2007 (4) TMI 757 - HC - Benami Property

Court Declares Trust, Denies Specific Performance, Upholds Fiduciary Duty

Gopal L. Raheja Of Mumbai, Indian Versus Vijay B. Raheja Of Mumbai, Indian

The court found that the agreement between the parties was uncertain and inchoate regarding the development terms of the property, leading to a ... - Issues Involved:1. Declaration of Trust and Transfer of Shares2. Fiduciary Obligations and Breach of Agreement3. Applicability of Benami Transactions (Prohibition) Act, 19884. Constructive Trust Doctrine5. Interim Relief and InjunctionsDetailed Analysis:1. Declaration of Trust and Transfer of Shares:The plaintiffs sought a declaration that Defendant Nos. 1, 2, and/or 6 to 9 hold 50% of the shares and directorships of the Fifth Defendant-Company in trust for the plaintiffs. They also sought a decree for the transfer of these shares and the appointment of directors from among the plaintiffs. The plaintiffs argued that the defendants had agreed to acquire the property through a nominee company on behalf of both parties and that they would be allotted equal shares and directorships in the company. The court found that the agreement was prima facie inchoate and uncertain about the terms on which the property would be developed and the hotel project implemented. The reliefs sought were not in respect of a half share in the immovable property but a declaration that the shares and directorships were held in trust.2. Fiduciary Obligations and Breach of Agreement:The plaintiffs contended that the obligations assumed by the First and Second Defendants under the agreement dated 27th September 2003 were of a fiduciary character and that they had wrongfully sought to exclude the plaintiffs from the benefits of the agreement. The court examined whether the relationship between the plaintiffs and the First and Second Defendants was one of agency or fiduciary character within the meaning of Section 88 of the Indian Trusts Act, 1882. The court found that the agreement reflected a commercial dealing between two commercial interests and involved an arm's length transaction, and therefore, the remedy for a breach of the contractual obligation would sound in damages rather than specific performance.3. Applicability of Benami Transactions (Prohibition) Act, 1988:The defendants argued that the transaction would be hit by Section 4 of the Benami Act if the plaintiffs sought a declaration that the Fifth Defendant holds the property but that the beneficial interest is of the plaintiffs. The court noted that Section 88 of the Indian Trusts Act, 1882, which deals with fiduciary obligations, is not overridden by the Benami Act. The issue was whether the First and Second Defendants could be regarded as persons bound in a fiduciary capacity to protect the interests of the plaintiffs. The court found that there was no convincing material to indicate that the plaintiffs were to bid for the property on their own accord and had refrained from submitting a separate bid based on a representation contained in a pre-acquisition agreement.4. Constructive Trust Doctrine:The plaintiffs invoked the trust doctrine, citing English cases like Pallant v. Morgan and Banner Homes Group plc v. Luff Developments Ltd., to argue that the defendants held the property in trust for them. The court noted that the Indian Trusts Act, 1882, had been amended to delete the provision for constructive trusts by the Benami Transactions (Prohibition) Act, 1988. The court held that it would be statutorily impermissible to apply the doctrine of constructive trust in India due to this deletion. Moreover, the court found that the agreement did not suggest the kind of pre-acquisition agreement involved in the cited English cases.5. Interim Relief and Injunctions:The plaintiffs sought interim relief to restrain the defendants from alienating or developing the property. The Learned Single Judge held that a strong prima facie case had not been made out for passing a drastic interim order. The court directed that any construction by the Fifth Defendant should be in accordance with the sanctioned building plan and that any encumbrances created in the land would be subject to the result of the suit. The court also directed the Fifth Defendant to retain 50% of the authorized capital during the pendency of the suit. The Division Bench imposed sanctions on the defendants for breach of an interim order and directed that the effect of these directions should continue pending the disposal of the suit. The appeals were dismissed, and the interim directions issued by the Learned Single Judge were deemed adequate to protect the rights of the parties during the pendency of the suit.