IDBI TRUSTEESHIP SERVICES LTD. vs. HUBTOWN LTD.

REPORTABLE IN THE SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL NO._10860_ of 2016 (ARISING OUT OF SLP (CIVIL) NO.31439 OF 2015) IDBI TRUSTEESHIP SERVICES LTD. …APPELLANT VERSUS HUBTOWN LTD. …RESPONDENT J U D G M E N T R.F. Nariman, J. 1. Leave granted. JUDGMENT 2. The present appeal arises out of a Summons for Judgment No. 39 of 2013 in a Summary Suit filed on the original side of the Bombay High Court, by the Petitioner, a debenture trustee, to enforce rights that arise out of a Corporate Guarantee executed by the Respondent-defendant. The necessary averments made in the plaint would disclose the 1 Page 1 cause of action of the suit as well as the facts necessary to decide this appeal. They are as follows:

JUDGMENT 4. The Plaintiff is India’s largest Trusteeship Company and provides a wide spectrum of Trusteeship Services. The Plaintiff has been 2 Page 2

December, 2009 executed by Rubix Trading Private Limited (hereinafter referred to as “ Rubix ”), Vinca, the Defendant and the Plaintiff as amended by th OPCD Amendment Agreement dated 8 September, 2010; (hereinafter collectively referred to as the “ Debenture Trust Deeds ”) in relation to Vinca’s investment in OPCDs issued by Amazia and Rubix. A copy of the Debenture Trust Deeds is annexed hereto and marked as Exhibits “A-1”, “A-2” and “A-3” . 5. Pursuant to and in accordance with the terms of the Debenture Trust Deeds, Vinca has subscribed to: i. certain secured, non marketable, transferable, OPCDs of Rubix, of a face value of Rs.10,00,000 each aggregating to INR 1,285,000,000 in tranche 1; JUDGMENT ii. additional secured, non marketable, transferable, OPCDs of Rubix, of a face value of Rs. 10,00,000 each, aggregating to INR 1,395,000,000 in tranche 2; iii. certain secured, non marketable, transferable, OPCDs of Amazia, of a face value of Rs.10,00,000 each, aggregating to INR 1,500,000,000. 6. The OPCDs carry a variable running coupon and a back ended coupon to ensure an internal rate of return of 14.75% per annum. 3 Page 3

8. The Plaintiff states that in order to secure the said OPCDs, and to ensure the due and punctual payment by Amazia and Rubix of all dues to Vinca under the Debenture Guarantee Deeds, the Defendant has, inter alia vide the Corporate th Guarantee Deed, dated 9 December, 2009, issued an unconditional, absolute and irrevocable corporate guarantee in favour of the Plaintiff, inter alia for the benefit of Vinca (hereinafter referred to as the “ Guarantee ”). A copy of the Guarantee is annexed hereto and marked as Exhibit “B” . 9. The Plaintiff submits that inter alia the following defaults were committed by Amazia and Rubix , inter alia under the said Debenture Trust Deeds: i. Defaults by Amazia and Rubix in payment of interest on the OPCDs, as contemplated under Condition 7 of Schedule 3 of the Debenture Trust Deeds, which default has th been subsisting since 15 June, 2011, on the th interest accrued on the OPCDs since 16 JUDGMENT March, 2011; ii. Defaults by Amazia and Rubix in payment of default interest accrued on the OPCDs since th 16 June, 2011; iii. The occurrence of an event of default (cross default) specified in Clause 21(a) of Schedule 14 of the Debenture Trust Deeds, arising inter alia out of a default by Vinca under the CCDs; 4 Page 4

JUDGMENT 10. In view of the aforesaid defaults, the Plaintiff nd was constrained to issue notices dated 2 May, 2012 to Amazia and Rubix respectively, under Clause 33.1 of the Debenture Trust Deeds, for subsisting payment of interest on OPCDs as contemplated under Condition 7 of Schedule 3 of 5 Page 5

