Supreme Court of India
IDBI TRUSTEESHIP SERVICES LTD.versusHUBTOWN LTD.
- Citation
- 2016 INSC 1027
- Decided
- 15 November 2016
- Disposal
- Appeal(s) allowed
- Bench
- KURIAN JOSEPH
Holding
The 1976 amendment to Order XXXVII Rule 3 supersedes Mechelec’s ratio, and the trial judge may impose conditions, including deposit of the principal sum, when the defence is merely plausible but improbable.
Summary
The appeal arose from a summary suit filed by IDBI Trusteeship Services Ltd., a debenture trustee, to enforce an unconditional corporate guarantee issued by Hubtown Ltd. (formerly Ackruti City Ltd.) on behalf of its subsidiary Vinca. The plaintiff alleged defaults on debentures issued by Amazia and Rubix, while the defendant contended that the underlying foreign investment structure violated FEMA regulations and that the guarantee was part of an illegal scheme. The key issue was whether the amendment to Order XXXVII Rule 3 of the Code of Civil Procedure in 1976 altered the law laid down in Mechelec Engineers v. Basic Equipment Corp., thereby allowing the trial judge to impose conditions (deposit or security) even when a triable issue is raised. The Supreme Court held that the amendment supersedes Mechelec’s principles, that the trial judge has discretion to impose conditions, and that the defence raised was merely "plausible but improbable". Consequently, leave to defend was granted conditionally, requiring the defendant to deposit the principal sum of ₹418 crore or furnish security. The appeal was allowed and the High Court’s judgment set aside.
Issues considered
- The effect of the 1976 amendment to Order XXXVII Rule 3 on the precedent set by Mechelec Engineers v. Basic Equipment Corp.
- Whether a defendant who raises only a plausible‑but‑improbable defence can be compelled to deposit security under the amended provision.
- Whether the corporate guarantee is enforceable given the alleged FEMA violations and the alleged illegal purpose of the transaction.
- Whether the plaintiff is entitled to unconditional leave to defend or must be protected by a monetary deposit when a triable issue exists.
Legislation cited
- Code of Civil Procedure, 1908s. Order XXXVII Rule 3 (post‑amendment), s. Order XXXVII Rule 3 (pre‑amendment), s. Section 115
- Foreign Exchange Management Act, 1999s. Regulation 4, s. Regulation 5
Subjects
summary suitleave to defendOrder XXXVIIamendment 1976conditional leaveFEMAforeign direct investmentcorporate guaranteetriable issuesubstantial defencedepositsecuritycommercial cause
Judgment
[2016] 11 S.C.R. 660
A IDBI TRUSTEESHIP SERVICES LTD.
v.
HUBTOWN LTD.
(Civil Appeal No. I 0860of2016)
B NOVEMBER 15, 2016
(KURIAN JOSEPH AND R. F. NARIMAN, JJ.)
Code of Civil Procedure, 1908:
Or. XXXVII, r.3 (unamended and as amended in 1976) -
c Summary Suit - Principles for grant of leave to defend - Change in
latt\ pre & post-amendment - Effect of the amendment on the ratio
contained in Mec/1e/ec's case (pre-amendment) - Pre-amendment,
there ll'as no compulsion for making any deposit as a condition
precedent to grant of leave to defend a suit - Plea of defendant
D that post-amendment the only change in law was that deposit of
any admitted amount was now a condition precedent for grant of
leave to defend - However, plaintiff pleaded that post-amendment
even if the Court thinks that a triable issue is raised by defendant,
the plaintiff ought to be secured in monetary terms as a condition
for leave to defend - Held: 01: XXXVII has suffered a change in
E 1976, and that change has made a difference in the law laid down
in Meclte/ec's case (pre-amendment) - The position in !all' now is
that the trial Judge is vested with a discretion which has to result in
iustice being done on the facts of each case - Thus, post-amendment
even if the defendant raises triable issues, if a doubt is left with the
F trial judge about the defendants 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 fi1rnishing
security - Further, Mecltelec's case (3 Judges) did not consider the
binding decision of 4 judges in Milkltiram's case lt'hich is a direct
authority on the amended provision in Or. XXXVIJ, r.3 - Therefore,
G
by virtue of amendment in law and the binding decision of four
iudges in Milkltiram's case, principles stated in Mechelec's case
governing 01: XXXVIl will noll' stand superseded.
