# IDBI TRUSTEESHIP SERVICES LTD v. HUBTOWN LTD

- **Citation:** [2016] 11 S.C.R. 660
- **Court:** Supreme Court of India
- **Decided:** 2016-11-15
- **Case number:** Civil Appeal No. I 0860of2016
- **Bench:** Kurian Joseph, R. F. Nariman
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/idbi-trusteeship-services-ltd-v-hubtown-ltd-31177
- **Pages:** 40

## Headnote

Code of Civil Procedure, 1908:
Or. XXXVII, r.3 (unamended and as amended in 1976) -
Summary Suit - Principles for grant of leave to defend - Change in
latt\ pre & post-amendment - Effect of the amendment on the ratio
contained in Mec/1e/ec's case (pre-amendment) - Pre-amendment,
there ll'as no compulsion for making any deposit as a condition
precedent to grant of leave to defend a suit - Plea of defendant
that post-amendment the only change in law was that deposit of
any admitted amount was now a condition precedent for grant of
leave to defend - However, plaintiff pleaded that post-amendment
even if the Court thinks that a triable issue is raised by defendant,
the plaintiff ought to be secured in monetary terms as a condition
for leave to defend - Held: 01: XXXVII has suffered a change in
1976, and that change has made a difference in the law laid down
in Meclte/ec's case (pre-amendment) - The position in !all' now is
that the trial Judge is vested with a discretion which has to result in
iustice being done on the facts of each case - Thus, post-amendment
even if the defendant raises triable issues, if a doubt is left with the
trial judge about the defendants 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 fi1rnishing
security - Further, Mecltelec's case (3 Judges) did not consider the
binding decision of 4 judges in Milkltiram's case lt'hich is a direct
authority on the amended provision in Or. XXXVIJ, r.3 - Therefore,
by virtue of amendment in law and the binding decision of four
iudges in Milkltiram's case, principles stated in Mechelec's case
governing 01: XXXVIl will noll' stand superseded.
Or. XXXVIl, r.3 - Summary suit by appellant - Grant of
unconditional leave to defend the suit, to respondent - Propriety of
660
JOBI TRUSTEESHJP SERVICES LTD. v. HUBTOWN LTD.
- FMO, a Dutch company invested in 'V' (subsidiary of defendant)
- 'V' invested said money in OPCDs (Optionally Partially Convertible
Debentures) issued by 'A' & 'R' - Debenture Trust Deed executed in
relation to this investment - Plaintiff appointed as Debenture Trustee
under the Debenture Trust Deed -
Defendant issued an
unconditional, irrevocable Corporate Guarantee in favour of
plaintiff on behalf of 'V' - Default in payments - Corporate
Guarantee invoked - Summary suit by plaintiff to enforce its rights
arising out of said Corporate Guarantee - Defendant alleged that
the amount invested by 'V' in OPCDs issued by 'A' & 'R' was to
circumvent FEMA Regulations and thus, the Corporate Guarantee
was part of a larger illegal transaction - High Court allowed
unconditional leave to defend holding that defendant raised a
triable issue - On appeal, held: The suit was filed only on invocation
of Corporate Guarantee and it is not the defendant :S case that the
said Guarantee was wrongly invoked - Even if a triable issue may
be said to arise on the application of FEMA Regulations,
nevertheless, there is a real doubt about the defendants good faith
and the genuineness of such a triable issue - Therefore, it cannot
be said that the defendant raised a substantial defence to the claim
made in the suit - Rather the defence raised appears to be in the
realm of being 'plausible but improbable' - This being the case, the
plaintiff needs to be protected - Defendant to be granted leave to
defend the suit only if it deposits the principal sum invested by FMO,
or gives security for the said amount - Impugned judgment set aside
- Suit to be tried expeditiously by High Court - FEMA Regulations
- regns. 4 & 5.
Allowing the appeal, the Court
HELD: 1.1 The present case 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.xx:xvn in 1976. [Para 9] (686-BJ
1.2 The 3 judge bench in Mechelec's case stated that the
only question which arose before them was whether the High
Court could, in exe

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[2016] 11 S.C.R. 660
IDBI TRUSTEESHIP SERVICES LTD.
v.
HUBTOWN LTD.
(Civil Appeal No. I 0860of2016)
NOVEMBER 15, 2016
(KURIAN JOSEPH AND R. F. NARIMAN, JJ.)
