
of the Respondent, has reiterated the submissions of his
predecessor in the Bombay High Court. According to him there
is a clear breach of the FEMA Regulations and this being so,
26Page 27
the Ld. Single Judge was correct in referring to the judgment in
Immami Appa Rao vs. G. Ramalingamurthi, (1962) 3 SCR
739, and stating that where two persons may be party to an
illegality, the court would be justified, in the larger public
interest, in not lending the court’s aid to a person who comes to
court to enforce such illegality. That this may incidentally benefit
the defendant is of no moment, and therefore the Ld. Single
Judge was correct in prima facie coming to the conclusion that
the suit was to lend assistance to the plaintiff in enforcing
something illegal, the Corporate Guarantee being part of the
larger illegal transaction. According to ld. senior counsel, there
is in fact no change made by the amendment of 1976, save and
except in one area – that where the defendant admits that a
certain amount is due from him, then even though leave to
defend may be granted, the admitted amount ought to be
deposited or secured. Short of this change, the law continues to
be the same, and therefore, according to him, triable issues
having been raised in the present case, it is clear that clause
(e) of the propositions laid down in paragraph 8 of Mechelec’s
case alone would entitle the Plaintiff to an order for deposit into
27Page 28
court or security, and sub-clause (e) not being attracted, the Ld.
Single Judge was absolutely right in the conclusion that he
reached. He also asked us not to interfere with the Ld. Single
Judge’s judgment under Article 136 as there was nothing
perverse in the Single Judge's conclusions.
9. This case therefore raises a larger and very important
question: namely, whether the judgment in Mechelec’s case
continues to be the law even after the amendment of O.XXXVII
in 1976. To appreciate the respective submissions of counsel, it
is necessary to set out O.XXXVII Rule 3 as it stood
pre-amendment and as it now stands.
O.XXXVII, Rule 3 (pre-amendment)
“3. Defendant showing defence on merits to
have leave to appear. (1) The Court shall, upon an
application by the defendant, give leave to appear
and to defend the suit, upon affidavits which
disclose such facts as would make it incumbent on
the holder to prove consideration, or such other
facts as the Court may deem sufficient to support
the application.
(2) Leave to defend may be given unconditionally or
subject to such terms as to payment into Court,
giving security, framing and recording issues or
otherwise as the Court thinks fit.”
28Page 29
O.XXXVII, Rule 3 (post amendment)
“3. Procedure for the appearance of defendant.
—(1) In a suit to which this Order applies, the
plaintiff shall, together with the summons under
Rule 2, serve on the defendant a copy of the plaint
and annexures thereto and the defendant may, at
any time within ten days of such service, enter an
appearance either in person or by pleader and, in
either case, he shall file in Court an address for
service of notices on him.
(2) Unless otherwise ordered, all summonses,
notices and other judicial processes, required to be
served on the defendant, shall be deemed to have
been duly served on him if they are left at the
address given by him for such service.
(3) On the day of entering the appearance, notice of
such appearance shall be given by the defendant to
the plaintiff's pleader, or, if the plaintiff sues in
person, to the plaintiff himself, either by notice
delivered at or sent by a prepaid letter directed to
the address of the plaintiff's pleader or of the
plaintiff, as the case may be.
(4) If the defendant enters an appearance, the
plaintiff shall thereafter serve on the defendant a
summons for judgment in Form 4-A in Appendix B
or such other Form as may be prescribed from time
to time, returnable not less than ten days from the
date of service supported by an affidavit verifying
the cause of action and the amount claimed and
stating that in his belief there is no defence to the
suit.
(5) The defendant may, at any time within ten days
from the service of such summons for judgment, by
affidavit or otherwise disclosing such facts as may
be deemed sufficient to entitle him to defend, apply
29Page 30
on such summons for leave to defend such suit, and
leave to defend may be granted to him
unconditionally or upon such terms as may appear
to the Court or Judge to be just:
Provided that leave to defend shall not be refused
unless the Court is satisfied that the facts disclosed
by the defendant do not indicate that he has a
substantial defence to raise or that the defence
intended to be put up by the defendant is frivolous
or vexatious:
Provided further that, where a part of the amount
claimed by the plaintiff is admitted by the defendant
to be due from him, leave to defend the suit shall
not be granted unless the amount so admitted to be
due is deposited by the defendant in Court.
(6) At the hearing of such summons for judgment,—
(a) if the defendant has not applied for leave to
defend, or if such application has been made and is
refused, the plaintiff shall be entitled to judgment
forthwith; or
(b) if the defendant is permitted to defend as to the
whole or any part of the claim, the Court or Judge
may direct him to give such security and within such
time as may be fixed by the Court or Judge and
that, on failure to give such security within the time
specified by the Court or Judge or to carry out such
other directions as may have been given by the
Court or Judge, the plaintiff shall be entitled to
judgment forthwith.
(7) The Court or Judge may, for sufficient cause
shown by the defendant, excuse the delay of the
defendant in entering an appearance or in applying
for leave to defend the suit.”
30Page 31
10. The 3 judge bench in Mechelec’s case heard an appeal
from a judgment of the Delhi High Court. In paragraph 2 of the
judgment, the unamended O.XXXVII Rule 3 is set out, after
which, in paragraph 4, the Court stated that the only question
which arose before them in that appeal by special leave was
whether the High Court could, in exercise of its powers under
Section 115 of the CPC, interfere with the discretion of the
district court in granting unconditional leave to defend to the
defendant-appellant, upon grounds which even a perusal of the
impugned judgment of the High Court showed to be
reasonable. The answer to the question thus posed was in the
question itself, and this Court had no doubt that the High Court
judgment, in interfering with the trial court’s judgment under its
revisional jurisdiction, was wrong. Paragraphs 6 and 7, which
constitute the ratio of the judgment, went into the
well-established principles repeatedly laid down by this court
which govern the jurisdiction of the High Courts under Section
115 of the CPC. This Court held that such principles had been
ignored in the judgment under appeal. However, in paragraph
8, the judges set out the 5 propositions governing O.XXXVII laid
31Page 32
down in Kiranmoyee Dassi Smt v. Dr J. Chatterjee, AIR 1949
Cal 479, as follows:
“In Kiranmoyee Dassi Smt v. Dr J. Chatterjee [AIR
1949 Cal 479 : 49 CWN 246, 253 : ILR (1945) 2 Cal
145.] Das, J., after a comprehensive review of
authorities on the subject, stated the principles
applicable to cases covered by Order 37 CPC in the
form of the following propositions (at p. 253):
“(a) If the defendant satisfies the court that he has a
good defence to the claim on its merits the plaintiff
is not entitled to leave to sign judgment and the
defendant is entitled to unconditional leave to
defend.
(b) If the defendant raises a triable issue indicating
that he has a fair or bona fide or reasonable
defence although not a positively good defence the
plaintiff is not entitled to sign judgment and the
defendant is entitled to unconditional leave to
defend.
(c) If the defendant discloses such facts as may be
deemed sufficient to entitle him to defend, that is to
say, although the affidavit does not positively and
immediately make it clear that he has a defence,
yet, shews such a state of facts as leads to the
inference that at the trial of the action he may be
able to establish a defence to the plaintiff's claim the
plaintiff is not entitled to judgment and the
defendant is entitled to leave to defend but in such a
case the court may in its discretion impose
conditions as to the time or mode of trial but not as
to payment into court or furnishing security.
(d) If the defendant has no defence or the defence
set-up is illusory or sham or practically moonshine
then ordinarily the plaintiff is entitled to leave to sign
32Page 33
judgment and the defendant is not entitled to leave
to defend.
(e) If the defendant has no defence or the defence
is illusory or sham or practically moonshine then
although ordinarily the plaintiff is entitled to leave to
sign judgment, the court may protect the plaintiff by
only allowing the defence to proceed if the amount
claimed is paid into court or otherwise secured and
give leave to the defendant on such condition, and
thereby show mercy to the defendant by enabling
him to try to prove a defence.” [para 8]
11. As the case before the court did not fall within clause (e),
this Court held that imposition of a condition to deposit an
amount in court would not be possible, and allowed the appeal
as aforesaid. It is interesting to note that a binding four judge
bench decision on order 37 in Milkhiram (India) (P) Ltd. v.
Chamanlal Bros., AIR 1965 SC 1698, was bunched together
with several other judgments that were relied upon in paragraph
6, as judgments relating to the exercise of jurisdiction of High
Courts under section 115 of the CPC.
12. We find that Milkhiram’s case is in fact an important
judgment on the scope of O.XXXVII of the CPC, and is not a
judgment on principles to be applied under Section 115. This
33Page 34
judgment, being a judgment of four learned judges of this court,
set out, in paragraph 1, O.XXXVII, Rule 3 sub-rules (2) and (3)
as amended by the Bombay High Court at the relevant time, as
follows:
“(2) If the defendant enters an appearance, the
plaintiff shall thereafter serve on the defendant a
summons for judgment returnable not less than ten
clear days from the date of service supported by an
affidavit verifying the cause of action and the
amount claimed and stating that in his belief there is
no defence to the suit.
(3) The defendant may at any time within ten days
from the service of such summons for judgment by
affidavit or otherwise disclosing such facts as may
be deemed sufficient to entitle him to defend, apply
on such summons for leave to defend the suit.
Leave to defend may be granted to him
unconditionally or upon such terms as to the Judge
appear just.”
13. The trial court found that the defence disclosed by the
affidavit required by sub-rule (3) was sufficient to grant leave to
defend the suit, but as against a claim of 4,05,434.38/-, the ₹
Court ordered the appellant to deposit security worth 70,000/-. ₹
A first appeal having been dismissed, the Supreme Court had
to decide whether it was incumbent upon the trial court to grant
unconditional leave to defend, having found that a triable issue
34Page 35
exists. Since this judgment is of seminal importance in deciding
the issue raised before us, it is necessary for us to quote parts
of this judgment, as follows:
“Learned counsel relied upon a decision of this
court in Santosh Kumar v. Bhai Mool Singh [ (1958)
SCR 1211] and particularly upon a passage at p.
1216. That was a case in which the Court of
Commercial Subordinate Judge, Delhi, had held
that the defence raised a triable issue but that
defence was vague and was not bona fide because
the defendant had produced no evidence to prove
his assertion. For these reasons the court granted
leave to defend the suit on the condition of the
defendant giving security for the entire claim in the
suit and costs thereon. This court held that the test
is to see whether the defence raises a real issue
and not a sham one, in the sense that, if the facts
alleged by the defendant are established, there
would be a good, or even a plausible defence on
those facts. If the court is satisfied about that, leave
must be given unconditionally. This Court further
held that the trial court was wrong in imposing a
condition about giving security on the ground that
documentary evidence had not been adduced by
the defendant. This Court pointed out that the stage
of proof can only arise after leave to defend has
been granted and that the omission to adduce
documentary evidence would not justify the
inference the defence sought to be raised was
vague and not bona fide. While dealing with the
matter Bose, J., who spoke for the Court observed
(p. 1216):
“Taken by and large, the object is to see that the
defendant does not unnecessarily prolong the
litigation and prevent the plaintiff from obtaining an
early decree by raising untenable and frivolous
35Page 36
defences in a class of cases where speedy
decisions are desirable in the interests of trade and
commerce. In general, therefore, the test is to see
whether the defence raises a real issue and not a
sham one, in the sense that, if the facts alleged by
the defendant are established, there would be a
good, or even a plausible, defence on those facts.”