Or. XXXVIl, r.3 - Summary suit by appellant - Grant of
unconditional leave to defend the suit, to respondent - Propriety of
H
660
JOBI TRUSTEESHJP SERVICES LTD. v. HUBTOWN LTD. 661
- FMO, a Dutch company invested in 'V' (subsidiary of defendant) A
- 'V' invested said money in OPCDs (Optionally Partially Convertible
Debentures) issued by 'A' & 'R' - Debenture Trust Deed executed in
relation to this investment - Plaintiff appointed as Debenture Trustee
under the Debenture Trust Deed - Defendant issued an
unconditional, irrevocable Corporate Guarantee in favour of 8
plaintiff on behalf of 'V' - Default in payments - Corporate
Guarantee invoked - Summary suit by plaintiff to enforce its rights
arising out of said Corporate Guarantee - Defendant alleged that
the amount invested by 'V' in OPCDs issued by 'A' & 'R' was to
circumvent FEMA Regulations and thus, the Corporate Guarantee
was part of a larger illegal transaction - High Court allowed c
unconditional leave to defend holding that defendant raised a
triable issue - On appeal, held: The suit was filed only on invocation
of Corporate Guarantee and it is not the defendant :S case that the
said Guarantee was wrongly invoked - Even if a triable issue may
be said to arise on the application of FEMA Regulations, D
nevertheless, there is a real doubt about the defendants good faith
and the genuineness of such a triable issue - Therefore, it cannot
be said that the defendant raised a substantial defence to the claim
made in the suit - Rather the defence raised appears to be in the
realm of being 'plausible but improbable' - This being the case, the
E
plaintiff needs to be protected - Defendant to be granted leave to
defend the suit only if it deposits the principal sum invested by FMO,
or gives security for the said amount - Impugned judgment set aside
- Suit to be tried expeditiously by High Court - FEMA Regulations
- regns. 4 & 5.
F
Allowing the appeal, the Court
HELD: 1.1 The present case 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.xx:xvn in 1976. [Para 9] (686-BJ G
1.2 The 3 judge bench in Mechelec's case stated that the
only question which arose before them 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-respondent.
H
662 SUPREME COURT REPORTS [2016] 11 S.C.R.
A However, in paragraph 8, the judges set out 5 propositions
governing O.XXXVIL [Para 10] [688-C-D, F]
Mechelec Engineers & Manufacturers v. Basic
Equipment Corporation (1976) 4 SCC 687 : 1977 (1)
SCR 1060 - held stands superseded.
B
2.1 O.XXXVII has suffered a change in 1976, and that change
has made a difference in the law laid down. Further, Milkhiram 's
case, is a direct and binding 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
c in the said judgment. 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. [Para 17] [696-D-F]
2.2 The principles stated in Mechelec's case will now stand
superseded given the amendment of O.XXXVII R. 3, and the
D 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
E 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
F 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
G 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
H security;
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD. 663
d. if the Defendant raises a defence which is plausible but A
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 snch B
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;
c
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. [Para 18)
[697-C-H; 698-A-BJ D
Milkhiram (India) (P) Ltd. v. Chamanlal Bros. AIR 1965
SC 1698 - followed.
3.1 In the present case, it is clear that a sum of 1 418 crores
was paid by FMO, the Dutch company, to Vinca for purchase of
shares as well as compulsorily convertible debentures. This E
transaction by itself is not alleged to be violative of the FEMA
regulations. Further, the suit was 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 was wrongly invoked. The payment under the said F
Guarantee was to the debenture trustee, an Indian company, for
and on behalf of Vinca, another Indian company, so that prima
facie again there was no infraction of the FEMA Regulations.
Since FMO became a 99% holder of Vinca after the requisite
time period had elapsed, FMO may at that stage utilise the funds
G
received pursuant to the overall structure agreements in India.
If this was so, again prima facie there was no breach of FEMA
Regulations. 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. [Para 19) [698-B-FJ H
664 SUPREME COURT REPORTS [2016] 11 S.C.R.
A 3.2 Based on the aforesaid facts, it cannot be said that the
defendant had raised a substantial defence to the claim made in
the suit. Even if a triable issue may be said to arise on the
application of the FEMA Regulations, nevertheless, there is 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
B
and submerged in a building construction project, with payments
under the structured arrangement admittedly being made by the
concerned parties until 2011, after which payments were stopped.
The defence thus raised appears to be in the realm of being
'plausible bnt improbable'. This being the case, the plaintiff needs
c to be protected. Thus, 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. [Para 20) [698-G-H; 699-A-B)
Immami Appa Rao v. GRamalingamurthi (1962) 3 SCR
D 739-held inapplicable.
Defiance Knitting Industries (P) Ltd. v. Jay Arts (2006)
8 SCC 25 : 2006 (5) Suppl. SCR 625; Southern Sales
& Services v. Sauermilch Design & Handels GMBH
(2008) 14 SCC 457 : 2008 (14) SCR 130 - relied on.
