TaxTMI 
TaxTMI 
2016 (11) TMI 1529
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....ter referred to as "Vinca"). As a result of the said investment, FMO currently holds (i) 10% of the equity of Vinca through Class A shares and is entitled to 10% of the voting rights and economic interest in Vinca by virtue thereof; and (ii) 3 CCDs in Vinca. Further, as on date, the Defendant owns 49% of the equity of Vinca through Class A shares and is entitled to 49% of the voting rights and economic interest in Vinca by virtue thereof. The remaining 41% Class A equity shares in Vinca are owned by the individual promoters of the Defendant, being Hemant Shah and Vyomesh Shah, which entitles them to 41% of the voting rights and economic interest in Vinca. Hemant Shah and Vyomesh Shah together also own 100% of Class B equity shares of Vinca, which carry with them collective voting rights and dividend entitlement not exceeding 0.01%. Upon conversion, the 3 CCDs in Vinca will entitle FMO to 99% of the equity of Vinca (by allotment of additional Class A shares), thereby entitling it to 99% of the voting and economic 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 referre....
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....orporate Guarantee Deed, dated 9th December, 2009, issued an unconditional, absolute and irrevocable corporate guarantee in favour of the Plaintiff, inter alia for the benefit of Vinca (hereinafter referred to as the "Guarantee"). A copy of the Guarantee is annexed hereto and marked as Exhibit "B". 9. The Plaintiff submits that inter alia the following defaults were committed by Amazia and Rubix, inter alia under the said Debenture Trust Deeds: Defaults by Amazia and Rubix in payment of interest on the OPCDs, as contemplated under Condition 7 of Schedule 3 of the Debenture Trust Deeds, which default has been subsisting since 15th June, 2011, on the interest accrued on the OPCDs since 16th March, 2011; Defaults by Amazia and Rubix in payment of default interest accrued on the OPCDs since 16th June, 2011; The occurrence of an event of default (cross default) specified in Clause 21(a) of Schedule 14 of the Debenture Trust Deeds, arising inter alia out of a default by Vinca under the CCDs; Failure on the part of Rubix, Amazia and the Defendant in providing the financial statements required to be provided as per Entry I (Financial Statements)....
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.... "Redemption Notices") for the reasons and on the grounds contained therein, inter alia calling upon Amazia and Rubix to fully redeem all the OPCDs at par value on 3rd July, 2012 (hereinafter referred to as the "Early Redemption Date") and to credit the Principal Redemption Amount alongwith interest accrued and unpaid thereon, aggregating to Rs. 4,843,299,862.97/- into A/c. no.: 00600350098359 held in the name of the Plaintiff at HDFC Bank, on the Early Redemption Date. A copy of the Redemption Notices is annexed hereto and marked Exhibits "D-1" and "D-2". 12. However, despite repeated reminders to rectify their various defaults under the Debenture Trust Deeds, and various attempts to resolve the issues amicably, Amazia and Rubix have failed and neglected to pay the amounts due and payable in terms of the Debenture Trust Deeds. Consequently, the Plaintiff was constrained to issue a Demand Certificate for the enforcement of the Guarantee, in terms of the said Guarantee, to the Defendant on 3rd August, 2012. A copy of the Demand Certificate dated 3rd August, 2012 is annexed hereto and marked Exhibit "E". 13. No reply has been received to the aforementioned Demand Certificate fr....
