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Calcutta High Court

Mcleod Russel India Limited vs Il And Fs Financial Services Limited And ... on 25 November, 2019

Author: Sanjib Banerjee

Bench: Sanjib Banerjee, Kausik Chanda

OD 1 & 2



                 IN THE HIGH COURT AT CALCUTTA
                     Civil Appellate Jurisdiction
                           ORIGINAL SIDE


                          APO 143 of 2019
                          GA 2167 of 2019
                                 In
                           CS 177 of 2019


                   MCLEOD RUSSEL INDIA LIMITED
                              VERSUS
           IL AND FS FINANCIAL SERVICES LIMITED AND ORS


                                WITH


                          APO 144 of 2019
                          GA 2168 of 2019
                                 In
                           CS 177 of 2019


                EVEREADY INDUSTRIES INDIA LIMITED
                              VERSUS
           IL AND FS FINANCIAL SERVICES LIMITED AND ORS




  BEFORE:

  The Hon'ble JUSTICE SANJIB BANERJEE

And The Hon'ble JUSTICE KAUSIK CHANDA Date : 25th November, 2019.

APPEARANCE:

Mr. S.N.Mookherjee,Sr. Adv.

Mr. Padam Khaitan,Adv.

Mr. Samik Chakraborty,Adv.

Mr. Srinjoy Bhattacharya,Adv.

Mr. Ritoban Sarkar,Adv.

Mr. S.K.Kapur,Sr. Adv.

Mr. Rishad Medora,Adv.

Mr. Ramya Hariharan,Adv.

Ms. Asmita Rakhecha,Adv.

The Court :- Companies Eveready Industries India Limited and Mcleod Russel India Limited, the flag-bearers of the Williamson Magor stable in its halcyon days, question the propriety of an ad interim order and complain that, to the extent the injunction affects the appellants, the impugned order must be seen to be legally perverse as it is not founded either on facts or any legal basis.

Plaintiff IL and FS Financial Services Limited has a substantial claim in excess of Rs. 120 crore against the several other defendants in the suit. According to the plaintiff, an initial loan or credit facility was granted to one or more entities in the Williamson Magor Group and, upon such facilities not being repaid by or about March 2018, a fresh agreement was entered into for a further Rs. 100 crore to be infused in the form of the plaintiff subscribing to compulsorily convertible preference shares in the third defendant, McNally Bharat Engineering Company Limited.

Several documents were executed on or about March 27, 2018, including a share subscription agreement and an agreement that defined the rights of the creditor and the obligations of the parties who could be called upon by the creditor to repay the loan. These agreements covered events of default which indicated the circumstances in which the facility could be recalled by the creditor even though the period for which the facility had been accorded had not expired.

It appears that certain parameters were required to be maintained by several of the defendants for the credit facility to continue and for the loan amount to stand converted into preference shares and be bought back by several of the defendants at a price or a price range that was indicated in the agreements. It appears that such parameters could not be maintained and several events of default happened and the right of the creditor to recall the facility was triggered off. For weeks and months, letters came to be issued by the defendants requesting the creditor to not take any precipitous steps that could be ruinous to the defaulters and to the group as a whole.

Eveready's participation, as an entity, in the transaction appears to be somewhat doubtful; though it is undeniable that the principal persons in control of Eveready as the human agencies in charge of the Williamson Magor Group were parties to the agreements and were in the thick of the transaction. Mcleod Russel's participation was limited to the issuance of a letter of comfort which, whether by virtue of the last clause in such 4 letter or otherwise, cannot be legally regarded as a letter of guarantee that would oblige the issuer to be pursued for any default on the part of the principal debtors.

It is not necessary, considering that the entire matter in this Court is at its nascent stage, to refer to the clauses from the agreement or engage in a threadbare discussion thereon. It has to be recognised that only a very tentative view can be taken at this stage which may be altered upon reassessment after affidavits are received by the interlocutory Court; and even then it would only be a prima facie view that would be subject to alteration at the trial. It is, of course, of some concern that the matter was heard for several days at the ad interim stage and the writing of the judgment, according to the parties, was spread over three working days, if only for parts of such working days.

Ordinarily, matters should not take more than minutes or a few hours at the ad interim stage since it is the extreme prejudice case that is assessed at such stage. A limited order, if at all, is made before the adversary's version on affidavits is invited for a more detailed adjudication to be taken up thereupon. As far as possible, ad interim hearings should not spill over to a second day.

What is evident from the documents and the argument put forth by the parties is that though Eveready and Mcleod Russel were integral parts of the Williamson Magor Group at the time that the subject agreements were entered into in March, 2018, the plaintiff did not deem 5 it fit to rope in either company or oblige either Eveready or Mcleod Russel to stand as guarantor to promise the due discharge of the debt by their sister concerns. Indeed, the manner in which the agreements were drawn up and prepared would lead to the inevitable conclusion that, to such extent, Eveready and Mcleod Russel were excluded from being liable to the creditor whether for repayment or upon any default in the process of repayment occurring.

