TMI Blog2016 (11) TMI 1529X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The judgment in Immami Appa Rao’s [1961 (9) TMI 87 - SUPREME COURT]case would be attracted only if the illegal purpose is fully carried out, and not otherwise. Based on the aforesaid, it cannot be said that the defendant has raised a substantial defence to the claim made in the suit. Arguably at the highest, as held by the learned Single Judge, even if a triable issue may be said to arise on the application of the FEMA Regulations, nevertheless, we are left with a real doubt about the Defendant’s good faith and the genuineness of such a triable issue. Rs.418 crores has been stated to be utilized and submerged in a building construction project, with payments under the structured arrangement mentioned above admittedly being made by the concerned parties until 2011, after which payments stopped being made by them. The defence thus raised appears to us to be in the realm of being ‘plausible but improbable’. This being the case, the plaintiff needs to be protected. In our opinion, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onomic rights of Vinca. The said monies invested by FMO into Vinca were then used by Vinca to subscribe to certain optionally partially convertible debentures (hereinafter referred to as OPCDs ), as specified below. 4. The Plaintiff is India s largest Trusteeship Company and provides a wide spectrum of Trusteeship Services. The Plaintiff has been appointed as the Debenture Trustee under (i) the Debenture Subscription and Debenture Trust Deed dated 1st December, 2009 executed by Amazia Developers Private Limited (hereinafter referred to as Amazia ), Vinca, Brainpoint Infotech Private Limited (hereinafter referred to as Brainpoint ), the Defendant and the Plaintiff; and (ii) the Debenture Subscription and Debenture Trust Deed dated 1st December, 2009 executed by Rubix Trading Private Limited (hereinafter referred to as Rubix ), Vinca, the Defendant and the Plaintiff as amended by OPCD Amendment Agreement dated 8th September, 2010; (hereinafter collectively referred to as the Debenture Trust Deeds ) in relation to Vinca s investment in OPCDs issued by Amazia and Rubix. A copy of the Debenture Trust Deeds is annexed hereto and marked as Exhibits A- 1 , A-2 and A-3 . 5. P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Defendant in providing the financial statements required to be provided as per Entry I (Financial Statements) of Part A of Schedule 7 (Covenants of the Obligors and Security Providers) of the Debenture Trust Deeds; Failure on the part of the Defendant in maintaining the Net Debt to EBITDA Ratio, the Debt Service Cover Ratio and the Interest Coverage Ratio as per the provisions of Part B of Schedule 7 (Covenants of the Obligors and Security Providers) of the Debenture Trust Deeds, for the Ratio period from 1st April, 2011 to 30th September, 2011; Failure on the part of Rubix, Amazia and the Defendant in complying with a number of the Positive Covenants which were required to be fulfilled by them as per the provisions of Part C of Schedule 7 (Covenants of the Obligors and Security Providers) of the Debenture Trust Deeds, including the failure to apply the proceeds from the issue of OPCD s in the manner contemplated in the abovementioned Schedule i.e. towards projects that are compliant with the Indian foreign direct investment law; Failure on the part of Rubix, Amazia and the Defendant in complying with a number of the Negative Covenants as per the provisions of Part D o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... annexed hereto and marked Exhibit E . 13. No reply has been received to the aforementioned Demand Certificate from the Defendant till date. The Defendant therefore failed and neglected to make payment of the amounts due to the Plaintiff under the Guarantee. 33. The Plaintiff therefore prays: this Hon ble Court be pleased to order and decree the Defendant to pay to the Plaintiff a sum of ₹ 532,11,29,364.05/- (Rupees Five Hundred and Thirty Two Crores Eleven Lakhs Twenty Nine Thousand Three Hundred and Sixty Four and Five Paisa Only) as on May 6, 2013, being (i) ₹ 477,51,90,932.97/- (Rupees Four Hundred Seventy Seven Crores Fifty One Lakhs Ninety Thousand Nine Hundred and Thirty Two and Ninety Seven Paisa only) as the revised principal amount, being ₹ 484,32,99,862.97/- (Rupees Four Hundred and Eighty Four Crores Thirty Two Lakhs Ninety Nine Thousand Eight Hundred and Sixty Two and Ninety Seven Paise only) (hereinafter referred to as Principal Amount ), less an amount of ₹ 6,81,08,930/- (Rupees Six Crores Eighty One Lakhs Eight Thousand Nine Hundred and Thirty Only) received on March 4, 2013 under the Amazia TRA Agreement (hereinafter referred to a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubix) was devised/adopted as follows: i) Vinca was interposed as the Holding