Code of Civil Procedure, 1908:
Or. XXXVII, r.3 (unamended and as amended in 1976) -
Summary Suit - Principles for grant of leave to defend - Change in
latt\ pre & post-amendment - Effect of the amendment on the ratio
contained in Mec/1e/ec's case (pre-amendment) - Pre-amendment,
there ll'as no compulsion for making any deposit as a condition
precedent to grant of leave to defend a suit - Plea of defendant
that post-amendment the only change in law was that deposit of
any admitted amount was now a condition precedent for grant of
leave to defend - However, plaintiff pleaded that post-amendment
even if the Court thinks that a triable issue is raised by defendant,
the plaintiff ought to be secured in monetary terms as a condition
for leave to defend - Held: 01: XXXVII has suffered a change in
1976, and that change has made a difference in the law laid down
in Meclte/ec's case (pre-amendment) - The position in !all' now is
that the trial Judge is vested with a discretion which has to result in
iustice being done on the facts of each case - Thus, post-amendment
even if the defendant raises triable issues, if a doubt is left with the
trial judge about the defendants 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 fi1rnishing
security - Further, Mecltelec's case (3 Judges) did not consider the
binding decision of 4 judges in Milkltiram's case lt'hich is a direct
authority on the amended provision in Or. XXXVIJ, r.3 - Therefore,
by virtue of amendment in law and the binding decision of four
iudges in Milkltiram's case, principles stated in Mechelec's case
governing 01: XXXVIl will noll' stand superseded.
Or. XXXVIl, r.3 - Summary suit by appellant - Grant of
unconditional leave to defend the suit, to respondent - Propriety of
660
JOBI TRUSTEESHJP SERVICES LTD. v. HUBTOWN LTD.
- FMO, a Dutch company invested in 'V' (subsidiary of defendant)
- 'V' invested said money in OPCDs (Optionally Partially Convertible
Debentures) issued by 'A' & 'R' - Debenture Trust Deed executed in
relation to this investment - Plaintiff appointed as Debenture Trustee
under the Debenture Trust Deed -
Defendant issued an
unconditional, irrevocable Corporate Guarantee in favour of
plaintiff on behalf of 'V' - Default in payments - Corporate
Guarantee invoked - Summary suit by plaintiff to enforce its rights
arising out of said Corporate Guarantee - Defendant alleged that
the amount invested by 'V' in OPCDs issued by 'A' & 'R' was to
circumvent FEMA Regulations and thus, the Corporate Guarantee
was part of a larger illegal transaction - High Court allowed
unconditional leave to defend holding that defendant raised a
triable issue - On appeal, held: The suit was filed only on invocation
of Corporate Guarantee and it is not the defendant :S case that the
said Guarantee was wrongly invoked - Even if a triable issue may
be said to arise on the application of FEMA Regulations,
nevertheless, there is a real doubt about the defendants good faith
and the genuineness of such a triable issue - Therefore, it cannot
be said that the defendant raised a substantial defence to the claim
made in the suit - Rather the defence raised appears to be in the
realm of being 'plausible but improbable' - This being the case, the
plaintiff needs to be protected - Defendant to be granted leave to
defend the suit only if it deposits the principal sum invested by FMO,
or gives security for the said amount - Impugned judgment set aside
- Suit to be tried expeditiously by High Court - FEMA Regulations
- regns. 4 & 5.
Allowing the appeal, the Court
HELD: 1.1 The present case 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.xx:xvn in 1976. [Para 9] (686-BJ
1.2 The 3 judge bench in Mechelec's case stated that the
only question which arose before them 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-respondent.
661
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SUPREME COURT REPORTS
[2016] 11 S.C.R.
A However, in paragraph 8, the judges set out 5 propositions
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governing O.XXXVIL
[Para 10] [688-C-D, F]
Mechelec Engineers & Manufacturers v. Basic
Equipment Corporation (1976) 4 SCC 687 : 1977 (1)
SCR 1060 - held stands superseded.
2.1 O.XXXVII has suffered a change in 1976, and that change
has made a difference in the law laid down. Further, Milkhiram 's
case, is a direct and binding authority on the amended O.XXXVII
provision, as the amended provision in O.XXXVII Rule 3 is the
same as the Bombay amendment which this Court was considering
in the said judgment. 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. [Para 17] [696-D-F]
2.2 The principles stated in Mechelec's case will now stand
superseded given the amendment of O.XXXVII R. 3, and the
binding decision of four judges in Milkhiram's case, as followsa. If the defendant satisfies the Court that he has a substantial
defence, that is, a defence that is likely to succeed, the
plaintiff is not entitled to leave to sign judgment, and the
defendant is entitled to unconditional leave to defend the
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suit;
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
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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
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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
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security;
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD.
