Sh. Surendra Singh Karnawat And Ors vs Sh. Sudhir Heerawat And Ors

This appeal filed under Order XLIII Rule (1)(r) of the CPC read with Section 5 and 13 (1A) of the Commercial Courts Act, 2015 seeks to challenge the order dated 01.10.2018 passed by the Commercial Court No.1 (District Level), Jaipur. The Commercial Court by the aforesaid order has allowed the temporary injunction application.

Appellants are the defendants in a suit for recovery and permanent injunction filed by respondent no.1-Sudhir Heerawat inter alia with the pleading that defendant nos.1 and 2 i.e. the appellants herein, incorporated defendant no.3-M/s. Kanishka Platinum Gold and Silver Product Ltd. (proforma respondent no.3 herein) while keeping the complete shareholding and control on its day to day affairs with them. Plaintiff was taken as an Executive Director of the Company. He was neither having any interference in day to day affairs of the company, nor having any participation in business of the company directly or indirectly. The defendant nos.1 and 2 requested him to arrange loan for business of the company. The defendant no.3 had submitted an application to the State Bank of India, Branch Malviya Nagar, Jaipur for sanction of loan. Plaintiff and defendant nos.1 and 2 stood guarantors to the financial facilities granted in favour of defendant no.3-company. It was alleged that the plaintiff also mortgaged its property in favour of the Bank for securing the said financial facilities. The immovable properties of the company as well as plant and machinery were also mortgaged/hypothecated with the Bank to secure the said facility. The defendant nos.1 and 2 utilized the proceeds and profit of the company for their personal benefit and therefore the repayment of the loan could not be made, with the result that the loan account of the company was declared as NPA.

The Bank initiated proceedings for enforcing the aforesaid securities under the Securitization Act, 2002. A demand letter dated 27.08.2011 was issued by the Bank for full payment. After negotiations, the Bank offered a compromise for releasing plaintiff from his liability as well as mortgaged property in lieu of payment of Rs.3.05 crore, which he accepted and deposited the said amount on 21.10.2013. The Bank therefore issued No Dues Certificate to him on 21.10.2013 and returned the title documents. It was alleged that defendant nos.1 and 2 have given their consent for aforesaid compromise and also took responsibility of the aforesaid amount paid to the Bank and for repayment of the said amount.

It was further pleaded in the plaint that the defendant no.1 issued a cheque no.194205 dated 7.2.2014 for payment of the said amount of Rs.3.05 crores in the capacity of the authorised signatory of the defendant no.3. The said cheque was returned on 14.2.2014 due to insufficient funds. Thereafter, a legal notice was sent and criminal complaint under Section 138 of the Negotiable Instruments Act was also instituted against defendant nos.1 and 3. The details of the properties held by defendant nos.1 and 2 i.e. appellant nos.1 and 2 and defendant nos.3 to 6 were given in para 21 of the suit. The plaintiff prayed for decree of recovery of Rs.3.05 crores + Rs.1,37,25,000 towards interest till date of filing suit and interest @ 18% from the date of suit till recovery. The plaintiff also sought permanent injunction to restrain the defendant nos.1 and 2 and defendant nos.3 to 6 from alienating the properties mentioned in para 21 of the plaint in favour of their parties during pendency of the suit. Plaintiff also filed an application under Order XXXIX Rule 1 and 2 CPC for temporary injunction for restraining the defendant nos.1 and 2 and defendant nos.3 to 6 from alienating the properties mentioned in para 21 of the suit in favour of their parties.

