TMI Blog2007 (4) TMI 757X X X X Extracts X X X X X X X X Extracts X X X X ..... (iii) An injunction restraining the Defendants from alienating or developing the property without first transferring to the Plaintiffs 50% of the shares of the Company and appointing half the Directors from amongst the Plaintiffs and their nominees; (iv) An injunction restraining the Defendants from alienating or encumbering shares of the Fifth Defendant and from exercising any right or receiving any benefit in regard thereto. The dispute: 3. A tract of land admeasuring 3 acres, situated on the junction of Kasturba Road and Vittal Mallya Road in Bangalore, is described in Exhibit 'A' to the Plaint as forming the matter in dispute. The case of the Plaintiffs revolves around a brief communication dated 27th September 2003 addressed by the First and Second Defendants to the Plaintiffs and confirmed by the Plaintiffs with an endorsement at the foot of the document. The communication is to the following effect: Sub : UB City Property of 3 acres bearing Khatta No. 24 situate at the corner of Kasturba Gandhi Marg and Vithal Mallya Road, Bangalore. We confirm that we are buying the above property in a company called Mont Blanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... greement between the parties Defendants Nos. 1 and 2 were required to act on behalf of the Plaintiffs, in the matter of acquisition of the said property for construction of a hotel thereon and in the matter of the said Hotel project. It was inter alia agreed between the Plaintiffs and Defendants Nos. 1 and 2 that: (i) The Plaintiffs and Defendants Nos. 1 and 2 would act jointly in the matter of purchase of the said property and in the development thereof and in the running of the hotel proposed to be constructed thereon (i.e. the said Hotel project ). The agreement set up by the Plaintiffs involves: (i) Acquisition of the property by a Company formed by the First and Second Defendants; (ii) Allotment of shares to the Plaintiffs in the Company and appointment of an equal number of Directors; (iii) Construction upon and development of the property; and (iv) Conduct of the Hotel as part of a project that was envisaged between the Plaintiffs on the one hand and the First and Second Defendants on the other as partners. 4. According to the Plaintiffs, the obligations assumed by the First and Second Defendants under the agreement dated 27th September 2003 were ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale of the plot to the Fifth Defendant instead of the Fourth Defendant. On 19th January 2004, the agreement between the Fourth Defendant and UB was cancelled and an agreement was entered into between the Fifth Defendant and UB for the same consideration of ₹ 43.50 crores. The Fourth Defendant was a confirming party to the agreement. The property was conveyed under a Deed of Conveyance executed on 26th March 2004 to the Fifth Defendant against the balance payment of ₹ 32 crores by the Fifth Defendant. 7. The Plaintiffs had addressed a letter on 11th March 2004 for the completion of the formalities of the transfer of 50% shares and Directorships in the Fourth Defendant and followed this by a further communication dated 3rd April 2004. On 12th April 2004, the First Defendant purportedly informed the Plaintiffs that in the absence of funds from you and any agreement being reached between us , it was impossible to meet the 'time lines' specified by UB and Marriott as a result of which the First Defendant had to withdraw from the project. According to the First Defendant, no agreement was ever reached between the parties at any stage. 8. By a lette ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Fifth Defendant. Besides, the Learned Single Judge was of the view that sufficient material was placed on the record to show that the Sixth to Ninth Defendants have their own financial standing and that they are not nominees of the First and Second Defendants. The association of the First Defendant with the Hotel project alone could not, according to the Learned Single Judge, lead to an inference at the interlocutory stage, that it was the First and Second Defendants and not the Sixth to Ninth Defendants who are the owners of the Company. The Learned Single Judge noted that in the circumstances, a strong prima facie case had not been made out for the passing of a drastic interim order. The project of the hotel, the Court noted, involves an outlay in excess of ₹ 250 crores and the value of the land was in excess of ₹ 40 crores. In the circumstances, the Learned Single Judge held that it would not be appropriate to injunct the construction of the hotel or to pass a blanket order restraining the Defendants from creating encumbrances on the property which may otherwise be required for carrying out a project of the magnitude involved. The Learned Single Judge, accordi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts received by it towards allotment of the new shares in any manner whatsoever including paying the same to any party or parties. (ii) Respondent No. 5 shall within a period of eight weeks from today deposit all the amounts received by it towards allotment of the new shares pursuant to the said resolutions in Court. Thereupon the Prothonotary Senior Master, High Court, Bombay, shall invest the same in fixed deposit of a Nationalized Bank initially for a period of one year and thereafter for like periods of one year each. (iii) The parties are at liberty to make an application or adopt any other proceedings in respect of the said amounts. (d) Each of the Respondents shall pay the costs of this Notice of Motion fixed at ₹ 10,000/-to the Appellants within a period of eight weeks from today. 