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 snch
interest as the court feels the justice of the case requires.
e. if the Defendant has no substantial defence and/or raises no
genuine triable issues, and the court finds such defence to
be frivolous or vexatious, then leave to defend the suit shall
be refused, and the plaintiff is entitled to judgment forthwith;
f. if any part of the amount claimed by the plaintiff is admitted
by the defendant to be due from him, leave to defend the
suit, (even if triable issues or a substantial defence is
raised), shall not be granted unless the amount so admitted
to be due is deposited by the defendant in court. [Para 18)
[697-C-H; 698-A-BJ
Milkhiram (India) (P) Ltd. v. Chamanlal Bros. AIR 1965
SC 1698 - followed.
3.1 In the present case, it is clear that a sum of 1 418 crores
was 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. Further, the suit was 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 was wrongly invoked. The payment under the said
Guarantee was to the debenture trustee, an Indian company, for
and on behalf of Vinca, another Indian company, so that prima
facie again there was no infraction of the FEMA Regulations.
Since FMO became a 99% holder of Vinca after the requisite
time period had elapsed, FMO may at that stage utilise the funds
received pursuant to the overall structure agreements in India.
If this was so, again prima facie there was no breach of FEMA
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. [Para 19) [698-B-FJ
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SUPREME COURT REPORTS
[2016] 11 S.C.R.
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3.2 Based on the aforesaid facts, it cannot be said that the
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defendant had raised a substantial defence to the claim made in
the suit. Even if a triable issue may be said to arise on the
application of the FEMA Regulations, nevertheless, there is a
real doubt about the Defendant's good faith and the genuineness
of such a triable issue. '{ 418 crores has been stated to be utilized
and submerged in a building construction project, with payments
under the structured arrangement admittedly being made by the
concerned parties until 2011, after which payments were stopped.
The defence thus raised appears to be in the realm of being
'plausible bnt improbable'. This being the case, the plaintiff needs
to be protected. Thus, the defendant will be granted leave to
defend the suit only if it deposits in the Bombay High Court the
principal sum of'{ 418 crores invested by FMO, or gives security
for the said amount of. [Para 20) [698-G-H; 699-A-B)
Immami Appa Rao v. GRamalingamurthi (1962) 3 SCR
739-held inapplicable.
Defiance Knitting Industries (P) Ltd. v. Jay Arts (2006)
8 SCC 25 : 2006 (5) Suppl. SCR 625; Southern Sales
& Services v. Sauermilch Design & Handels GMBH
(2008) 14 SCC 457 : 2008 (14) SCR 130 - relied on.
Kiranmoyee Dassi Smt v. Dr J. Chatterjee AIR 1949
Cal 479; Municipal Corpn. of Delhi v. Suresh Chandra
Jaipuria (1976) 4 SCC 719 : 1977 (2) SCR 10; Sunil
Enterprises v. SB! Commercial & International Bank
Ltd. (1998) 5 sec 354; State Bank of Saurashtra V.
Ashit Shipping Services (P) Ltd. (2002) 4 SCC 736 :
2002 (2) SCR 1074; Uma Shankar Kamal Narain v.
MD. Overseas Ltd. (2007) 4 SCC 133 : 2007 (3) SCR
1034; SIFY Ltd. v. First Flight Couriers Ltd. (2008) 4
SCC 246 : 2008 (1) SCR 339; Wada Arzm Asbestos (P)
Ltd. v. Gujarat Water Supply & Sewerage Board (2009)
2 SCC 432 : 2008 (17) SCR 686; R. Saravana Prabhu
v. Videocon Leasing & Industrial Finance Ltd. (2013)
14 SCC 606; State Bank of Hyderabad v. Rabo Bank
(2015) 10 SCC 521 : 2015 (11)
SCR 471- referred
to.
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD.