The defendant no. 1, 2, 3 and 6 filed their joint written statement inter alia contending therein that the defendant no. 1 and 2 are the Directors of the defendant no. 3. It was contended that the plaintiff knowing expertise of the defendant no. 1 in production of Silver Leaves (Vark) has requested proposed to establish the business, to which defendant no. 1 and 2 replied that it is not possible for them to run business in India as they mostly resided out of India, however the plaintiff assured them that he will take care of whole business. It was contended that the defendant no. 1 and 2 are the citizen of USA. It was not possible for defendant no. 1 and 2 to keep any control of business of defendant no. 3 with them being citizen of USA. The defendant no. 3 is a private limited company and the plaintiff as well as defendant no. 1 and 2 are the Directors of the said company and therefore defendant no. 1 and 2 cannot be made liable for any loss or profit of defendant no. 3. The whole business and activities of the defendant no. 3 were under the control of plaintiff and he was running the company. The defendant no. 1 and 2 were not interested in doing business in India and it was plaintiff who requested to do so with a view to take benefit of expertise and technical knowledge of defendant no. 1 and keeping the close relationship in mind, the defendant no. 1 and 2 have agreed. It was contended that the defendant no. 1 and 2 along with plaintiff signed the loan documents in the capacity of Directors. It was categorically denied that the defendant no. 1 and 2 have appropriated the funds of company for their own use, had it been so the plaintiff could raise the issue in the meeting of Board Directors. It was further contended that the affairs of defendant no. 3 are managed through Resolutions of Board of Directors, to which the plaintiff himself a director and is therefore responsible for all activities of defendant no. 3. It was specifically denied that the plaintiff has requested for clearing the loan, rather plaintiff has never called the meeting of Board of Directors. It is specifically contended that the plaintiff got released his property from the bank with conspiracy with bank officials. In respect of cheque of 3.05 crore, in respect of which present suit arises, it was specifically contended that the defendants no. 1 and 2 mostly resides out of India and therefore, few signed cheques were kept in the factory of company situated at Bassi, however the plaintiff with conspiracy with bank official has opened the lock and stolen the singed cheque, in respect of which a criminal complaint has been filed, which is pending. It was further contended that plaintiff fully knew that the loan account has been classified as NPA and there was no fund in the account of defendant no. 3 company but still receiving cheque from said account in itself is proved false. It is contended that the directors are not liable for repayment of loan of the defendant no. 3 personally or morally. As far as the properties mentioned in para 21 of the plaint are concerned, it was contended that these properties are not subject matter of suit. In additional plea it has been submitted that the plaintiff was removed from the post of Director w.e.f. 15.09.2015 and prior to that he was having full control of defendant no. 3. The defendants have prayed for dismissal of the suit. The defendant no. 1, 2, 3 and 6 also filed reply to the application for temporary injunction to the aforesaid effect. The defendant no. 4 and 5 have submitted their separate written statement inter alia contending therein that they are registered companies under the provisions of Companies Act, 1956, having their separate entity and they have no connection or transaction in regard to the repayment of loan amount of Rs. 3.05 crores by the plaintiff to the bank as guarantor of defendant no. 3.

Learned Commercial Court by order dated 01.10.2018 allowed the temporary injunction application while concluding thus:

"Hence, keeping in view the case law propounded by Hon'ble Supreme Court titled as Dalpat Kumar vs. Prahlad Singh AIR 1993 SC 276, M/s Gujrat Bottling Co. Ltd. vs. Coca Cola Company AIR 1995 SC 2372, there is a serious disputed question to be tired in the suit and the interference of the Court is necessary to protect the party from the species of injury. Non grant of injunction would cause hardship or mischief or inconvenience to the plaintiff then the defendants. Resultantly, without commenting on the merits and demerits of the case, I am of the considered view that application of the plaintiff carries weight and defendants are restrained from alienating the immovable property described in para no. 22 of the application till disposal of the main suit. Injunction application is disposed of accordingly. File be reduced from the pendency list and be attached with the main file."

Shri Ajeet Kumar Bhandari, learned senior counsel for the appellants, has argued that the learned court below has wholly misunderstood and misapplied the law on the principle of lifting the corporate veil, which would be done only when the legislative provision justifies adoption of such a course. It is only where fraud is pleaded or trading with an enemy is sought to be defeated, the veil of a corporation is lifted by judicial decisions and in such circumstances, the shareholders are held liable for dues of corporation. In the present case, there is no pleading about any fraudulent act, legislative provisions or trading with enemy sought to be defeated. In fact, the learned court below has not truly lifted the veil, however, yet in para 9 of the impugned order, it discussed the lifting of the corporate veil for trying to find out as to whether transaction is a colourable device for distribution of earnings/gains/profits. The corporate veil can be lifted to give effect to the law sought to be circumvented. The plaintiff while alleging that he stood guarantor to the loan facility has nowhere alleged any fraud, evasion of tax, breach of any provision of any act on the part of the defendants.

It is argued that the Supreme Court in R.C. Cooper vs. Union of India-AIR 1970 SC 564 has held that property of the company is not the property of shareholders. A shareholder has merely an interest in the company arising under its Article of Associations, measure by a sum of money for the purpose of liability, and by a share in the profit. The learned court below has committed grave mistake of law and it failed to consider the provisions of Section 145 of the Contract Act, which inter alia provide that in every contract of guarantee, there is an implied promise by the principal debtor to indemnify the surety and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee. This provision rather strengthens the case of the defendants that the plaintiff is entitled to recovery of his dues from the principal debtor and not from defendant nos.1 and 2 and 4 to 6. Learned senior counsel in support of his arguments has relied on the judgement of the Supreme Court in Balwant Rai Saluja & Anr. Etc.Etc. vs. Air India Ltd. & Ors.-(2014) 9 SCC 407.

We have considered the submissions made by learned counsel for the appellants and perused the impugned judgement.