11. Consequently, and further to the Plaintiff’s nd letters dated 2 May, 2012, and in view of the fact that the said defaults were not rectified by Amazia and Rubix as required under the said letters dated nd 2 May, 2012, the Plaintiff, in exercise of its right of early redemption under Condition 12.1(a) and Condition 12.2 of Schedule 3 of the Debenture Trust Deeds, has issued redemption notices to both th Amazia and Rubix on 27 June, 2012 (hereinafter referred to as the “ Redemption Notices ”) for the reasons and on the grounds contained therein, inter alia calling upon Amazia and Rubix to fully redeem rd all the OPCDs at par value on 3 July, 2012 (hereinafter referred to as the “ Early Redemption Date ”) and to credit the Principal Redemption Amount alongwith interest accrued and unpaid thereon, aggregating to Rs.4,843,299,862.97/- into A/c. no.: 00600350098359 held in the name of the Plaintiff at HDFC Bank, on the Early Redemption Date. A copy of the Redemption Notices is annexed hereto and marked Exhibits “D-1” and “D-2” . JUDGMENT 12. However, despite repeated reminders to rectify their various defaults under the Debenture Trust Deeds, and various attempts to resolve the issues amicably, Amazia and Rubix have failed and neglected to pay the amounts due and payable in terms of the Debenture Trust Deeds. Consequently, the Plaintiff was constrained to issue a Demand Certificate for the enforcement of the Guarantee, in rd terms of the said Guarantee, to the Defendant on 3 6 Page 6 August, 2012. A copy of the Demand Certificate rd dated 3 August, 2012 is annexed hereto and marked Exhibit “E” .

33. The Plaintiff therefore prays: this Hon’ble Court be pleased to order and decree the Defendant to pay to the Plaintiff a sum of Rs.532,11,29,364.05/- (Rupees Five Hundred and Thirty Two Crores Eleven Lakhs Twenty Nine Thousand Three Hundred and Sixty Four and Five Paisa Only) as on May 6, 2013, being (i) Rs. 477,51,90,932.97/- (Rupees Four Hundred Seventy Seven Crores Fifty One Lakhs Ninety Thousand Nine Hundred and Thirty Two and Ninety Seven Paisa only) as the revised principal amount, being Rs.484,32,99,862.97/- (Rupees Four Hundred and Eighty Four Crores Thirty Two Lakhs Ninety Nine Thousand Eight Hundred and Sixty Two and Ninety Seven Paise only) (hereinafter referred to as “Principal Amount”), less an amount of Rs.6,81,08,930/- (Rupees Six Crores Eighty One Lakhs Eight Thousand Nine Hundred and Thirty Only) received on March 4, 2013 under the Amazia TRA Agreement (hereinafter referred to as “Revised Principal Amount”); (ii) Rs.42,26,78,815.12/- (Rupees Forty Two Crores Twenty Six Lakhs Seventy Eight Thousand Eight Hundred and Fifteen and Twelve Paisa only) as the default interest on the Principal Amount, at the rate of 14.75% per annum from August 11, 2012 till March 4, 2013 as per Clause 3 of the Guarantee; and (iii) Rs.12,32,59,615.96/- (Rupees Twelve Crores Thirty Two Lakhs Fifty Nine Thousand Six Hundred and Fifteen and Ninety Six Paise only) as the default JUDGMENT 7 Page 7

3. The affidavit-in-reply to the aforesaid Summons for Judgment raised the following defence, as recorded by the Ld. th Single Judge in the impugned judgment dated 8 May, 2015. “16. Since according to the Defendant, the above submission is their main submission in the present matter, the same is elaborated as follows: 16.1 That the FDI Policy and the statutory FEMA Regulations (which incorporate the FDI Policy as a Schedule thereto), permit FDI in townships, construction of houses, only by way of equity investments (which is defined to also include debentures which are compulsorily required to be converted into equity: CCDs). The FDI Policy and the FEMA Regulations prohibit any other form of investment (non equity) in the said sector with an assured return/rate of return. JUDGMENT 16.2 That FMO, a foreign entity wanted to invest a substantial sum by way of FDI in a slum rehabilitation project being undertaken in Mumbai by Rubix and an Industrial Park being undertaken/ owned by Amazia. FMO was however only willing to 8 Page 8