14. The Division Bench while making the Motion absolute in terms of prayer Clause (d) set aside the resolution increasing the authorised capital, the issue of shares and the appointment of the First and Second Defendants and their nominees as Directors. 15. By an order dated 20th December 2006, the Division Bench noted that an unconditional apol ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Appellants is premised on three propositions that were set forth by Counsel at the hearing: (i) Where a pre-acquisition agreement is arrived at between two parties in pursuance of which one undertakes to the other that if the latter does not bid for the purchase of immovable property, the former will bid for both, a breach of the agreement would constitute a species of fraud; (ii) Where the cause of action sounds in fraud, the Court will be bound to make the agreement certain and workable and a lesser degree of scrutiny regarding the uncertainty or inchoatness will be made by the Court than in an action founded on contract; (iii) If for want of detail or certainty, such an agreement cannot be specifically enforced as a contract, the equity arising from such a situation creates obligations in the nature of a trust making it inequitable for the Defendant to retain what he has wrongfully obtained. The trust doctrine, it is urged, will enable the Court to make a declaration in terms of the agreement or in terms of an equality of shares. The equity, in the submission, arises from the Defendant being an agent for purchase and it is a breach of the agent's duty which raises a fi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the submission of the Plaintiffs, the following circumstances would disclose the falsity of the defence: (i) The Plaintiffs were never required to bring in funds by the Defendants: On the contrary, the agreement was acted upon throughout October 2003 during the course of which no such grievance was made; (ii) There was no communication indicating either a breach by the Plaintiffs or communicating a termination of the agreement dated 27th September 2003, nor was that issue raised in meetings held between the parties between November 2003 and February 2004; (iii) There is no cogent explanation of how the Fifth Defendant agreed to acquire a plot from UB on 22nd October 2003 when the Company was not incorporated until December 2005; (iv) There is no explanation by the First and Second Defendants as to why they would abandon the hotel project on a prime plot merely on account of the failure of the Plaintiffs to bring in funds. Had the Plaintiffs committed a breach, the First and Second Defendants would have terminated the agreement and openly continued with the project themselves; (v) If the First and Second Defendants had decided by 22nd October 2003 to terminate the Fourth Defendant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o moved the Court to seek permission for the retention of the amount as an unsecured interest free loan. These circumstances have been pressed in aid to buttress the submission that the course of dealing of the Defendants is fraudulent and in breach of the fiduciary character assumed by the First and Second Defendants. The agreement between the parties, in the submission of the Plaintiffs, and the surrounding circumstances are adequate in themselves to invoke the trust doctrine. The invocation of the trust doctrine by the Plaintiffs is essentially founded on three English decisions: (i) The decision of Harman, J. in the Chancery Division in Pallant v. Morgan 1953 1 Ch.D. 43; (ii) The decision of Malins, V.C. in Chattock v. Muller 1878 VIII Ch.D. 177; and (iii) The decision of the Court of Appeal in Banner Homes Group plc v. Luff Developments Ltd. (2000) 2 All ER 117. 