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....tions (which incorporate the FDI Policy as a Schedule thereto), permit FDI in townships, construction of houses, only by way of equity investments (which is defined to also include debentures which are compulsorily required to be converted into equity: CCDs). The FDI Policy and the FEMA Regulations prohibit any other form of investment (non equity) in the said sector with an assured return/rate of return. 16.2 That FMO, a foreign entity wanted to invest a substantial sum by way of FDI in a slum rehabilitation project being undertaken in Mumbai by Rubix and an Industrial Park being undertaken/ owned by Amazia. FMO was however only willing to invest in the said projects on the basis of an assured/fixed return, which was and is not permissible under the FEMA Regulations/FDI Policy. To enable FMO to bypass/circumvent the said FEMA/FDI prohibitions and get a fixed return of 14.5% per annum on its investment of Rs. 418 crores, the investment structure (i.e investment by way of CCDs in Vinca and Vinca purporting to invest the said amounts in OPCDs of Amazia and Rubix) was devised/adopted as follows: i) Vinca was interposed as the Holding Company of Amazia and Rubix and V....
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....re the receipt by FMO at the fixed rate of return of 14.5%. 16.3 That, if the entire transaction is looked at as a whole, it is clear that the interposing of Vinca as the nominal recipient of the FDI (against issuance of equity shares and CCDs) was a colourable and artificially structured transaction, the object and purpose of which was to enable FMO to secure a fixed rate of return on its FDI investments in townships/construction of housing, notwithstanding the FEMA Regulations/FDI Policy which permit only an equity investment without any fixed/agreed rate of return in the said sector. The said structure was and is not lawful and was and is opposed to public policy as it was designed to defeat and would defeat the provisions of law, the FEMA Regulations read with the FDI Policy. 16.4 That, the present Petition has been filed to effectuate the said illegal object of securing the said fixed rate of return for FMO. Although IDBI, the Petitioner, claims to be nominally acting on behalf of Vinca, it is in fact admittedly acting only at the instance of FMO/FMO's Nominee Directors on the Board of Vinca. FMO through its Nominee Directors on the Board of Vinca has ins....
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....resent proceedings, the Plaintiff is acting at the instance of FMO/FMO nominees on the Board of Directors of Vinca. This is the stipulation in Vinca's articles and under the DTD. In any event, inasmuch as the transaction (based on return of the FDI/principal amount invested along with a fixed rate of return thereon) is not permissible/prohibited under the FDI policy and the FEMA Regulations, neither IDBI nor FMO can seek the assistance of the Court to effectuate/implement/enforce such a prohibited/illegal transaction. 32. The Plaintiff has lastly contended that the alleged illegal purpose of securing a fixed return has not been carried out and that if the proceedings are allowed, the money will go to Vinca and not to FMO. It has been contended that FMO cannot receive the sums without complying with the FDI Regulations for sale of shares and repatriation. 32.1 This submission too of the Plaintiff cannot be accepted. The present claim has been made and the present proceeding has been initiated/filed by the Plaintiff at the instance of FMO/FMO nominees on Vinca's Board of Directors, in order to secure repayment/return of the FDI amount invested along with a fixed rat....
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....3) though ostensibly in favour of Vinca, an Indian Company, was part of the aforesaid illegal structure/scheme and was given to ensure that FMO received back its FDI amount with interest as aforesaid through Vinca. The Guarantee was therefore part of the aforesaid illegal structures/scheme and therefore prima facie illegal and unenforceable. 37.3 Further the question of the Defendant not being allowed to plead its own wrong also does not arise in the facts of the present case. Through the present Petition, the Plaintiff (who is admittedly acting at the instance of FMO/FMO's nominees) is in effect seeking the assistance of this Court to enable/enforce recovery by FMO of its FDI amount and interest thereon (through Vinca), contrary to the provisions of the FEMA Regulations and FDI policy embodied therein. As has been held by the Hon'ble Supreme Court in the case of Immami Appa Rao vs. G. Ramalingamurthi (supra), the Plaintiff who wants orders in his favour, is actually seeking the active assistance of the Court to achieve what the law prohibits/declares illegal and that is clearly and patently inconsistent with public interest. Moreover, as has been held by ....