i) Vinca was interposed as the Holding Company of Amazia and Rubix and Vinca was the nominal recipient of the FDI of Rs. 418 crores from FMO by way of equity investment and CCDs (in apparent compliance with the FDI/FEMA Regulations). ii) The documents executed for the FDI investment (Subscription Agreement and Debenture Trust Deed annexed as Schedule 13 thereto), however establish that the FDI received from FMO, was not intended for/could not be used by Vinca for any project of its own but was specifically required to be immediately invested by/through Vinca in OPCDs of Rubix & Amazia, bearing a fixed rate of return of 13.5%. JUDGMENT iii) Under the FEMA/FDI regulations/policy FMO could not have invested the said amounts in Amazia and Rubix through OPCDs bearing a fixed rate of return. By interposing Vinca (an Indian Company) the amounts received from FMO were invested in OPCDs of Amazia and Rubix bearing the fixed 14.5% rate of return. iv) At the same time it was provided (a) that on conversion of the CCDs FMO would own 99% of the equity of Vinca and further that (b) the Articles of Vinca were amended to provide that any decision regarding the OPCDs/investment could only be 9 Page 9 taken by FMO nominees on the Board of Vinca. (c) the DTDs for the Amazia and Rubix OPCDs provided that the Debenture Trustee/the Petitioner would only act on the instructions of the Nominee Directors of FMO.

(a) the FDI amount would be immediately routed by Vinca to Amazia & Rubix against issue by them of OPCDs bearing a return of 14.5%. (b) FMO/its Nominee Directors could exclusively deal with the OPCDs and the Debenture Trustee/IDBI. (c) after receipt by Vinca of the fixed rate of return (14.5 per cent per annum) from Amazia and Rubix under the OPCDs, FMO would on conversion of the CCDs, become the owner of Vinca and thereby receive/become entitled to the amounts received by Vinca by way of the fixed rate of return from Amazia and Rubix. JUDGMENT vi) The Deed of Guarantee was contemporaneously executed by the Respondents on 9th December, 2009 in favour of the Debenture Trustee (the Petitioner herein) for securing the “due and punctual payment” of the principal and the interest by Amazia and Rubix to Vinca, actually to FMO and was part of the structure devised to ensure the receipt by FMO at the fixed rate of return of 14.5%. 16.3 That, if the entire transaction is looked at as a whole, it is clear that the interposing of Vinca as the nominal recipient of the FDI (against issuance of equity shares and CCDs) was a colourable and artificially structured transaction, the object and 10 Page 10

16.4 That, the present Petition has been filed to effectuate the said illegal object of securing the said fixed rate of return for FMO. Although IDBI, the Petitioner, claims to be nominally acting on behalf of Vinca, it is in fact admittedly acting only at the instance of FMO/FMO's Nominee Directors on the Board of Vinca. FMO through its Nominee Directors on the Board of Vinca has instructed IDBI to demand the said sums (principal and agreed rate of return) from Amazia and Rubix and has further instructed/required IDBI to invoke the said Guarantee and file the present Petition. (sic – actually, Plaint). This is apparent from the correspondence annexed as Exhibits-C to V to the Petition. JUDGMENT xxx 16.6 That, by the present Petition, the Petitioner, acting at the instance of FMO, is seeking to utilise the process of this Court to secure for FMO a 14.5 per cent fixed rate of return on its FDI investment, contrary to the statutory stipulation/prohibition contained in the FEMA Regulations (which incorporate/embody the FDI Policy), which require FDI in townships/housing/construction development projects to be made only by equity participation (including compulsorily convertible debentures) and prohibits/precludes any assured return/rate of 11 Page 11 return. It is submitted that this would be contrary to law, public policy and public interest.” 4. Based on this defence, the Ld. Single Judge in the

“31. According to the Plaintiff, the doctrine of Pari Delicto is not applicable, that IDBI is not a party to the conspiracy and IDBI is not acting on behalf of FMO. Even if IDBI is acting on behalf of FMO, the doctrine of Pari Delicto would not be applicable as the Defendant had induced FMO to make the FDI/Investment by representing that the transaction was FDI/FEMA complaint. 31.1 The above submission of the Plaintiff cannot be accepted. The conduct of FMO in routing its FDI nominally through Vinca to Amazia and Rubix against issuance by them of OPCDs and the amendments/provisions made in Vinca’s Articles of Association, establishes that FMO was fully aware that it could not under the FDI policy and FEMA Regulations directly invest in the OPCDs, or require that its FDI amount/investment be returned back to it with a fixed rate of return after a stipulated period i.e. without bearing an equity investment risk. The complex structure devised for FMO’s FDI investment establishes that all parties (including FMO) were aware that the transaction which was premised on return back of the FDI amount along with a fixed rate of return thereon, was not permissible under/in violation of the FDI policy and the FEMA Regulations. It is clear that in claiming the amount and initiating the present proceedings, the Plaintiff is acting at the instance of FMO/FMO nominees on the Board of Directors of Vinca. This is the stipulation in Vinca’s articles and under the DTD. In any event, inasmuch as the JUDGMENT 12 Page 12