665
Case Law Reference
A
AIR 1949 Cal 479
referred to
Para 10
1977 (2) SCR 10
referred to
Para 14
(1?98) 5 sec 354
referred to
Para 14
B
2002 (2) SCR 1074
referred to
Para 14
2007 (3) SCR 1034
referred to
Para 14
20Q~ (1) SCR 339
referred to
Para 14
c
2008 (17) SCR 686
referred to
Para 14
(2013) 14 sec 606
referred to
Para i4
2015 (11) SCR 471
referred to
Para 14
2006 (5) Suppl. SCR625
relied on
Para 15
D
2008 (14) SCR 130
relied on
Para 16
AIR 1965 SC 1698
folJQwed
Paras 17, 18
1977 (1) SCR 1060
held stands superseded Para 18
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(1?62) 3 SCR 739
held inapplicable
Para 19
From the Judgment and Order dated 08.05.2015 of the High Court
of Judicature at Bombay in Summons for Judgment No. 39 of2013 in
Summary Suit No. 520 of20!3.
A. M. Singhvi, Ciccu Mukhopadhyay, Sr. Advs., Indranil
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Deshmukh, Kiraj Singh Nagra, Aditya Mehta, Pranav Vyas, Ms. Ishita
Chakrabarti, Vineet Unnikrishnan, Ms. Neha Sarna, Amit Bhandari, (For
Mis. Cyril Amarchand Mangaldas), Advs. for the Appellant.
Aspi Chenoy, Sr. Adv., Ashok Aggarwal, Parvez Alam Khan,
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Ms. Madhusmita Bora, Pawan Kishore Singh, Ms. Aprajita Tripathi,
Ms. Rani Singh, Advs. for the Respondent.
The Judgment of the Court was delivered by
R. F. NARIMAN, J. I. Leave granted.
2. The present appeal arises out of a Summons for Judgment No.
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SUPREME COURT REPORTS
f20161 11 S.C.R.
39 of 2013 in a Summary Suit filed on the original side of the Bombay
High Court, by the Appellant-Plaintiff, a debenture trustee, to enforce
rights that arise out of a Corporate Guarantee executed by the
Respondent-defendant. The necessary averments made in the plaint
would disclose the cause of action of the suit as well as the facts
necessary to decide this appeal. They are as follows:
"3. In 2009 and 20 I 0, Nederlandse FinancieringsMaatschappij voor Ontwikkelingslanden N.V. (hereinafter
referred to as "FMO") invested in certain equity shares
and compulsorily convertible debentures (hereinafter
referred to as the "CCDs") of Vinca Developer Private
Limited (hereinafter referred to as "Vinca"). As a result
of the said investment, FMO cmTently holds (i) I 0% of the
equity of Yinca through Class A shares and is entitled to
I 0% 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 Yinca 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 I 00%
of Class B equity shares ofVinca, which carry with them
collective voting rights and dividend entitlement not
exceeding 0.01 %. Upon conversion, the 3 CCDs in Yinca
will entitle FMO to 99% of the equity ofYinca (by allotment
ofadditional Class A shares), thereby entitling it to 99% of
the voting and economic rights ofVinca. The said monies
invested by FMO into Yinca 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
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD.
[R. F. NARIMAN, J.]
dated I" December, 2009 executed by Amazia Developers
Private Limited (hereinafter referred to as "Amazia"),
Vinca, Brainpoint Jnfotech 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 Rub ix
Trading Private Limited (hereinafter referred to as "Rub ix"),
Vinca, the Defendant and the Plaintiff as amended by
OPCD Amendment Agreement dated 8th September, 20 IO;
(hereinafter collectively referred to as the "Debenture
Trust Deeds") in relation to Vinca's investment in OPCDs
issued by Amazia and Rub ix. A copy of the Debenture
Trust Deeds is annexed hereto and marked as Exhibits
"A-1", "A-2" and "A-3".
5. Pursuant to and in accordance with the terms of the
Debenture Trust Deeds, Vinca has subscribed to:
i. certain secured, non marketable, transferable, OPCDs
of Rub ix, of a face value of Rs. I 0,00,000 each aggregating
to INR 1,285,000,000 in tranche l;
ii. additional secured, non marketable, transferable, OPCDs
of Rub ix, of a face value of Rs. I 0,00,000 each, aggregating
to INR 1,395,000,000 in tranche 2;
iii. certain secured, non marketable, transferable, OPCDs
of Amazia, of a face value of Rs. I 0,00,000 each, aggregating
to INR 1,500,000,000.
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6. The OPCDs carry a variable running coupon and a back
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ended coupon to ensure an internal rate ofreturn of14. 75%
per annum.
