Bombay High Court
Tata Capital Financial Services ... vs Williamson Financial Services ... on 21 November, 2022
Bench: N. J. Jamadar
comss-161-2020.doc
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
SUMMONS FOR JUDGMENT NO.29 OF 2020
IN
COMMERCIAL SUMMARY SUIT NO.161 OF 2020
Tata Capital Financial Services Limited ...Plaintiff
vs.kashya
Williamson Financial Services Limited ...Defendant
VISHAL
SUBHASH Mr. Karl Tamboly a/w. Mr. Rohit Lalwani, Mr. Sanaya Dadachanji,
PAREKAR Mr. Advait Raorane i/b. Manilal Kher Ambalal and Co., for the
Digitally signed by Plaintiff.
VISHAL SUBHASH
PAREKAR Mr. Rohaan Cama a/w. Mr. Anish Karande, Mr. Arshalan A.T. i/b.
Date: 2022.11.22
17:55:05 +0530 Mr. Vishal Shriyan, for the Defendant.
CORAM : N. J. JAMADAR, J.
RESERVED ON : 22nd SEPTEMBER, 2022
PRONOUNCED ON : 21st NOVEMBER, 2022
-------------
JUDGMENT:
1. This Commercial Division Summary Suit is instituted for
recovery of a sum of Rs. 33,20,76,377.69/- along with interest at
the rate of 18% p.a. from the date of the suit till payment and/or
realization on the basis of a letter of undertaking/guarantee.
2. Shorn of unnecessary details, the plaintiff's case can be stated
as under:-
a] Both the plaintiff and the defendant are the companies
incorporated under the Companies Act, 1956. The plaintiff and
Vishal Parekar. ...1
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defendant are also Non-Banking Finance Companies (NBFC)
registered with Reserve Bank of India. McNally Bharat is also a
public limited company. "McNally Bharat" is engaged in the
business of executing turnkey projects and handling engineering
and construction contracts. McNally Bharat is one of the group
companies of Williamson Magor Group, of which the defendant is
also a group company. All the group companies of the Williamson
Magor Group, including McNally Bharat and the defendant, have a
tight group structure with strong organizational and financial links.
b] McNally Bharat had approached the plaintiff seeking financial
assistance to shore up its net worth and improve its debt/equity
ratio. On the strength of the representations made by McNally
Bharat and reputation of Williamson Magor Group, the plaintiff
evinced interest in subscribing to Redeemable Preference Shares
(RPS) of McNally Bharat subject to the terms and conditions set out
in the sanction letter dated 30th November, 2012. Eventually, the
plaintiff and McNally Bharat entered into a Subscription
Agreement dated 28th February, 2013 for subscription of 6,25,000
cumulative Non-Convertible RPS of McNally Bharat at a face value
of Rs. 100/- each issued at a premium of Rs. 540/- each for an
aggregate consideration of Rs. 40 Crores in accordance with the
Vishal Parekar. ...2
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terms and conditions incorporated therein.
3. The Subscription Agreement provided for, inter alia, payment
of dividend on a cumulative basis calculated at a fixed rate of
11.50% p.a. payable quarterly on the face value of each of the
preference shares commencing from the closing date i.e. 6 th March,
2013. The tenure of RPS was 7 years and they were to be redeemed
in 8 equal installments in the 5th, 6th and 7th year. At the end of 7th
year and final redemption, McNally Bharat was to pay the
redemption premium so that IRR on the investment came to 16%.
The Subscription Agreement also provided for events of default. In
the absence of event of default and no cause for early redemption,
the redemption of RPS would have commenced from June, 2018 and
completed by March, 2020. Certain supplementary documents like
Non-Disposal Undertaking cum Agreement to Pledge dated 28 th
February, 2013 and Power of Attorney dated 28th February, 2013
were also executed.
4. The plaintiff avers McNally Bharat failed to infuse Rs. 35
Crores through its affiliates by way of equity/preference shares, as
undertaken in the Subscription Agreement. It constituted an event
of default. On 14th October, 2014 the credit rating of RPS of McNally
Vishal Parekar. ...3
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Bharat was downgraded to BBB (Minus). According to plaintiff, this
also amounted to a further event of default under the terms of
Subscription Agreement.
5. A lengthy correspondence, followed by meetings, proposals
and counter proposals, ensued between plaintiff and McNally
Bharat. The plaintiff asserts, in the process, various assurances
were given by McNally Bharat, time and again. In the context of the
issues which may arise for determination in this suit, especially the
Summons for Judgment, it may not be necessary to delve
elaborately into the sequence of events.
6. It would be suffice to note that, the plaintiff avers, during
March/October, 2017 McNally Bharat identified various buyers for
part redemption of RPS which led to the sale of a total 2,25,617 RPS
held by the plaintiff for an amount of Rs. 23,59,23,382/-. Since
McNally Bharat directly or through its affiliates or group companies
could not complete the purchase of RPS, as assured at the time of
taking unconditional approval for McNally's proposed Compulsory
Convertible Preference Shares (CCPS) and Equity Issue, the
plaintiff called upon McNally Bharat to pay outstanding redemption
amount and liquidated damages of Rs. 36,32,07,895/- due as of 30 th
Vishal Parekar. ...4
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June, 2018. The plaintiff further called upon McNally Bharat to
create a first ranking pledge over the specified shares of McNally
Sayaji Engineering Limited (MSEL).