The Commercial Court has in the impugned order noted that all the three companies namely; M/s. Kanishka Platinum Gold and Silver Product Pvt. Ltd., M/s. Subnani Textiles Pvt. Ltd. and M/s. Admiral Trading Pvt. Ltd. are in the nature of quasi partnership concern. Even the resolution dated 03.03.2014 filed along with the documents would go to show that defendant no.1, who is signatory to the Bank Accounts as well as to the petition filed in NCLT, Bombay and Jaipur shows that he is at the helm of affairs of all the companies. Therefore, by invoking the doctrine of lifting of corporate veil, it is abundantly clear that the defendant no.1 is managing the affairs of all the aforesaid three companies. The Commercial Court also noted the allegation that defendant no.1 and 2 siphoned off the money from the defendant no.2, which is clear from the notice for declaring the willful defaulter, given by the bank as a result the defendant no.3 defaulted in repayment of the loan and the account was declared NPA. The Bank therefore initiated action under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 proceedings against the defendant no.3 and proceeded to auction the properties mortgaged with the Bank. It is therefore that the plaintiff had to enter into one time settlement with the bank qua his liability as guarantor and pay Rs.3.05 crores to the Bank by selling his property. The Court has also taken note of the argument of the plaintiff that after settlement when the plaintiff sought repayment from the defendant nos.1 to 3, the defendant no.1 under his signatures issued a cheque to the plaintiff for an amount of Rs.3.05 crores, which when presented to the Bank was dishonoured. The plaintiff, therefore, filed criminal complaint in the Court against him for offence u/s.138 of the Negotiable Instruments Act, which is pending. Simultaneously, in order to recover the amount due, the plaintiff filed the present suit. The Court has also noted that defendant nos.1 and 2 i.e. appellant nos.1 and 2 are owners of defendant nos.3, 4 and 5 companies through their HUF and completely control the affairs of the company. Defendant nos.4 and 5 jointly own a plot of land in respect of which JDA has issued a Patta and the DLC rates of the said plot were produced before the Court.

The court below noted that as per Section 145 of the Contract Act, 1872 in every contract of guarantee, there is an implied promise by the principle debtor to indemnify the surety and the surety is entitled to recover from the principle debtor whatever sum he has rightfully paid under the guarantee. Since defendant no.3 is a Private Ltd. Company and the liability of the share holders/owners can go up to the personal properties, the principle of lifting of corporate veil is required to be invoked, otherwise the applicant shall suffer irreparable loss and injury which can be compensated in terms of money as the defendant will alienate the suit property and in order to defeat the claim of the creditors, would frustrate the proceedings. The court below also noted that Order XXXIX Rule 1(b) of CPC clearly shows that where "the defendant threatens, or intends to remove or dispose of his property with a view to defrauding his creditors, the Court may, by order, grant a temporary injunction to restrain such act, or make such other order for the purpose of staying and preventing the wasting, damaging, alienation, sale, removal or disposition of the property." The Commercial Court with this much of discussion, has recorded a finding of prima facie case in favour of the plaintiff and observed that the plaintiff after paying off the debt of defendant no.1 has stepped into the shoes of creditor. Hence, a fair question/substantial question needs an investigation. The balance of convenience also lies in favour of the plaintiffapplicant and against the defendant. The Commercial Court relied on several judgements in support of its such finding.

The relied judgement of the Supreme Court in Balwant Rai Saluja, supra arose out of a dispute where the issue was relationship of employer-employee. The Supreme Court held that doctrine of piercing the veil allows the court to disregard the separate legal personality of a company and impose liability upon the persons exercising real control over the said company. It should be applied only in scenarios wherein it is created by the persons exercising control over the said company for the purpose of avoiding liability. The intent of piercing the veil must be such that would seek to remedy a wrong done by the persons controlling the company. Its application would thus depend upon the facts and circumstances of each case.

Having considered the matter in entirety, we do not find any reason to hold that the learned Commercial Court has committed any illegality in passing the order of injunction as in our considered view also if all the properties referred to in para 22 of the application are allowed to be alienated/transferred before the rights of the parties are finally determined in the pending civil suit, it could frustrate the lawful claim of the plaintiff. It would expose the plaintiff to the risk of loosing the money forever, which it otherwise is entitled to claim from the principal borrower. The Commercial Court cannot be held to have erred in recording the prima facie finding and balance of convenience in favour of the plaintiff, we therefore do not find any merit in this appeal.

Learned counsel for the appellant in the course of arguments submitted that since the plaintiff and defendant no.1 are real brothers and the dispute is amongst the close relatives, reference should be made for exploring the possibility of settlement between the parties before the Mediation.

We therefore direct the Commercial Court to make an endeavour for amicable settlement of dispute between the parties by referring the dispute to the Mediation before proceeding to try the suit, which exercise in any case, should not take more than 60 days. If the Mediation efforts fails within that period or at any time earlier than that, the learned trial court shall proceed with the trial of the suit and try to conclude the same within a period of six months from the date of conclusion of the mediation proceedings.

The appeal is dismissed, however, with the aforesaid observations.