Bombay High Court
Canbank Financial Services Ltd. vs V.B. Desai And Anr. on 12 June, 2001
Equivalent citations: [2002]112COMPCAS143(BOM), AIR 2002 BOMBAY 247, (2002) 2 ALLMR 182 (BOM), 2002 (2) ALL MR 182, (2002) 2 BANKCAS 492, (2003) 1 BANKJ 405, (2002) 112 COMCAS 143, (2002) 3 MAHLR 428, 2002 (1) BOM LR 649, 2002 BOM LR 1 649
Author: S. Radhakrishnan
Bench: S. Radhakrishnan
JUDGMENT S. Radhakrishnan, J.
1. Heard the learned counsel for the parties. By this Chamber Summons the defendants are seeking the relief of rejection of the Plaint and/or striking off of the Plaint and dismissal of the suit as per the provisions of Order VII Rule 11 of the Code of Civil Procedure, 1908.
2. Mr. Tulzapurkar, the learned counsel appearing for the Defendants has submitted that in the instant case, the transactions involved between the plaintiff and defendants were in the nature of ready forward transactions. Referring to the decision of the Supreme Court in the case of B.O.I. Finance Ltd. v. The Custodian , Mr. Tulzapurkar has pointed out that in the said case the Supreme Court has held that in such a ready forward transaction, the forward leg aspect is illegal and impermissible in law.
3. The Chamber Summons taken out by the defendants mainly proceeds on basis of the aforesaid decision of the Supreme court. Mr. Tulzapurkar, the learned Counsel for the defendants has contended that in case of ready forward transaction, forward leg is illegal as the same is not permissible under the Securities Contracts (Regulation) Act, 1956. Mr. Tulzapurkar has further contended that in the instant case the transactions involved were in the nature of ready forward transactions, and therefore, in the light of aforesaid decision of the Apex Court in the B.O.I. Finance Limited, the forward leg aspect which is the issue involved in the present suit is totally illegal, and as such, Plaint ought to be rejected.
4. Mr. Tulzapurkar brought to my notice the provisions of Order VII Rule 11 (a) and (d) of Code of Civil Procedure, 1908. Rule 11 (a) contemplates that the Plaint shall be rejected where it does not disclose a cause of action. Rule 11 (d) contemplates that Plaint shall be rejected where the suit appears from the statement in the plaint to be barred by any law. It is the contention of Mr. Tulzapurkar that the Plaint along with its exhibits clearly contemplate that the transactions involved were ready forward transactions, which are prohibited by the Securities Contracts (Regulation) Act, 1956, and the position in law has been made explicitly clear by the aforesaid decision of the Supreme Court in B.O.I. Finance Limited's case.
5. Mr. Tlzapurkar, the learned Counsel for the defendants has pointed out that in the letter dated 2-9-1992 which is annexed as Exhibits 'A' to the Plaint, it is mentioned by the plaintiff that the plaintiff had entered into ready forward purchase transactions with the defendants and that the Defendants should buy back the scrips. Referring to Exhibit 'B' to the Plaint, which is a letter dated 22-9-1992, Mr. Tulzapurkar, the learned Counsel for the defendants has pointed out that it was categorically mentioned by the plaintiff in the said letter that the defendants did not fulfill their commitment to repurchase the scrips. Referring to these two exhibits 'A' and 'B' to the Plaint. Mr. Tulzapurkar has contended that both these letters written by the Advocates & Solicitors of the plaintiff make it clear that these were the ready forward purchase transactions and the Plaintiff had called upon the defendants to repurchase the said scrips and upon their failure to do so, this suit has been filed. Thus, the learned Counsel for the defendants has submitted that this is a case of enforcing the forward leg aspect, as the ready leg aspect was already completed, and the Plaintiff has approached this Court for enforcement of forward leg aspect.
6. Mr. Tulzapurkar, the learned Counsel for the defendants also referred to and relied upon the Judgment of this Court in the case of A.K. Menon v. Fairgrowth Financial Services Ltd. and in the case of BOI Finance Ltd. v. The Custodian dated 14th December, reported in 1993 (81) Company Cases 508. Mr. Tulzapurkar referred to this Judgment with regard to the aspect that any security which may even not be listed on the Stock Exchange will be covered under the Securities Contracts (Regulation) Act, 1956. Mr. Tulzapurkar therefore contended that even in the instant case, whether the scrips known as Canstar, Canshare and Cantriple were listed or not in the Stock Exchange, makes no difference and they ought to be construed as being covered under the Securiteis Contracts (Regulation) Act, 1956.