Company of Amazia and Rubix and Vinca was the nominal recipient of the FDI of ₹ 418 crores from FMO by way of equity investment and CCDs (in apparent compliance with the FDI/FEMA Regulations). ii) The documents executed for the FDI investment (Subscription Agreement and Debenture Trust Deed annexed as Schedule 13 thereto), however establish that the FDI received from FMO, was not intended for/could not be used by Vinca for any project of its own but was specifically required to be immediately invested by/through Vinca in OPCDs of Rubix Amazia, bearing a fixed rate of return of 13.5%. iii) Under the FEMA/FDI regulations/policy FMO could not have invested the said amounts in Amazia and Rubix through OPCDs bearing a fixed rate of return. By interposing Vinca (an Indian Company) the amounts received from FMO were invested in OPCDs of Amazia and Rubix bearing the fixed 14.5% rate of return. iv) At the same time it was provided (a) that on conversion of the CCDs FMO would own 99% of the equity of Vinca and further that (b) the Articles of Vinca were amended to provide that any decision regard ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its Nominee Directors on the Board of Vinca has instructed IDBI to demand the said sums (principal and agreed rate of return) from Amazia and Rubix and has further instructed/required IDBI to invoke the said Guarantee and file the present Petition. (sic actually, Plaint). This is apparent from the correspondence annexed as Exhibits-C to V to the Petition. xxx 16.6 That, by the present Petition, the Petitioner, acting at the instance of FMO, is seeking to utilise the process of this Court to secure for FMO a 14.5 per cent fixed rate of return on its FDI investment, contrary to the statutory stipulation/prohibition contained in the FEMA Regulations (which incorporate/embody the FDI Policy), which require FDI in townships/housing/construction development projects to be made only by equity participation (including compulsorily convertible debentures) and prohibits/precludes any assured return/rate of return. It is submitted that this would be contrary to law, public policy and public interest. 4. Based on this defence, the Ld. Single Judge in the impugned judgment arrived at the following conclusions: 31. According to the Plaintiff, the doctrine of Pari Delicto is not a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith a fixed rate of return thereon i.e. for seeking the active assistance of this Court to implement/effectuate/enforce a transaction prohibited by the FDI policy and the FEMA Regulations. The contractual documents (SSA DTD) establish that it was always agreed and understood that Vinca was only the nominal recipient of the FDI amount received from FMO and was also only nominally the recipient of the FDI amount and interest thereon at 14.5 per cent per annum to be received back from Amazia and Rubix. On receipt back by Vinca of the FDI amount and 14.5 per cent interest thereon, FMO can and will by conversion of the three CCDs become the 99% shareholder of Vinca. Under the FDI policy/FEMA Regulations, FMO can thereafter sell the shares of Vinca at the fair value, which will necessarily include the value/benefit of the FDI amount and interest at 14.5 per cent thereon. 33. However, I must also state that I do not find substance qua the following defences raised by the Defendant: 33.1 That the Suit deserves to be dismissed on the ground that the guarantee as well as trusteeship of IDBI has been discharged/terminated; 33.2 That under the provisions of the FDI Policy, an Indian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e case, in such a case there can be no question of estoppel and the paramount consideration of public interest requires that the plea be allowed to be raised and tried. xxx 40.2 In my view, the Plaintiff is also not correct when they state/submit that the judgment supports the Plaintiff in contending that the Defendant had not brought on record a shred of material to show how the facts of the present dispute would mandate lifting of the corporate veil... Even if it is assumed that the corporate veil is not to be lifted or Vinca, Amazia and Rubix are to be treated as one Company, as has been mentioned hereinabove, Vinca interposed as the holding Company of Amazia and Rubix only for the purpose of structuring FMO's FDI investment into Amazia and Rubix, through Vinca as the nominal recipient. The SSA and the annexed Debenture Trust Deed, specifically provided that the FDI amount to be received by Vinca from FMO against issuance of CCDs and equity shares by Vinca, was not to be retained by Vinca or used by Vinca in its own projects. The SSA and Trust Deed in fact expressly stipulated that the FDI amount received by Vinca from FMO, was to be immediately passed on by Vinca to Amaz ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , that: 1. It