7. The Plaintiff states thatthe proceeds obtained by Amazia
and Rubix from the issue of the OPCD's to Vinca were to
be applied towards inter a/ia projects which are compliant
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with Indian foreign direct investment law as applicable to
townships, housing, built-up infrastructure and construction
development projects, as provided more particularly under
clause I, Part C, Schedule 7 of the Debenture Trust Deeds.
8. The Plaintiff states that in order to secure the said
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f20161 11 S.C.R.
OPCDs, and to ensure the due and punctual payment by
Amazia and Rub ix of all dues to Vinca under the Debenture
Guarantee Deeds, the Defendant has, inter alia vide the
Corporate 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 Vin ca (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:
1. Defaults by Amazia and Rub ix 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;
ii. Defaults by Amazia and Rubix in payment of default
interest accrued on the OPCDs since 16th June, 2011;
iii. The occurrence of an event of default (cross default)
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specified in Clause 2l(a) of Schedule 14 of the
Debenture Trust Deeds, arising inter alia out of a default
by Vinca under the CCDs;
iv. Failure on the part ofRubix, Amazia and the Defendant
in providing the financial statements required to be
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provided as per Entry I (Financial Statements) of Patt A
of Schedule 7 (Covenants of the Obligors and Security
Providers) of the Debenture Trust Deeds;
v. Failure on the part of the Defendant in maintaining the
Net Debt to EBITDA Ratio, the Debt Service Cover
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Ratio and the Interest Coverage Ratio as per the
provisions of Part B of Schedule 7 (Covenants of the
Obli[!,ors and Security Providers) of the Debenture
Trust Deeds, for the Ratio period from I st April, 2011 to
30th September, 2011;
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IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD.
[R.F. NARIMAN, J.]
vi. Failure on the part ofRuhix, 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 ofOPCD's in the manner contemplated in the
abovementioned Schedule i.e. towards projects that are·
compliant with the Indian foreign direct investment law;
vii. Failure on the part ofRubix, Amazia and the Defendant
in complying with a number of the Negative Covenants
as per the provisions of Part D of Schedule 7 (Covenants
of the Obligors and Security Providers) of the Debenture
Trust Deeds.
10. In view of the aforesaid defaults, the. Plaintiff was
constrained to issue notices dated znd May, 2012 toAmazia
and Rub ix respectively, under Clause 33 .1 of the Debenture
Trust Deeds, for subsisting payment of interest on OPCDs
as contemplated under Condition 7 of Schedule 3 of the
Debenture Trust Deeds, setting out inter alia (i) the payment
defaults subsisting as on the said date; (ii) the default by
Amazia and Rub ix in crediting the designated account with
lease rental proceeds; and (iii) the failure to provide
information, and breach of certain identified covenants.
However, no response was forthcoming from Amazia and/
or Rubix. A copy of the notices dated znd May, 2012 is
annexed hereto and marked Exhibits "C-1" and "C-2".
11. Consequently, and further to the Plaintiff's letters dated
znd May, 2012, and in view of the fact that the said defaults
were not rectified by Amazia and Rubix as required under
the said letters dated znd May, 2012, the Plaintiff, in exercise
of its right of early redemption under Condition 12.1 (a) and
Condition 12.2 of Schedule 3 of the Debenture Trust Deeds,
has issued redemption notices to both Amazia and Rubix
on 27th June, 2012 (hereinafter referred to as the
"Redemption Notices") for the reasons and on the
grounds contained therein, inter alia calling upon Amazia
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f2016l l l S.C.R.
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/- intoA/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 Guarantee1
in terms of the said Guarantee, to the Defendant on 3ro
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 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
Rs.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, beiQg(i) Rs. 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 Rs.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
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD.
[R. F. NARIMAN, J.]
as "Principal Amount"), less an amount ofRs.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 TRAAgreement (hereinafter referred to
as "Revised Principal Amount"); (ii) Rs.42,26,78,815.12/-
(Rupees Forty Two Crores Twenty Six Lakhs Seventy Eight
Thousand Eight Hundred and Fifteen and Twelve Paisa only)
as the default interest on the Principal Amount, at the rate
of 14.75% per annum from August II, 2012 till March 4,
2013 as per Clause 3 of the Guarantee; and (iii)
Rs.12,32,59,615.96/- (Rupees Twelve Crores Thirty Two
Lakhs Fifty Nine Thousand Six Hundred and Fifteen and
Ninety Six Paise only) as the default interest on the Revised
Principal Amount, at the rate of 14. 75% per annum from
March 5, 2013 till May 6, 2013, as per Clause 3 of the
Guarantee and thereafter, such further interest@ 14.75%
per annum on the Revised Principal Amount being Rs.