E
Kiranmoyee Dassi Smt v. Dr J. Chatterjee AIR 1949
Cal 479; Municipal Corpn. of Delhi v. Suresh Chandra
Jaipuria (1976) 4 SCC 719 : 1977 (2) SCR 10; Sunil
Enterprises v. SB! Commercial & International Bank
F Ltd. (1998) 5 sec 354; State Bank of Saurashtra V.
Ashit Shipping Services (P) Ltd. (2002) 4 SCC 736 :
2002 (2) SCR 1074; Uma Shankar Kamal Narain v.
MD. Overseas Ltd. (2007) 4 SCC 133 : 2007 (3) SCR
1034; SIFY Ltd. v. First Flight Couriers Ltd. (2008) 4
SCC 246 : 2008 (1) SCR 339; Wada Arzm Asbestos (P)
G Ltd. v. Gujarat Water Supply & Sewerage Board (2009)
2 SCC 432 : 2008 (17) SCR 686; R. Saravana Prabhu
v. Videocon Leasing & Industrial Finance Ltd. (2013)
14 SCC 606; State Bank of Hyderabad v. Rabo Bank
(2015) 10 SCC 521 : 2015 (11) SCR 471- referred
H to.
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD. 665
Case Law Reference A
AIR 1949 Cal 479 referred to Para 10
1977 (2) SCR 10 referred to Para 14
(1?98) 5 sec 354 referred to Para 14
B
2002 (2) SCR 1074 referred to Para 14
2007 (3) SCR 1034 referred to Para 14
20Q~ (1) SCR 339 referred to Para 14
c
2008 (17) SCR 686 referred to Para 14
(2013) 14 sec 606 referred to Para i4
2015 (11) SCR 471 referred to Para 14
2006 (5) Suppl. SCR625 relied on Para 15 D
2008 (14) SCR 130 relied on Para 16
AIR 1965 SC 1698 folJQwed Paras 17, 18
1977 (1) SCR 1060 held stands superseded Para 18 E
(1?62) 3 SCR 739 held inapplicable Para 19
From the Judgment and Order dated 08.05.2015 of the High Court
of Judicature at Bombay in Summons for Judgment No. 39 of2013 in
Summary Suit No. 520 of20!3.
F
A. M. Singhvi, Ciccu Mukhopadhyay, Sr. Advs., Indranil
Deshmukh, Kiraj Singh Nagra, Aditya Mehta, Pranav Vyas, Ms. Ishita
Chakrabarti, Vineet Unnikrishnan, Ms. Neha Sarna, Amit Bhandari, (For
Mis. Cyril Amarchand Mangaldas), Advs. for the Appellant.
Aspi Chenoy, Sr. Adv., Ashok Aggarwal, Parvez Alam Khan,
G
Ms. Madhusmita Bora, Pawan Kishore Singh, Ms. Aprajita Tripathi,
Ms. Rani Singh, Advs. for the Respondent.
The Judgment of the Court was delivered by
R. F. NARIMAN, J. I. Leave granted.
2. The present appeal arises out of a Summons for Judgment No. H
666 SUPREME COURT REPORTS f20161 11 S.C.R.
A 39 of 2013 in a Summary Suit filed on the original side of the Bombay
High Court, by the Appellant-Plaintiff, 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:
B
"3. In 2009 and 20 I 0, Nederlandse Financierings-
Maatschappij voor Ontwikkelingslanden N.V. (hereinafter
referred to as "FMO") invested in certain equity shares
and compulsorily convertible debentures (hereinafter
c referred to as the "CCDs") of Vinca Developer Private
Limited (hereinafter referred to as "Vinca"). As a result
of the said investment, FMO cmTently holds (i) I 0% of the
equity of Yinca through Class A shares and is entitled to
I 0% of the voting rights and economic interest in Vinca by
virtue thereof; and (ii) 3 CCDs in Vinca. Further, as on
D 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 Yinca are
owned by the individual promoters of the Defendant, being
E 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 I 00%
of Class B equity shares ofVinca, which carry with them
collective voting rights and dividend entitlement not
exceeding 0.01 %. Upon conversion, the 3 CCDs in Yinca
F
will entitle FMO to 99% of the equity ofYinca (by allotment
ofadditional Class A shares), thereby entitling it to 99% of
the voting and economic rights ofVinca. The said monies
invested by FMO into Yinca were then used by Vinca to
subscribe to certain optionally partially convertible
G 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 appointed as the Debenture Trustee under
H (i) the Debenture Subscription and Debenture Trust Deed
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD. 667
[R. F. NARIMAN, J.]