The latter part of the observations of the learned
Judge have to be under-stood in the background of
the facts of the case this Court was called upon to
consider. The trial Judge being already satisfied that
the defence raised a triable issue was not justified in
imposing a condition to the effect that the defendant
must deposit security because he had not adduced
any documentary evidence in support of the
defence. The stage for evidence had not been
reached. Whether the defence raises a triable issue
or not has to be ascertained by the court from the
pleadings before it and the affidavits of parties and it
is not open to it to call for evidence at that stage. If
upon consideration of material placed before it the
court comes to the conclusion that the defence is a
sham one or is fantastic or highly improbable it
would be justified in putting the defendant upon
terms before granting leave to defend. Even when a
defence is plausible but is improbable the court
would be justified in coming to the conclusion that
the issue is not a triable issue and put the defendant
on terms while granting leave to defend. To hold
otherwise would make it impossible to give effect to
the provisions of Order 37 which have been
enacted, as rightly pointed out by Bose, J., to
ensure speedy decision in cases of certain types. It
will be seen that Order 37 Rule 2 is applicable to
what may be compendiously described as
commercial causes. Trading and commercial
operations are liable to be seriously impeded if, in
particular, money disputes between the parties are
not adjudicated upon expeditiously. It is these
36Page 37
considerations which have to be borne in mind for
the purpose of deciding whether leave to defend
should be given or withheld and if given should be
subjected to a condition.
It may be mentioned that this Court relied upon the
decision in Jacobs v. Booth's Distillery Co. [(1901)
85 LT 262] in which the House of Lords held that
whenever a defence raises a triable issue leave
must be given and also referred to two subsequent
decisions where it was held that when such is the
case leave must be given unconditionally. In this
connection we may refer to the following
observations of Devlin, L.J. in Fieldrank
Ltd. v. Stein [ (1961) 3 AELR 681 at pp 682-3] :
“The broad principle, which is founded
on Jacob v.Booth's Distillery Co. is summarised on
p. 266 of the Annual Practice (1962 Edn.) in the
following terms:
‘The principle on which the court acts is that where
the defendant can show by affidavit that there is a
bona fide triable issue, he is to be allowed to defend
as to that issue without condition.'”
If that principle were mandatory, then the
concession by counsel for the plaintiffs that there is
here a triable issue would mean at once that the
appeal ought to be allowed; but counsel for the
plaintiffs has drawn our attention to some comments
that have been made on Jacobs v. Booth's Distillery
Co. [(1901) 85 LT 262] They will be found at pp. 251
and 267 of the Annual Practice, 1962. It is
suggested (see p. 251) that possibly the case, if it is
closely examined, does not go as far as it has
hitherto been thought to go; and on the top of p. 267
the learned editors of the Annual Practice have this
note: “The condition of payment into court, or giving
security, is nowadays more often imposed than
formerly, and not only where the defendant
consents but also where there is a good ground in
37Page 38
the evidence for believing that the defence set up is
a sham defence and the master ‘is prepared very
nearly to give judgment for the plaintiff.”
It is worth noting also that in Lloyd's Banking
Co. v.Ogle 1 Ex. D. at p. 264 in a dictum which was
said to have been overruled or qualified
by Jacob v. Booth's Distillery Co.[ (1901) 85 LT 262]
Bramwell, B., had said that
“....those conditions (of bringing money into court or
giving security) should only be applied when there is
something suspicious in the defendant's mode of
presenting his case.”
I should be very glad to see some relaxation of the
strict rule in Jacob v. Booth's Distillery Co. I think
that any Judge who has sat in chambers in RSC,
Order 14 summonses has had the experience of a
case in which, although he cannot say for certain
that there is not a triable issue, nevertheless he is
left with a real doubt about the defendant's good
faith, and would like to protect the plaintiff,
especially if there is not grave hardship on the
defendant in being made to pay money into court. I
should be prepared to accept that there has been a
tendency in the last few years to use this condition
more often than it has been used in the past, and I
think that that is a good tendency;”
These observations as well as some observations
of Chagla, C.J., in Rawalpindi Theatres Private
Ltd. v. Film Group Bombay [ (1958) BLR 1373 at p
1374] may well be borne in mind by the court sitting
in appeal upon the order of the trial Judge granting
conditional leave to defend. It is indeed not easy to
say in many cases whether the defence is a
genuine one or not and therefore it should be left to
the discretion of the trial Judge who has experience
of such matters both at the bar and the bench to
form his own tentative conclusion about the quality
or nature of the defence and determine the
38Page 39
conditions upon which leave to defend may be
granted. If the Judge is of opinion that the case
raises a triable issue, then leave should ordinarily
be granted unconditionally. On the other hand, if he
is of opinion that the defence raised is frivolous, or
false, or sham, he should refuse leave to defend
altogether. Unfortunately, however, the majority of
cases cannot be dealt with in a clear cut way like
this and the judge may entertain a genuine doubt on
the question as to whether the defence is genuine
or sham or in other words whether it raises a triable
issue or not. It is to meet such cases that the
amendment to Order 37 Rule 2 made by the
Bombay High Court contemplates that even in
cases where an apparently triable issue is raised
the Judge may impose conditions in granting leave
to defend. Thus this is a matter in the discretion of
the trial Judge and in dealing with it, he ought to
exercise his discretion judiciously. Care must be
taken to see that the object of the rule to assist the
expeditious disposal of commercial causes to which
the Order applies, is not defeated. Care must also
be taken to see that real and genuine triable issues
are not shut out by unduly severe orders as to
deposit. In a matter of this kind, it would be
undesirable and inexpedient to lay down any rule of
general application.” [paras 7 – 12]
14. We may hasten to add that Mechelec’s case has since
been followed in a series of judgments of this court – Municipal
Corpn. of Delhi v. Suresh Chandra Jaipuria, (1976) 4 SCC
719 at para 11; Sunil Enterprises v. SBI Commercial &
International Bank Ltd., (1998) 5 SCC 354 at para 4; State
Bank of Saurashtra v. Ashit Shipping Services (P) Ltd.,
39Page 40
(2002) 4 SCC 736 at para 10; Uma Shankar Kamal Narain v.
M.D. Overseas Ltd., (2007) 4 SCC 133 at paras 8 and 9; SIFY
Ltd. v. First Flight Couriers Ltd., (2008) 4 SCC 246 at para
10; Wada Arun Asbestos (P) Ltd. v. Gujarat Water Supply &
Sewerage Board, (2009) 2 SCC 432 at para 19; R. Saravana
Prabhu v. Videocon Leasing & Industrial Finance Ltd.,
(2013) 14 SCC 606 at para 4; and State Bank of Hyderabad v.
Rabo Bank, (2015) 10 SCC 521 at para 16.
15. However, there are two judgments of this Court which
directly deal with the amendment made to O.XXXVII and the
effect thereof on the ratio contained in Mechelec’s case. In
Defiance Knitting Industries (P) Ltd. v. Jay Arts, (2006) 8
SCC 25, this Court, after setting out the amended O.XXXVII
and after referring to Mechelec’s case, laid down the following
principles –
“While giving leave to defend the suit the court shall
observe the following principles:
(a) If the court is of the opinion that the case raises
a triable issue then leave to defend should ordinarily
be granted unconditionally. See Milkhiram (India)
(P) Ltd. v.Chamanlal Bros. [AIR 1965 SC 1698 : 68
Bom LR 36] The question whether the defence
raises a triable issue or not has to be ascertained by
40Page 41
the court from the pleadings before it and the
affidavits of parties.
(b) If the court is satisfied that the facts disclosed by
the defendant do not indicate that he has a
substantial defence to raise or that the defence
intended to be put up by the defendant is frivolous
or vexatious it may refuse leave to defend
altogether. Kiranmoyee Dassi v. Dr. J.
Chatterjee [AIR 1949 Cal 479 : 49 CWN 246] (noted
and approved in Mechelec case [(1976) 4 SCC
687 : AIR 1977 SC 577] ).
(c) In cases where the court entertains a genuine
doubt on the question as to whether the defence is
genuine or sham or whether it raises a triable issue
or not, the court may impose conditions in granting
leave to defend.” [para 13]
16. In Southern Sales & Services v. Sauermilch Design &
Handels GMBH, (2008) 14 SCC 457, this Court was squarely
asked to render its decision on whether the judgment in
Mechelec’s case was to a large extent rendered ineffective in
view of the amended O.XXXVII. This Court found:
“Having considered the submissions made on
behalf of the respective parties and the decisions
cited, there appears to be force in Mr Sharma's
submissions regarding the object intended to be
achieved by the introduction of sub-rules (4), (5)
and (6) in Rule 3, Order 37 of the Code. Whereas in
the unamended provisions of Rule 3, there was no
compulsion for making any deposit as a condition
precedent to grant of leave to defend a suit by virtue
41Page 42
of the second proviso to sub-rule (5), the said
provision was altered to the extent that the deposit
of any admitted amount is now a condition
precedent for grant of leave to defend a suit filed
under Order 37 of the Code. A distinction has been
made in respect of any part of the claim, which is
admitted. The second proviso to sub-rule (5) of Rule
3 makes it very clear that leave to defend a suit
shall not be granted unless the amount as admitted
to be due by the defendant is deposited in court.”
[para 15]
17. It is thus clear that O.XXXVII has suffered a change in
1976, and that change has made a difference in the law laid
down. First and foremost, it is important to remember that
Milkhiram’s case is a direct authority on the amended
O.XXXVII provision, as the amended provision in O.XXXVII
Rule 3 is the same as the Bombay amendment which this Court
was considering in the aforesaid judgment. We must hasten to
add that the two provisos to sub-rule (3) were not, however,
there in the Bombay amendment. These are new, and the effect
to be given to them is something that we will have to decide.
The position in law now is that the trial Judge is vested with a
discretion which has to result in justice being done on the facts
of each case. But Justice, like Equality, another cardinal
constitutional value, on the one hand, and arbitrariness on the
other, are sworn enemies. The discretion that a Judge
exercises under Order XXXVII to refuse leave to defend or to
grant conditional or unconditional leave to defend is a discretion
akin to Joseph’s multi-coloured coat – a large number of
baffling alternatives present themselves. The life of the law
not being logic but the experience of the trial Judge, is what
comes to the rescue in these cases; but at the same time
informed by guidelines or principles that we propose to lay
down to obviate exercise of judicial discretion in an arbitrary
manner. At one end of the spectrum is unconditional leave to
defend, granted in all cases which present a substantial
defence. At the other end of the spectrum are frivolous or
vexatious defences, leading to refusal of leave to defend. In
between these two extremes are various kinds of defences
raised which yield conditional leave to defend in most cases. It
is these defences that have to be guided by broad principles
which are ultimately applied by the trial Judge so that justice is
done on the facts of each given case.
18. Accordingly, the principles stated in paragraph 8 of
Mechelec’s case will now stand superseded, given the
amendment of O.XXXVII R.3, and the binding decision of four
judges in Milkhiram’s case, as follows:
a. If the defendant satisfies the Court that he has a
substantial defence, that is, a defence that is likely to succeed,
the plaintiff is not entitled to leave to sign judgment, and the
defendant is entitled to unconditional leave to defend the suit;
b. if the defendant raises triable issues indicating that he has
a fair or reasonable defence, although not a positively good
defence, the plaintiff is not entitled to sign judgment, and the
defendant is ordinarily entitled to unconditional leave to defend;
c. even if the defendant raises triable issues, if a doubt is left
with the trial judge about the defendant’s good faith, or the
genuineness of the triable issues, the trial judge may impose
conditions both as to time or mode of trial, as well as payment
into court or furnishing security. Care must be taken to see that
the object of the provisions to assist expeditious disposal of
commercial causes is not defeated. Care must also be taken to
see that such triable issues are not shut out by unduly severe
orders as to deposit or security;
d. if the Defendant raises a defence which is plausible but
improbable, the trial Judge may impose conditions as to time or
mode of trial, as well as payment into court, or furnishing
security. As such a defence does not raise triable issues,
conditions as to deposit or security or both can extend to the
entire principal sum together with such interest as the court
feels the justice of the case requires.
e. if the Defendant has no substantial defence and/or raises
no genuine triable issues, and the court finds such defence to
be frivolous or vexatious, then leave to defend the suit shall be
refused, and the plaintiff is entitled to judgment forthwith;
f. if any part of the amount claimed by the plaintiff is
admitted by the defendant to be due from him, leave to defend
the suit, (even if triable issues or a substantial defence is
raised), shall not be granted unless the amount so admitted to
be due is deposited by the defendant in court.