4 77,51,90,932.97 /-(Rupees Four Hundred Seventy Seven
Crores Fifty One Lakhs Ninety Thousand Nine Hundred
and Thirty Two and Ninety Seven Paise only), till the date
of actual payment or realization."
3. The affidavit-in-reply to the aforesaid Summons for Judgment
raised the following defence, as recorded by the Ld. Single Judge in the
impugned judgment dated 8
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"16. Since according to the Defendant, the above submission
is their main submission in the present matter, the same is
elabo~ated as follows:
16. I That the FDI Policy and the statutory FEMA
Regulations (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
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substantial sum by way ofFDI 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/FD! Policy. To
enable FMO to bypass/circumvent the said FEMA/FDI
prohibitions and get a fixed return of I 4.5% per annum on
its investment of Rs. 4 I 8 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 ofAmazia
and Rubix and Vinca was the nominal recipient of the FD!
of Rs. 418 crores from FMO by way of equity investment
and CCDs (in apparent compliance with the FDl/FEMA
Regulations).
ii) The documents executed for the FD! investment
(Subscription Agreement and Debenture Trust Deed
annexed as Schedule 13 thereto), however establish that
the FD! 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 ofRubix & 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 Rub ix 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 ofVinca
and further that (b) the Articles ofVinca were amended to
provide that any decision regarding the OPCDs/investment
could only be taken by FMO nominees on the Board of
Vinca. (c) the DTDs for the Amazia and Rubix OPCDs
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD.
673
[R.F. NARlMAN, J.]
provided that the Debenture Trustee/the Petitioner would
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only act on the instructions of the Nominee Directors of
FMO.
v) Accordingly though Vinca was an "Indian Company"
and the nominal recipient of the FD!, the transaction was
so structured that:
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(a) the FD! amount would be immediately routed by Vinca
to Amazia & Rub ix against issue by them of OPCDs bearing
a return of 14.5%.
(b) FMO/its Nominee Directors could exclusively deal with
the OPCDs and the Debenture Trustee/IDBI.
(c) after receipt by Vinca of the fixed rate of return (14.5
per cent per annum) from Amazia and Rubix under the
OPCDs, FMO would on conversion of the CCDs, become
the owner ofVinca and thereby receive/become entitled to
the amounts received by Vinca by way of the fixed rate of
return from Amazia and Rubix.
vi) The Deed of Guarantee was contemporaneously
executed by the Respondents on 9th December, 2009 in
favour of the Debenture Trustee (the Petitioner herein) for
securing the "due and punctual payment" of the principal
and the interest by Amazia and Rubix to Vinca, actually to
FMO and was part of the structure devised to ensure the
receipt by FMO at the fixed rate of return of 14.5%.
16.3 That, ifthe entire transaction is looked at as a whole,
it is clear that the interposing of Vinca as the nominal
recipient of the FD! (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 FD! investments
in townships/construction of housing, notwithstanding the
FEMA Regulations/FOi 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
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Regulations read with the FD! Policy.
16.4 That, the present Petition has been filed to effectuate
the said illegal object of securing the said fixed rate ofreturn
for FMO. Although IDBI, the Petitioner, claims to be
nominally acting on behalf ofVinca, it is in fact admittedly
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acting only at the instance of FMO/FMO's Nominee
Directors on the Board ofVinca. FMO through its Nominee
Directors on the Board of Vinca has instructed IDBI to
demand the said sums (principal and agreed rate ofreturn)
from Amazia and Rubix and has further instructed/required
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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.
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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
FD! 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
applicable, that IDBI is not a party to the conspiracy and IDBI is not
acting on behalf of FMO. Even if IDBI is acting on behalfof FMO, the
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doctrine of Pari Delicto would not be applicable as the Defendant had
induced FMO to make the FDI/lnvestment by representing that the
transaction was FDI/FEMA complaint.
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31.1 The above submission of the Plaintiff cannot be
accepted. The conduct ofFMO in routing its FD! nominally
through Vinca to Amazia and Rubix against issuance by
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD.