32. The Plaintiff has lastly contended that the alleged illegal purpose of securing a fixed return has not been carried out and that if the proceedings are allowed, the money will go to Vinca and not to FMO. It has been contended that FMO cannot receive the sums without complying with the FDI Regulations for sale of shares and repatriation. 32.1 This submission too of the Plaintiff cannot be accepted. The present claim has been made and the present proceeding has been initiated/filed by the Plaintiff at the instance of FMO/FMO nominees on Vinca’s Board of Directors, in order to secure repayment/return of the FDI amount invested along with a fixed rate of return thereon i.e. for seeking the active assistance of this Court to implement/effectuate/enforce a transaction prohibited by the FDI policy and the FEMA Regulations. The contractual documents (SSA & DTD) establish that it was always agreed and understood that Vinca was only the nominal recipient of the FDI amount received from FMO and was also only nominally the recipient of the FDI amount and interest thereon at 14.5 per cent per annum to be received back from Amazia and Rubix. On receipt back by Vinca of the FDI amount and 14.5 per cent interest thereon, FMO can and will by conversion of the three CCDs become the 99% shareholder of Vinca. Under the FDI policy/FEMA Regulations, FMO can thereafter sell the shares of Vinca at the fair value, which will necessarily include JUDGMENT 13 Page 13 the value/benefit of the FDI amount and interest at 14.5 per cent thereon.

33.2 That under the provisions of the FDI Policy, an Indian Company which has received foreign direct investment can utilise its funds downstream only for making investment by way of equity instruments (i.e. in the form of equity capital or compulsorily and mandatorily convertible preference shares or debentures); 33.3 That Investment by an Indian Company in OPCDs issued by subsidiary (also an Indian Company) would amount to an external commercial borrowing. xxx JUDGMENT 37.2 In the case in hand, I am prima facie of the view that the structure/device of routing FMO's FDI amount of Rs. 418 crores to Amazia and Rubix through the newly interposed Vinca (as the nominal recipient of the FDI) was a colourable device structured only to enable FMO to secure repayment (through Vinca) of its FDI amount and interest thereon at 14.75%, contrary to the statutory FEMA Regulations and the FDI policy embodied therein, which only permit FDI investment in townships/real estate development sector to be made in the form of equity (including Compulsorily Convertible Debentures) and preclude any assured return. I am also prima facie of the 14 Page 14

37.3 Further the question of the Defendant not being allowed to plead its own wrong also does not arise in the facts of the present case. Through the present Petition, the Plaintiff (who is admittedly acting at the instance of FMO/FMO's nominees) is in effect seeking the assistance of this Court to enable/enforce recovery by FMO of its FDI amount and interest thereon (through Vinca), contrary to the provisions of the FEMA Regulations and FDI policy embodied therein. As has been held by the Hon'ble Supreme Court in the case of Immami Appa Rao vs. G. Ramalingamurthi (supra), the Plaintiff who wants orders in his favour, is actually seeking the active assistance of the Court to achieve what the law prohibits/declares illegal and that is clearly and patently inconsistent with public interest. Moreover, as has been held by the Supreme Court i n the above case, in such a case there can be no question of estoppel and the paramount consideration of public interest requires that the plea be allowed to be raised and tried.” JUDGMENT xxx 40.2 In my view, the Plaintiff is also not correct when they state/submit that the judgment supports the Plaintiff in contending that the Defendant had not “brought on record a shred of material to show how the facts of the present dispute would mandate 15 Page 15

JUDGMENT xxx 42. In the circumstances I am of the view that the Defendant has raised triable issues which require adjudication on further evidence at the time of final disposal of the suit. Hence the following order: (i) Unconditional leave is granted to the Defendant to defend the above suit; (ii) The suit is transferred to the list of commercial causes and the Defendant is directed to file its written statement on or before 15th June, 2015; 16 Page 16