19. Coming to the facts of the present case:
a. It is clear that a sum of 418 crores has been paid by ₹
FMO, the Dutch company, to Vinca for purchase of shares as
well as compulsorily convertible debentures. This transaction by
itself is not alleged to be violative of the FEMA regulations.
b. The suit is filed only on invocation of the Corporate
Guarantee which on its terms is unconditional. It may be added
that it is not the defendant's case that the said Corporate
Guarantee is wrongly invoked.
c. Payment under the said Guarantee is to the debenture
trustee, an Indian company, for and on behalf of Vinca, another
Indian company, so that prima facie again there is no infraction
of the FEMA Regulations.
d. Since FMO becomes a 99% holder of Vinca after the
requisite time period has elapsed, FMO may at that stage utilise
the funds received pursuant to the overall structure agreements
in India. If this is so, again prima facie there is no breach of
FEMA Regulations.
e. At the stage that FMO wishes to repatriate such funds,
RBI permission would be necessary. If RBI permission is not
granted, then again there would be no infraction of FEMA
Regulations.
f. The judgment in Immami Appa Rao’s case would be
attracted only if the illegal purpose is fully carried out, and not
otherwise.
20. Based on the aforesaid, it cannot be said that the
defendant has raised a substantial defence to the claim made
in the suit. Arguably at the highest, as held by the learned
Single Judge, even if a triable issue may be said to arise on the
application of the FEMA Regulations, nevertheless, we are left
with a real doubt about the Defendant’s good faith and the
genuineness of such a triable issue. 418 crores has been ₹
stated to be utilized and submerged in a building construction
project, with payments under the structured arrangement
mentioned above admittedly being made by the concerned
parties until 2011, after which payments stopped being made by
them. The defence thus raised appears to us to be in the realm
of being ‘plausible but improbable’. This being the case, the
plaintiff needs to be protected. In our opinion, the defendant will
be granted leave to defend the suit only if it deposits in the
Bombay High Court the principal sum of 418 crores invested ₹
by FMO, or gives security for the said amount of 418 crores, ₹
to the satisfaction of the Prothonotary and Senior Master,
Bombay High Court within a period of three months from today.
The appeal is accordingly allowed, and the judgment of the
Bombay High Court is set aside.
21. We further direct that the suit be tried expeditiously,
preferably within a period of one year from the date of this
judgment, uninfluenced by any observations made by us
herein.
……………………J.
(Kurian Joseph)
……………………J.
New Delhi; (R.F. Nariman)
November 15, 2016
Print Page
1976, and that change has made a difference in the law laid
down. First and foremost, it is important to remember that
Milkhiram’s case is a direct authority on the amended
O.XXXVII provision, as the amended provision in O.XXXVII
Rule 3 is the same as the Bombay amendment which this Court
was considering in the aforesaid judgment. We must hasten to
add that the two provisos to sub-rule (3) were not, however,
there in the Bombay amendment. These are new, and the effect
to be given to them is something that we will have to decide.
The position in law now is that the trial Judge is vested with a
discretion which has to result in justice being done on the facts
of each case. But Justice, like Equality, another cardinal
constitutional value, on the one hand, and arbitrariness on the
other, are sworn enemies. The discretion that a Judge
exercises under Order XXXVII to refuse leave to defend or to
grant conditional or unconditional leave to defend is a discretion
akin to Joseph’s multi-coloured coat – a large number of
baffling alternatives present themselves. The life of the law
not being logic but the experience of the trial Judge, is what
comes to the rescue in these cases; but at the same time
informed by guidelines or principles that we propose to lay
down to obviate exercise of judicial discretion in an arbitrary
manner. At one end of the spectrum is unconditional leave to
defend, granted in all cases which present a substantial
defence. At the other end of the spectrum are frivolous or
vexatious defences, leading to refusal of leave to defend. In
between these two extremes are various kinds of defences
raised which yield conditional leave to defend in most cases. It
is these defences that have to be guided by broad principles
which are ultimately applied by the trial Judge so that justice is
done on the facts of each given case.
18. Accordingly, the principles stated in paragraph 8 of
Mechelec’s case will now stand superseded, given the
amendment of O.XXXVII R.3, and the binding decision of four
judges in Milkhiram’s case, as follows:
a. If the defendant satisfies the Court that he has a
substantial defence, that is, a defence that is likely to succeed,
the plaintiff is not entitled to leave to sign judgment, and the
defendant is entitled to unconditional leave to defend the suit;
b. if the defendant raises triable issues indicating that he has
a fair or reasonable defence, although not a positively good
defence, the plaintiff is not entitled to sign judgment, and the
defendant is ordinarily entitled to unconditional leave to defend;
c. even if the defendant raises triable issues, if a doubt is left
with the trial judge about the defendant’s good faith, or the
genuineness of the triable issues, the trial judge may impose
conditions both as to time or mode of trial, as well as payment
into court or furnishing security. Care must be taken to see that
the object of the provisions to assist expeditious disposal of
commercial causes is not defeated. Care must also be taken to
see that such triable issues are not shut out by unduly severe
orders as to deposit or security;
d. if the Defendant raises a defence which is plausible but
improbable, the trial Judge may impose conditions as to time or
mode of trial, as well as payment into court, or furnishing
security. As such a defence does not raise triable issues,
conditions as to deposit or security or both can extend to the
entire principal sum together with such interest as the court
feels the justice of the case requires.
e. if the Defendant has no substantial defence and/or raises
no genuine triable issues, and the court finds such defence to
be frivolous or vexatious, then leave to defend the suit shall be
refused, and the plaintiff is entitled to judgment forthwith;
f. if any part of the amount claimed by the plaintiff is
admitted by the defendant to be due from him, leave to defend
the suit, (even if triable issues or a substantial defence is
raised), shall not be granted unless the amount so admitted to
be due is deposited by the defendant in court.
REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO._10860_ of 2016
(ARISING OUT OF SLP (CIVIL) NO.31439 OF 2015)
IDBI TRUSTEESHIP SERVICES LTD
VERSUS
HUBTOWN LTD.
Dated:November 15, 2016
Citation:AIR 2016 Bom243,(2017)1 SCC 568
R.F. Nariman, J.
1. Leave granted.
2. The present appeal arises out of a Summons for
Judgment No. 39 of 2013 in a Summary Suit filed on the
original side of the Bombay High Court, by the Petitioner, a
debenture trustee, to enforce rights that arise out of a
Corporate Guarantee executed by the Respondent-defendant.
The necessary averments made in the plaint would disclose the
cause of action of the suit as well as the facts necessary to
decide this appeal. They are as follows:
“3. In 2009 and 2010, Nederlandse
Financierings-Maatschappij voor
Ontwikkelingslanden N.V. (hereinafter referred to as
“FMO”) invested in certain equity shares and
compulsorily convertible debentures (hereinafter
referred to as the “CCDs”) of Vinca Developer
Private Limited (hereinafter referred to as “Vinca”).
As a result of the said investment, FMO currently
holds (i) 10% of the equity of Vinca through Class A
shares and is entitled to 10% of the voting rights
and economic interest in Vinca by virtue thereof;
and (ii) 3 CCDs in Vinca. Further, as on date, the
Defendant owns 49% of the equity of Vinca through
Class A shares and is entitled to 49% of the voting
rights and economic interest in Vinca by virtue
thereof. The remaining 41% Class A equity shares
in Vinca are owned by the individual promoters of
the Defendant, being Hemant Shah and Vyomesh
Shah, which entitles them to 41% of the voting
rights and economic interest in Vinca. Hemant
Shah and Vyomesh Shah together also own 100%
of Class B equity shares of Vinca, which carry with
them collective voting rights and dividend
entitlement not exceeding 0.01%. Upon conversion,
the 3 CCDs in Vinca will entitle FMO to 99% of the
equity of Vinca (by allotment of additional Class A
shares), thereby entitling it to 99% of the voting and
economic rights of Vinca. The said monies invested
by FMO into Vinca were then used by Vinca to
subscribe to certain optionally partially convertible
debentures (hereinafter referred to as “OPCDs”), as
specified below.
4. The Plaintiff is India’s largest Trusteeship
Company and provides a wide spectrum of
Trusteeship Services. The Plaintiff has been
2Page 3
appointed as the Debenture Trustee under (i) the
Debenture Subscription and Debenture Trust Deed
dated 1st December, 2009 executed by Amazia
Developers Private Limited (hereinafter referred to
as “Amazia”), Vinca, Brainpoint Infotech Private
Limited (hereinafter referred to as “Brainpoint”), the
Defendant and the Plaintiff; and (ii) the Debenture
Subscription and Debenture Trust Deed dated 1st
December, 2009 executed by Rubix Trading Private
Limited (hereinafter referred to as “Rubix”), Vinca,
the Defendant and the Plaintiff as amended by
OPCD Amendment Agreement dated 8th September,
2010; (hereinafter collectively referred to as the
“Debenture Trust Deeds”) in relation to Vinca’s
investment in OPCDs issued by Amazia and Rubix.
A copy of the Debenture Trust Deeds is annexed
hereto and marked as Exhibits “A-1”, “A-2” and
“A-3”.
5. Pursuant to and in accordance with the terms
of the Debenture Trust Deeds, Vinca has
subscribed to:
i. certain secured, non marketable, transferable,
OPCDs of Rubix, of a face value of Rs.10,00,000
each aggregating to INR 1,285,000,000 in tranche
1;
ii. additional secured, non marketable,
transferable, OPCDs of Rubix, of a face value of Rs.
10,00,000 each, aggregating to INR 1,395,000,000
in tranche 2;
iii. certain secured, non marketable, transferable,
OPCDs of Amazia, of a face value of Rs.10,00,000
each, aggregating to INR 1,500,000,000.
6. The OPCDs carry a variable running coupon
and a back ended coupon to ensure an internal rate
of return of 14.75% per annum.
3Page 4
7. The Plaintiff states that the proceeds obtained
by Amazia and Rubix from the issue of the OPCD’s
to Vinca were to be applied towards inter alia
projects which are compliant with Indian foreign
direct investment law as applicable to townships,
housing, built-up infrastructure and construction
development projects, as provided more particularly
under clause I, Part C, Schedule 7 of the Debenture
Trust Deeds.
8. The Plaintiff states that in order to secure the
said OPCDs, and to ensure the due and punctual
payment by Amazia and Rubix of all dues to Vinca
under the Debenture Guarantee Deeds, the
Defendant has, inter alia vide the Corporate
Guarantee Deed, dated 9th December, 2009, issued
an unconditional, absolute and irrevocable
corporate guarantee in favour of the Plaintiff, inter
alia for the benefit of Vinca (hereinafter referred to
as the “Guarantee”). A copy of the Guarantee is
annexed hereto and marked as Exhibit “B”.