shall ensure that Amazia shall duly and punctually pay or repay the Amazia Secured Obligations and Rubix shall duly and punctually pay or repay the Rubix Secured Obligations and Rubix Facility Secured Obligations, including but not limited to the Principal Amount under the Amazia OPCD Subscription and Debenture Trust Deed and the Rubix OPCD Subscription and Debenture Trust Deed, respectively and the Facility, together with all interest, liquidated damages, commitment charges, premia on prepayment or on redemption, costs, expenses, and other monies due to (i) the Debenture Holder and the Debenture Trustee and any remuneration and charges that and (ii) the Lender and the Security Trustee and any remuneration and charges that might be payable to the Security Trustee, in accordance with the Facility Agreement and perform and comply with all the other terms, conditions and covenants contained in the OPCD Subscription and Debenture Trust Deeds and the Facility Agreement. 2. The Surety guarantees to the Debenture Trustee acting for the benefit of the Debenture Holder and the Security Trustee acting for the benefit of the Lender, jointly and severally, the due and punct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty Trustee s/ Lender s rights under any security which the Debenture Holder/ the Trustee (acting on Approved Instructions) and the Security Trustee, jointly and severally, shall have the fullest liberty to call upon the Guarantor to pay all or part of the monies for the time being due to the Debenture Holder/ the debenture Trustee and/or the Security Trustee/ the Lender (as the case may be) in respect of the Secured Obligations without requiring the Debenture Trustee/ the debenture Holder and/or the Security Trustee/ the Lender to realize from the Issuers the amount outstanding to the Debenture Holder/ the Debenture Trustee and/or the Security Trustee/ the Lender pursuant to the Debentures/ Facility and/or requiring the Debenture Trustee/ the Debenture Holder and/or the Security Trustee/ the Lender to enforce any remedies or securities available to the Debenture Trustee/ the Debenture Holder and/or the Security Trustee/ the Lender. 31. The Guarantor agrees that the amount hereby guaranteed shall be payable to the Debenture Trustee and/or the Security Trustee immediately upon the Debenture Trustee and/or the Security Trustee/ Lender serving the Guarantor with a notice requiring p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Private Limited]. Accordingly, we hereby give you notice pursuant to Clause 2 and Clause 31 of the Deed that we require you to pay such amount. All amounts due should be paid to the account [details of account] entitled [.] under the [.] immediately and in no event later than 5 Business Days from the date hereof. Capitalised terms used herein shall have the meaning given to them in the Guarantee. Yours faithfully [Debenture Trustee]/ [Security Trustee] 6. It is on this Corporate Guarantee that the Summary Suit is based. Dr. Singhvi has argued before us that there has been no violation of the FEMA Regulations, 1999, as observed by the Ld. Single Judge. In particular, he referred to and relied upon Regulations 4 and 5 of the FEMA Regulations, which are set out as follows: Restriction on an Indian entity to issue security to a person resident outside India or to record a transfer of security from or to such a person in its books :- 4. Save as otherwise provided in the Act or Rules or Regulations made thereunder, an Indian entity shall not issue any security to a person resident outside India or shall not record in its books any transfer of security from or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not a word has been stated against its invocation, namely, that it has not been alleged to have been invoked wrongly. According to him, there is no defence whatsoever to the suit, and the defence being entirely frivolous and vexatious, leave to defend ought to have been refused altogether. But, he stated as an alternative argument, that in any case the Appellant-plaintiff should be fully secured for the amount claimed in the plaint. He also submitted before us that the test laid down in Mechelec Engineers Manufacturers v. Basic Equipment Corporation, (1976) 4 SCC 687 is no longer good law in view of the fact that O.XXXVII of the Code of Civil Procedure, 1908 ( CPC ) was amended in 1976, and it is the amended provision that has to be looked at. He cited certain judgments before us to show that this court has taken the view that the amended provision makes a sea change in the law, as a result of which it is open to the court, even if it thinks that a triable issue is made out, to secure the plaintiff in monetary terms as a condition for leave to defend the suit. 8. Shri Aspi Chinoy, Ld. senior counsel appearing on behalf of the Respondent, has reiterated the submissions of his ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) 3. Procedure for the appearance of defendant.