2. Respondents' Submissions: The submissions on behalf of the Defendants, urged by Counsel were thus: 20. (i) The suit before the Court is, in essence, a suit to enforce a partnership or a joint venture, as evident from the pleadings and the reliefs claimed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to do so on the assurance contained in the agreement dated 27th September 2003. On the contrary, in reply to the interrogatories served upon them, the Plaintiffs only stated that it was in December 2000 and January 2001 that the First Plaintiff had contacted a broker. There is absolutely no material to indicate that the Plaintiffs were interested in separately bidding for the property themselves in 2003; (viii) If the Plaintiffs seek a declaration that the Fifth Defendant holds the property but, that the beneficial interest is of the Plaintiffs such a transaction would be hit by Section 4 of the Benami Act. Absent such a declaration, no relief can be sought against the Fifth Defendant. But for such a declaration, the suit must fail and if a declaration is implied in the prayer for injunction, it would run contrary to the Benami Act; (ix) The Fifth Defendant is a bonafide purchaser for value without notice and there is no allegation of any notice qua the Fifth Defendant in the plaint. There is no material in the plaint to indicate how a fiduciary relationship can be claimed against the Fifth, Eighth or Ninth Defendants, nor is there any allegation that these Defen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t a Five Star Deluxe Hotel would be constructed and operated on the property by both the parties together as partners with the participation of Marriott International. The specific plea of the Plaintiffs is that it is this agreement which is recorded in the writing dated 27th September 2003. According to the Plaintiffs, the First and Second Defendants were required to act on their behalf in the matter of acquisition of the property for the construction of a hotel thereon and in the matter of the said hotel project (para 4(g)). The pleadings of the Plaintiffs thus prima facie demonstrate that the Plaintiffs are before the Court on the plea that there was an agreement for the acquisition and development of the property and that in order to make the Plaintiffs partners in the hotel project, they would be allotted an equal number of shares and Directorships as the group of the First and Second Defendants. 24. The agreement is prima facie inchoate and uncertain about the terms on which the property would be developed and the hotel project would be implemented. But the submission of Counsel appearing on behalf of the Plaintiffs is that the suit seeks an enforcement only of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y on an application of the trust doctrine. That is now an issue to which the Court must turn. The Trust doctrine: 26. The Indian Trusts Act, 1882, was an Act to define and amend the law relating to private trusts and trustees. The Statement of objects and reasons notes that while trusts were not unknown in the country, trusts in the strict sense of the term as used by English Lawyers, that is to say, confidences to the existence of which a 'legal' and an 'equitable' estate are necessary, were unknown. The object of the Bill was to codify the law relating to trusts in the wider sense. Section 88 of the Trusts Act provides as follows: 88. Advantage gained by fiduciary. - Where a trustee, executor, partner, agent, director of a company, legal adviser, or other person bound in a fiduciary character to protect the interests of another person, by availing himself of his character, gains for himself any pecuniary advantage, or where any person so bound enters into any dealings under circumstances in which his own interests are, or may be, adverse to those of such other person, and thereby gains for himself a pecuniary advantage, he must hold for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ates that no suit, claim or 4 Para 5.14 of the Report action to enforce any right in respect of any property held benami against the person in whose name the property is held or against any other person shall lie by or on behalf of a person claiming to be the real owner of such property. Sub-section (3) of Section 4 carves out certain exceptions and read in conjunction with Clause (b) provides that nothing in the Act shall apply where the person in whose name the property is held is a trustee or other person standing in a fiduciary capacity and the property is held for the benefit of another person for whom he is a trustee or towards whom he stands in such capacity. Section 88 of the Indian Trusts Act, 1882 is not overridden by the provisions of the Benami Act. For the purposes of the present appeal, the issue which will have to be addressed is whether the relationship between the Plaintiffs and the First and Second Defendants was of agency within the meaning of Section 88 or whether the First and Second Defendants can be regarded as persons bound in a fiduciary capacity to protect the interest of another person namely, the Plaintiffs. If the First and Second Defendants had then av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t if each were to bid against the other, no one would profit except the owner. Parties, therefore, considered it preferable that they would agree before the sale not to compete. Though parties were near an agreement, they had as a matter of fact failed to arrive at a final understanding. At the auction which was attended by agents on behalf of the Plaintiff and the Defendant, the Plaintiff's agent had an authority to bid upto 2000 Pounds, while the Defendant's agent could bid upto 3000 Pounds. The