9. The Plaintiff submits that inter alia the
following defaults were committed by Amazia and
Rubix, inter alia under the said Debenture Trust
Deeds:
i. Defaults by Amazia and Rubix in payment of
interest on the OPCDs, as contemplated
under Condition 7 of Schedule 3 of the
Debenture Trust Deeds, which default has
been subsisting since 15th June, 2011, on the
interest accrued on the OPCDs since 16th
March, 2011;
ii. Defaults by Amazia and Rubix in payment of
default interest accrued on the OPCDs since
16th June, 2011;
iii. The occurrence of an event of default (cross
default) specified in Clause 21(a) of Schedule
14 of the Debenture Trust Deeds, arising inter
alia out of a default by Vinca under the CCDs;
4Page 5
iv. Failure on the part of Rubix, Amazia and the
Defendant in providing the financial
statements required to be provided as per
Entry I (Financial Statements) of Part A of
Schedule 7 (Covenants of the Obligors and
Security Providers) of the Debenture Trust
Deeds;
v. Failure on the part of the Defendant in
maintaining the Net Debt to EBITDA Ratio, the
Debt Service Cover Ratio and the Interest
Coverage Ratio as per the provisions of Part
B of Schedule 7 (Covenants of the Obligors
and Security Providers) of the Debenture
Trust Deeds, for the Ratio period from 1st April,
2011 to 30th September, 2011;
vi. Failure on the part of Rubix, Amazia and the
Defendant in complying with a number of the
Positive Covenants which were required to be
fulfilled by them as per the provisions of Part
C of Schedule 7 (Covenants of the Obligors
and Security Providers) of the Debenture
Trust Deeds, including the failure to apply the
proceeds from the issue of OPCD’s in the
manner contemplated in the abovementioned
Schedule i.e. towards projects that are
compliant with the Indian foreign direct
investment law;
vii. Failure on the part of Rubix, Amazia and the
Defendant in complying with a number of the
Negative Covenants as per the provisions of
Part D of Schedule 7 (Covenants of the
Obligors and Security Providers) of the
Debenture Trust Deeds.
10. In view of the aforesaid defaults, the Plaintiff
was constrained to issue notices dated 2nd May,
2012 to Amazia and Rubix respectively, under
Clause 33.1 of the Debenture Trust Deeds, for
subsisting payment of interest on OPCDs as
contemplated under Condition 7 of Schedule 3 of
5Page 6
the Debenture Trust Deeds, setting out inter alia (i)
the payment defaults subsisting as on the said date;
(ii) the default by Amazia and Rubix in crediting the
designated account with lease rental proceeds; and
(iii) the failure to provide information, and breach of
certain identified covenants. However, no response
was forthcoming from Amazia and/or Rubix. A copy
of the notices dated 2nd May, 2012 is annexed
hereto and marked Exhibits “C-1” and “C-2”.
11. Consequently, and further to the Plaintiff’s
letters dated 2nd May, 2012, and in view of the fact
that the said defaults were not rectified by Amazia
and Rubix as required under the said letters dated
2
nd May, 2012, the Plaintiff, in exercise of its right of
early redemption under Condition 12.1(a) and
Condition 12.2 of Schedule 3 of the Debenture Trust
Deeds, has issued redemption notices to both
Amazia and Rubix on 27th June, 2012 (hereinafter
referred to as the “Redemption Notices”) for the
reasons and on the grounds contained therein, inter
alia calling upon Amazia and Rubix to fully redeem
all the OPCDs at par value on 3rd July, 2012
(hereinafter referred to as the “Early Redemption
Date”) and to credit the Principal Redemption
Amount alongwith interest accrued and unpaid
thereon, aggregating to Rs.4,843,299,862.97/- into
A/c. no.: 00600350098359 held in the name of the
Plaintiff at HDFC Bank, on the Early Redemption
Date. A copy of the Redemption Notices is annexed
hereto and marked Exhibits “D-1” and “D-2”.
12. However, despite repeated reminders to
rectify their various defaults under the Debenture
Trust Deeds, and various attempts to resolve the
issues amicably, Amazia and Rubix have failed and
neglected to pay the amounts due and payable in
terms of the Debenture Trust Deeds. Consequently,
the Plaintiff was constrained to issue a Demand
Certificate for the enforcement of the Guarantee, in
terms of the said Guarantee, to the Defendant on 3rd
6Page 7
August, 2012. A copy of the Demand Certificate
dated 3rd August, 2012 is annexed hereto and
marked Exhibit “E”.
13. No reply has been received to the
aforementioned Demand Certificate from the
Defendant till date. The Defendant therefore failed
and neglected to make payment of the amounts due
to the Plaintiff under the Guarantee.
33. The Plaintiff therefore prays:
this Hon’ble Court be pleased to order and decree
the Defendant to pay to the Plaintiff a sum of
Rs.532,11,29,364.05/- (Rupees Five Hundred and
Thirty Two Crores Eleven Lakhs Twenty Nine
Thousand Three Hundred and Sixty Four and Five
Paisa Only) as on May 6, 2013, being (i) Rs.
477,51,90,932.97/- (Rupees Four Hundred Seventy
Seven Crores Fifty One Lakhs Ninety Thousand
Nine Hundred and Thirty Two and Ninety Seven
Paisa only) as the revised principal amount, being
Rs.484,32,99,862.97/- (Rupees Four Hundred and
Eighty Four Crores Thirty Two Lakhs Ninety Nine
Thousand Eight Hundred and Sixty Two and Ninety
Seven Paise only) (hereinafter referred to as
“Principal Amount”), less an amount of
Rs.6,81,08,930/- (Rupees Six Crores Eighty One
Lakhs Eight Thousand Nine Hundred and Thirty
Only) received on March 4, 2013 under the Amazia
TRA Agreement (hereinafter referred to as “Revised
Principal Amount”); (ii) Rs.42,26,78,815.12/-
(Rupees Forty Two Crores Twenty Six Lakhs
Seventy Eight Thousand Eight Hundred and Fifteen
and Twelve Paisa only) as the default interest on
the Principal Amount, at the rate of 14.75% per
annum from August 11, 2012 till March 4, 2013 as
per Clause 3 of the Guarantee; and (iii)
Rs.12,32,59,615.96/- (Rupees Twelve Crores Thirty
Two Lakhs Fifty Nine Thousand Six Hundred and
Fifteen and Ninety Six Paise only) as the default
7Page 8
interest on the Revised Principal Amount, at the rate
of 14.75% per annum from March 5, 2013 till May 6,
2013, as per Clause 3 of the Guarantee and
thereafter, such further interest @ 14.75% per
annum on the Revised Principal Amount being Rs.
477,51,90,932.97/- (Rupees Four Hundred Seventy
Seven Crores Fifty One Lakhs Ninety Thousand
Nine Hundred and Thirty Two and Ninety Seven
Paise only), till the date of actual payment or
realization.”
3. The affidavit-in-reply to the aforesaid Summons for
Judgment raised the following defence, as recorded by the Ld.
Single Judge in the impugned judgment dated 8th May, 2015.
“16. Since according to the Defendant, the above
submission is their main submission in the present
matter, the same is elaborated as follows:
16.1 That the FDI Policy and the statutory FEMA
Regulations (which incorporate the FDI Policy as a
Schedule thereto), permit FDI in townships,
construction of houses, only by way of equity
investments (which is defined to also include
debentures which are compulsorily required to be
converted into equity: CCDs). The FDI Policy and
the FEMA Regulations prohibit any other form of
investment (non equity) in the said sector with an
assured return/rate of return.
16.2 That FMO, a foreign entity wanted to invest a
substantial sum by way of FDI in a slum
rehabilitation project being undertaken in Mumbai
by Rubix and an Industrial Park being undertaken/
owned by Amazia. FMO was however only willing to
8Page 9
invest in the said projects on the basis of an
assured/fixed return, which was and is not
permissible under the FEMA Regulations/FDI
Policy. To enable FMO to bypass/circumvent the
said FEMA/FDI prohibitions and get a fixed return of
14.5% per annum on its investment of Rs. 418
crores, the investment structure (i.e investment by
way of CCDs in Vinca and Vinca purporting to invest
the said amounts in OPCDs of Amazia and Rubix)
was devised/adopted as follows:
i) Vinca was interposed as the Holding Company of
Amazia and Rubix and Vinca was the nominal
recipient of the FDI of Rs. 418 crores from FMO by
way of equity investment and CCDs (in apparent
compliance with the FDI/FEMA Regulations).
ii) The documents executed for the FDI investment
(Subscription Agreement and Debenture Trust Deed
annexed as Schedule 13 thereto), however
establish that the FDI received from FMO, was not
intended for/could not be used by Vinca for any
project of its own but was specifically required to be
immediately invested by/through Vinca in OPCDs of
Rubix & Amazia, bearing a fixed rate of return of
13.5%.
iii) Under the FEMA/FDI regulations/policy FMO
could not have invested the said amounts in Amazia
and Rubix through OPCDs bearing a fixed rate of
return. By interposing Vinca (an Indian Company)
the amounts received from FMO were invested in
OPCDs of Amazia and Rubix bearing the fixed
14.5% rate of return.
iv) At the same time it was provided (a) that on
conversion of the CCDs FMO would own 99% of the
equity of Vinca and further that (b) the Articles of
Vinca were amended to provide that any decision
regarding the OPCDs/investment could only be
9Page 10
taken by FMO nominees on the Board of Vinca. (c)
the DTDs for the Amazia and Rubix OPCDs
provided that the Debenture Trustee/the Petitioner
would only act on the instructions of the Nominee
Directors of FMO.
v) Accordingly though Vinca was an “Indian
Company” and the nominal recipient of the FDI, the
transaction was so structured that:
(a) the FDI amount would be immediately routed by
Vinca to Amazia & Rubix against issue by them of
OPCDs bearing a return of 14.5%.
(b) FMO/its Nominee Directors could exclusively
deal with the OPCDs and the Debenture
Trustee/IDBI.
(c) after receipt by Vinca of the fixed rate of return
(14.5 per cent per annum) from Amazia and Rubix
under the OPCDs, FMO would on conversion of the
CCDs, become the owner of Vinca and thereby
receive/become entitled to the amounts received by
Vinca by way of the fixed rate of return from Amazia
and Rubix.
vi) The Deed of Guarantee was contemporaneously
executed by the Respondents on 9th December,
2009 in favour of the Debenture Trustee (the
Petitioner herein) for securing the “due and punctual
payment” of the principal and the interest by Amazia
and Rubix to Vinca, actually to FMO and was part of
the structure devised to ensure the receipt by FMO
at the fixed rate of return of 14.5%.
16.3 That, if the entire transaction is looked at as a
whole, it is clear that the interposing of Vinca as the
nominal recipient of the FDI (against issuance of
equity shares and CCDs) was a colourable and
artificially structured transaction, the object and
10Page 11
purpose of which was to enable FMO to secure a
fixed rate of return on its FDI investments in
townships/construction of housing, notwithstanding
the FEMA Regulations/FDI Policy which permit only
an equity investment without any fixed/agreed rate
of return in the said sector. The said structure was
and is not lawful and was and is opposed to public
policy as it was designed to defeat and would defeat
the provisions of law, the FEMA Regulations read
with the FDI Policy.
16.4 That, the present Petition has been filed to
effectuate the said illegal object of securing the said
fixed rate of return for FMO. Although IDBI, the
Petitioner, claims to be nominally acting on behalf of
Vinca, it is in fact admittedly acting only at the
instance of FMO/FMO's Nominee Directors on the
Board of Vinca. FMO through its Nominee Directors
on the Board of Vinca has instructed IDBI to
demand the said sums (principal and agreed rate of
return) from Amazia and Rubix and has further
instructed/required IDBI to invoke the said
Guarantee and file the present Petition. (sic –
actually, Plaint). This is apparent from the
correspondence annexed as Exhibits-C to V to the
Petition.
xxx
16.6 That, by the present Petition, the Petitioner,
acting at the instance of FMO, is seeking to utilise
the process of this Court to secure for FMO a 14.5
per cent fixed rate of return on its FDI investment,
contrary to the statutory stipulation/prohibition
contained in the FEMA Regulations (which
incorporate/embody the FDI Policy), which require
FDI in townships/housing/construction development
projects to be made only by equity participation
(including compulsorily convertible debentures) and
prohibits/precludes any assured return/rate of
11Page 12
return. It is submitted that this would be contrary to
law, public policy and public interest.”
