TMI Blog1981 (2) TMI 189X X X X Extracts X X X X X X X X Extracts X X X X ..... vember, 1974, a loan of Rs. 5,00,000 (rupees five lakhs only) was given to him on 23rd December, 1974, at 16% per annum as interest. Defendant No. 1 executed a promissory note on the same day in consideration of his having obtained the loan. Thereafter, on the request of defendant No. 1, vide letter dated 15th January, 1975, the plaintiff advanced another loan of Rs. 10,00,000 (rupees ten lakhs only) on 29th January, 1975. It was represented by defendant No. 1 that he would utilise the said amount for the purchase of immovable property in Delhi and the directors of the plaintiff-company sanctioned the grant of the loan on the following terms : ( i )the loan amount of Rs. 10,00,000 would carry interest @ 16% per annum payable quarterly on the last day of each quarter; ( ii )the loan would be repaid in twelve monthly instalments commencing from April, 1975 ; and ( iii )the loan would be secured by deposit of the title deed of the property as soon as the property was registered in the name of defendant No. 1. A pro-note with regard to the same was also executed by defendant No. 1 on the aforesaid date, viz ., 29th January, 1975. He did not pay anything either towards the prin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that defendant No. 3 had purchased the property known as 10, Panchsheel Marg, New Delhi, and that defendant No. 5 had purchased the flats bearing Nos. 101 and 102, situated at 27, Barakhamba Road, New Delhi. However, they asserted that the said properties had been purchased by defendants 3 and 5 out of their own funds and being bodies corporate they were the owner of the same in their own right. Further, all these defendants took up the stand that there is no privity of contract between the plaintiff and any of them and such suit against them was not at all maintainable and was misconceived. Faced with this situation, the plaintiff came forth with some details in the rejoinders to the replies filed by defendants 2 to 5. It was contended that as per information available with the plaintiff, out of Rs. 5,00,000 taken on loan on 23rd December, 1974, defendant No. 1 transferred a sum of Rs. 3,10,000 to defendant No. 2 on that very day and certain amounts were paid to M/s. Dabri Company subsequently. Further, the entire amount of Rs. 10,00,000 received by defendant No. 1 as loan from the plaintiff on 29th January, 1975, was diverted to defendant No. 2 partly on the same day and p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ff reiterated that the properties in question had been purchased by defendants 3 to 5 out of the amounts advanced by the plaintiff to defendant No. 1, which were ultimately diverted to those defendants. Thereupon, defendant No. 2 with the leave of the court filed detailed counter-affidavits on behalf of himself and defendants 3 and 5 in his capacity as secretary of the former and director of the latter. While admitting that on December 23, 1974, he received two cheques, one for Rs. 40,00,000 and the other for Rs. 2,50,000 from defendant No. 1, he asserted that the former cheque was in repayment of the amount due and owing by defendant No. 1 to him and that the other amount of Rs. 2,50,000 was duly repaid by him by means of three account payee cheques mentioned therein and as such no amount remained outstanding between him and defendant No. 1 as on December 31, 1974. Similarly, while admitting that he had received certain amounts aggregating Rs. 6,70,000 from defendant No. 1 on different dates during January, 1975, up to January 29, 1975, he asserted that the same stood squared up finally by payments made by him to defendant No. 1, the major payment being of Rs. 6,00,000, vide che ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me of the institution of the suit. He filed a copy of the balance-sheet of defendant No. 5 as on October 31, 1975, in support of this contention. Upon these facts the learned counsel for the plaintiff has canvassed with considerable fervour that defendants Nos. 3 to 5 were dummy companies having been created by defendant No. 1 in collusion with defendant No 2 and other close relations and friends to have a corporate facade and to take the properties in question which had, in fact, been purchased by him, although in the names of defendants Nos. 3 and 5, out of the loan amounts, beyond the reach of the plaintiff. It is contended that an intent to divert on the part of defendant No. 1 is writ large, in that, he did not purchase any property in his own name, as given out by him while applying for the loan of Rs. 10,00,000 to the plaintiff and instead he devised the scheme of purchasing properties in the names of defendants Nos. 3 and 5 surreptitiously by diverting the loan amount to them directly or indirectly. He has pointed out that notwithstanding the specific averment made by the plaintiff to that effect, defendants Nos. 3 to 5 have not come out with detailed particulars of their ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tled