7. On 24th September, 2018 the plaintiff again reminded McNally
Bharat of its non-fulfillment of the assurance of providing an
undertaking or surety to the plaintiff to buy back the balance
outstanding RPS. Pursuant thereto, a meeting was held on 26 th
September, 2018 between officers of the plaintiff and Mr. K.K.
Baheti, one of the Directors of defendant, with a view to amicably
resolve the dispute. In the said meeting, the plaintiff avers,
defendant agreed to step in as a surety and guaranteed the
purchase of balance outstanding RPS from the plaintiff for and on
behalf of McNally Bharat. In furtherance of the said understanding,
McNally Bharat also requested the defendant to step in as a surety
by undertaking to purchase the balance RPS as per the following
schedule set out in the letter dated 27th September, 2018.
Date Amount of Purchase
(On or before) (Principal + Redemption Premium)
29th September, 2018 5.00 Crores
25 October, 2018
th
9.20 Crores
25th November, 2018 9.20 Crores
25th December, 2018 9.20 Crores with additional redemption
premium charges as applicable on the date of
payment
Vishal Parekar. ...5
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8. Vide a separate letter dated 27th September, 2018, the
plaintiff asserts, the defendant agreed to act as a Guarantor and to
unconditionally purchase the entire outstanding RPS from the
plaintiff pursuant to the decisions arrived at in the meeting held on
26th September, 2018 and the request of McNally Bharat in the
letter dated 27th September, 2018, in accordance with aforesaid
schedule.
9. The plaintiff avers the defendant did purchase the first
tranche of RPS for a sum of Rs. 5 Crores in accordance with the
terms of undertaking. In view of the default in purchase of balance
outstanding RPS, the plaintiff called upon the defendant vide letter
dated 7th November, 2019 to pay the outstanding amount. Despite
service thereof there was no reply to the said notice.
10. The plaintiff has initiated arbitration proceedings against
McNally Bharat. However, since the liability of McNally Bharat
under the Subscription Agreement and that of the defendant under
the letter of undertaking/guarantee dated 27th September, 2018 is
distinct, this suit for recovery of the outstanding amount of RPS
under a contract of guarantee.
Vishal Parekar. ...6
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11. It would be contextually relevant to note that the plaintiff
instituted the suit availing leave under the clause XII of the Letters
Patent granted by an order dated 20 th January, 2020 in Leave
Petition No. 8 of 2020.
12. Upon service of Writ of Summons, the defendant has entered
appearance. Thereupon, the plaintiff has taken out a Summons for
Judgment.
13. An affidavit in reply is filed on behalf of the defendant seeking
an unconditional leave to defend the suit.
14. At the outset, the tenability of the suit without resorting to
pre-institution mediation under section 12A of the Commercial
Courts Act, 2015 (the Act, 2015) is assailed. Secondly, the
defendant contends, the suit does not fall within the sphere of Order
XXXVII of the Code of Civil Procedure, 1908 (the Code) as there is
no debt or liquidated demand in money payable by the defendant to
the plaintiff. According to the plaintiff the institution of the
Summary Suit on the strength of the letter dated 27 th September,
2018, wherein the defendant allegedly agreed to purchase the
balance RPS, is wholly misconceived as it can not be construed as a
Vishal Parekar. ...7
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written contract within the meaning of Order XXXVII. Fourthly,
since the plaintiff has commenced arbitration proceeding against
McNally Bharat to recover the very same amount, the plaintiff
cannot seek an identical relief against the defendant in this suit.
Lastly, the jurisdiction of this Court to entertain, try and decide the
suit is also called in question on the premise that no part of cause of
action has arisen within the local limits of ordinary original civil
jurisdiction of this Court. The defendant stated that it was in the
process of filing an application seeking revocation of leave granted
by this Court by order dated 20th January, 2020.
15. On the merits of the claim, the defendant contends that the
letter dated 27th September, 2018, at best, amounts to a proposal to
purchase RPS. It, however, remained in the realm of proposal only
as there is no material to show that the said proposal was accepted
by the plaintiff so at to give rise to a contract. In any event, the said
letter of undertaking/ guarantee does not give rise to the contract of
guarantee. Of necessity, the Court would be required to embark
upon an inquiry to ascertain the intent of the parties from the
contents of the said letter. That furnishes a justifiable ground to
grant an unconditional leave to defend the suit. It is further
contended that the said letter being un-stamped, cannot be taken
Vishal Parekar. ...8
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into account and relied upon until the said letter is impounded and
requisite stamp duty along with penalty is paid thereon.
16. On the core of the issue, the defendant categorically denies
that it had agreed to purchase the balance outstanding RPS at the
behest of McNally Bharat, as a guarantor. The defendant
controverts the claim of the plaintiff that the defendant had
purchased the first tranche of RPS and had made payment of Rs. 5
Crores. No payment has been made or was required to be made by
the defendant. On the contrary, the defendant claimed to have paid
a sum of Rs. 5 Crores on 29th June, 2018 in respect of purchase of
42200 RPS from plaintiff and yet those shares had not been
credited/ transferred by the plaintiff into the demat account of the
defendant. On these, amongst other, grounds the defendant has
prayed for an unconditional leave to defend the suit.
17. An affidavit in rejoinder is filed on behalf of the plaintiff. An
additional affidavit has also been filed by the plaintiff. To the
additional affidavit a copy of RTGS receipt is annexed which shows
that a sum of Rs. 5 Crores was credited to the account of plaintiff on
29th September, 2018 from C Julie Developers and FL, another
group Co. of Williamson Magor Group, like the defendant company.