4. Based on this defence, the Ld. Single Judge in the
impugned judgment arrived at the following conclusions:
“31. According to the Plaintiff, the doctrine of Pari
Delicto is not applicable, that IDBI is not a party to
the conspiracy and IDBI is not acting on behalf of
FMO. Even if IDBI is acting on behalf of FMO, the
doctrine of Pari Delicto would not be applicable as
the Defendant had induced FMO to make the
FDI/Investment by representing that the transaction
was FDI/FEMA complaint.
31.1 The above submission of the Plaintiff cannot
be accepted. The conduct of FMO in routing its FDI
nominally through Vinca to Amazia and Rubix
against issuance by them of OPCDs and the
amendments/provisions made in Vinca’s Articles of
Association, establishes that FMO was fully aware
that it could not under the FDI policy and FEMA
Regulations directly invest in the OPCDs, or require
that its FDI amount/investment be returned back
to it with a fixed rate of return after a
stipulated period i.e. without bearing an equity
investment risk. The complex structure devised
for FMO’s FDI investment establishes that all
parties (including FMO) were aware that the
transaction which was premised on return back of
the FDI amount along with a fixed rate of return
thereon, was not permissible under/in violation of
the FDI policy and the FEMA Regulations. It is clear
that in claiming the amount and initiating the present
proceedings, the Plaintiff is acting at the instance of
FMO/FMO nominees on the Board of Directors of
Vinca. This is the stipulation in Vinca’s articles and
under the DTD. In any event, inasmuch as the
12Page 13
transaction (based on return of the FDI/principal
amount invested along with a fixed rate of return
thereon) is not permissible/prohibited under the FDI
policy and the FEMA Regulations, neither IDBI
nor FMO can seek the assistance of the Court
to effectuate/implement/enforce such a
prohibited/illegal transaction.
32. The Plaintiff has lastly contended that the
alleged illegal purpose of securing a fixed return has
not been carried out and that if the proceedings are
allowed, the money will go to Vinca and not to FMO.
It has been contended that FMO cannot receive the
sums without complying with the FDI Regulations
for sale of shares and repatriation.
32.1 This submission too of the Plaintiff cannot be
accepted. The present claim has been made and
the present proceeding has been initiated/filed by
the Plaintiff at the instance of FMO/FMO nominees
on Vinca’s Board of Directors, in order to secure
repayment/return of the FDI amount invested along
with a fixed rate of return thereon i.e. for seeking
the active assistance of this Court to
implement/effectuate/enforce a transaction
prohibited by the FDI policy and the FEMA
Regulations. The contractual documents (SSA &
DTD) establish that it was always agreed and
understood that Vinca was only the nominal
recipient of the FDI amount received from FMO and
was also only nominally the recipient of the FDI
amount and interest thereon at 14.5 per cent per
annum to be received back from Amazia and Rubix.
On receipt back by Vinca of the FDI amount and
14.5 per cent interest thereon, FMO can and will by
conversion of the three CCDs become the 99%
shareholder of Vinca. Under the FDI policy/FEMA
Regulations, FMO can thereafter sell the shares of
Vinca at the fair value, which will necessarily include
13Page 14
the value/benefit of the FDI amount and interest at
14.5 per cent thereon.
33. However, I must also state that I do not find
substance qua the following defences raised by the
Defendant:
33.1 That the Suit deserves to be dismissed on the
ground that the guarantee as well as trusteeship of
IDBI has been discharged/terminated;
33.2 That under the provisions of the FDI Policy, an
Indian Company which has received foreign direct
investment can utilise its funds downstream only for
making investment by way of equity instruments
(i.e. in the form of equity capital or compulsorily and
mandatorily convertible preference shares or
debentures);
33.3 That Investment by an Indian Company in
OPCDs issued by subsidiary (also an Indian
Company) would amount to an external commercial
borrowing.
xxx
37.2 In the case in hand, I am prima facie of the
view that the structure/device of routing FMO's FDI
amount of Rs. 418 crores to Amazia and Rubix
through the newly interposed Vinca (as the nominal
recipient of the FDI) was a colourable device
structured only to enable FMO to secure repayment
(through Vinca) of its FDI amount and interest
thereon at 14.75%, contrary to the statutory FEMA
Regulations and the FDI policy embodied
therein, which only permit FDI investment in
townships/real estate development sector to
be made in the form of equity (including
Compulsorily Convertible Debentures) and preclude
any assured return. I am also prima facie of the
14Page 15
view that the Defendant's guarantee (which is the
basis of the Company Petition No. 644 of 2013)
though ostensibly in favour of Vinca, an Indian
Company, was part of the aforesaid illegal
structure/scheme and was given to ensure that
FMO received back its FDI amount with interest as
aforesaid through Vinca. The Guarantee was
therefore part of the aforesaid illegal
structures/scheme and therefore prima facie illegal
and unenforceable.
37.3 Further the question of the Defendant not
being allowed to plead its own wrong also does not
arise in the facts of the present case. Through the
present Petition, the Plaintiff (who is admittedly
acting at the instance of FMO/FMO's nominees) is
in effect seeking the assistance of this Court to
enable/enforce recovery by FMO of its FDI amount
and interest thereon (through Vinca), contrary to the
provisions of the FEMA Regulations and FDI policy
embodied therein. As has been held by the Hon'ble
Supreme Court in the case of Immami Appa Rao
vs. G. Ramalingamurthi (supra), the Plaintiff who
wants orders in his favour, is actually seeking the
active assistance of the Court to achieve what the
law prohibits/declares illegal and that is clearly and
patently inconsistent with public interest.
Moreover, as has been held by the Supreme Court i
n the above case, in such a case there can be no
question of estoppel and the paramount
consideration of public interest requires that the
plea be allowed to be raised and tried.”
xxx
40.2 In my view, the Plaintiff is also not correct
when they state/submit that the judgment supports
the Plaintiff in contending that the Defendant had
not “brought on record a shred of material to show
how the facts of the present dispute would mandate
15Page 16
lifting of the corporate veil...” Even if it is assumed
that the corporate veil is not to be lifted or Vinca,
Amazia and Rubix are to be treated as one
Company, as has been mentioned hereinabove,
Vinca interposed as the holding Company of
Amazia and Rubix only for the purpose of
structuring FMO's FDI investment into Amazia and
Rubix, through Vinca as the nominal recipient.
The SSA and the annexed Debenture Trust Deed,
specifically provided that the FDI amount to be
received by Vinca from FMO against issuance of
CCDs and equity shares by Vinca, was not to be
retained by Vinca or used by Vinca in its own
projects. The SSA and Trust Deed in fact expressly
stipulated that the FDI amount received by Vinca
from FMO, was to be immediately passed on by
Vinca to Amazia and Rubix, against issuance by
them of OPCDs. Accordingly the SSA and
the Trust Deed itself established that Vinca had
been interposed only to provide a facade of
compliance with the FEMA Regulations/FDI policy
and was only a nominal recipient of the FDI and that
Vinca was immediately required to route the entire
amount received from FMO to Amazia and Rubix,
against issuance by them of OPCDs.”
xxx
42. In the circumstances I am of the view that the
Defendant has raised triable issues which require
adjudication on further evidence at the time of final
disposal of the suit. Hence the following order:
(i) Unconditional leave is granted to the Defendant
to defend the above suit;
(ii) The suit is transferred to the list of commercial
causes and the Defendant is directed to file its
written statement on or before 15th June, 2015;
16Page 17
(iii) The hearing of the suit is expedited and the
Court will endeavour to dispose of the suit within a
period of one year from the date of this order. It is
clarified that the Suit shall be decided without being
influenced by any of the observations made in the
present order.
(iv) Place the suit for framing of issues on 29th
June, 2015.”
5. Since the summary suit is filed on a Corporate
Guarantee, and since this document has been heavily relied
upon by Dr. Abhishek Manu Singhvi, Ld. Senior Counsel on
behalf of the appellant, it is necessary to set out some of the
clauses of this Guarantee. It may first be noticed that the deed
of Corporate Guarantee cum Mortgage, dated 9th December,
2009, was made by Ackruti City Ltd. as guarantor. Ackruti City
Ltd. has since become Hubtown Ltd., the
Respondent-defendant. IDBI Trusteeship Services Ltd. is
described as the debenture trustee for the benefit of Vinca
Developer Pvt. Ltd., for the Amazia Optional Partially
Convertible Debentures (hereinafter referred to as “OPCDs”)
and the Rubix OPCDs, and appointed pursuant to the Amazia
OPCD subscription and debenture trust deed and the Rubix
17Page 18
OPCD subscription and debenture trust deed. The very opening
clause of the Deed of Corporate Guarantee states as follows:
“A. GUARANTEE
In consideration of the premises, the Surety hereby
unconditionally, absolutely and irrevocably
guarantees to and agrees with the Debenture
Trustee for the benefit of the Debenture Holder and
the Security Trustee, for the benefit of the Lender,
respectively, that:
1. It shall ensure that Amazia shall duly and
punctually pay or repay the Amazia Secured
Obligations and Rubix shall duly and punctually pay
or repay the Rubix Secured Obligations and Rubix
Facility Secured Obligations, including but not
limited to the Principal Amount under the Amazia
OPCD Subscription and Debenture Trust Deed and
the Rubix OPCD Subscription and Debenture Trust
Deed, respectively and the Facility, together with all
interest, liquidated damages, commitment charges,
premia on prepayment or on redemption, costs,
expenses, and other monies due to (i) the
Debenture Holder and the Debenture Trustee and
any remuneration and charges that and (ii) the
Lender and the Security Trustee and any
remuneration and charges that might be payable to
the Security Trustee, in accordance with the Facility
Agreement and perform and comply with all the
other terms, conditions and covenants contained in
the OPCD Subscription and Debenture Trust Deeds
and the Facility Agreement.
2. The Surety guarantees to the Debenture
Trustee acting for the benefit of the Debenture
18Page 19
Holder and the Security Trustee acting for the
benefit of the Lender, jointly and severally, the due
and punctual payment by Amazia of the Amaxia
Secured Obligations and by Rubix of the Rubix
Secured Obligation and Rubix Facility Secured
Obligations, which are due but unpaid, and
irrevocably and unconditionally agrees and
undertakes (as primary obligor and not only as (sic.)
to pay to the Debenture Trustee and/or the Security
Trustee forthwith on demand (which demand shall
be made in terms of the Transaction Documents) as
stated in Clause 31 herein (and in any event within
five (5) Business Days of the demand) and
indemnify and keep indemnified the Debenture
Trustee acting for the benefit of the Debenture
Holder and the Security Trustee acting for the
benefit of the Lender against all losses, damages,
claims, charges, fees and expenses whatsoever
which the Debenture Trustee/Security Trustee may
incur by reason of or in connection with any default
on the part of the Guarantor or on the part of the
Issuers in making such payment and including in
connection with legal proceedings taken against the
Issuers and/or the Guarantor for recovery of the
moneys referred to in this Guarantee. In this regard
the Debenture Trustee’s and/or the Security
Trustee’s independent opinion of default of the
Issuers and the amounts comprising shortfall
amounts, as indicated in the Demand Certificate (as
defined hereinafter in Clause 31) shall be final and
binding on the Guarantor and the Guarantor shall
not dispute the same. This Guarantee shall be
continuing and shall remain in full force and effect
until all the Secured Obligations have been
discharged in full to the satisfaction of the
19Page 20
Debenture Approved Instructions) and the Security
Trustee certify the same in writing.