Plaintiff's agent refrained from bidding as a result of which the Defendant's agent acquired the lot on behalf of the Defendant for 1000 Pounds. Pallant was, therefore, a case where the Defendant would have acquired the property even if the Plaintiff were to bid for it because the authority of the agent of the Plaintiff in regard to the price at which he could bid for the property fell short of the authority granted to the agent of the Defendant. Harman, J. held on facts that the agent of the Defendant when he bid for the lot was bidding for both the parties on an agreement that there should be an arrangement between the parties on the division of the lots if he w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment spoke of the circumstances in which equity will impose a constructive trust: ...equity will impose a constructive trust on property acquired by one person, say A, in furtherance of some pre-acquisition arrangement or understanding with another, say B, that, upon the acquisition of the property by A in circumstances in which B kept out of the market, B would be granted some interest in the property; notwithstanding that the arrangement or understanding falls short of creating contractual obligations enforceable at law. The Court referred to the earlier decisions including the dictum of Lord Diplock in Gissing v. Gissing [1970] 2 All ER 780, in which in the context of the acquisition of a matrimonial home a resultant, implied or constructive trust was held to have been created by a transaction between the trustee and the cestui que trust in connection with the acquisition by the trustee of a legal estate in land. The principles on which a constructive trust would arise from a Pallant v. Morgan equity were emphasized thus in the judgment in Banner Homes: (1) A Pallant v. Morgan equity may arise where the arrangement or understanding on which it is based ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed. There has to be a pre-acquisition agreement between the parties under which it is agreed that one of the parties would take steps to acquire the property and on acquisition the other will obtain some interest therein. Moreover, the non- acquiring party, on the assurance contained in the pre-acquisition agreement must do or omit to do something which confers an advantage on the acquiring party in relation to the acquisition of the property. In Pallant v. Morgan, the Plaintiff had not as a matter of fact, suffered any detriment as a consequence of his agent's agreement not to bid, because even if the Plaintiff's agent were to bid for the property, he would have been outbid by the agent of the Defendant. The authorisation to the agent of the Defendant in regard to the price of the bid being higher than that of the Plaintiff's agent there was no detriment to the Plaintiff. Nonetheless as a result of the agent of the Plaintiff not bidding for the property, the Defendant acquired the property at a lower figure. An advantage or detriment may, therefore, be located in the pre-acquisition agreement by which the non-acquiring party does not submit a bid for the property. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y keeping in view the conditions in our country look at the view taken by the English courts and if consistent with our jurisprudence, our social conditions, our chalked out path in which the law must move, one can profitably take help of the decision. There would be nothing wrong in referring to the same. But ignoring all the relevant considerations, one cannot bodily import English decisions in our system to develop a hybrid legal system and one cannot be so hypnotised by English decisions to overlook legislative changes introduced in Indian law. 32. The second reason for not applying the Pallant v. Morgan equity in the present case is that prima facie, there is no convincing material at the present stage to indicate that the Plaintiffs were to bid for the property on their own accord and that they had refrained from submitting a separate bid on the strength of a representation contained in a pre-acquisition agreement of the kind involved in Chattock or Pallant. Ultimately, this is a matter of trial on the basis of evidence to be led by the parties. On the question as to whether the Plaintiffs had, as a matter of fact, demonstrated any interest in acquiring the property ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the hotel project. The property was to be acquired in a Company, the Fourth Defendant, in whom shares and Directorships were to be allotted to the Plaintiffs. Consequently, the reliefs sought by the Plaintiffs include a declaration that Defendant Nos. 1, 2 and 6 to 9 hold half the shares and Directorships of the Fifth Defendant through which the property has been acquired in trust for the Plaintiffs, a mandatory order for the transfer of the shares and allotment of Directorships and an injunction. The agreement, therefore, was to induct the Plaintiffs as partners in the joint venture at the future point of time. Evidently, the Plaintiffs were not partners when the agreement was signed. The agreement prima facie does not disclose an acquisition of interest by the Plaintiffs in the immovable property. 