Vishal Parekar. ...9
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18. In the backdrop of the aforesaid pleadings, I have heard Mr.
Tamboly, learned counsel for the plaintiff, and Mr. Cama, learned
counsel for the defendant at some length. The learned counsel took
the Court through the pleadings of the parties as well as the
documents placed on record to substantiate their respective
contentions.
19. Mr. Tamboly, learned counsel for the plaintiff, submitted that
the defences sought to be raised on behalf of the defendant namely,
interdict contained in section 12A of the Act, 2015, inadequate
stamp duty on the letter of guarantee and the said letter, in
substance, being in the nature of a mere proposal, are, in a sense,
technical defences. Mr. Tamboly submitted that the defendant has
made no endevour to meet the positive case of the plaintiff that the
defendant, in the capacity of a member of Williamson Magor Group,
had undertaken to discharge the liability of McNally Bharat. On the
contrary, the execution of the letters dated 27 th September, 2018
both by McNally Bharat and defendant is rather incontrovertible.
Thus, the submission on behalf of the defendant that the said letter
was in the nature of a mere proposal, is simply untenable.
20. In opposition to this, Mr. Cama, learned counsel for the
Vishal Parekar. ...10
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defendant, stoutly submitted that each of the grounds of defence
raised by the defendant is sturdy enough to sustain an
unconditional leave. Mr. Cama would urge that, first and foremost,
the institution of the suit without resorting to pre-institution
mediation under section 12A of the Act, 2015 is itself unsustainable.
21. Taking the Court through the pronouncements of the Division
Bench of this Court in the case of Deepak Raheja vs. Ganga Taro
Vazirani1 and the judgment of the Supreme Court in the case of M/s.
Patil Automation Private Limited and Ors. vs. Rakheja Engineers
Private Limited2, Mr. Cama would submit that the mandatory
nature of the requirement of pre-institution mediation under
section 12A of the Act, 2015 has since been authoritatively
pronounced, and the suit in question did not contemplate an urgent
interim relief, it was not open to the plaintiff to institute the suit
without resorting to pre-institution mediation.
22. Mr. Cama further submitted that from the very averments in
the plaint, it becomes abundantly clear that no part of cause of
action has arisen within the local limits of the jurisdiction of this
Court. In such circumstances, merely because the plaintiff
1 2021 SCC Online Bom 3124.
2 AIR 2022 SUPREME COURT 3848.
Vishal Parekar. ...11
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succeeded in obtaining leave under clause XII is not of decisive
significance and the defendant can very well demonstrate that this
Court lacks territorial jurisdiction. If a triable issue arises as
regards the territorial jurisdiction of this Court to entertain, try
and decide the suit, the defendant deserves an unconditional leave
to defend the suit.
23. On merits, according to Mr. Cama, even if the case of the
plaintiff is taken at par and the letter dated 27 th September, 2018 is
construed rather generously, at best, it amounts to an undertaking
to purchase the outstanding RPS. Mr. Cama submitted that there is
a world of difference between a 'contract to purchase' and 'contract
to pay money'. In the former case, in the event of breach, the
remedy is, a suit for damages. There is no debt in presenti. At most,
the letter dated 27th September, 2018 would furnish a cause of
action for a suit for specific performance and damages. Such suits
are clearly beyond the province of Order XXXVII of the Code,
submitted Mr. Cama.
24. I have given careful consideration to the submissions
canvassed across the bar.
Vishal Parekar. ...12
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25. To start with, it may be apposite to deal with the preliminary
challenge to the tenability of the suit for not resorting to pre-
institution mediation under section 12A of the Act, 2015.
Indisputably, the transaction in question represents a commercial
dispute. Section 12A of the Act, 2015, was brought on the statue
book with effect from 30th May, 2018. Sub-section (1) of Section 12A
of the Act, 2015 reads as under:
"Section 12-A(1) :- A suit, which does not contemplate any
urgent interim relief under this Act, shall not be instituted
unless the plaintiff exhausts the remedy of pre-instituion
mediation in accordance with such manner and procedure
as may be prescribed by rules made by the Central
Government."
26. On a plain reading the text of section 12A(1) bars the very
institution of the suit without exhausting the remedy of the pre-
institution mediation, if the suit does not contemplate any urgent
interim relief.
27. However, there was a divergence of opinion as regards the
nature of the provisions contained in section 12A of the Act, 2015.
In the case of M/s. Patil Automation (supra), the Supreme Court
considered the question as to whether the statutory pre-litigation
mediation contemplated under section 12A of the Act, 2015, as
amended by the Amendment Act, 2018, is mandatory and whether
Vishal Parekar. ...13
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the Courts below erred in not allowing the application filed under
Order VII Rule 11 of the Code, to reject the plaint filed by the
plaintiffs in the respective suits without complying with the
procedure under section 12A of the Act, 2015. After an elaborate
analysis the Supreme Court ruled that section 12A is mandatory.
However, having regard to the cleavage of judicial opinion on the
interpretation of mandatory or directory nature of section 12A and
the consequences the declaration that the said provision is
mandatory entailed, the Supreme Court resorted to the device of
prospective declaration.
28. The observations in paragraphs 83 and 84 are instructive and
hence extracted below.