3. If the Guarantor delays in making payments in
full pursuant to the demand being made on it, then it
shall pay interest at the rate of 14.75% per annum
(“Default Interest Rate”) on the outstanding amount,
till the same is discharged in full to the satisfaction
of the Debenture Trustee (acting on Approved
Instructions) or the Security Trustee and the
Guarantor agrees that the Default Interest Rate
agreed, is a genuine pre-estimate of the loss likely
to be suffered by the Debenture Holder, Debenture
Trustees, Security Trustee and/or the Lender on
account of any default by the Guarantor in
discharging its obligations as agreed herein.
14. Notwithstanding the Debenture Holder’s/the
Debenture Trustee’s and the Security Trustee’s/
Lender’s rights under any security which the
Debenture Holder/ the Trustee (acting on Approved
Instructions) and the Security Trustee, jointly and
severally, shall have the fullest liberty to call upon
the Guarantor to pay all or part of the monies for the
time being due to the Debenture Holder/ the
debenture Trustee and/or the Security Trustee/ the
Lender (as the case may be) in respect of the
Secured Obligations without requiring the
Debenture Trustee/ the debenture Holder and/or the
Security Trustee/ the Lender to realize from the
Issuers the amount outstanding to the Debenture
Holder/ the Debenture Trustee and/or the Security
Trustee/ the Lender pursuant to the Debentures/
Facility and/or requiring the Debenture Trustee/ the
Debenture Holder and/or the Security Trustee/ the
Lender to enforce any remedies or securities
20Page 21
available to the Debenture Trustee/ the Debenture
Holder and/or the Security Trustee/ the Lender.
31. The Guarantor agrees that the amount hereby
guaranteed shall be payable to the Debenture
Trustee and/or the Security Trustee immediately
upon the Debenture Trustee and/or the Security
Trustee/ Lender serving the Guarantor with a notice
requiring payment of the amount due (the “Demand
Certificate”), in the form and manner set out in
Schedule I hereto, at the address and details
specified in Clause 34 below. Save and except as
provided above, prior to making any demand
hereunder, the Debenture Trustee/ the Debenture
Holder and/or the Security Trustee/ the Lender shall
not be required to take any step, make any demand
upon, exercise any remedies or obtain any
judgment against any of the Obligors, give notice to
the Obligors or any other person under the
Transaction Documents or otherwise and
howsoever arising, or make or file any claim or
proof in the dissolution or winding-up of any of the
Obligors or enforce or seek to enforce any Security
now or hereafter held by any of the Debenture
Trustee/Debenture Holder and/or the Security
Trustee/ Lender in respect of the when sent (with
the correct answerback), (ii) if sent by fax, when
sent (on receipt of a confirmation to the correct fax
number), (iii) if sent by person, when delivered, (iv)
if sent by courier, one (1) Business Day after
deposit with an overnight courier, and (v) if sent by
registered letter, when the registered letter would, in
the ordinary course of post, be delivered whether
actually delivered or not. An original of each notice
and communication sent by telex or telecopy shall
21Page 22
be dispatched by person or overnight courier and, if
such person or courier service is not available, by
registered first class mail with postage prepaid,
provided that the effective date of any such notice
shall be determined in accordance with paragraphs
(i) or (ii) of this Clause 31, as the case may be,
without regard to the dispatch of such original.
SCHEDULE I
FORM OF DEMAND CERTIFICATE
To: Ackruti City Limited [as “Guarantor”]
From: [.] [as “Debenture Trustee”/ Security Trustee”]
Dated: [.]
Dear Sirs,
Ref: Deed of Corporate Guarantee cum Mortgage
dated [.] (the “Deed”) executed by the Guarantor in
favour of the Debenture Trustee and the Security
Trustee.
[Amazia Developers Private Limited/Rubix Trading
Private Limited] has not fulfilled its obligations under
[the Amazia OPCD Subscription and Debenture
Trust Deed dated [.] and/or the Rubix OPCD
Subscription and Debenture Trust Deed dated [.]
and/or the Facility Agreement] and an amount of Rs.
[.] (Rupees [.] only) is due and payable by [Amazia
Developers Private Limited/Rubix Trading Private
Limited]. Accordingly, we hereby give you notice
pursuant to Clause 2 and Clause 31 of the Deed
that we require you to pay such amount.
All amounts due should be paid to the account
[details of account] entitled [.] under the [.]
22Page 23
immediately and in no event later than 5 Business
Days from the date hereof.
Capitalised terms used herein shall have the
meaning given to them in the Guarantee.
Yours faithfully
[Debenture Trustee]/
[Security Trustee]”
6. It is on this Corporate Guarantee that the Summary Suit is
based. Dr. Singhvi has argued before us that there has been no
violation of the FEMA Regulations, 1999, as observed by the
Ld. Single Judge. In particular, he referred to and relied upon
Regulations 4 and 5 of the FEMA Regulations, which are set
out as follows:
“Restriction on an Indian entity to issue security
to a person resident outside India or to record a
transfer of security from or to such a person in
its books :-
4. Save as otherwise provided in the Act or
Rules or Regulations made thereunder, an
Indian entity shall not issue any security to a
person resident outside India or shall not
record in its books any transfer of security
from or to such person:-
23Page 24
Provided that the Reserve Bank may, on an
application made to it and for sufficient
reasons, permit an entity to issue any security
to a person resident outside India or to record
in its books transfer of security from or to such
person, subject to such conditions as may be
considered necessary.
Permission for purchase of shares by certain
persons resident outside India :-
5. (1) (i) A person resident outside India (other
than a citizen of Bangladesh or Pakistan) or
an entity incorporated outside India (other
than an entity in Bangladesh or Pakistan),
may purchase shares or convertible
debentures or warrants of an Indian company
under Foreign Direct Investment Scheme,
subject to the terms and conditions specified
in Schedule 1.
Explanation.--- Shares or convertible
debentures containing an optionality clause
but without any option/right to exit at an
assured price shall be reckoned as eligible
instruments to be issued to a person resident
outside India by an Indian company subject to
the terms and conditions as specified in
Schedule 1.”
7. Dr. Singhvi argued that there is no breach whatsoever of
the Regulations inasmuch as the suit, based upon a Corporate
Guarantee to enforce its terms, is filed by an Indian company,
namely, the debenture trustee IDBI Trusteeship Pvt. Ltd.,
against another Indian company namely Hubtown Ltd, the
24Page 25
beneficiary being a subsidiary of Hubtown namely Vinca, which
is also an Indian company. There is therefore no question of
any funds going out of the country in violation of any FEMA
Regulation, the ultimate repose of the funds being for the
benefit of Vinca which is an Indian company. He argued before
us that admittedly 418 crores were paid by FMO, a Dutch ₹
company, and have been swallowed by the development
project that has been set up by Amazia and Rubix. He also
argued that there is no question of any infraction of the FEMA
Regulations for the reason that these funds went to purchase
equity shares of Vinca in the form of fully convertible
debentures, such debentures having to be converted into
shares after a certain period, and that, therefore, there was no
question of any illegality in the said transaction. He further
submitted that it is only in 2011 that defaults were made in
payment, as a result of which the Corporate Guarantee was
invoked. The said Corporate Guarantee is unconditional and
not a word has been stated against its invocation, namely, that
it has not been alleged to have been invoked wrongly.
According to him, there is no defence whatsoever to the
25Page 26
suit, and the defence being entirely frivolous and
vexatious, leave to defend ought to have been refused
altogether. But, he stated as an alternative argument, that in
any case the Appellant-plaintiff should be fully secured for the
amount claimed in the plaint. He also submitted before us that
the test laid down in Mechelec Engineers & Manufacturers v.
Basic Equipment Corporation, (1976) 4 SCC 687 is no longer
good law in view of the fact that O.XXXVII of the Code of Civil
Procedure, 1908 (“CPC”) was amended in 1976, and it is the
amended provision that has to be looked at. He cited certain
judgments before us to show that this court has taken the view
that the amended provision makes a sea change in the law, as
a result of which it is open to the court, even if it thinks that a
triable issue is made out, to secure the plaintiff in monetary
terms as a condition for leave to defend the suit.
8. Shri Aspi Chinoy, Ld. senior counsel appearing on behalf
of the Respondent, has reiterated the submissions of his
predecessor in the Bombay High Court. According to him there
is a clear breach of the FEMA Regulations and this being so,
26Page 27
the Ld. Single Judge was correct in referring to the judgment in
Immami Appa Rao vs. G. Ramalingamurthi, (1962) 3 SCR
739, and stating that where two persons may be party to an
illegality, the court would be justified, in the larger public
interest, in not lending the court’s aid to a person who comes to
court to enforce such illegality. That this may incidentally benefit
the defendant is of no moment, and therefore the Ld. Single
Judge was correct in prima facie coming to the conclusion that
the suit was to lend assistance to the plaintiff in enforcing
something illegal, the Corporate Guarantee being part of the
larger illegal transaction. According to ld. senior counsel, there
is in fact no change made by the amendment of 1976, save and
except in one area – that where the defendant admits that a
certain amount is due from him, then even though leave to
defend may be granted, the admitted amount ought to be
deposited or secured. Short of this change, the law continues to
be the same, and therefore, according to him, triable issues
having been raised in the present case, it is clear that clause
(e) of the propositions laid down in paragraph 8 of Mechelec’s
case alone would entitle the Plaintiff to an order for deposit into
27Page 28
court or security, and sub-clause (e) not being attracted, the Ld.
Single Judge was absolutely right in the conclusion that he
reached. He also asked us not to interfere with the Ld. Single
Judge’s judgment under Article 136 as there was nothing
perverse in the Single Judge's conclusions.
9. This case therefore raises a larger and very important
question: namely, whether the judgment in Mechelec’s case
continues to be the law even after the amendment of O.XXXVII
in 1976. To appreciate the respective submissions of counsel, it
is necessary to set out O.XXXVII Rule 3 as it stood
pre-amendment and as it now stands.
O.XXXVII, Rule 3 (pre-amendment)
“3. Defendant showing defence on merits to
have leave to appear. (1) The Court shall, upon an
application by the defendant, give leave to appear
and to defend the suit, upon affidavits which
disclose such facts as would make it incumbent on
the holder to prove consideration, or such other
facts as the Court may deem sufficient to support
the application.
(2) Leave to defend may be given unconditionally or
subject to such terms as to payment into Court,
giving security, framing and recording issues or
otherwise as the Court thinks fit.”
28Page 29
O.XXXVII, Rule 3 (post amendment)
“3. Procedure for the appearance of defendant.
—(1) In a suit to which this Order applies, the
plaintiff shall, together with the summons under
Rule 2, serve on the defendant a copy of the plaint
and annexures thereto and the defendant may, at
any time within ten days of such service, enter an
appearance either in person or by pleader and, in
either case, he shall file in Court an address for
service of notices on him.
(2) Unless otherwise ordered, all summonses,
notices and other judicial processes, required to be
served on the defendant, shall be deemed to have
been duly served on him if they are left at the
address given by him for such service.
(3) On the day of entering the appearance, notice of
such appearance shall be given by the defendant to
the plaintiff's pleader, or, if the plaintiff sues in
person, to the plaintiff himself, either by notice
delivered at or sent by a prepaid letter directed to
the address of the plaintiff's pleader or of the
plaintiff, as the case may be.