-( 1) In a suit to which this Order applies, the plaintiff shall, together with the summons under Rule 2, serve on the defendant a copy of the plaint and annexures thereto and the defendant may, at any time within ten days of such service, enter an appearance either in person or by pleader and, in either case, he shall file in Court an address for service of notices on him. (2) Unless otherwise ordered, all summonses, notices and other judicial processes, required to be served on the defendant, shall be deemed to have been duly served on him if they are left at the address given by him for such service. (3) On the day of entering the appearance, notice of such appearance shall be given by the defendant to the plaintiff's pleader, or, if the plaintiff sues in person, to the plaintiff himself, either by notice delivered at or sent by a prepaid letter directed to the address of the plaintiff's pleader or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court stated that the only question which arose before them in that appeal by special leave was whether the High Court could, in exercise of its powers under Section 115 of the CPC, interfere with the discretion of the district court in granting unconditional leave to defend to the defendant-appellant, upon grounds which even a perusal of the impugned judgment of the High Court showed to be reasonable. The answer to the question thus posed was in the question itself, and this Court had no doubt that the High Court judgment, in interfering with the trial court s judgment under its revisional jurisdiction, was wrong. Paragraphs 6 and 7, which constitute the ratio of the judgment, went into the well-established principles repeatedly laid down by this court which govern the jurisdiction of the High Courts under Section 115 of the CPC. This Court held that such principles had been ignored in the judgment under appeal. However, in paragraph 8, the judges set out the 5 propositions governing O.XXXVII laid down in Kiranmoyee Dassi Smt v. Dr J. Chatterjee, AIR 1949 Cal 479, as follows: In Kiranmoyee Dassi Smt v. Dr J. Chatterjee [AIR 1949 Cal 479 : 49 CWN 246, 253 : ILR (1945) 2 Cal 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon in paragraph 6, as judgments relating to the exercise of jurisdiction of High Courts under section 115 of the CPC. 12. We find that Milkhiram s case is in fact an important judgment on the scope of O.XXXVII of the CPC, and is not a judgment on principles to be applied under Section 115. This judgment, being a judgment of four learned judges of this court, set out, in paragraph 1, O.XXXVII, Rule 3 sub-rules (2) and (3) as amended by the Bombay High Court at the relevant time, as follows: (2) If the defendant enters an appearance, the plaintiff shall thereafter serve on the defendant a summons for judgment returnable not less than ten clear days from the date of service supported by an affidavit verifying the cause of action and the amount claimed and stating that in his belief there is no defence to the suit. (3) The defendant may at any time within ten days from the service of such summons for judgment by affidavit or otherwise disclosing such facts as may be deemed sufficient to entitle him to defend, apply on such summons for leave to defend the suit. Leave to defend may be granted to him unconditionally or upon such terms as to the Judge appear just. 13. The t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the sense that, if the facts alleged by the defendant are established, there would be a good, or even a plausible, defence on those facts. The latter part of the observations of the learned Judge have to be under- stood in the background of the facts of the case this Court was called upon to consider. The trial Judge being already satisfied that the defence raised a triable issue was not justified in imposing a condition to the effect that the defendant must deposit security because he had not adduced any documentary evidence in support of the defence. The stage for evidence had not been reached. Whether the defence raises a triable issue or not has to be ascertained by the court from the pleadings before it and the affidavits of parties and it is not open to it to call for evidence at that stage. If upon consideration of material placed before it the court comes to the conclusion that the defence is a sham one or is fantastic or highly improbable it would be justified in putting the defendant upon terms before granting leave to defend. Even when a defence is plausible but is improbable the court would be justified in coming to the conclusion that the issue is not a triable is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evidence for believing that the defence set up is a sham defence and the master is prepared very nearly to give judgment for the plaintiff. It is worth noting also that in Lloyd's Banking Co. v.Ogle 1 Ex. D. at p. 264 in a dictum which was said to have been overruled or qualified by Jacob v. Booth's Distillery Co.