83] The statute which has generated the controversy
is the Amending Act of year 2018. We have noticed
that there is undoubtedly a certain amount of
cleavage of opinion among the High Courts. The other
feature which is to be noticed is that, this is a case
where the law in question, the Amending Act
containing certain Section 12A is a toddler. The law
necessarily would have teething problems at the
nascent stage. The specified value has been lowered
drastically from Rs.1 crore to Rs.3 lakhs. The
imperative need to comply with the mandate of
Section 12A which we have unravelled if it has not
been shared by the parties on the advice they received
or on the view prevailing in the High Courts would
necessarily mean that unless we hold that the law, we
declare is prospective such suits must perish. The
court fee paid would have to be written off. In a fresh
suit which would be otherwise barred by limitation,
shelter can be taken only under Section 14 of the
Limitation Act. The availability of the power under
Vishal Parekar. ...14
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Section 14 itself may have to be decided by the court.
84] Having regard to all these circumstances, we would
dispose of the matters in the following manner. We
declare that Section 12A of the Act is mandatory and
hold that any suit instituted violating the mandate of
Section 12A must be visited with rejection of the plaint
under Order VII Rule 11. This power can be exercised
even suo moto by the court as explained earlier in the
judgment. We, however, make this declaration effective
from 20.08.2022 so that concerned stakeholders
become sufficiently informed. Still further, we however
direct that in case plaints have been already rejected
and no steps have been taken within the period of
limitation, the matter cannot be reopened on the basis
of this declaration. Still further, if the order of rejection
of the plaint has been acted upon by filing a fresh suit,
the declaration of prospective effect will not avail the
plaintiff. Finally, if the plaint is filed violating Section
12A after the jurisdictional High Court has declared
Section 12A mandatory also, the plaintiff will not be
entitled to the relief.
29. In paragraph 83 the Supreme Court adverted to the
consequences which the declaration that the provision is
mandatory would entail. Thus, in paragraph 84, to address the
situation which may arise on account of such declaration, which
would otherwise relate back to the date of Amendment Act, 2018,
the Supreme Court made the declaration effective from 20 th August,
2022 so that concerned stake holders become sufficiently informed.
This prospective declaration was also made subject to three
caveats. First, in case plaints have been already rejected and steps
have not been taken within the period of limitation, the matter
cannot be reopened on the basis of said declaration. Second, if the
Vishal Parekar. ...15
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order of rejection has been acted upon by filing a fresh suit the
declaration of prospective effect will not avail the plaintiff. Third, if
the plaint is filed violating section 12A after the jurisdictional High
Court declared section 12A mandatory, the plaintiff will not be
entitled to the relief.
30. Whether the third exception governs the case at hand ? In
the case of Ganga Taro Vazirani (supra) by a judgment and order
dated 1st October, 2021, this Court declared section 12A mandatory.
It is imperative to note that the instant suit came to be lodged on
13th March, 2020. Evidently, on the date of the institution of the
suit, there was no declaration by this Court that section 12A is
mandatory. Consequently, the instant suit can not be said to have
been instituted after the provisions contained in section 12A were
declared mandatory by the jurisdictional High Court.
31. Mr. Cama would however urge that aforesaid prospective
declaration is of no assistance to the plaintiff. Mr. Cama premised
his submission on the basis that section 12A, post its introduction
on the statute book by the Amendment Act, 2018, cannot be so
construed as if it was not on the statute book. On a plain reading of
section 12A, which uses the peremptory expression 'shall', the
Vishal Parekar. ...16
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mandatory nature of the said provision is borne out. Therefore,
according to Mr. Cama, the fact that in case of Patil Automation
(supra), the Supreme Court has made the declaration prospective
does not imply that the suits which were instituted flouting the
express legislative mandate can be said to have been validly
instituted.
32. I am afraid to accede to the aforesaid submission. I have
extracted the observations in paragraph Nos. 83 and 84 on
purpose. In fact, the Supreme Court has in paragraph Nos. 76 to 84
elaborately expounded the reasons which weighed with the Court in
resorting to the device of prospective declaration drawing support
and sustenance from the doctrine of 'prospective overruling'. After
adverting to the pronouncement of the Supreme Court in the cases
of M/s. Somaiya Organics (India) Ltd. vs. State of Uttar Pradesh 3;
P.V. George and Others vs. State of Kerala and Others 4; and Harsh
Dhingra vs. State of Haryana and Others 5, the Supreme Court
enunciated that the doctrine of prospective overruling may not be
confined to a straight jacket. The ambit of the doctrine of
prospective overruling is co-extensive with the equity of a situation
whereunder on the law being pronounced it is likely to intrude into
3 AIR 2001 SC 1723
4 AIR 2007 SC 1034
5 (2001) 9 SCC 550
Vishal Parekar. ...17
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or reopen settled transactions. Thus, the Supreme Court made the
declaration about mandatory nature of section 12A prospective.
33. Mr. Tamboly was justified in canvassing a submission that the
Supreme Court made the declaration (that section 12A is
mandatory) itself prospective by directing that the said declaration
will be effective from 20th August, 2022. It is pertinent to note that
in paragraph 76 the Supreme Court expressly recorded that the
declaration of law by Supreme Court would relate back to the date
of Amendment Act, 2018 and, thereafter, considered the
consequences which such declaration would entail and the
necessity for making the declaration prospective.
34. I am, thus, not inclined to agree with the submission of Mr.
Cama that the plaintiffs in the suits instituted during the period
commencing from insertion of section 12A of the Act, 2015 (30 th
May, 2018) to the declaration thereof as mandatory by the Division
Bench in the case of Ganga Taro Vazirani (supra) (1st October,
2021), are not entitled to the benefit of prospective declaration of
law by the Supreme Court in the case of Patil Automation (supra).