5. Since the summary suit is filed on a Corporate Guarantee, and since this document has been heavily relied upon by Dr. Abhishek Manu Singhvi, Ld. Senior Counsel on behalf of the appellant, it is necessary to set out some of the clauses of this Guarantee. It may first be noticed that the deed th of Corporate Guarantee cum Mortgage, dated 9 December, 2009, was made by Ackruti City Ltd. as guarantor. Ackruti City Ltd. has since become Hubtown Ltd., the JUDGMENT Respondent-defendant. IDBI Trusteeship Services Ltd. is described as the debenture trustee for the benefit of Vinca Developer Pvt. Ltd., for the Amazia Optional Partially Convertible Debentures (hereinafter referred to as “ OPCDs ”) and the Rubix OPCDs, and appointed pursuant to the Amazia OPCD subscription and debenture trust deed and the Rubix 17 Page 17 OPCD subscription and debenture trust deed. The very opening clause of the Deed of Corporate Guarantee states as follows: “A. GUARANTEE

1. It shall ensure that Amazia shall duly and punctually pay or repay the Amazia Secured Obligations and Rubix shall duly and punctually pay or repay the Rubix Secured Obligations and Rubix Facility Secured Obligations, including but not limited to the Principal Amount under the Amazia OPCD Subscription and Debenture Trust Deed and the Rubix OPCD Subscription and Debenture Trust Deed, respectively and the Facility, together with all interest, liquidated damages, commitment charges, premia on prepayment or on redemption, costs, expenses, and other monies due to (i) the Debenture Holder and the Debenture Trustee and any remuneration and charges that and (ii) the Lender and the Security Trustee and any remuneration and charges that might be payable to the Security Trustee, in accordance with the Facility Agreement and perform and comply with all the other terms, conditions and covenants contained in the OPCD Subscription and Debenture Trust Deeds and the Facility Agreement. JUDGMENT 2. The Surety guarantees to the Debenture Trustee acting for the benefit of the Debenture 18 Page 18

JUDGMENT 19 Page 19 Debenture Approved Instructions) and the Security Trustee certify the same in writing.

14. Notwithstanding the Debenture Holder’s/the Debenture Trustee’s and the Security Trustee’s/ Lender’s rights under any security which the Debenture Holder/ the Trustee (acting on Approved Instructions) and the Security Trustee, jointly and severally, shall have the fullest liberty to call upon the Guarantor to pay all or part of the monies for the time being due to the Debenture Holder/ the debenture Trustee and/or the Security Trustee/ the Lender (as the case may be) in respect of the Secured Obligations without requiring the Debenture Trustee/ the debenture Holder and/or the Security Trustee/ the Lender to realize from the Issuers the amount outstanding to the Debenture Holder/ the Debenture Trustee and/or the Security Trustee/ the Lender pursuant to the Debentures/ Facility and/or requiring the Debenture Trustee/ the Debenture Holder and/or the Security Trustee/ the Lender to enforce any remedies or securities JUDGMENT 20 Page 20 available to the Debenture Trustee/ the Debenture Holder and/or the Security Trustee/ the Lender.

JUDGMENT 21 Page 21

SCHEDULE I FORM OF DEMAND CERTIFICATE To: Ackruti City Limited [as “Guarantor”] From: [.] [as “Debenture Trustee”/ Security Trustee”] Dated: [.] Dear Sirs, Ref: Deed of Corporate Guarantee cum Mortgage dated [.] (the “Deed” ) executed by the Guarantor in favour of the Debenture Trustee and the Security Trustee. [Amazia Developers Private Limited/Rubix Trading Private Limited] has not fulfilled its obligations under [the Amazia OPCD Subscription and Debenture Trust Deed dated [.] and/or the Rubix OPCD Subscription and Debenture Trust Deed dated [.] and/or the Facility Agreement] and an amount of Rs. [.] (Rupees [.] only) is due and payable by [Amazia Developers Private Limited/Rubix Trading Private Limited]. Accordingly, we hereby give you notice pursuant to Clause 2 and Clause 31 of the Deed that we require you to pay such amount. JUDGMENT All amounts due should be paid to the account [details of account] entitled [.] under the [.] 22 Page 22 immediately and in no event later than 5 Business Days from the date hereof. Capitalised terms used herein shall have the meaning given to them in the Guarantee. Yours faithfully [Debenture Trustee]/ [Security Trustee]” 6. It is on this Corporate Guarantee that the Summary Suit is based. Dr. Singhvi has argued before us that there has been no violation of the FEMA Regulations, 1999, as observed by the Ld. Single Judge. In particular, he referred to and relied upon Regulations 4 and 5 of the FEMA Regulations, which are set out as follows: JUDGMENT “Restriction on an Indian entity to issue security to a person resident outside India or to record a transfer of security from or to such a person in its books :- 4. Save as otherwise provided in the Act or Rules or Regulations made thereunder, an Indian entity shall not issue any security to a person resident outside India or shall not record in its books any transfer of security from or to such person:- 23 Page 23