(4) If the defendant enters an appearance, the
plaintiff shall thereafter serve on the defendant a
summons for judgment in Form 4-A in Appendix B
or such other Form as may be prescribed from time
to time, returnable not less than ten days from the
date of service supported by an affidavit verifying
the cause of action and the amount claimed and
stating that in his belief there is no defence to the
suit.
(5) The defendant may, at any time within ten days
from the service of such summons for judgment, by
affidavit or otherwise disclosing such facts as may
be deemed sufficient to entitle him to defend, apply
29Page 30
on such summons for leave to defend such suit, and
leave to defend may be granted to him
unconditionally or upon such terms as may appear
to the Court or Judge to be just:
Provided that leave to defend shall not be refused
unless the Court is satisfied that the facts disclosed
by the defendant do not indicate that he has a
substantial defence to raise or that the defence
intended to be put up by the defendant is frivolous
or vexatious:
Provided further that, where a part of the amount
claimed by the plaintiff is admitted by the defendant
to be due from him, leave to defend the suit shall
not be granted unless the amount so admitted to be
due is deposited by the defendant in Court.
(6) At the hearing of such summons for judgment,—
(a) if the defendant has not applied for leave to
defend, or if such application has been made and is
refused, the plaintiff shall be entitled to judgment
forthwith; or
(b) if the defendant is permitted to defend as to the
whole or any part of the claim, the Court or Judge
may direct him to give such security and within such
time as may be fixed by the Court or Judge and
that, on failure to give such security within the time
specified by the Court or Judge or to carry out such
other directions as may have been given by the
Court or Judge, the plaintiff shall be entitled to
judgment forthwith.
(7) The Court or Judge may, for sufficient cause
shown by the defendant, excuse the delay of the
defendant in entering an appearance or in applying
for leave to defend the suit.”
30Page 31
10. The 3 judge bench in Mechelec’s case heard an appeal
from a judgment of the Delhi High Court. In paragraph 2 of the
judgment, the unamended O.XXXVII Rule 3 is set out, after
which, in paragraph 4, the Court stated that the only question
which arose before them in that appeal by special leave was
whether the High Court could, in exercise of its powers under
Section 115 of the CPC, interfere with the discretion of the
district court in granting unconditional leave to defend to the
defendant-appellant, upon grounds which even a perusal of the
impugned judgment of the High Court showed to be
reasonable. The answer to the question thus posed was in the
question itself, and this Court had no doubt that the High Court
judgment, in interfering with the trial court’s judgment under its
revisional jurisdiction, was wrong. Paragraphs 6 and 7, which
constitute the ratio of the judgment, went into the
well-established principles repeatedly laid down by this court
which govern the jurisdiction of the High Courts under Section
115 of the CPC. This Court held that such principles had been
ignored in the judgment under appeal. However, in paragraph
8, the judges set out the 5 propositions governing O.XXXVII laid
31Page 32
down in Kiranmoyee Dassi Smt v. Dr J. Chatterjee, AIR 1949
Cal 479, as follows:
“In Kiranmoyee Dassi Smt v. Dr J. Chatterjee [AIR
1949 Cal 479 : 49 CWN 246, 253 : ILR (1945) 2 Cal
145.] Das, J., after a comprehensive review of
authorities on the subject, stated the principles
applicable to cases covered by Order 37 CPC in the
form of the following propositions (at p. 253):
“(a) If the defendant satisfies the court that he has a
good defence to the claim on its merits the plaintiff
is not entitled to leave to sign judgment and the
defendant is entitled to unconditional leave to
defend.
(b) If the defendant raises a triable issue indicating
that he has a fair or bona fide or reasonable
defence although not a positively good defence the
plaintiff is not entitled to sign judgment and the
defendant is entitled to unconditional leave to
defend.
(c) If the defendant discloses such facts as may be
deemed sufficient to entitle him to defend, that is to
say, although the affidavit does not positively and
immediately make it clear that he has a defence,
yet, shews such a state of facts as leads to the
inference that at the trial of the action he may be
able to establish a defence to the plaintiff's claim the
plaintiff is not entitled to judgment and the
defendant is entitled to leave to defend but in such a
case the court may in its discretion impose
conditions as to the time or mode of trial but not as
to payment into court or furnishing security.
(d) If the defendant has no defence or the defence
set-up is illusory or sham or practically moonshine
then ordinarily the plaintiff is entitled to leave to sign
32Page 33
judgment and the defendant is not entitled to leave
to defend.
(e) If the defendant has no defence or the defence
is illusory or sham or practically moonshine then
although ordinarily the plaintiff is entitled to leave to
sign judgment, the court may protect the plaintiff by
only allowing the defence to proceed if the amount
claimed is paid into court or otherwise secured and
give leave to the defendant on such condition, and
thereby show mercy to the defendant by enabling
him to try to prove a defence.” [para 8]
11. As the case before the court did not fall within clause (e),
this Court held that imposition of a condition to deposit an
amount in court would not be possible, and allowed the appeal
as aforesaid. It is interesting to note that a binding four judge
bench decision on order 37 in Milkhiram (India) (P) Ltd. v.
Chamanlal Bros., AIR 1965 SC 1698, was bunched together
with several other judgments that were relied upon in paragraph
6, as judgments relating to the exercise of jurisdiction of High
Courts under section 115 of the CPC.
12. We find that Milkhiram’s case is in fact an important
judgment on the scope of O.XXXVII of the CPC, and is not a
judgment on principles to be applied under Section 115. This
33Page 34
judgment, being a judgment of four learned judges of this court,
set out, in paragraph 1, O.XXXVII, Rule 3 sub-rules (2) and (3)
as amended by the Bombay High Court at the relevant time, as
follows:
“(2) If the defendant enters an appearance, the
plaintiff shall thereafter serve on the defendant a
summons for judgment returnable not less than ten
clear days from the date of service supported by an
affidavit verifying the cause of action and the
amount claimed and stating that in his belief there is
no defence to the suit.
(3) The defendant may at any time within ten days
from the service of such summons for judgment by
affidavit or otherwise disclosing such facts as may
be deemed sufficient to entitle him to defend, apply
on such summons for leave to defend the suit.
Leave to defend may be granted to him
unconditionally or upon such terms as to the Judge
appear just.”
13. The trial court found that the defence disclosed by the
affidavit required by sub-rule (3) was sufficient to grant leave to
defend the suit, but as against a claim of 4,05,434.38/-, the ₹
Court ordered the appellant to deposit security worth 70,000/-. ₹
A first appeal having been dismissed, the Supreme Court had
to decide whether it was incumbent upon the trial court to grant
unconditional leave to defend, having found that a triable issue
34Page 35
exists. Since this judgment is of seminal importance in deciding
the issue raised before us, it is necessary for us to quote parts
of this judgment, as follows:
“Learned counsel relied upon a decision of this
court in Santosh Kumar v. Bhai Mool Singh [ (1958)
SCR 1211] and particularly upon a passage at p.
1216. That was a case in which the Court of
Commercial Subordinate Judge, Delhi, had held
that the defence raised a triable issue but that
defence was vague and was not bona fide because
the defendant had produced no evidence to prove
his assertion. For these reasons the court granted
leave to defend the suit on the condition of the
defendant giving security for the entire claim in the
suit and costs thereon. This court held that the test
is to see whether the defence raises a real issue
and not a sham one, in the sense that, if the facts
alleged by the defendant are established, there
would be a good, or even a plausible defence on
those facts. If the court is satisfied about that, leave
must be given unconditionally. This Court further
held that the trial court was wrong in imposing a
condition about giving security on the ground that
documentary evidence had not been adduced by
the defendant. This Court pointed out that the stage
of proof can only arise after leave to defend has
been granted and that the omission to adduce
documentary evidence would not justify the
inference the defence sought to be raised was
vague and not bona fide. While dealing with the
matter Bose, J., who spoke for the Court observed
(p. 1216):
“Taken by and large, the object is to see that the
defendant does not unnecessarily prolong the
litigation and prevent the plaintiff from obtaining an
early decree by raising untenable and frivolous
35Page 36
defences in a class of cases where speedy
decisions are desirable in the interests of trade and
commerce. In general, therefore, the test is to see
whether the defence raises a real issue and not a
sham one, in the sense that, if the facts alleged by
the defendant are established, there would be a
good, or even a plausible, defence on those facts.”
The latter part of the observations of the learned
Judge have to be under-stood in the background of
the facts of the case this Court was called upon to
consider. The trial Judge being already satisfied that
the defence raised a triable issue was not justified in
imposing a condition to the effect that the defendant
must deposit security because he had not adduced
any documentary evidence in support of the
defence. The stage for evidence had not been
reached. Whether the defence raises a triable issue
or not has to be ascertained by the court from the
pleadings before it and the affidavits of parties and it
is not open to it to call for evidence at that stage. If
upon consideration of material placed before it the
court comes to the conclusion that the defence is a
sham one or is fantastic or highly improbable it
would be justified in putting the defendant upon
terms before granting leave to defend. Even when a
defence is plausible but is improbable the court
would be justified in coming to the conclusion that
the issue is not a triable issue and put the defendant
on terms while granting leave to defend. To hold
otherwise would make it impossible to give effect to
the provisions of Order 37 which have been
enacted, as rightly pointed out by Bose, J., to
ensure speedy decision in cases of certain types. It
will be seen that Order 37 Rule 2 is applicable to
what may be compendiously described as
commercial causes. Trading and commercial
operations are liable to be seriously impeded if, in
particular, money disputes between the parties are
not adjudicated upon expeditiously. It is these
36Page 37
considerations which have to be borne in mind for
the purpose of deciding whether leave to defend
should be given or withheld and if given should be
subjected to a condition.
It may be mentioned that this Court relied upon the
decision in Jacobs v. Booth's Distillery Co. [(1901)
85 LT 262] in which the House of Lords held that
whenever a defence raises a triable issue leave
must be given and also referred to two subsequent
decisions where it was held that when such is the
case leave must be given unconditionally. In this
connection we may refer to the following
observations of Devlin, L.J. in Fieldrank
Ltd. v. Stein [ (1961) 3 AELR 681 at pp 682-3] :
“The broad principle, which is founded
on Jacob v.Booth's Distillery Co. is summarised on
p. 266 of the Annual Practice (1962 Edn.) in the
following terms:
‘The principle on which the court acts is that where
the defendant can show by affidavit that there is a
bona fide triable issue, he is to be allowed to defend
as to that issue without condition.'”
If that principle were mandatory, then the
concession by counsel for the plaintiffs that there is
here a triable issue would mean at once that the
appeal ought to be allowed; but counsel for the
plaintiffs has drawn our attention to some comments
that have been made on Jacobs v. Booth's Distillery
Co. [(1901) 85 LT 262] They will be found at pp. 251
and 267 of the Annual Practice, 1962. It is
suggested (see p. 251) that possibly the case, if it is
closely examined, does not go as far as it has
hitherto been thought to go; and on the top of p. 267
the learned editors of the Annual Practice have this
note: “The condition of payment into court, or giving
security, is nowadays more often imposed than
formerly, and not only where the defendant
consents but also where there is a good ground in
37Page 38
the evidence for believing that the defence set up is
a sham defence and the master ‘is prepared very
nearly to give judgment for the plaintiff.”
It is worth noting also that in Lloyd's Banking
Co. v.Ogle 1 Ex. D. at p. 264 in a dictum which was
said to have been overruled or qualified
by Jacob v. Booth's Distillery Co.[ (1901) 85 LT 262]
Bramwell, B., had said that
“....those conditions (of bringing money into court or
giving security) should only be applied when there is
something suspicious in the defendant's mode of
presenting his case.”