In a commercial contract, it is not only imperative to see the transaction and the conduct of the parties in the context of the agreement between them, but also to notice what is not included in the agreement. If the parties entered into an agreement and provided for certain terms while not incorporating others, the terms not included must be seen to have been consciously excluded. In such a situation, if a party to a commercial contract finds itself in a bind, it cannot run to the Court and seek reliefs on the basis of terms which were not included in the contract.

There was nothing stopping the plaintiff in this case to decline to make the credit facilities available to McNally Bharat or to the group as a whole without the two flagship companies taking responsibility therefor. In such flagship companies being excluded from the transactions, the inevitable conclusion is that such companies were deliberately kept outside the purview of the transactions and could not, subsequently, be 6 made liable for the obligations that the other members of the group failed to discharge.

There are several exceptions to the everyday situation that arises out of a commercial contract. One of them is when some element of fraud at the inception of the transaction is demonstrated. It may also be that money obtained from a creditor is funneled into a corporate vehicle for it to be siphoned off. In either case the Court may find remedies beyond the agreement. In the second case, despite the relevant corporate vehicle not being a party to the transaction, it can be made accountable by tracing the flow of funds into such entity. This is not to provide an exhaustive list of the possibilities that may arise; but only to indicate a couple of instances where the usual approach of a commercial Court will be guided by the conduct of the parties, particularly a party sought to be affected by an order when such party was not involved in a transaction at its inception.

The plaintiff's case here is not as high as that. The plaintiff cannot demonstrate that there was any element of fraud involved at the inception of the transaction for the Court to look beyond the confines of the agreements to discover an appropriate remedy for the plaintiff. It is not even the plaintiff's case that the money made available by it to McNally Bharat has found its way to the coffers of Mcleod Russel or has landed in the till of Eveready. All that the plaintiff seeks to suggest is that in present scenario, where the parties who are obliged to repay to 7 the plaintiff are found in parlous circumstances, the asset-rich companies in the group should step in and make good the money owed to the plaintiff, whether or not they are obliged to under any agreement with the plaintiff.

When a party, particularly a party to a commercial contract, enters into a transaction with its eyes wide open and provides for certain remedies in certain circumstances and does not provide for certain other remedies which may have also been conceived of and included, it will not do for such party to rush to Court when it finds itself in difficulty and exhort the Court to make available the remedies that it had excluded in the first place. This is exactly the essence of the plaintiff's case which has been accepted by the trial court and this is exactly what the appellants here assert to be legally perverse as the plaintiff was not entitled to the form of the order, whether on facts or in law.

There are a couple of letters of April, 2019 that the plaintiff has brandished with considerable flourish to assert its case. Such letters, according to the plaintiff, demonstrate that the entire group was behind the defaulters and a promise had been made that the support of the group companies would be available to discharge the liabilities of the debtor. The plaintiff claims that the share-pricing formula which is evident from the agreement is rendered meaningless now, particularly, since the price at which the shares of McNally Bharat trade today are not 8 comparable to the price that it commanded at the time the agreements were entered into in March, 2018.

In similar vein, the plaintiff refers to the letters issued by the statutory auditors of the three principal companies: McNally Bharat, Mcleod Russel and Eveready. Several paragraphs from such letters are read out to demonstrate that the statutory auditors of each of such companies perceived that the management of the relevant company had concealed the real state of the financial affairs of the companies from its statutory auditors. The plaintiff says that there are no free assets available in McNally Bharat or in the other corporate entities which were arrayed as obligors under the agreements and unless the assets of Mcleod Russel and Eveready are preserved, the decree that the plaintiff is certain to obtain would be meaningless.

On the legal aspect, the plaintiff relied on the group of companies doctrine before the trial court and placed a recent judgment of the Supreme Court pertaining to an arbitration matter to convince the trial court that the analogy would apply to a commercial transaction in equal force. The discussion in the relevant judgment of the Supreme Court in the yet unreported case of Mahanagar Telephone Nigam Ltd v. Canara Bank rendered on August 8, 2019 pertains to when a party which was not a signatory to an arbitration agreement could be held to be bound thereby, by the group of companies doctrine. Such key issue was decided with the observation that a non-signatory may be bound by an 9 arbitration agreement if it had been a part of the entire group of concerns that had been engaged in the negotiation or performance of the commercial contract, or "made statements indicating its intention to be bound by the contract." Several authorities beginning Russel on Arbitration to International Commercial Arbitration by Gary B. Born have been placed, including passages quoted therefrom in recent Supreme Court judgments.