dated I" December, 2009 executed by Amazia Developers A
Private Limited (hereinafter referred to as "Amazia"),
Vinca, Brainpoint Jnfotech 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 Rub ix
B
Trading Private Limited (hereinafter referred to as "Rub ix"),
Vinca, the Defendant and the Plaintiff as amended by
OPCD Amendment Agreement dated 8th September, 20 IO;
(hereinafter collectively referred to as the "Debenture
Trust Deeds") in relation to Vinca's investment in OPCDs
issued by Amazia and Rub ix. A copy of the Debenture c
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:
D
i. certain secured, non marketable, transferable, OPCDs
of Rub ix, of a face value of Rs. I 0,00,000 each aggregating
to INR 1,285,000,000 in tranche l;
ii. additional secured, non marketable, transferable, OPCDs
of Rub ix, of a face value of Rs. I 0,00,000 each, aggregating
E
to INR 1,395,000,000 in tranche 2;
iii. certain secured, non marketable, transferable, OPCDs
ofAmazia, of a face value of Rs. I 0,00,000 each, aggregating
to INR 1,500,000,000.
6. The OPCDs carry a variable running coupon and a back F
ended coupon to ensure an internal rate ofreturn of14. 75%
per annum.
7. The Plaintiff states thatthe proceeds obtained by Amazia
and Rubix from the issue of the OPCD's to Vinca were to
be applied towards inter a/ia projects which are compliant G
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 H
668 SUPREME COURT REPORTS f20161 11 S.C.R.
A OPCDs, and to ensure the due and punctual payment by
Amazia and Rub ix 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
B guarantee in favour of the Plaintiff, inter alia for the benefit
of Vin ca (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
c were committed by Amazia and Rubix, inter alia under
the said Debenture Trust Deeds:
1. Defaults by Amazia and Rub ix in payment of interest on
the OPCDs, as contemplated under Condition 7 of
Schedule 3 of the Debenture Trust Deeds, which default
D 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)
E specified in Clause 2l(a) of Schedule 14 of the
Debenture Trust Deeds, arising inter alia out of a default
by Vinca under the CCDs;
iv. Failure on the part ofRubix, Amazia and the Defendant
in providing the financial statements required to be
F provided as per Entry I (Financial Statements) of Patt 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
G Ratio and the Interest Coverage Ratio as per the
provisions of Part B of Schedule 7 (Covenants of the
Obli[!,ors and Security Providers) of the Debenture
Trust Deeds, for the Ratio period from I st April, 2011 to
30th September, 2011;
H
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD. 669
[R.F. NARIMAN, J.]
vi. Failure on the part ofRuhix, Amazia and the Defendant A
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 B
the issue ofOPCD'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 ofRubix, Amazia and the Defendant
in complying with a number of the Negative Covenants c
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 znd May, 2012 toAmazia D
and Rub ix 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 the
Debenture Trust Deeds, setting out inter alia (i) the payment
defaults subsisting as on the said date; (ii) the default by
Amazia and Rub ix in crediting the designated account with E
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 znd May, 2012 is
annexed hereto and marked Exhibits "C-1" and "C-2". F
11. Consequently, and further to the Plaintiff's letters dated
znd 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 znd May, 2012, the Plaintiff, in exercise
of its right of early redemption under Condition 12.1 (a) and G
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
H
670 SUPREME COURT REPORTS f2016l l l S.C.R.
A 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/- intoA/c. no.:
00600350098359 held in the name of the Plaintiff at HDFC
8
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
c 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 Guarantee1
D in terms of the said Guarantee, to the Defendant on 3ro
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
E 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
F
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, beiQg(i) Rs. 477,51,90,932.97/-(Rupees Four Hundred
G 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
H Two and Ninety Seven Paise only) (hereinafter referred to
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD. 671
[R. F. NARIMAN, J.]
as "Principal Amount"), less an amount ofRs.6,81,08,930/ A
- (Rupees Six Crores Eighty One Lakhs Eight Thousand
Nine Hundred and Thirty Only) received on March 4, 2013
under the Amazia TRAAgreement (hereinafter referred to
as "Revised Principal Amount"); (ii) Rs.42,26,78,815.12/-
(Rupees Forty Two Crores Twenty Six Lakhs Seventy Eight
B
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 II, 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 c
Ninety Six Paise only) as the default 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. D
4 77,51,90,932.97 /-(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 E
raised the following defence, as recorded by the Ld. Single Judge in the
1
impugned judgment dated 8 ~ May, 2015.