I should be very glad to see some relaxation of the
strict rule in Jacob v. Booth's Distillery Co. I think
that any Judge who has sat in chambers in RSC,
Order 14 summonses has had the experience of a
case in which, although he cannot say for certain
that there is not a triable issue, nevertheless he is
left with a real doubt about the defendant's good
faith, and would like to protect the plaintiff,
especially if there is not grave hardship on the
defendant in being made to pay money into court. I
should be prepared to accept that there has been a
tendency in the last few years to use this condition
more often than it has been used in the past, and I
think that that is a good tendency;”
These observations as well as some observations
of Chagla, C.J., in Rawalpindi Theatres Private
Ltd. v. Film Group Bombay [ (1958) BLR 1373 at p
1374] may well be borne in mind by the court sitting
in appeal upon the order of the trial Judge granting
conditional leave to defend. It is indeed not easy to
say in many cases whether the defence is a
genuine one or not and therefore it should be left to
the discretion of the trial Judge who has experience
of such matters both at the bar and the bench to
form his own tentative conclusion about the quality
or nature of the defence and determine the
38Page 39
conditions upon which leave to defend may be
granted. If the Judge is of opinion that the case
raises a triable issue, then leave should ordinarily
be granted unconditionally. On the other hand, if he
is of opinion that the defence raised is frivolous, or
false, or sham, he should refuse leave to defend
altogether. Unfortunately, however, the majority of
cases cannot be dealt with in a clear cut way like
this and the judge may entertain a genuine doubt on
the question as to whether the defence is genuine
or sham or in other words whether it raises a triable
issue or not. It is to meet such cases that the
amendment to Order 37 Rule 2 made by the
Bombay High Court contemplates that even in
cases where an apparently triable issue is raised
the Judge may impose conditions in granting leave
to defend. Thus this is a matter in the discretion of
the trial Judge and in dealing with it, he ought to
exercise his discretion judiciously. Care must be
taken to see that the object of the rule to assist the
expeditious disposal of commercial causes to which
the Order applies, is not defeated. Care must also
be taken to see that real and genuine triable issues
are not shut out by unduly severe orders as to
deposit. In a matter of this kind, it would be
undesirable and inexpedient to lay down any rule of
general application.” [paras 7 – 12]
14. We may hasten to add that Mechelec’s case has since
been followed in a series of judgments of this court – Municipal
Corpn. of Delhi v. Suresh Chandra Jaipuria, (1976) 4 SCC
719 at para 11; Sunil Enterprises v. SBI Commercial &
International Bank Ltd., (1998) 5 SCC 354 at para 4; State
Bank of Saurashtra v. Ashit Shipping Services (P) Ltd.,
39Page 40
(2002) 4 SCC 736 at para 10; Uma Shankar Kamal Narain v.
M.D. Overseas Ltd., (2007) 4 SCC 133 at paras 8 and 9; SIFY
Ltd. v. First Flight Couriers Ltd., (2008) 4 SCC 246 at para
10; Wada Arun Asbestos (P) Ltd. v. Gujarat Water Supply &
Sewerage Board, (2009) 2 SCC 432 at para 19; R. Saravana
Prabhu v. Videocon Leasing & Industrial Finance Ltd.,
(2013) 14 SCC 606 at para 4; and State Bank of Hyderabad v.
Rabo Bank, (2015) 10 SCC 521 at para 16.
15. However, there are two judgments of this Court which
directly deal with the amendment made to O.XXXVII and the
effect thereof on the ratio contained in Mechelec’s case. In
Defiance Knitting Industries (P) Ltd. v. Jay Arts, (2006) 8
SCC 25, this Court, after setting out the amended O.XXXVII
and after referring to Mechelec’s case, laid down the following
principles –
“While giving leave to defend the suit the court shall
observe the following principles:
(a) If the court is of the opinion that the case raises
a triable issue then leave to defend should ordinarily
be granted unconditionally. See Milkhiram (India)
(P) Ltd. v.Chamanlal Bros. [AIR 1965 SC 1698 : 68
Bom LR 36] The question whether the defence
raises a triable issue or not has to be ascertained by
40Page 41
the court from the pleadings before it and the
affidavits of parties.
(b) If the court is satisfied that the facts disclosed by
the defendant do not indicate that he has a
substantial defence to raise or that the defence
intended to be put up by the defendant is frivolous
or vexatious it may refuse leave to defend
altogether. Kiranmoyee Dassi v. Dr. J.
Chatterjee [AIR 1949 Cal 479 : 49 CWN 246] (noted
and approved in Mechelec case [(1976) 4 SCC
687 : AIR 1977 SC 577] ).
(c) In cases where the court entertains a genuine
doubt on the question as to whether the defence is
genuine or sham or whether it raises a triable issue
or not, the court may impose conditions in granting
leave to defend.” [para 13]
16. In Southern Sales & Services v. Sauermilch Design &
Handels GMBH, (2008) 14 SCC 457, this Court was squarely
asked to render its decision on whether the judgment in
Mechelec’s case was to a large extent rendered ineffective in
view of the amended O.XXXVII. This Court found:
“Having considered the submissions made on
behalf of the respective parties and the decisions
cited, there appears to be force in Mr Sharma's
submissions regarding the object intended to be
achieved by the introduction of sub-rules (4), (5)
and (6) in Rule 3, Order 37 of the Code. Whereas in
the unamended provisions of Rule 3, there was no
compulsion for making any deposit as a condition
precedent to grant of leave to defend a suit by virtue
41Page 42
of the second proviso to sub-rule (5), the said
provision was altered to the extent that the deposit
of any admitted amount is now a condition
precedent for grant of leave to defend a suit filed
under Order 37 of the Code. A distinction has been
made in respect of any part of the claim, which is
admitted. The second proviso to sub-rule (5) of Rule
3 makes it very clear that leave to defend a suit
shall not be granted unless the amount as admitted
to be due by the defendant is deposited in court.”
[para 15]
17. It is thus clear that O.XXXVII has suffered a change in
1976, and that change has made a difference in the law laid
down. First and foremost, it is important to remember that
Milkhiram’s case is a direct authority on the amended
O.XXXVII provision, as the amended provision in O.XXXVII
Rule 3 is the same as the Bombay amendment which this Court
was considering in the aforesaid judgment. We must hasten to
add that the two provisos to sub-rule (3) were not, however,
there in the Bombay amendment. These are new, and the effect
to be given to them is something that we will have to decide.
The position in law now is that the trial Judge is vested with a
discretion which has to result in justice being done on the facts
of each case. But Justice, like Equality, another cardinal
constitutional value, on the one hand, and arbitrariness on the
other, are sworn enemies. The discretion that a Judge
exercises under Order XXXVII to refuse leave to defend or to
grant conditional or unconditional leave to defend is a discretion
akin to Joseph’s multi-coloured coat – a large number of
baffling alternatives present themselves. The life of the law
not being logic but the experience of the trial Judge, is what
comes to the rescue in these cases; but at the same time
informed by guidelines or principles that we propose to lay
down to obviate exercise of judicial discretion in an arbitrary
manner. At one end of the spectrum is unconditional leave to
defend, granted in all cases which present a substantial
defence. At the other end of the spectrum are frivolous or
vexatious defences, leading to refusal of leave to defend. In
between these two extremes are various kinds of defences
raised which yield conditional leave to defend in most cases. It
is these defences that have to be guided by broad principles
which are ultimately applied by the trial Judge so that justice is
done on the facts of each given case.
18. Accordingly, the principles stated in paragraph 8 of
Mechelec’s case will now stand superseded, given the
amendment of O.XXXVII R.3, and the binding decision of four
judges in Milkhiram’s case, as follows:
a. If the defendant satisfies the Court that he has a
substantial defence, that is, a defence that is likely to succeed,
the plaintiff is not entitled to leave to sign judgment, and the
defendant is entitled to unconditional leave to defend the suit;
b. if the defendant raises triable issues indicating that he has
a fair or reasonable defence, although not a positively good
defence, the plaintiff is not entitled to sign judgment, and the
defendant is ordinarily entitled to unconditional leave to defend;
c. even if the defendant raises triable issues, if a doubt is left
with the trial judge about the defendant’s good faith, or the
genuineness of the triable issues, the trial judge may impose
conditions both as to time or mode of trial, as well as payment
into court or furnishing security. Care must be taken to see that
the object of the provisions to assist expeditious disposal of
commercial causes is not defeated. Care must also be taken to
see that such triable issues are not shut out by unduly severe
orders as to deposit or security;
d. if the Defendant raises a defence which is plausible but
improbable, the trial Judge may impose conditions as to time or
mode of trial, as well as payment into court, or furnishing
security. As such a defence does not raise triable issues,
conditions as to deposit or security or both can extend to the
entire principal sum together with such interest as the court
feels the justice of the case requires.
e. if the Defendant has no substantial defence and/or raises
no genuine triable issues, and the court finds such defence to
be frivolous or vexatious, then leave to defend the suit shall be
refused, and the plaintiff is entitled to judgment forthwith;
f. if any part of the amount claimed by the plaintiff is
admitted by the defendant to be due from him, leave to defend
the suit, (even if triable issues or a substantial defence is
raised), shall not be granted unless the amount so admitted to
be due is deposited by the defendant in court.
19. Coming to the facts of the present case:
a. It is clear that a sum of 418 crores has been paid by ₹
FMO, the Dutch company, to Vinca for purchase of shares as
well as compulsorily convertible debentures. This transaction by
itself is not alleged to be violative of the FEMA regulations.
b. The suit is filed only on invocation of the Corporate
Guarantee which on its terms is unconditional. It may be added
that it is not the defendant's case that the said Corporate
Guarantee is wrongly invoked.
c. Payment under the said Guarantee is to the debenture
trustee, an Indian company, for and on behalf of Vinca, another
Indian company, so that prima facie again there is no infraction
of the FEMA Regulations.
d. Since FMO becomes a 99% holder of Vinca after the
requisite time period has elapsed, FMO may at that stage utilise
the funds received pursuant to the overall structure agreements
in India. If this is so, again prima facie there is no breach of
FEMA Regulations.
e. At the stage that FMO wishes to repatriate such funds,
RBI permission would be necessary. If RBI permission is not
granted, then again there would be no infraction of FEMA
Regulations.
f. The judgment in Immami Appa Rao’s case would be
attracted only if the illegal purpose is fully carried out, and not
otherwise.
20. Based on the aforesaid, it cannot be said that the
defendant has raised a substantial defence to the claim made
in the suit. Arguably at the highest, as held by the learned
Single Judge, even if a triable issue may be said to arise on the
application of the FEMA Regulations, nevertheless, we are left
with a real doubt about the Defendant’s good faith and the
genuineness of such a triable issue. 418 crores has been ₹
stated to be utilized and submerged in a building construction
project, with payments under the structured arrangement
mentioned above admittedly being made by the concerned
parties until 2011, after which payments stopped being made by
them. The defence thus raised appears to us to be in the realm
of being ‘plausible but improbable’. This being the case, the
plaintiff needs to be protected. In our opinion, the defendant will
be granted leave to defend the suit only if it deposits in the
Bombay High Court the principal sum of 418 crores invested ₹
by FMO, or gives security for the said amount of 418 crores, ₹
to the satisfaction of the Prothonotary and Senior Master,
Bombay High Court within a period of three months from today.
The appeal is accordingly allowed, and the judgment of the
Bombay High Court is set aside.
21. We further direct that the suit be tried expeditiously,
preferably within a period of one year from the date of this
judgment, uninfluenced by any observations made by us
herein.
……………………J.
(Kurian Joseph)
……………………J.
New Delhi; (R.F. Nariman)
November 15, 2016
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