35. This propels me to the second count of challenge based on
Vishal Parekar. ...18
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purported lack of jurisdiction. Amplifying the challenge, Mr. Cama
would urge that no part of cause of action has arisen within the
local limits of the jurisdiction of this Court nor the defendant
resides within the said limits. Though this Court by an order dated
20th January, 2020 in Leave Petition No. 8 of 2020 granted leave to
institute the suit under clause XII of the Letters Patent yet, the
issue of lack of jurisdiction, which is essentially rooted in facts,
gives rise to a triable issue.
36. Per contra, Mr. Tamboly, submitted that the challenge on the
count of lack of jurisdiction is equally infirm. Inviting the attention
of the Court to the stated case of the defendant in the affidavit in
reply that the defendant was in the process of filing an application
seeking, inter alia, revocation of the leave granted by this Court, Mr.
Tamboly submitted that the said course of action is legally
impermissible. Thus, at this stage, according to Mr. Tamboly it is not
open for the defendant to question the jurisdiction of this Court to
entertain, try and decide the suit.
37. Mr. Tamboly as well as Mr. Cama banked upon the
pronouncement of the Supreme Court in the case of Isha
Distribution House Private Limited vs. Aditya Birla Nuvo Limited
Vishal Parekar. ...19
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and Another6, albeit to bolster up their respective submissions. In
the case of Isha Distribution (supra) the Supreme Court was
confronted with a question whether, leave under clause XII of the
Letters Patent having been granted, the Court on an application of
the defendant can revoke the leave granted to the plaintiff. After
adverting to the pronouncement of the Supreme Court in the case of
Indian Mineral & Chemicals Company vs. Deutsche Bank 7, wherein
the observations of Rankin, C.J. in Secretary of State for India in
Council vs. Golabrai Paliram8 were held to correctly represent the
law as to how the Court should approach the application for
revocation of leave, the Supreme Court held that the following
observation in Golabrai (supra) is now the law laid down by the
Supreme Court in view of its affirmation in the case of Indian
Mineral (supra).
".... I do really protest against questions of difficulty
and importance being dealt with by an application to
revoke the leave under Clause 12 of the Letters
Patent and to take the plaint off the file. Normally it is
well settled that the proper way to plead to the
jurisdiction of the Court is to take the plea in the
written statement and as a substantive part of the
defence. Except in the clearest cases that should be
the course."
38. Mr. Cama would, however, urge that aforesaid statement of
law that an application for revocation of leave can not be
6 (2019) 12 Supreme Court Cases 205
7 (2004) 12 SCC 376.
8 1931 SCC OnLine Cal 88
Vishal Parekar. ...20
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entertained post grant of such leave and the proper course is to
raise the issue of jurisdiction in the written statement, does not
preclude the defendant from agitating the issue of jurisdiction while
seeking an unconditional leave to defend the suit. Mr. Cama
strenuously submitted that an issue of jurisdiction is primarily
rooted in facts and the defence raised by the defendants of bar of
jurisdiction poses a mixed question of law and fact. Reliance was
placed on the following observations of the Supreme Court in the
case of Isha Distribution (supra),
19] In our opinion, a plea of territorial jurisdiction is
essentially a mixed question of law and fact. It is for
this reason, the respondents(defendants) should be
allowed to raise such plea in the written statement to
enable the Court to try it on its merits in accordance
with law in the light of the requirements of Order 14
of the Code of Civil Procedure, 1908 and other
relevant provisions governing the issue on merits.
........ ...........
22] On such written statement being filed, the Single
Judge will frame appropriate issues arising in the
suit and proceed to answer them in accordance with
law keeping in view the procedure laid down in
Order 14 of the Code of Civil Procedure.
39. The aforesaid pronouncement clearly forecloses an
application for revocation of leave granted under clause XII of the
Letters Patent. It is, however, open for the defendant to raise the
issue and if the issue really arises for determination, the Court is
enjoined to determine the same at the trial. I am, therefore, not
Vishal Parekar. ...21
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persuaded to jettison away the challenge for the sole reason that the
defendant claimed in the affidavit in reply that it was in the process
of filing an application for revocation of leave.
40. On the factual premise, it is the case of the plaintiff that
money was to be paid to the plaintiff at Mumbai. Secondly, the letter
of undertaking/guarantee was purportedly received by the plaintiff
from the defendant, at Mumbai. The plaintiff claimed to have called
upon the defendant to make payment in accordance with the terms
of the undertaking/ guarantee by addressing a letter from Mumbai.
41. In the circumstances, the Court having considered all the
relevant aspects while granting leave to defend in its order dated
20th January, 2020 in Leave Petition No. 8 of 2020, including the
fact that the registered and other offices of the defendant were
beyond the local limits of the jurisdiction of this Court, at this stage,
I am impelled to hold that the material on record is not of such a
nature that it can be recorded without risk of contravention that no
material part of cause of action has arisen within the local limits of
this Court.
42. This takes me to the core challenge based on the construction
Vishal Parekar. ...22
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of the letter of undertaking/ guarantee dated 27 th September, 2018.
Mr. Cama urged with a degree of vehemence that the said letter,
even if construed rather generously, does not constitute a contract
of guarantee and reflect a debt in praesenti. At best, it was a
promise to purchase the RPS. To appreciate the aforesaid
submission in a correct perspective, it may be advantageous to
extract the said letter dated 27th September, 2018 in verbatim.
