2001 (6) TMI 781 - HC - Companies Law

Court denies chamber summons to reject plaint; evidence required to determine transactions' nature.

The court dismissed the chamber summons seeking rejection of the plaint as it concluded that evidence needs to be led to determine whether the ... Securities Issues Involved:1. Legality of the ready-forward transactions.2. Applicability of the Securities Contracts (Regulation) Act, 1956 to the transactions.3. Rejection of the plaint under Order VII, Rule 11 of the Code of Civil Procedure, 1908.4. Whether the plaint discloses a cause of action or is barred by law.Detailed Analysis:1. Legality of the Ready-Forward Transactions:The defendants contended that the transactions between the plaintiff and defendants were ready-forward transactions, which are illegal as per the Supreme Court's decision in B.O.I. Finance Ltd. v. Custodian. The Supreme Court held that the forward leg of such transactions is impermissible under the Securities Contracts (Regulation) Act, 1956. The defendants argued that since the transactions in question were ready-forward, the forward leg aspect is illegal, and thus, the plaint should be rejected.2. Applicability of the Securities Contracts (Regulation) Act, 1956:The defendants referred to the judgment in A.K. Menon v. Fairgrowth Financial Services Ltd., asserting that any security, listed or not, is covered under the Act. They also cited the Delhi High Court's judgment in Sanjay Kaushish v. D.C. Kaushish, emphasizing that the court can reject a plaint if it does not disclose a cause of action or is barred by limitation based on the admitted documents.The plaintiff countered that the scrips involved (Canstar, Canshare, and Cantriple) were issued by a mutual fund, which is a trust, and not by an incorporated company or body corporate. Therefore, these scrips do not fall within the definition of 'securities' under Section 2(h) of the Act as it stood at the relevant time.3. Rejection of the Plaint Under Order VII, Rule 11 of the Code of Civil Procedure, 1908:The defendants sought rejection of the plaint under Order VII, Rule 11(a) and (d) of the Code, arguing that the plaint does not disclose a cause of action and the suit is barred by law. They contended that the plaint explicitly shows that the transactions were ready-forward, which are prohibited by law.The plaintiff argued that the plaint should be read as a whole, and it clearly states that the plaintiff financed the defendants, retaining the scrips as security until repayment. The plaintiff's counsel highlighted that the defendants had admitted to the financing in their correspondence, and part of the securities was taken back by the defendants upon payment.4. Whether the Plaint Discloses a Cause of Action or is Barred by Law:The court noted that the plaint, especially paragraphs 3, 4, 5, 6, and 12, proceeds on the basis that the plaintiff financed the defendants, and the scrips were retained as security. The correspondence, particularly the letter dated 14-5-1992, confirmed that the financing was done by Canfina at 18% per annum.The Supreme Court's judgment in B.O.I. Finance Ltd. mentioned that the parties in that case had agreed that the transactions were ready-forward. However, in the present case, there was no such agreement or admission. The court emphasized that it must be established whether the transactions were ready-forward and whether the scrips were covered under the Act.Conclusion:The court concluded that evidence needs to be led to determine whether the transactions were ready-forward and whether the scrips were covered under the Act. The plaint does not proceed on a claim barred by law and discloses a cause of action. Therefore, the chamber summons seeking rejection of the plaint was dismissed.