The plaintiff has relied on the judgments reported at (2018)16 SCC 413; (2014)9 SCC 407; (1976)1 WLR 852 and (1986)1 SCC 264 for the proposition that whether it is the lifting of the corporate veil or the application of the group of companies doctrine, when an act of impropriety is cited before the Court, the Court disregards any juristic facade that may be put up by way of defence and gets to the root of the matter by applying such principles. It must be noticed that in the first of the cases, the one of 2018, it was, again, a decision on an arbitration agreement as to whether a non-signatory could be bound thereby. Even on facts, it appears that the non-signatory in that case had more of a role in the transaction than either Mcleod Russel or Eveready in the present case. The other judgments cited are of no immediate assistance to the plaintiff.

The appellants claim that the legal principles on which the plaintiff fashions its case may not be applicable, particularly, since there is no act 10 of impropriety on the part of Mcleod Russel or Eveready that the plaintiff has been able to, even prima facie, establish.

There is no doubt that several of the defendants in the suit owe money to the plaintiff. On the basis of the agreements between such defendants and the plaintiff, the quantification is no difficult task. It is also plain to see that the persons who were liable to arrange the refund or discharge the debt may not have adequate means for the plaintiff to obtain any effective orders against such persons. It is in such circumstances, that the plaintiff has been constrained to chase the two companies in the group that the plaintiff perceives to have the best assets so that such assets cannot be alienated before the plaintiff's debt is discharged.

The principle of lifting the corporate veil is invoked in respect of the party invoking it to find such party to be entitled to a benefit, as being the alter ego of another entity entitled to the same benefit or as being a part of a larger cluster of entities where every entity in the cluster is entitled to the benefit. Equally, the theory of lifting the corporate veil may be used to chase a recalcitrant corporate entity and hold it accountable when it seeks to escape the dragnet by citing its independent juristic identity. But it is only in a grave case of egregious fraud or gross impropriety that a corporate entity is chased, its corporate veil is lifted and its true identity bared. The plaintiff here does not refer to any crass impropriety on the part of either Mcleod Russel or Eveready to excite the 11 court to even touch their corporate veils. Indeed, the appellants are not shy of their association with the other defendants or of their being a part of the Williamson Magor Group. No act of impropriety is attributed to either Mcleod Russel or Eveready and, in the absence of any act of impropriety on the part of the relevant corporate entities, there is no question of touching their corporate veils, whether or not the appellants have flaunted such veil.

In the present case, what is singularly lacking in the plaintiff's narrative is that neither Mcleod Russel nor Eveready has done anything wrong or improper. The plaintiff claims that the persons who are entitled to control Mcleod Russel and Eveready are the prime wrongdoers and, as such, Mcleod Russel and Eveready remain bound thereby. Prima facie, such proposition is not acceptable.

It may be possible to mould the reliefs claimed by the plaintiff to ensure that the primary wrongdoers or the defaulters in this case do not obtain any benefit from Mcleod Russel or Eveready in the event the assets of Mcleod Russel or Eveready or the entirety of such companies are sold out. However, for the case that the plaintiff brings, no direct injunction can be issued on either Mcleod Russel or Eveready nor can the business or functioning of either Mcleod Russel or Eveready be stopped for the approximately Rs.120 crore claim that the plaintiff has brought.

As a consequence, the judgment and order impugned dated September 3, 2019, insofar as it injuncts the defendant nos. 6 and 9 from transferring or alienating or encumbering any of their tangible or intangible assets till the disposal of the relevant interlocutory application, is vacated. However, all the defendants except the defendant nos. 6 and 9 will remain restrained from using the proceeds or usufructs from the sale of any asset of the defendant nos. 6 and 9 or either of them and all corporate entities with which the defendants, excluding the defendant nos. 6 and 9, are associated will also remain injuncted accordingly. In other words, monies coming out of the sale of any asset of Mcleod Russel or of Eveready cannot be received by any of the other defendants in the suit despite their entitlement to so receive nor can such monies be utilised to make any payment to the corporate entities with which the defendants, other than the defendant nos. 6 and 9, are associated till the entire debt of the plaintiff is first discharged.

It is made clear that the views expressed here are tentative and it will be open to the interlocutory court to decide the interlocutory application uninfluenced by the order impugned herein and the observations in this order.

APO No.143 of 2019 and APO No.144 of 2019 along with GA No.2167 of 2019 and GA No.2168 of 2019 are disposed of without any order as to costs.

Urgent certified website copies of this order, if applied for, be supplied to the parties upon compliance with all requisite formalities.

(SANJIB BANERJEE, J.) (KAUSIK CHANDA, J.) s.chandra/sg.