7. Mr. Tulzapurkar, the learned Counsel for the Defendants, also referred to the Judgment of the Delhi High Court in the case of Sanjay Kaushish v. D.C. Kaushish . The Delhi High Court was of the view that from a bare reading of Plaint and the admitted documents and facts coming out in the statement of the plaintiff under Order X of the Code of Civil Procedure, 1908, the Court could come to the conclusion that the plaint does not disclose the cause of action or the suit is barred by limitation or is not maintainable, the Court can decide the said point even without recording any evidence. Therefore, Mr.Tulzapurkar submitted that in the instant case, a bare reading of the Plaint along with the admitted correspondence viz. the exhibits annexed to the Plaint and in view of the Supreme Court's judgment, this Court ought to come to the conclusion that the present suit claim is clearly barred, inasmuch as it involves enforcement of forward leg which is prohibited by law as has been held by the Apex Court in the case of BOI Finance Limited (supra).
8. Mr. Tulzapurkar, the learned counsel for the defendants also referred to another judgment of the Apex Court in the case of T. Arivandandam v. T.V. Satyapal, reported in AIR 1977 SC 2421, and contended that the Court ought to reject the plaint at the initial stage. Nobody disputes the aforesaid proposition. In the aforesaid judgment of the Supreme Court, it was a case of vexatious and meritless plaint in the sense of not disclosing a clear right to sue, which was also an abuse of process of Court, and the Supreme Court had held that in such a case the trial Court should exercise its power under Order VII, Rule 11 of the Code of Civil Procedure, 1908. Under these circumstances, the learned Counsel for the defendants has submitted that the plaint ought to be rejected because the suit appears to be based on a cause of action which is barred by law, and as such, there cannot be any cause of action. According to him, the plaint ought to be rejected in view of the provisions of Order VII, Rule 11 (a) and (d) of the Code of Civil Procedure, 1908, and accordingly, the present Chamber Summons should be made absolute and the plaint should be rejected.
9. On the other hand, Sr. Counsel Mr. Mahendra Shah appearing on behalf of the plaintiff to oppose the present Chamber Summons, has submitted that the plaint ought to be read as a whole. It is the case of the learned counsel for the plaintiff that the plaintiff had financed the defendants and those scrips were to be retained by them by way of security till the money was repaid by the defendants. Referring to the paragraphs Nos. 3, 4, 5 and 6 of the plaint, Mr. Shah has brought to my notice that the plaintiff has pleaded that the plaintiff had financed the defendants, and the plaintiff were entitled to retain the said scrips until they were repaid by the defendants, and as they have failed to repay, the plaintiffs have moved this Court by way of this suit, As stated in para 8 of the plaint, it is pointed out by Mr. Shah that the defendants had also offered to Lake part delivery of 1,10,000 Canshare Units upon payment of Rs. 44,00,000/-. It is also pointed out by Mr. Shah that the defendants had taken back 2,20,000 Canshare Units and had paid an aggregate sum of Rs. 91,35,500/-. Mr. Shah has contended that, ultimately, as the defendants have failed to pay the balance amount due to the plaintiff, the plaintiffs had adjusted the value of the market price of the shares lying with them, and had sued for the balance amount along with interest. In this context, the learned Counsel Mr. Shah for the plaintiff has strongly relied upon the letter dated 24th September, 1992 which is Exh. 'C' to the plaint. In the said letter the defendants had confirmed that the R. F. transactions were still outstanding and had requested for three months time to square up the same. Mr. Shah has pointed out that by a letter dated 14th May, 1992 addressed by the defendants to the Chairman and Managing Director of Canara Bank, the defendants themselves have admitted that with regard to the aforesaid transactions of the securities pertaining to the Canshare, Canstar and Cantriple the financing was done by the Canfina @ 18% p.a. Therefore, Mr. Shah has contended that by the aforesaid letter dated 14th May, 1992, financing done by the Canfina has been admitted by the defendants.' Over and above, the defendants had acted on the said basis as pointed out hereinabove, and part of the Canshare Units were also taken back by paying certain amount as referred to in para 8 of the plaint. It is the contention of Mr. Shah that in this case it is not a case of clearly admitted position that it was a ready forward transaction, though it might have been described so. According to him, the pleadings in the plaint clearly make out a case that it was a case of financing done by the plaintiff and the defendants were to pay back the amount to the plaintiff, and on their failure, the plaintiff have approached this Court.
10. Mr. Shah has also contended that the defendants had taken back part of the Canshare Units on payment of certain amount and by their aforesaid letter dated 14th May, 1992 the defendants have also admitted that the financing was done by Canfina at the rate of 18% p.a. Referring to the decision of Apex Court in the case of BOI Finance Limited supra Mr. Shah has pointed out that in para 2 of the said judgment, the Apex Court has explicitly made it clear that:--
"For the purpose of this case these contracts have been regarded as ready-forward transactions or buy-back transactions. The parties are agreed, and it is on this basis that the High Court also proceeded that the nature of such a transaction is that it consists of two inter-connected legs, namely, the first or the ready leg, consisting of purchase or sale of certain securities at a specified price and the second or forward leg, consisting of the sale or purchase of the same or similar securities at a latter date at a price determined on the first date."