"16. Since according to the Defendant, the above submission
is their main submission in the present matter, the same is
elabo~ated as follows: F
16. I 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 G
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 H
672 SUPREME COURT REPORTS r20l6l l l S.C.R.
A substantial sum by way ofFDI 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 invest in the said projects on the
basis of an assured/fixed return, which was and is not
permissible under the FEMA Regulations/FD! Policy. To
B
enable FMO to bypass/circumvent the said FEMA/FDI
prohibitions and get a fixed return of I 4.5% per annum on
its investment of Rs. 4 I 8 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
c and Rubix) was devised/adopted as follows:
i) Vinca was interposed as the Holding Company ofAmazia
and Rubix and Vinca was the nominal recipient of the FD!
of Rs. 418 crores from FMO by way of equity investment
and CCDs (in apparent compliance with the FDl/FEMA
D Regulations).
ii) The documents executed for the FD! investment
(Subscription Agreement and Debenture Trust Deed
annexed as Schedule 13 thereto), however establish that
the FD! received from FMO, was not intended for/could
E not be used by Vinca for any project of its own but was
specifically required to be immediately invested by/through
Vinca in OPCDs ofRubix & Amazia, bearing a fixed rate
of return of 13.5%.
iii) Under the FEMA/FDI regulations/policy FMO could not
F 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 Rub ix bearing the fixed
14.5% rate of return.
G iv)At the same time it was provided (a) that on conversion
of the CCDs FMO would own 99% of the equity ofVinca
and further that (b) the Articles ofVinca were amended to
provide that any decision regarding the OPCDs/investment
could only be taken by FMO nominees on the Board of
H Vinca. (c) the DTDs for the Amazia and Rubix OPCDs
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD. 673
[R.F. NARlMAN, J.]
provided that the Debenture Trustee/the Petitioner would A
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 FD!, the transaction was
so structured that: B
(a) the FD! amount would be immediately routed by Vinca
to Amazia & Rub ix 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
(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 ofVinca and thereby receive/become entitled to
D
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
E
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, ifthe entire transaction is looked at as a whole,
it is clear that the interposing of Vinca as the nominal F
recipient of the FD! (against issuance of equity shares and
CCDs) was a colourable and artificially structured
transaction, the object and purpose of which was to enable
FMO to secure a fixed rate of return on its FD! investments
in townships/construction of housing, notwithstanding the G
FEMA Regulations/FOi 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
H
674 SUPREME COURT REPORTS f2016] 11 S.C.R.
A Regulations read with the FD! Policy.
16.4 That, the present Petition has been filed to effectuate
the said illegal object of securing the said fixed rate ofreturn
for FMO. Although IDBI, the Petitioner, claims to be
nominally acting on behalf ofVinca, it is in fact admittedly
B acting only at the instance of FMO/FMO's Nominee
Directors on the Board ofVinca. FMO through its Nominee
Directors on the Board of Vinca has instructed IDBI to
demand the said sums (principal and agreed rate ofreturn)
from Amazia and Rubix and has further instructed/required
C 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
D 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
FD! in townships/housing/construction development projects
E
to be made only by equity participation (including
compulsorily convertible debentures) and prohibits/precludes
any assured return/rate of 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
F
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 behalfof FMO, the
G doctrine of Pari Delicto would not be applicable as the Defendant had
induced FMO to make the FDI/lnvestment by representing that the
transaction was FDI/FEMA complaint.
31.1 The above submission of the Plaintiff cannot be
accepted. The conduct ofFMO in routing its FD! nominally
through Vinca to Amazia and Rubix against issuance by
H
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD. 675
'[R. F. NARIMAN, J.)
them of OPCDs and the amendments/provisions made in A
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 FD! amount/investment be returned back to it with a
fixed rate of return after a stipulated period i.e. without B
bearing an equity investment risk. The complex structure
devised for FMO's FOi 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 FOi policy and the FEMA c
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 ofVinca. This is the stipulation in Vinca's articles
and under the DTD. In any event, inasmuch as the D
transaction (based on return of the FDI/principal amount
invested along with a fixed rate of return thereon) is not
permissible/prohibited under the FOi policy and the FEMA
Regulations, neither IDBI nor FMO can seek the
assistance of the Comt to effectuate/implement/enforce
E
such a prohibited/illegal transaction.
32. The Plaintiffhas lastly contended that the alleged illegal
purpose of securing a fixed return has not been carried out
and that ifthe proceedings are allowed, the money will go
to Vin ca and not to FMO. It has been contended that FMO
F
cannot receive the sums without complying with the FOi
Regulations for sale of shares and repatriation.
32. I 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
G
instance of FMO/FMO nominees on Vinca's Board of
·Directors, in order to secure repayment/return of the FOi
amount invested :ilong 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
H
676 SUPREME COURT REPORTS [2016] 11 S.C.R.
A 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
B
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 ofVinca. Under the FDI policy/FEMA
Regulations, FMO canthereafter sell the shares ofVinca
c at the fair value, which will necessarily include the value/
benefit of the FDI ainount 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:
D
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 FD! Policy, an Indian
E Company which has received foreign direct iii vestment can
utilise its funds downstream only for making investment by
way of equity instruments (i.e. in the form of equity
capital or compulsorily a1id mandatorily convertible
preference shares or debentures);
F 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
G the structure/device of routing FMO's FDI amount of Rs .