5. (1) (i) A person resident outside India (other than a citizen of Bangladesh or Pakistan) or an entity incorporated outside India (other than an entity in Bangladesh or Pakistan), may purchase shares or convertible debentures or warrants of an Indian company under Foreign Direct Investment Scheme, subject to the terms and conditions specified in Schedule 1. Explanation.--- Shares or convertible debentures containing an optionality clause but without any option/right to exit at an assured price shall be reckoned as eligible instruments to be issued to a person resident outside India by an Indian company subject to the terms and conditions as specified in Schedule 1.” JUDGMENT 7. Dr. Singhvi argued that there is no breach whatsoever of the Regulations inasmuch as the suit, based upon a Corporate Guarantee to enforce its terms, is filed by an Indian company, namely, the debenture trustee IDBI Trusteeship Pvt. Ltd., against another Indian company namely Hubtown Ltd, the 24 Page 24 beneficiary being a subsidiary of Hubtown namely Vinca, which is also an Indian company. There is therefore no question of any funds going out of the country in violation of any FEMA

benefit of Vinca which is an Indian company. He argued before us that admittedly 418 crores were paid by FMO, a Dutch ₹ company, and have been swallowed by the development project that has been set up by Amazia and Rubix. He also argued that there is no question of any infraction of the FEMA Regulations for the reason that these funds went to purchase equity shares of Vinca in the form of fully convertible debentures, such debentures having to be converted into shares after a certain period, and that, therefore, there was no JUDGMENT question of any illegality in the said transaction. He further submitted that it is only in 2011 that defaults were made in payment, as a result of which the Corporate Guarantee was invoked. The said Corporate Guarantee is unconditional and not a word has been stated against its invocation, namely, that it has not been alleged to have been invoked wrongly. According to him, there is no defence whatsoever to the 25 Page 25 suit, and the defence being entirely frivolous and vexatious, leave to defend ought to have been refused altogether. But, he stated as an alternative argument, that in

amount claimed in the plaint. He also submitted before us that the test laid down in Mechelec Engineers & Manufacturers v. Basic Equipment Corporation, (1976) 4 SCC 687 is no longer good law in view of the fact that O.XXXVII of the Code of Civil Procedure, 1908 (“ CPC ”) was amended in 1976, and it is the amended provision that has to be looked at. He cited certain judgments before us to show that this court has taken the view that the amended provision makes a sea change in the law, as a result of which it is open to the court, even if it thinks that a JUDGMENT triable issue is made out, to secure the plaintiff in monetary terms as a condition for leave to defend the suit. 8. Shri Aspi Chinoy, Ld. senior counsel appearing on behalf of the Respondent, has reiterated the submissions of his predecessor in the Bombay High Court. According to him there is a clear breach of the FEMA Regulations and this being so, 26 Page 26 the Ld. Single Judge was correct in referring to the judgment in Immami Appa Rao vs. G. Ramalingamurthi , (1962) 3 SCR 739, and stating that where two persons may be party to an