'[R. F. NARIMAN, J.)
them of OPCDs and the amendments/provisions made in
Vinca's Articles of Association, establishes that FMO was
fully aware that it could not under the FDI policy and FEMA
Regulations directly invest in the OPCDs, or require that
its FD! amount/investment be returned back to it with a
fixed rate of return after a stipulated period i.e. without
bearing an equity investment risk. The complex structure
devised for FMO's FOi investment establishes that all
parties (including FMO) were aware that the transaction
which was premised on return back of the FDI amount
along with a fixed rate of return thereon, was not permissible
under/in violation of the FOi policy and the FEMA
Regulations. It is clear that in claiming the amount and
initiating the present proceedings, the Plaintiff is acting at
the instance of FMO/FMO nominees on the Board of
Directors ofVinca. 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 FOi policy and the FEMA
Regulations, neither IDBI nor FMO can seek the
assistance of the Comt to effectuate/implement/enforce
such a prohibited/illegal transaction.
32. The Plaintiffhas lastly contended that the alleged illegal
purpose of securing a fixed return has not been carried out
and that ifthe proceedings are allowed, the money will go
to Vin ca and not to FMO. It has been contended that FMO
cannot receive the sums without complying with the FOi
Regulations for sale of shares and repatriation.
32. I 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 FOi
amount invested :ilong with a fixed rate of return thereon
i.e. for seeking the active assistance of this Court to
implement/effectuate/enforce a transaction prohibited by
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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 ofVinca.
Under the FDI policy/FEMA
Regulations, FMO canthereafter sell the shares ofVinca
at the fair value, which will necessarily include the value/
benefit of the FDI ainount 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 FD! Policy, an Indian
Company which has received foreign direct iii vestment can
utilise its funds downstream only for making investment by
way of equity instruments (i.e. in the form
of equity
capital or compulsorily a1id mandatorily convertible
preference shares or debentures);
33.3 That Investment by an Indian Company in OPCDs
issued by subsidiary (also an Indian Company) would amount
to an external commercial borrowing.
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37.2 In the case in hand, I am prima facie of the view that
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the structure/device of routing FM O's FDI amount of Rs .
. 418 crores to Amazia and Rub ix through the newly interposed
Vin ca (as the nominal recipient of the FD!) was a colourable
device structured only to enable FMO to secure repayment
(through Vinca) of its FDI amount and interest thereon at
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IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD.
[R. F. NARIMAN, J.]
14. 75%, contrary to the statutory FEMA Regulations and
the FDI policy embodied therein, which only permit FDI
investment in townships/real estate development sector to
be made in the form of equity (including Compulsorily
Convertible Debentures) and preclude any assured return.
I am also prima facie of the view that the Defendant's
guarantee (which is the basis of the Company Petition No.
644 of2013) though ostensibly in favourofVinca, an Indian
Company, was part of the aforesaid illegal structure/scheme
and was given to ensure that FMO received back its FD!
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
FDJ 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 ofimmami 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 the Supreme Court
in the above 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."
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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
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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 FD! amount to be received by Vinca from
FMO against issuance of CC Os and equity shares by Vinca,
was not to be retained by Vinca or used by Vin ca in its own
projects. The SSA and Trust Deed in fact expressly
stipulated that the FD! amount received by Vinca from FMO,
was to be immediately passed on by Vinca to Amazia and
Rub ix, against issuance by them of OPCDs. Accordingly
the SSA and the Trust Deed itself established that Vinca
had been interposed only to provide a facade of compliance
with the FEMA Regulations/FDI policy and was only a
nominal recipient of the FOi and that Vinca was
immediately required to route the entire amount received
from FMO to Amazia and Rubix, against issuance by them
of OPCDs."
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42. In the circumstances I am of the view that the Defendant
has raised triable issues which require adjudication on further
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evidence at the time of final disposal of the suit. Hence
the following order:
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(i) Unconditional leave is granted to the Defendant to defend
the above suit;
(ii) The suit is transferred to the list of commercial causes
and the Defendant is directed to file its written statement
on or before 15th June, 2015;
(iii) The hearing of the suit is expedited and the Comt will
endeavour to dispose of the suit within a period of one year
from the date of this order. It is clarified that the Suit shall
IDBI TRUSTEESHIP SERVICES LTD. v. HUBTOWN LTD.
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[R. F. NARIMAN, J.]
be decided without being influenced by any of the
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observations made in the present order.
(iv) Place the suit for framing ofissues 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 Rub ix 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 Holder and the Security Trustee, for the benefit
of the Lender, respectively, that:
I.