11. Even at para 18 of the said judgment, it is made clear that the Special Court had heard the applications only on the points of law without going into the facts of any case, and the case proceeded on the assumption that the appellants had entered into ready forward transactions.
12. Mr. Shah, the learned Counsel for the plaintiff has further contended that in the instant case there is no question of admitted position that these were ready forward transactions and the plaint in fact proceeds on the basis that the monies were financed and the plaintiff were retaining the said scrips as securities till the monies were repaid back by the defendants along with interest. Mr. Shah has therefore contended that this is not a case of both the parties admittedly agreeing that the transaction was a ready forward transaction. At the relevant time when the transactions were involved the said Section 2(h) of the Securities Contracts (Regulation) Act, 1956 as it stood then read as under:--
"Securities" include--
(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;
(ii) Government securities, and
(iii) rights or interests in securities."
13. Mr. Shah has contended that as far as the "securities" defined under the aforesaid Section 2(h) of the Act, as it stood then, the present Canshare, Canstar and Cantriple could not fall within the definition mentioned therein, inasmuch as they were not scrips issued by any incorporated company or a body corporate, whereas the same were issued by the Mutual Fund which was a Trust.
14. Mr. Shah has submitted that Clause (iii) of Section 2(h) will have no application, inasmuch as Clause (iii) deals with rights or interests of such securities as contemplated under Clauses (i) and (ii), Clauses (i) and (ii) deal with securities of either incorporate company or body corporate and the Government securities, and Clause (iii) deals with rights or interests of such securities as mentioned in Clauses (i) and (ii) above, Mr. Shah, the learned Counsel for the plaintiff has submitted that in the instant case, there was no admitted position of a ready forward transaction. Over and above, the said scrips would not come within the purview of the Securities Contracts (Regulation) Act, 1956. According to him, in any event, this is not a matter to grant the reliefs by way of a Chamber Summons, without affording an opportunity to the plaintiff as well as to the defendants to lead evidence on these aspects as to whether there was a ready forward transaction and whether these securities were covered by the Securities Contracts (Regulation) Act, 1956. According to him, especially in view of the pleadings in the plaint and also in view of the correspondence between the parties coupled with the conduct of the defendants in taking back part of the Units of Canshares. It cannot be said that it was a clear case of ready forward transaction. Mr. Shah has contended that this Chamber Summons ought to be dismissed.
15. After having considered the arguments of both sides, the following picture is clear. That the plaint as such, especially paragraphs 3, 4, 5, 6 and 12 proceeds on the basis that the plaintiff had financed the defendants and the scrips were retained by the plaintiff by way of securities till they were repaid by the defendants as per the agreement between them. It is also clear from the plaint that part of the securities were taken back by the defendants by paying an agreed amount as per the agreement arrived at between the parties. Even in the correspondence, especially in letter dated 14th May, 1992, the defendants have clearly mentioned that the financing was done by Canfina at 18% p.a.
16. The aforesaid Supreme Court's judgment in the case of BOI Finance Limited supra very clearly mentions in paragraphs 2 and 18 of the judgment that in that case, the parties had categorically agreed before the Special Court that they had entered into ready forward transactions. Whereas in the instant case, there is no such agreement or admission between the parties that it is a case of ready forward transaction. On the contrary, the defendants have themselves mentioned in their letter dated 14th May, 1992 that the Canfina had financed them. Therefore, though the ready forward transactions are prohibited in law with regard to certain securities, in the instant case, it is yet to be clearly established whether the transactions involved were ready forward transactions or not. Over and above, it must be also established whether scrips involved in this case were covered under the Securities Contracts (Regulation) Act, 1956 or not.
17. As rightly pointed out by Mr. Shah, as per the definition of "securities" in the Securities Contracts (Regulation) Act, 1956, it is clear that the scrips which were issued by a Mutual Fund which is a Trust, are not covered by the said Act. If the same are not covered under the said Act, would the transactions be still prohibited? Therefore, on these two issues; viz. whether the transactions involved were of ready forward transactions or not, and whether the scrips involved were covered under the Securities Contracts (Regulation) Act, 1956 or not, evidence will have to be led, and merely by reading the plaint and correspondence and so also the aforesaid judgment of the Supreme Court, it cannot be said that the plaint proceeds on the basis of a claim which is barred by law and that it does not disclose any cause of action.
18. For the aforesaid reasons, I do not find any substance in the present Chamber Summons. Hence, the Chamber Summons is dismissed.
19. Parties to act on an ordinary copy of this order duly authenticated by the Chamber Registrar.
20. Issuance of certified copy is expedited.