To,
Tata Capital Financial Services Ltd.
Penninsula Business Park, 12th Floor, Tower A
Ganpat Rao Kadam Marg, Lower Parel,
Mumbai 13.
K.A.: Mr. Nitin Dharma.
Dear Sir,
In response to your letter dated 24.09.2018 to McNally Bharat
Engineering Company Ltd. (MBECL) and meeting with Mr.
Venkatesh K. and Mr. Mahendra Pradhan on 26.09.2018 with
MR. K.K. Baheti on the subject to resolve the matter at the
earliest, on behalf of MBECL, we have purchased Rs. 20.00
Crore Redeemable Preference Shares (RPS) of MBECL held by
TCFSL and undertake to purchase the balance outstanding RPS
from TCFSL as per the following schedule:
Date Amount of Purchase
(On or before) (Principal + Redemption Premium)
29.09.2018 5.00 Cr
25.10.2018 9.20 Cr
25.11.2018 9.20 Cr
25.12.2018 9.20 Cr with additional redemption premium,
charges as applicable on the date of payment
Thanking you.
For Williamson Financial Services Ltd.
Authorized Signatory
CC: Mr. Amitabh Guha Sarkar
Williamson Financial Services Ltd.
Mangalam Building, 2nd Floor, Room No. 210,
A wing, 24- Hemanta Basu Sarani,
Kolkata- 700 001.
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43. Mr. Cama would urge that the later part of the sentence above
the table makes it abundantly clear that the undertaking was to
purchase the balance outstanding RPS from the plaintiff as per
within mentioned schedule. In contrast, according to Mr. Cama,
there is no guarantee as claimed by the plaintiff.
44. If there is a dispute as to the very nature of the transaction,
an unconditional leave to defend must follow, as that would warrant
adjudication of the nature of the transaction and the instrument
which evidences the same, urged Mr. Cama. To lend support to the
aforesaid submission, Mr. Cama placed a strong reliance on the
observations of the Supreme Court in the case of Rai Duggal vs.
Ramesh Kumar Bansal9 wherein the tests to determine the grant of
leave to defend were enunciated in the following words:-
3] Leave is declined where the court is of the opinion
that the grant of leave would merely enable the
defendant to prolong the litigation by raising
untenable and frivolous defences. The test is to see
whether the defence raises a real issue and not a
sham one, in the sense that if the facts alleged by the
defendant are established there would be a good or
even a plausible defence on those facts. If the court is
satisfied about that leave must be given. If there is a
triable issue in the sense that there is a fair dispute to
be tried as to the meaning of a document on which the
claim is based or uncertainty as to the amount
actually due or where the alleged facts are of such a
nature as to entitle the defendant to interrogate the
plaintiff or to cross-examine his witnesses leave
should not be denied. Where also, the defendant shows
9 1991 Supp (1) Supreme Court Cases 191
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that even on a fair probability he was a bona fide
defence, he ought to have leave. Summary judgments
under Order 37 should not be granted where serious
conflict as to matter of fact or where any difficulty on
issues as to law arises. The court should not reject the
defence of the defendant merely because of its
inherent implausibility or its inconsistency.
(emphasis supplied)
45. Mr. Cama further submitted that the defendant, at the most,
can be attributed with breach of contract to purchase RPS. Breach
of contract gives rise to a claim for damages. Conversely, a breach of
contract does not give rise to a debt in praesenti. In case of breach
of contract, entitlement for damages as well as the quantum thereof
are the matters for adjudication, urged Mr. Cama.
46. To buttress the aforesaid submission, Mr. Cama placed
reliance on a judgment of this Court in the case of Iron and
Hardware (I) Co. vs. Shamlal and Brothers 10. In the said case, the
nature of the right which accrues on a breach of contract to the
party who complains of the breach, was expounded as under:-
"....... ......... It is well settled that when there is a
breach of contract the only right that accrues to the
person who complains of the breach is the right to file
a suit for recovering damages. The breach of contract
does not give rise to recover damages is not assignable
because it is not a chose in action. An actionable claim
can be assigned, but in order that there should be an
actionable claim there must be a debt in the sense of
an existing obligation. But inasmuch as a breach of
10 1954 The Bombay Law Reporter, Vol LVI, 473.
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contract does not result in any existing obligation on
the part of the person who commits the breach, the
right to recover damages is not an actionable claim
and cannot be assigned.
............ .........
As already stated, the only right which he has the
right to go to a Court of law and recover damages.
Now, damages are the compensation which a Court of
law gives to a party for the injury which he has
sustained. But, and this is most important to note, he
does not get damages or compensation by reason of
any existing obligation on the part of the person who
has committed the breach. He gets compensation as a
result of the flat of the Court. Therefore no pecuniary
liability arises till the Court has determined that the
party complaining of the breach is entitled to
damages. Therefore when damages are assessed it
would not be true to say that what the Court is doing
is ascertaining a pecuniary liability which already
existed."
47. Reliance was also placed on the judgment of the Supreme
Court in the case of Union of India vs. Raman Iron Foundry 11
wherein it was enunciated that,
11]....... When there is a breach of contract, the party
who commits the breach does not eo instanti incur
any pecuniary obligation, nor does the party
complaining of the breach becomes entitled to a debt
due from the other party. The only right which the
party aggrieved by the breach of the contract has is
the right to sue for damages.
48. In the case of Raman Iron Foundry (supra) the Supreme
Court approved the afore-extracted statement of law in the case of
Iron and Hardware (supra), as laying down the correct legal
position. It was, thereafter, observed that a claim for damages for
11 (1974) 2 Supreme Court Cases 231.