.418 crores to Amazia and Rub ix through the newly interposed
Vin ca (as the nominal recipient of the FD!) was a colourable
device structured only to enable FMO to secure repayment
(through Vinca) of its FDI amount and interest thereon at
H
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD. 677
[R. F. NARIMAN, J.]
14. 75%, contrary to the statutory FEMA Regulations and A
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 view that the Defendant's B
guarantee (which is the basis of the Company Petition No.
644 of2013) though ostensibly in favourofVinca, an Indian
Company, was part of the aforesaid illegal structure/scheme
and was given to ensure that FMO received back its FD!
amount with interest as aforesaid through Vinca. The
Guarantee was therefore part of the aforesaid illegal c
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, D
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
FDJ amount and interest thereon (through Vinca), contrary
to the provisions of the FEMA Regulations and FDI policy E
embodied therein. As has been held by the Hon 'ble
Supreme Court in the case ofimmami 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.
F
Moreover, as has been held by the Supreme Court
in 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." G
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
H
678 SUPREME COURT REPORTS f2016l 1I S.C.R.
A a shred of material to show how the facts of the present
dispute would mandate 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
B
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 FD! amount to be received by Vinca from
FMO against issuance of CC Os and equity shares by Vinca,
c was not to be retained by Vinca or used by Vin ca in its own
projects. The SSA and Trust Deed in fact expressly
stipulated that the FD! amount received by Vinca from FMO,
was to be immediately passed on by Vinca to Amazia and
Rub ix, against issuance by them of OPCDs. Accordingly
D 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 FOi and that Vinca was
immediately required to route the entire amount received
from FMO to Amazia and Rubix, against issuance by them
E
of OPCDs."
xxx
42. In the circumstances I am of the view that the Defendant
has raised triable issues which require adjudication on further
F 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
G and the Defendant is directed to file its written statement
on or before 15th June, 2015;
(iii) The hearing of the suit is expedited and the Comt 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
H
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD. 679
[R. F. NARIMAN, J.]
be decided without being influenced by any of the A
observations made in the present order.
(iv) Place the suit for framing ofissues 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 B
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 c
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 Rub ix OPCD subscription
and debenture trust deed. The very opening clause of the Deed of
D
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 E
Debenture Holder and the Security Trustee, for the benefit
of the Lender, respectively, that:
I. It shall ensure that Amazia shall duly and punctually pay
or repay the Amazia Secured Obligations and Rub ix shall
duly and punctually pay or repay the Rubix Secured
F
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 G
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
H
680 SUPREME COURT REPORTS [2016) 11 S.C.R.
A 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.
B 2. The Surety guarantees to the Debenture Trnstee acting
for the benefit of the Debenture 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 Rub ix of the Rub ix
Secured Obligation and Rub ix Facility Secured Obligations,
c
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
D 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,
E 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
F 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)
G 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 Debenture Approved Instructions) and
the Security Trustee certify the same in writing.
H
JOBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD. 681
[R.F. NARIMAN, J.]
3. If the Guarantor delays in making payments in full A
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
8
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.
c
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 D
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 E
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
F
securities 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
G
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
H
682 SUPREME COURT REPORTS f2016l l l S.C.R.
A 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
B
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
c 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
D (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 be dispatched
by person or overnight courier and, if such person or courier
service is not available, by registered first class mail with
E
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
F
FORM OF DEMAND CERTIFICATE
To: Ackruti City Limited [as "Guarantor"]
From: [.] [as "Debenture Trustee"/ Security Trustee"]
Dated: [.]
G
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.
II
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD. 683
[R. F. NARIMAN, J.]
[Amazia Developers Private Limited/Rubix Trading Private A
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
B
[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 c
account] entitled [.] under the [.] 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.
You_rs faithfully D
[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 E
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 F
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 G
or to such person:-
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 H
684 SUPREME COURT REPORTS f2016l l l S.C.R.
A person, subject to such conditions as may be considered
. ,.,,
necessary.
Permission for purchase of shares by certain persons resident
outside India :-
5. (I) (i) A person resident outside India (other than a
B
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 hwestment Scheme, subject to the
c 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
D outside India by an Indian company subject to the terms
and conditions as specified in Schedule I."