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....iv) Place the suit for framing of issues on 29th June, 2015." 5. Since the summary suit is filed on a Corporate Guarantee, and since this document has been heavily relied upon by Dr. Abhishek Manu Singhvi, Ld. Senior Counsel on behalf of the appellant, it is necessary to set out some of the clauses of this Guarantee. It may first be noticed that the deed of Corporate Guarantee cum Mortgage, dated 9th December, 2009, was made by Ackruti City Ltd. as guarantor. Ackruti City Ltd. has since become Hubtown Ltd., the Respondent-defendant. IDBI Trusteeship Services Ltd. is described as the debenture trustee for the benefit of Vinca Developer Pvt. Ltd., for the Amazia Optional Partially Convertible Debentures (hereinafter referred to as "OPCDs") and the Rubix OPCDs, and appointed pursuant to the Amazia OPCD subscription and debenture trust deed and the Rubix OPCD subscription and debenture trust deed. The very opening clause of the Deed of Corporate Guarantee states as follows: "A. GUARANTEE In consideration of the premises, the Surety hereby unconditionally, absolutely and irrevocably guarantees to and agrees with the Debenture Trustee for the benefit of the Debenture....
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....enture Trustee's and/or the Security Trustee's independent opinion of default of the Issuers and the amounts comprising shortfall amounts, as indicated in the Demand Certificate (as defined hereinafter in Clause 31) shall be final and binding on the Guarantor and the Guarantor shall not dispute the same. This Guarantee shall be continuing and shall remain in full force and effect until all the Secured Obligations have been discharged in full to the satisfaction of the Debenture Approved Instructions) and the Security Trustee certify the same in writing. 3. If the Guarantor delays in making payments in full pursuant to the demand being made on it, then it shall pay interest at the rate of 14.75% per annum ("Default Interest Rate") on the outstanding amount, till the same is discharged in full to the satisfaction of the Debenture Trustee (acting on Approved Instructions) or the Security Trustee and the Guarantor agrees that the Default Interest Rate agreed, is a genuine pre-estimate of the loss likely to be suffered by the Debenture Holder, Debenture Trustees, Security Trustee and/or the Lender on account of any default by the Guarantor in discharging its obligations as agre....
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....(v) if sent by registered letter, when the registered letter would, in the ordinary course of post, be delivered whether actually delivered or not. An original of each notice and communication sent by telex or telecopy shall be dispatched by person or overnight courier and, if such person or courier service is not available, by registered first class mail with postage prepaid, provided that the effective date of any such notice shall be determined in accordance with paragraphs (i) or (ii) of this Clause 31, as the case may be, without regard to the dispatch of such original. SCHEDULE I FORM OF DEMAND CERTIFICATE To: Ackruti City Limited [as "Guarantor"] From: [.] [as "Debenture Trustee"/ Security Trustee"] Dated: [.] Dear Sirs, Ref: Deed of Corporate Guarantee cum Mortgage dated [.] (the "Deed") executed by the Guarantor in favour of the Debenture Trustee and the Security Trustee. [Amazia Developers Private Limited/Rubix Trading Private Limited] has not fulfilled its obligations under [the Amazia OPCD Subscription and Debenture Trust Deed dated [.] and/or the Rubix OPCD Subscription and Debenture Trust Deed dated [.] and/o....
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.... resident outside India by an Indian company subject to the terms and conditions as specified in Schedule 1." 7. Dr. Singhvi argued that there is no breach whatsoever of the Regulations inasmuch as the suit, based upon a Corporate Guarantee to enforce its terms, is filed by an Indian company, namely, the debenture trustee IDBI Trusteeship Pvt. Ltd., against another Indian company namely Hubtown Ltd, the beneficiary being a subsidiary of Hubtown namely Vinca, which is also an Indian company. There is therefore no question of any funds going out of the country in violation of any FEMA Regulation, the ultimate repose of the funds being for the benefit of Vinca which is an Indian company. He argued before us that admittedly ?418 crores were paid by FMO, a Dutch company, and have been swallowed by the development project that has been set up by Amazia and Rubix. He also argued that there is no question of any infraction of the FEMA Regulations for the reason that these funds went to purchase equity shares of Vinca in the form of fully convertible debentures, such debentures having to be converted into shares after a certain period, and that, therefore, there was no question of any il....