interest, in not lending the court’s aid to a person who comes to court to enforce such illegality. That this may incidentally benefit the defendant is of no moment, and therefore the Ld. Single Judge was correct in prima facie coming to the conclusion that the suit was to lend assistance to the plaintiff in enforcing something illegal, the Corporate Guarantee being part of the larger illegal transaction. According to ld. senior counsel, there is in fact no change made by the amendment of 1976, save and except in one area – that where the defendant admits that a JUDGMENT certain amount is due from him, then even though leave to defend may be granted, the admitted amount ought to be deposited or secured. Short of this change, the law continues to be the same, and therefore, according to him, triable issues having been raised in the present case, it is clear that clause (e) of the propositions laid down in paragraph 8 of Mechelec ’ s case alone would entitle the Plaintiff to an order for deposit into 27 Page 27 court or security, and sub-clause (e) not being attracted, the Ld. Single Judge was absolutely right in the conclusion that he reached. He also asked us not to interfere with the Ld. Single

perverse in the Single Judge's conclusions. 9. This case therefore raises a larger and very important question: namely, whether the judgment in Mechelec’s case continues to be the law even after the amendment of O.XXXVII in 1976. To appreciate the respective submissions of counsel, it is necessary to set out O.XXXVII Rule 3 as it stood pre-amendment and as it now stands. O.XXXVII, Rule 3 (pre-amendment) JUDGMENT “ 3. Defendant showing defence on merits to have leave to appear. (1) The Court shall, upon an application by the defendant, give leave to appear and to defend the suit, upon affidavits which disclose such facts as would make it incumbent on the holder to prove consideration, or such other facts as the Court may deem sufficient to support the application. (2) Leave to defend may be given unconditionally or subject to such terms as to payment into Court, giving security, framing and recording issues or otherwise as the Court thinks fit.” 28 Page 28

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(7) The Court or Judge may, for sufficient cause shown by the defendant, excuse the delay of the defendant in entering an appearance or in applying for leave to defend the suit.” 30 Page 30 10. The 3 judge bench in Mechelec’s case heard an appeal from a judgment of the Delhi High Court. In paragraph 2 of the judgment, the unamended O.XXXVII Rule 3 is set out, after

which arose before them in that appeal by special leave was whether the High Court could, in exercise of its powers under Section 115 of the CPC, interfere with the discretion of the district court in granting unconditional leave to defend to the defendant-appellant, upon grounds which even a perusal of the impugned judgment of the High Court showed to be reasonable. The answer to the question thus posed was in the question itself, and this Court had no doubt that the High Court judgment, in interfering with the trial court’s judgment under its JUDGMENT revisional jurisdiction, was wrong. Paragraphs 6 and 7, which constitute the ratio of the judgment, went into the well-established principles repeatedly laid down by this court which govern the jurisdiction of the High Courts under Section 115 of the CPC. This Court held that such principles had been ignored in the judgment under appeal. However, in paragraph 8, the judges set out the 5 propositions governing O.XXXVII laid 31 Page 31 down in Kiranmoyee Dassi Smt v. Dr J. Chatterjee, AIR 1949 Cal 479, as follows:

( b ) If the defendant raises a triable issue indicating that he has a fair or bona fide or reasonable defence although not a positively good defence the plaintiff is not entitled to sign judgment and the defendant is entitled to unconditional leave to defend. ( c ) If the defendant discloses such facts as may be deemed sufficient to entitle him to defend, that is to say, although the affidavit does not positively and immediately make it clear that he has a defence, yet, shews such a state of facts as leads to the inference that at the trial of the action he may be able to establish a defence to the plaintiff's claim the plaintiff is not entitled to judgment and the defendant is entitled to leave to defend but in such a case the court may in its discretion impose conditions as to the time or mode of trial but not as to payment into court or furnishing security. JUDGMENT ( d ) If the defendant has no defence or the defence set-up is illusory or sham or practically moonshine then ordinarily the plaintiff is entitled to leave to sign 32 Page 32 judgment and the defendant is not entitled to leave to defend.