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
E trustee IDBI Trusteeship Pvt. Ltd., against another Indian company
namely Hubtown Ltd, the beneficiary being a subsidiary of Hubtown
namely Vinca, which is also an Indian company. There is therefore no
question ofany funds going out of the country in violation ofany FEMA
Regulation, the ultimate repose of the funds being for the benefit of
F 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 Rub ix. 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 ofVinca in the form offully convertible debentures, such
G 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 201 I 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
H word has been stated against its invocation, namely, that it has not been
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN .LTD. 685
[R. F. NARIMAN, J.]
alleged to have been invoked wrongly. According to him, there is no A
defence whatsoever to the 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 Mecheiec Engineers
B
& Manufacturers v. Basic Equipment Corporation, (1976) 4 SCC
687 is no longer good law in view of the fact that o.xxxvn 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 c
to the court, even if itthinks that a triable issue is made out, to secure the
plaintiff in monetary terms as a condition for leave to defend the suit.
8. ShriAspi 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 D
FEMA Regulations and this being so, 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 E
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 primafacie 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 Id.
senior coi;nsel, there is in fact no change made by the amendment of F
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 G
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 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
H
686 SUPREME COURT REPORTS f2016] I 1 S.C.R.
A 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 ofO.XXXVII in 1976. To appreciate the
B 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
leay~ to appear. (1) The Court shall, upon an application
c 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.
D (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."
O.XXXVII, Rule 3 (post amendment)
E
"3. Procedure for the appearance of defendant.-( I)
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
F
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
G
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
H
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD. 687
[R. F. NARIMAN, J.]
pleader, or, if the plaintiff sues in person, to the plaintiff A
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 B
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. c
(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 on such summons for leave
to defend such suit, and leave to defend may be granted to D
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 E
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 F
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 G
shall be entitled to judgment forthwith; or
(b) ifthe 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
H
688 SUPREME COURT REPORTS [2016] 11 S.C.R.
A 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.
B (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."
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
c 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-respondent, upon grounds which even a perusal of the
D
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
E 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 0.XXXVII laid down in Kiranmoyee Dassi Smt
F v. Dr J. Chatterjee, AIR 1949 Cal 4 79, as follows:
"In Kiranmoyee Dassi Smt v. Dr J. Chatterjee [AIR
1949 Cal 4 79 : 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
G
(atp. 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.
H
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD. 689
[R.F. NARIMAN, J.]
(b) If the defendant raises a triable issue indicating that he A
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 B
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 c
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 D
is illusory or sham or practically'.moonshine then ordinarily
the plaintiff is entitled to leave to sign 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 E
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 cburt or othel"Wise
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] F
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. lt is interesting
to note that a binding four judge bench decision on order37 in Milkhiram
(India) (P) Ltd. v. Chamanlal Bros., AIR 1965 SC 1698, was bunched G
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 11 S of the CPC.
12. We find that Milkhiram 's case is in fact an important judgment.
H
690 SUPREME COURT REPORTS [2016] 11 S.C.R.
A on the scope of O.XXXVII of the CPC, and is not a judgment on
principles to be applied under Section 115. This judgment, being a judgment
of four learned judges of this court, set out, in paragraph I, O.XXXVII,
Rule 3 sub-rules (2) and (3) as amended by the Bombay High Court at
the relevant time, as follows:
B "(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
c 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
D 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,
E 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 exists. Since this judgment is of seminal importance in
deciding the issue raised before us, it is necessary for us to quote parts
F ofthisjudgment, as follows:
"Learned counsel relied upon a decision of this court in
Santosh Kumar v. Bhai Moo/ Singh [ (1958) SCR 1211]
and particularly upon a passage at p. 1216. That was a
case in which the Court of Commercial Subordinate Judge,
G 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
H
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD. 691
[R. F. NARIMAN, J.]
entire claim in the suit and costs thereon. This court held A
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 B
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 c
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 D
the plaintiff from obtaining an early decree by raising
untenable and frivolous 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 E
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
F
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. G
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 H
692 SUPREME COURT REPORTS [2016] 11 S.C.R.
A 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
B 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
c 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 considerations which have to be borne in mind
for the purpose of deciding whether leave to defend should
D 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
E 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 Fie/drank Ltd. v. Stein [ (1961) 3 AELR
681 at pp 682-3] :
F
"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
G
defendant cari 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;
H
...
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD. 693
[R. F. NARIMAN, J.]
but counsel for the plaintiffs has drawn our attention to A
some comments that have been made on Jacobs v.
Booth's Distillery Co. [( 190 I) 85 LT 262] They will be
found at pp. 25 I and 267 ofthe Annual Practice, 1962. It is
suggested (seep. 25 I) that possibly the case, if it is closely
examined, does not go as far as it has hitherto been thought
B
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 the evidence for
believing that the defence set up is a sham defence and the c
master 'is prepared very nearly to give judgment for the
plaintiff."