to lift the mask of corporate entity if (the conception) is used for tax evasion, or to circumvent tax obligation or to perpetrate a fraud." Both these cases, no doubt, relate to tax assessment as noticed by the learned single judge. However, there is a catena of English decisions to warrant the conclusion that the doctrine of lifting the corporate veil or cracking open the corporate shell, as it is very often said, is not confined only to cases of tax evasion and the court would be well within its right and indeed be justified in lifting even the curtain rather than the veil and see what goes on behind it, concealed from the public gaze. Surely, the courts will refuse to allow the corporate entity principle to be used as an instrument of fraud. In Gilford Motor Co. Ltd. v. Home [1933] Ch 935, Home, a former employee of the plaintiff had covenanted not to solicit its customers. However, shortly afterwards he attempted to evade this obligation by forming a company which undertook the soliciting by carrying on parallel business for the sale of spare parts of Gilford vehicles. An injunction was sought by the plaintiff against Home as well as his newly formed company on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enunciated in Salomon v. Salomon Co. Ltd. [1897] AC 22, was sacrosanct. If we were to treat each of these concerns as being Dr. Wallersteiner himself under another hat, we should not, he said, be lifting a corner of the corporate veil We should be sending it up in flames. I am prepared to accept that the English concerns those governed by English company law or its counterparts in Nassau or Nigeria were distinct legal entities ....Even so, I am quite clear that they were just the puppets of Dr. Wallersteiner. He controlled their every movement. Each danced to his bidding. He pulled the strings. No one else got within reach of them. Transformed into legal language, they were his agents to do as he commanded. He was the principal behind them. I am of the opinion that the court should pull aside the corporate veil and treat these concerns as being his creatures for whose doings he should be, and is, responsible. At any rate, it was up to him to show that any one else had a say in their affairs and he never did so." (emphasis supplied) Yet another judicial decision which illustrates that the court may lift the veil to prevent the corporators from perpetrating a fraud is Jon ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hand, we find that despite the specific allegation of fraud and diversion of funds by defendant No. 1 to defendants Nos. 2 to 5, these defendants do not appear to have divulgee-all the essential facts truly and in a straightforward manner. No doubt defendant No. 2 has given sufficient details of the various amounts received by him from defendant No. 1 during the relevant period and he has also furnished the particulars of repayments made by him during that period, thus indicating that no part of the loans in question could be said to be outstanding against him but he is singularly silent with regard to the affairs of defendants Nos. 3 and 5 in which he holds an important position, vis-a-vis , defendant No. 1. His bald assertion that the issued, subscribed and paid-up capital of defendant No. 3 was Rs. 10,50,000 and that the investment in property bearing No. 10, Panchsheel Marg, New Delhi, was financed out of its share capital, does not lead one anywhere inasmuch as it does not disclose what interest defendant No. 1 and his other close relatives had in the shareholding of defendant No. 3 at the relevant time. Further, the mere fact that defendant No. 1 has ceased to be a member/s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed aside lightly at this stage. It is, of course, a different matter that the defendants may satisfy the court about the bona fide nature of the dealings and transactions in question at the trial. Hence, we consider it to be a fit case to grant and do grant ad interim relief to the plaintiff by restraining defendants Nos. 3 and 5 from in any manner alienating, transferring, disposing of or encumbering the properties in question, viz ., 10 Panchsheel Marg, New Delhi, and flats Nos. 101 102 in 'New Delhi House' at 27, Barakhamba Road, New Delhi, till the disposal of the suit. This brings us to the cross-appeal filed by Shri S.P. Jain, defendant No. 1. Having regard to his overall conduct as reflected by various circumstances adverted to above and the fact that he did not even consider it necessary to file a reply to I. A. No. 2897/76, we consider that the order of attachment before judgment of various assets, ostensibly held by him, by the learned single judge is perfectly justified. Strangely enough his counsel, Shri C. N. Murthy, made a categorical statement on 6th April, 1977, that he did not wish to file a reply to the said application. Subsequently, an application was moved ..... X X X X Extracts X X X X X X X X Extracts X X X X
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