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....h leave to defend may be granted, the admitted amount ought to be deposited or secured. Short of this change, the law continues to be the same, and therefore, according to him, triable issues having been raised in the present case, it is clear that clause (e) of the propositions laid down in paragraph 8 of Mechelec's case alone would entitle the Plaintiff to an order for deposit into court or security, and sub-clause (e) not being attracted, the Ld. Single Judge was absolutely right in the conclusion that he reached. He also asked us not to interfere with the Ld. Single Judge's judgment under Article 136 as there was nothing perverse in the Single Judge's conclusions. 9. This case therefore raises a larger and very important question: namely, whether the judgment in Mechelec's case continues to be the law even after the amendment of O.XXXVII in 1976. To appreciate the respective submissions of counsel, it is necessary to set out O.XXXVII Rule 3 as it stood pre-amendment and as it now stands. O.XXXVII, Rule 3 (pre-amendment) "3. Defendant showing defence on merits to have leave to appear. (1) The Court shall, upon an application by the defendant, give leave ....
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....facts disclosed by the defendant do not indicate that he has a substantial defence to raise or that the defence intended to be put up by the defendant is frivolous or vexatious: Provided further that, where a part of the amount claimed by the plaintiff is admitted by the defendant to be due from him, leave to defend the suit shall not be granted unless the amount so admitted to be due is deposited by the defendant in Court. (6) At the hearing of such summons for judgment,- (a) if the defendant has not applied for leave to defend, or if such application has been made and is refused, the plaintiff shall be entitled to judgment forthwith; or (b) if the defendant is permitted to defend as to the whole or any part of the claim, the Court or Judge may direct him to give such security and within such time as may be fixed by the Court or Judge and that, on failure to give such security within the time specified by the Court or Judge or to carry out such other directions as may have been given by the Court or Judge, the plaintiff shall be entitled to judgment forthwith. (7) The Court or Judge may, for sufficient cause shown by the defendant, excu....
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....s a defence, yet, shews such a state of facts as leads to the inference that at the trial of the action he may be able to establish a defence to the plaintiff's claim the plaintiff is not entitled to judgment and the defendant is entitled to leave to defend but in such a case the court may in its discretion impose conditions as to the time or mode of trial but not as to payment into court or furnishing security. (d) If the defendant has no defence or the defence set-up is illusory or sham or practically moonshine then ordinarily the plaintiff is entitled to leave to sign judgment and the defendant is not entitled to leave to defend. (e) If the defendant has no defence or the defence is illusory or sham or practically moonshine then although ordinarily the plaintiff is entitled to leave to sign judgment, the court may protect the plaintiff by only allowing the defence to proceed if the amount claimed is paid into court or otherwise secured and give leave to the defendant on such condition, and thereby show mercy to the defendant by enabling him to try to prove a defence." [para 8] 11. As the case before the court did not fall within clause (e), this Court he....
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....he defence raised a triable issue but that defence was vague and was not bona fide because the defendant had produced no evidence to prove his assertion. For these reasons the court granted leave to defend the suit on the condition of the defendant giving security for the entire claim in the suit and costs thereon. This court held that the test is to see whether the defence raises a real issue and not a sham one, in 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. If the court is satisfied about that, leave must be given unconditionally. This Court further held that the trial court was wrong in imposing a condition about giving security on the ground that documentary evidence had not been adduced by the defendant. This Court pointed out that the stage of proof can only arise after leave to defend has been granted and that the omission to adduce documentary evidence would not justify the inference the defence sought to be raised was vague and not bona fide. While dealing with the matter Bose, J., who spoke for the Court observed (p. 1216): "Taken by and large, the object is to see that ....