It is worth noting also that in Lloyd's Ba11ki11gCo. v.Ogle
I Ex. D. at p. 264 in a dictum which was said to have been
overruled or qualified by Jacob v. Booth's Distillery Co. [ D
(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."
E
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 F
defendant's good faith, and would like to protect the plaintiff,
especially ifthere 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 G
in the past, and r think that that is a good tendency;"
These observations as well as some observations ofChagla,
C.J., in Rawalpindi Theatres Private Ltd. v. Film Group
Bombay [ (1958) BLR 13 73 at p 13 74] may well be borne
in mind by the court sitting in appeal upon the order of the H
694 SUPREME COURT REPORTS [2016] 11 S.C.R.
A 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
B
tentative conclusion about the quality or nature of the defence
and determine the 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, ifhe is ofopinion that
the defence raised is frivolous, or false, or sham, he shou Id
c 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
D 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
E
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
F 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 II;
G Sunil Enterprises v. SBI Commercial & International Bank Ltd.,
(1998) S SCC 354 at para 4; State Bank of Saurashtra v. Ashit
Shipping Services (P) Ltd., (2002) 4 SCC 736 at para IO; 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
H para l O; Wada Arun Asbestos. (P) Ltd. v. Gujarat Water Supply &
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD. 695
[R.F. NARIMAN, J.]
Sewerage Board, (2009) 2 SCC 432 at para 19; R. Saravana Prabhu A
v. Videocon Leasing & Industrial Finance Ltd., (2013) 14 SCC 606
at para 4; and State Bank of Hyderabad v. Rabo Bank, (2015) 10
sec 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 B
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 c
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.Cha111a11lal Bros. [AIR 1965 SC 1698: 68 Bom LR 36] D
The question whether the defence raises a triable issue or
not has to be asce11ained by 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 E
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. Kira11111oyee Dassi v. Dr. J.
Chatterjee [AIR 1949 Cal 479: 49 CWN 246] (noted and
approved in Mechelec case [(1976) 4 SCC 687 : AIR F
1977 SC 577] ).
(c) In cases where the cou11 entertains a genuine doubt on
the question as to whether the defence is genuine or sham
or whethef'it ,raises a triable issue or not, the court may
impose conditions in granting leave to defend." [para I 3] G
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: H
696 SUPREME COURT REPORTS [2016) 11 S.C.R.
A "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
B
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 vi11ue 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
c 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
D in court." [para I 5]
17. It is thus clear that O.XXXVll 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.XXXVJI provision, as the amended provision
E 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
p 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-
G coloured coat - a large numb'er 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 dowJ1 to
obviate exercise of judicial discretion in an arbitrary manner. At one
H
IDBI TRUSTEESH 1P SERVICES LTD. v. HUBTOWN LTD. 697
'[R.F. NARIMAN, J.]
end of the spectrum is unconditional leave to defend, granted in all cases A
which present a.substantial defence. At the other end of the spectrum
are frivolous or vexatious defences, leading to refusal ofleave 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
B
by the trial Judge so that justice is done on the facts of each given case.
1'8. Accordingly, the principles stated in paragraph 8 ofMechelec's
case will now stand superseded, given the amendment of 0.XXXVII
R.3, and the binding decision of four judges in Milkhiram's case, as
follows: c
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. ifthe defendant raises triable issues indicating that he has a fair D
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 ifthe defendant raises triable issues, if a doubt is left with
the trial judge about the defendant's good faith, or the genuineness of E
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 F
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
G
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
H
698 SUPREME COURT REPORTS [2016] 11 S.C.R.
A 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
B court.
19. Coming to the facts of the present case:
.....
a. It is clear that a sum oH'4 I 8 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
C 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.
D c. Payment under the said Guarantee is to the debenture trustee,
an Indian company, for and on behalf ofVinca, another Indian company,
so that primafacie again there is no infraction of the FEMA Regulations.
d. Since FMO becomes a 99% holder ofVinca after the requisite
time period has elapsed, FMO may at that stage utilise the funds received
E pursuant to the overall structure agreements in India. If this is so, again
primafacie there is no breach ofFEMA Regulations.
e. At the stage that FMO wishes to repatriate such funds, RBI
permission would be necessary. IfRBI permission is not granted, then
again there would be no infraction ofFEMA Regulations.
F f. The judgment in Immami App a 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
atthe highest, as held by the lean:ed Single Judge, even ifa triable issue
G 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
H
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD. 699
[R.F. NARIMAN, J.]
admittedly being made by the concerned parties until 2011, after which A
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 ifit deposits in the Bombay
High Court the principal sum of~ 418 crores invested by FMO, or gives B
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 c
within a period ofone year from the date of this judgment, uninfluenced
by any observations made by us herein.
Divya Pandey Appeal allowed.
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