[ (1901) 85 LT 262] Bramwell, B., had said that ....those conditions (of bringing money into court or giving security) should only be applied when there is something suspicious in the defendant's mode of presenting his case. I should be very glad to see some relaxation of the strict rule in Jacob v. Booth's Distillery Co. I think that any Judge who has sat in chambers in RSC, Order 14 summonses has had the experience of a case in which, although he cannot say for certain that there is not a triable issue, nevertheless he is left with a real doubt about the defendant's good faith, and would like to protect the plaintiff, especially if there is not grave hardship on the defendant in being made to pay money into court. I should be prepared to accept that there has been a tendency in the last few years to use this condition more often than it h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Shankar Kamal Narain v. M.D. Overseas Ltd., (2007) 4 SCC 133 at paras 8 and 9; SIFY Ltd. v. First Flight Couriers Ltd., (2008) 4 SCC 246 at para 10; Wada Arun Asbestos (P) Ltd. v. Gujarat Water Supply Sewerage Board, (2009) 2 SCC 432 at para 19; R. Saravana Prabhu v. Videocon Leasing Industrial Finance Ltd., (2013) 14 SCC 606 at para 4; and State Bank of Hyderabad v. Rabo Bank, (2015) 10 SCC 521 at para 16. 15. However, there are two judgments of this Court which directly deal with the amendment made to O.XXXVII and the effect thereof on the ratio contained in Mechelec s case. In Defiance Knitting Industries (P) Ltd. v. Jay Arts, (2006) 8 SCC 25, this Court, after setting out the amended O.XXXVII and after referring to Mechelec s case, laid down the following principles While giving leave to defend the suit the court shall observe the following principles: (a) If the court is of the opinion that the case raises a triable issue then leave to defend should ordinarily be granted unconditionally. See Milkhiram (India) (P) Ltd. v.Chamanlal Bros. [AIR 1965 SC 1698 : 68 Bom LR 36] The question whether the defence raises a triable issue or not has to be ascertained by the c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sub-rule (3) were not, however, there in the Bombay amendment. These are new, and the effect to be given to them is something that we will have to decide. The position in law now is that the trial Judge is vested with a discretion which has to result in justice being done on the facts of each case. But Justice, like Equality, another cardinal constitutional value, on the one hand, and arbitrariness on the other, are sworn enemies. The discretion that a Judge exercises under Order XXXVII to refuse leave to defend or to grant conditional or unconditional leave to defend is a discretion akin to Joseph s multi-coloured coat a large number of baffling alternatives present themselves. The life of the law not being logic but the experience of the trial Judge, is what comes to the rescue in these cases; but at the same time informed by guidelines or principles that we propose to lay down to obviate exercise of judicial discretion in an arbitrary manner. At one end of the spectrum is unconditional leave to defend, granted in all cases which present a substantial defence. At the other end of the spectrum are frivolous or vexatious defences, leading to refusal of leave to defend. In between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is raised), shall not be granted unless the amount so admitted to be due is deposited by the defendant in court. 19. Coming to the facts of the present case: a. It is clear that a sum of ?418 crores has been paid by FMO, the Dutch company, to Vinca for purchase of shares as well as compulsorily convertible debentures. This transaction by itself is not alleged to be violative of the FEMA regulations. b. The suit is filed only on invocation of the Corporate Guarantee which on its terms is unconditional. It may be added that it is not the defendant's case that the said Corporate Guarantee is wrongly invoked. c. Payment under the said Guarantee is to the debenture trustee, an Indian company, for and on behalf of Vinca, another Indian company, so that prima facie again there is no infraction of the FEMA Regulations. d. Since FMO becomes a 99% holder of Vinca after the requisite time period has elapsed, FMO may at that stage utilise the funds received pursuant to the overall structure agreements in India. If this is so, again prima facie there is no breach of FEMA Regulations. e. At the stage that FMO wishes to repatriate such funds, RBI permission would be necess ..... X X X X Extracts X X X X X X X X Extracts X X X X
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