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breach of contract is, therefore, not a claim for a sum presently due
and payable.
49. The aforesaid pronouncements, in my view, would assist the
cause of the submission on behalf of the defendant only when this
Court finds that, afore-extracted letter of undertaking/ guarantee is
a mere promise to purchase the RPS and, consequently, the
plaintiff's remedy is in damages. On the contrary, if the Court
draws an inference that the jural relationship between the parties,
brought about by the aforesaid letter, is one of creditor and surety,
the aforesaid pronouncements would not govern the facts of the
case.
50. A contract of guarantee, it is trite, is a tripartite agreement
which contemplates a principal debtor, creditor and the surety.
Undoubtedly, a contract of guarantee is a matter of construction.
However, it is not necessary that there must be a simultaneous
tripartite contract between all the three parties, i.e. principal
debtor, creditor and the guarantor. Once a contract between
principal debtor and creditor is formed, the contract between the
surety and the creditor whereby the surety guarantees the debt can
also spring in existence. Consideration for such contract of
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guarantee may move either from the creditor or the principal
debtor or both. A contract of guarantee is required to be interpreted
having due regard to the relative position of the contracting parties
and attendant circumstances. It is, however, well recognized that a
surety, being a favoured debtor, cannot be made liable to discharge
the liability beyond his bargain.
51. A useful reference in this context can be made to a judgment
of the Supreme Court in the case of State of Maharashtra vs. Dr. M.
N. Kaul (dead)12 wherein it was enunciated that whether a
guarantee is enforceable or not, depends upon the terms under
which the guarantor bound himself. The Supreme Court referred to
the principle of contra proferentem. The observations of the
Supreme Court in paragraph 6 are instructive and hence extracted
below:-
6] The question is whether this guarantee is
enforceable. That depends upon the terms under
which the guarantor bound himself. Under the law he
cannot be made liable for more than he has
undertaken. It is often said that a surety is a favoured
debtor, for in the expressive phrase of Lord Westbury
L. C. in Blest v. Brown (1862 4 De.G F. & J. 367 at 376.
"you bind him to the letter of his engagement,
Beyond the proper interpretation of that engagement
you have no hold upon him."
These observations have been recalled in cases of
12 AIR 1967 Supreme Court 1634
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guarantee and suretyship by the Judicial Committee
and also this Court. Sea for example Pratapsing
Moholalbhai v. Keshavlal Harilal Setalvad. 62 Ind App
23 at p.33 = (AIR 1933 PC 21 at p 24) and M.S.
Anirudhan v. Thomco's Bank Ltd., 1963 Supp 1 SCR
63 at p. 77 = (AIR 1963 SC 746 at p. 752). To this
there are some exceptions. In case of ambiguity when
all other rules of construction fail the Courts interpret
the guarantee contra proferentem, that is, against the
guarantor or use the recitals to control the meaning of
the operative part where that is possible. But
whatever the mode employed, the cardinal rule is that
the guarantor must not be made liable beyond the
terms of his engagement.
(emphasis supplied)
52. In the case of Punjab National Bank Ltd. vs. Sri Bikram Cotton
Mills Ltd. And Another13 the distinction between a contract of
indemnity and contract of guarantee was expounded as under:-
10] A promise to be primarily and independently
liable for another person's conduct may amount to a
contract of indemnity. A contract of guarantee
requires concurrence of three persons-the principal
debtor, the surety and the creditor--the surety
undertaking an obligation at the request express or
implied of the principal debtor. The obligation of the
surety depends substantially on the principal debtor's
default; under a contract of indemnity liability arises
from loss caused to the promise by the conduct of the
promisor himself or by the conduct of another person.
53. On the aforesaid touchstone, reverting to the facts of the case,
it is imperative to note that the existence of a contract between the
plaintiff and McNally Bharat to purchase RPS is incontestible. Thus,
the jural relationship of creditor and principal debtor between the
plaintiff and McNally Bharat is rather indubitable.
13 AIR 1970 SUPREME COURT 1973.
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54. The inquiry now proceeds to next stage to ascertain the
existence of a contract of guarantee between the plaintiff and
defendant. Here again, the execution of the letters dated 27 th
September, 2018 by McNally Bharat and the afore-extracted letter
by the defendant are not in dispute. In the first letter addressed on
behalf of McNally Bharat, a request was made to the defendant to
purchase the balance RPS. The said letter not only referred to the
discussion which preceded the said proposal but also the schedule
of purchase. Though it is not peremptory to have an express
request on the part of the principal debtor to the guarantor, in
every case of a valid contract of guarantee, in the case at hand,
there is indeed such an express request by McNally Bharat to the
defendant to perform the former's obligation.
55. Keeping in view the aforesaid attendant factors, the afore-
extracted letter dated 27th September, 2018 addressed by the
defendant to the plaintiff, is required to be construed. Evidently,
aforesaid letter is more elaborate than the request letter of McNally
Bharat. It refers to the letter dated 24th September, 2018 addressed
on behalf of the plaintiff to McNally Bharat and also the meeting
which the parties had on 26th September, 2018 in which the
defendant was represented by Mr. K.K. Baheti. It also refers to the
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fact that on behalf of McNally Bharat, the defendant had purchased
20 Crore worth RPS of McNally Bharat from the plaintiff. With this
prelude, the letter records that the defendant undertakes to
purchase the balance outstanding RPS in accordance with the very
schedule as proposed by McNally Bharat.