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....o. [(1901) 85 LT 262] in which the House of Lords held that whenever a defence raises a triable issue leave must be given and also referred to two subsequent decisions where it was held that when such is the case leave must be given unconditionally. In this connection we may refer to the following observations of Devlin, L.J. in Fieldrank Ltd. v. Stein [ (1961) 3 AELR 681 at pp 682-3] : "The broad principle, which is founded on Jacob v.Booth's Distillery Co. is summarised on p. 266 of the Annual Practice (1962 Edn.) in the following terms: 'The principle on which the court acts is that where the defendant can show by affidavit that there is a bona fide triable issue, he is to be allowed to defend as to that issue without condition.'" If that principle were mandatory, then the concession by counsel for the plaintiffs that there is here a triable issue would mean at once that the appeal ought to be allowed; but counsel for the plaintiffs has drawn our attention to some comments that have been made on Jacobs v. Booth's Distillery Co. [(1901) 85 LT 262] They will be found at pp. 251 and 267 of the Annual Practice, 1962. It is suggested (see p. 251....
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....then leave should ordinarily be granted unconditionally. On the other hand, if he is of opinion that the defence raised is frivolous, or false, or sham, he should refuse leave to defend altogether. Unfortunately, however, the majority of cases cannot be dealt with in a clear cut way like this and the judge may entertain a genuine doubt on the question as to whether the defence is genuine or sham or in other words whether it raises a triable issue or not. It is to meet such cases that the amendment to Order 37 Rule 2 made by the Bombay High Court contemplates that even in cases where an apparently triable issue is raised the Judge may impose conditions in granting leave to defend. Thus this is a matter in the discretion of the trial Judge and in dealing with it, he ought to exercise his discretion judiciously. Care must be taken to see that the object of the rule to assist the expeditious disposal of commercial causes to which the Order applies, is not defeated. Care must also be taken to see that real and genuine triable issues are not shut out by unduly severe orders as to deposit. In a matter of this kind, it would be undesirable and inexpedient to lay down any rule of general ap....
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.... & Handels GMBH, (2008) 14 SCC 457, this Court was squarely asked to render its decision on whether the judgment in Mechelec's case was to a large extent rendered ineffective in view of the amended O.XXXVII. This Court found: "Having considered the submissions made on behalf of the respective parties and the decisions cited, there appears to be force in Mr Sharma's submissions regarding the object intended to be achieved by the introduction of sub-rules (4), (5) and (6) in Rule 3, Order 37 of the Code. Whereas in the unamended provisions of Rule 3, there was no compulsion for making any deposit as a condition precedent to grant of leave to defend a suit by virtue of the second proviso to sub-rule (5), the said provision was altered to the extent that the deposit of any admitted amount is now a condition precedent for grant of leave to defend a suit filed under Order 37 of the Code. A distinction has been made in respect of any part of the claim, which is admitted. The second proviso to sub-rule (5) of Rule 3 makes it very clear that leave to defend a suit shall not be granted unless the amount as admitted to be due by the defendant is deposited in court." [para 15] ....
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.... b. if the defendant raises triable issues indicating that he has a fair or reasonable defence, although not a positively good defence, the plaintiff is not entitled to sign judgment, and the defendant is ordinarily entitled to unconditional leave to defend; c. even if the defendant raises triable issues, if a doubt is left with the trial judge about the defendant's good faith, or the genuineness of the triable issues, the trial judge may impose conditions both as to time or mode of trial, as well as payment into court or furnishing security. Care must be taken to see that the object of the provisions to assist expeditious disposal of commercial causes is not defeated. Care must also be taken to see that such triable issues are not shut out by unduly severe orders as to deposit or security; d. if the Defendant raises a defence which is plausible but improbable, the trial Judge may impose conditions as to time or mode of trial, as well as payment into court, or furnishing security. As such a defence does not raise triable issues, conditions as to deposit or security or both can extend to the entire principal sum together with such interest as the court feels the ....