35. The case of the Plaintiffs, however, is that there is a relationship of agency under the document of 27th September 2003 and the First and Second Defendants were bound in a fiduciary character to protect their interest. Section 88 of the Indian Trusts Act, 1882 comprehends first, certain specified relationships - those of a trustee, executor, partner, agent, director of a c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... duciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary. As Dr. Finn pointed out in his classic work Fiduciary Obligations (1977), p. 2, he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary. 36. The judgment of the High Court of Australia in Hospital Products Ltd. v. United States Surgical Corporation Choice Inc. (1984) 156 CLR 41, contains an elaborate discussion of the concept of fiduciary and the circumstances in which a fiduciary duty may be found to exist. Gibbs C.J. noted that the archetype of a fiduciary is of course the trustee but it is recognised by decisions of Courts that there are other classes of persons who normally stand in a fiduciary relations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is supplied). 37. Both the groups comprise of men experienced in the world of trade, commerce and business. The Plaintiffs as well the the First and Second Defendants have wide and diversified interests in the business of conducting hotels. The present case prima facie involves a dealing between two commercial interests represented by the Plaintiffs on the one hand, and the First and Second Defendants on the other. Prima facie, both the parties have entered into a commercial transaction. The remedy for a breach of the contractual obligation would, therefore, sound in a remedy in the law of contract. 38. Decided cases where the principle of agency or of a fiduciary character have been applied would only emphasize the completely different situation which obtains in the present case. In P.V. Shankara Kurup v. Leelavathy Nambiar , the Petitioner was the agent and Power of Attorney of the Respondent-plaintiff and was to look after her property. In a Court auction, the suit property was purchased by the Petitioner in his name but all the expenses incurred for the litigation till obtaining the sale certificate were credited to the account of the Respondent-Plaintiff. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Financial Services Ltd. v. Custodian (2004) 7 SCC 355, the Andhra Bank acting at the request of the Second Respondent who was a registered stock broker, and its wholly owned subsidiary applied for CANCIGO Units of a face value of ₹ 11 crores and ₹ 22 crores. The payment of the application money was to be made from the Bank Account of the Second Respondent. The certificates were handed over to the Second Respondent and the interest was credited to his account. There were dealings between the Second Respondent and the Appellant as a beneficiary which were accepted in discharge of the liability owed to the Appellant. In this context, the Supreme Court held as follows: By reason of the said transaction, a cestui que trust was created, inasmuch as Respondents 3 and 4 applied for allotment of CANCIGOs on behalf of Respondent 2 and not on their own behalf. The trust was created for a purpose, namely, the benefit arising therefrom would be appropriated by Respondent 2. The principle of cestui que trust is a synonym of a beneficiary . The said principle is not confined to the ingredients of Section 82 of the Trusts Act. It also covers cases falling under Section 88 the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creation of any encumbrances in the land during the pendency of the suit shall be subject to the result of the suit and the person in whose favour the encumbrances were created would be informed in writing. The Fifth Defendant has also been directed to retain 50% of the authorised share capital with itself during the pendency of the suit and it has also been provided that any development on the land shall be subject to the result of the suit. The Learned Single Judge held that the Plaintiffs had not made out a strong prima facie case so as to entitle them to a drastic interim order in the Notice of Motion. The Learned Single Judge took note of the fact that the hotel project involves an outlay in excess of ₹ 250 crores and that the value of the land itself is in excess of ₹ 40 crores. On considering the matter, the Learned Single Judge held that stopping the construction of the hotel would not be appropriate and the passing of a blanket injunction restraining the Defendants from alienating or transferring the property would cause hindrance in the completion of the project since, for a project of the magnitude involved it may become necessary for the Fifth Defendant to c ..... X X X X Extracts X X X X X X X X Extracts X X X X
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