56. The submission of Mr. Cama that the later part of the letter,
"undertake to purchase the balance outstanding
RPS from Tata Capital Financial Services Ltd. as per
the following schedule........"
is a mere promise to purchase the RPS, in my considered view,
proceeds on a very constricted view of the matter. It losses sight of
all the surrounding circumstances and the relative position of the
parties. It is premised as if there were no attendant circumstances,
including the persistent default on the part of McNally Bharat to
purchase the RPS, and for the first time the defendant promised to
purchase the RPS from the plaintiff. The material on record shows
to the contrary.
57. McNally Bharat, which is a group company of Williamson
Magor Group, like the defendant, the principal debtor, had already
incurred the liability to purchase the RPS. Events of default had
occurred. In the past as well the defendant had purchased RPS from
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the plaintiff on behalf of McNally Bharat. The parties negotiated for
an early resolution of the dispute. Pursuant to the discussion in the
meeting held on 26th September, 2018, the principal debtor made an
express request to the defendant to discharge the liability.
Thereupon, the defendant, after recording all the developments,
undertook to purchase the balance outstanding RPS, as per the
agreed schedule.
58. In the totality of the circumstances, in my view, an inference
that the defendant agreed to discharge the liability of McNally
Bharat post default on the part of the McNally Bharat, is rather
inexorable. I am, therefore, persuaded to hold that the jural
relationship brought about by the transaction evidenced by
aforesaid letter dated 27th September, 2018 is in the nature of a
contract of guarantee.
59. Mr. Cama submitted that the aforesaid letter, if it is construed
to be a letter of guarantee, cannot be acted upon as it has not been
properly stamped. This objection need not detain the Court from
deciding the Summons for Judgment.
60. In the case of IL & FS Financial Services Ltd. vs. Skil
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Infrastructure Limited and Ors.14, I had an occasion to deal with an
objection based on inadequate stamp duty on the instrument in
question. In the said case, this Court had resorted to the mechanism
of impounding the instrument and sending the same for
adjudication of stamp duty by the authorities under Maharashtra
Stamp Act, 1958.
61. In the case at hand as well, the plaintiff can be directed to
tender the original letter dated 27th September, 2018 and thereupon
the said instrument would stand impounded and forwarded to the
Collector of Stamps for adjudication of stamp duty and penalty, if
any, thereon.
62. The conspectus of the aforesaid consideration is that, the
defendant had undertaken to discharge the liability of McNally
Bharat and purchase the balance outstanding RPS from the
plaintiff. Though the question as to whether the defendant had
acted upon the said undertaking by purchasing the first lot of RPS
in accordance with the schedule by paying a sum of Rs. 5 Crore on
29th September, 2018 was put in contest, by disputing the fact that
such payment was made by the defendant. Yet, to the additional
affidavit the plaintiff has annexed an RTGS payment receipt to show
14 SJ.No.30/2019 in Comss No.779/2019 Dt.18/02/2020
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that on 29th September, 2018 a sum of Rs. 5 Crore was credited to
its account by C Julie Developers and FL, a group company of
Williamson Magor Group, like the defendant. A determinative
finding on this aspect, at this stage, is not warranted for the reason
that even if the payment is disputed, it does not detract materially
from the liability incurred under the afore-extracted letter.
63. In the circumstances, even if it is assumed that the defendant
has raised a triable issues as regards the jurisdiction and
construction of the contract of guarantee yet, in my view, the
defendant cannot be granted an unconditional leave to defend the
suit in the face of clear and explicit undertaking for purchase the
RPS and to make the payment. It would, therefore be expedient to
grant leave to the defendant to defend the suit on the condition of
depositing of the principal value of balance RPS aggregating to Rs.
27,60,00,000/- as undertaken vide aforesaid letter.
Hence, the following order.
ORDER
1] Leave to defend the suit is granted to the Defendant subject to
deposit of the sum of Rs.27,60,00,000/- within a period of six weeks
from today.
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2] If the aforesaid deposit is made within the stipulated period,
this suit shall be transferred to the list of Commercial Causes and
the Defendant shall file written statement within a period of four
weeks from the date of deposit;
3] If this conditional order of deposit is not complied with, within
the afore stipulated period, the Plaintiff shall be entitled to apply for
an ex-parte decree against the Defendant after obtaining a non-
deposit certificate from the Prothonotary and Senior Master of this
Court.
4] The plaintiff shall produce the original letter dated 27 th
September, 2018 before the Prothonotary and Senior Master of this
Court within one week from today. Thereupon, the said letter would
stand impounded. Thereafter, the Prothonotary and Senior Master
is directed to forward the said instrument to the Collector of
Stamps, Mumbai for adjudication. A copy of forwarding letter be
sent to the advocate for the plaintiff and the defendant.
5] The Collector of Stamps, Mumbai, is directed to adjudicate the
stamp duty and penalty, if any, within six weeks from the date of
the receipt of the impounded document from the Prothonotary and
Senior Master, High Court, Bombay.
6] Upon adjudication, the authority shall communicate the order
to the Prothonotary and Senior Master of this Court and the
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advocate for the plaintiff and defendant.
7] The plaintiff shall pay the amount of stamp duty and penalty,
if any, to be adjudicated by the Collector of Stamps within two weeks
of receiving a copy of such order.
8] Summons for Judgment stands disposed of in the aforesaid
terms.
(N. J. JAMADAR, J.)
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