11. As the case before the court did not fall within clause (e), this Court held that imposition of a condition to deposit an amount in court would not be possible, and allowed the appeal as aforesaid. It is interesting to note that a binding four judge bench decision on order 37 in Milkhiram (India) (P) Ltd. v. Chamanlal Bros., AIR 1965 SC 1698, was bunched together JUDGMENT with several other judgments that were relied upon in paragraph 6, as judgments relating to the exercise of jurisdiction of High Courts under section 115 of the CPC. 12. We find that Milkhiram’s case is in fact an important judgment on the scope of O.XXXVII of the CPC, and is not a judgment on principles to be applied under Section 115. This 33 Page 33 judgment, being a judgment of four learned judges of this court, set out, in paragraph 1, O.XXXVII, Rule 3 sub-rules (2) and (3) as amended by the Bombay High Court at the relevant time, as follows: “(2) If the defendant enters an appearance, the plaintiff shall thereafter serve on the defendant a summons for judgment returnable not less than ten clear days from the date of service supported by an affidavit verifying the cause of action and the amount claimed and stating that in his belief there is no defence to the suit. (3) The defendant may at any time within ten days from the service of such summons for judgment by affidavit or otherwise disclosing such facts as may be deemed sufficient to entitle him to defend, apply on such summons for leave to defend the suit. Leave to defend may be granted to him unconditionally or upon such terms as to the Judge appear just.” 13. The trial court found that the defence disclosed by the JUDGMENT affidavit required by sub-rule (3) was sufficient to grant leave to defend the suit, but as against a claim of 4,05,434.38/-, the ₹ Court ordered the appellant to deposit security worth 70,000/-. ₹ A first appeal having been dismissed, the Supreme Court had to decide whether it was incumbent upon the trial court to grant unconditional leave to defend, having found that a triable issue 34 Page 34 exists. Since this judgment is of seminal importance in deciding the issue raised before us, it is necessary for us to quote parts of this judgment, as follows:

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14. We may hasten to add that Mechelec’s case has since been followed in a series of judgments of this court – Municipal Corpn. of Delhi v. Suresh Chandra Jaipuria , (1976) 4 SCC 719 at para 11; Sunil Enterprises v. SBI Commercial & International Bank Ltd. , (1998) 5 SCC 354 at para 4; State Bank of Saurashtra v. Ashit Shipping Services (P) Ltd. , 39 Page 39 (2002) 4 SCC 736 at para 10; Uma Shankar Kamal Narain v. M.D. Overseas Ltd ., (2007) 4 SCC 133 at paras 8 and 9; SIFY Ltd. v. First Flight Couriers Ltd. , (2008) 4 SCC 246 at para

Sewerage Board , (2009) 2 SCC 432 at para 19; R. Saravana Prabhu v. Videocon Leasing & Industrial Finance Ltd. , (2013) 14 SCC 606 at para 4; and State Bank of Hyderabad v. Rabo Bank , (2015) 10 SCC 521 at para 16. 15. However, there are two judgments of this Court which directly deal with the amendment made to O.XXXVII and the effect thereof on the ratio contained in Mechelec’s case . In Defiance Knitting Industries (P) Ltd. v. Jay Arts, (2006) 8 JUDGMENT SCC 25, this Court, after setting out the amended O.XXXVII and after referring to Mechelec’s case , laid down the following principles – “While giving leave to defend the suit the court shall observe the following principles: ( a ) If the court is of the opinion that the case raises a triable issue then leave to defend should ordinarily be granted unconditionally. See Milkhiram (India) (P) Ltd. v. Chamanlal Bros. [AIR 1965 SC 1698 : 68 Bom LR 36] The question whether the defence raises a triable issue or not has to be ascertained by 40 Page 40

asked to render its decision on whether the judgment in JUDGMENT Mechelec’s case was to a large extent rendered ineffective in view of the amended O.XXXVII. This Court found:

41 Page 41 of the second proviso to sub-rule (5), the said provision was altered to the extent that the deposit of any admitted amount is now a condition precedent for grant of leave to defend a suit filed under Order 37 of the Code. A distinction has been made in respect of any part of the claim, which is admitted. The second proviso to sub-rule (5) of Rule 3 makes it very clear that leave to defend a suit shall not be granted unless the amount as admitted to be due by the defendant is deposited in court.” [para 15] 17. It is thus clear that O.XXXVII has suffered a change in 1976, and that change has made a difference in the law laid down. First and foremost, it is important to remember that Milkhiram’s case is a direct authority on the amended O.XXXVII provision, as the amended provision in O.XXXVII Rule 3 is the same as the Bombay amendment which this Court was considering in the aforesaid judgment. We must hasten to JUDGMENT add that the two provisos to sub-rule (3) were not, however, there in the Bombay amendment. These are new, and the effect to be given to them is something that we will have to decide. The position in law now is that the trial Judge is vested with a discretion which has to result in justice being done on the facts of each case. But Justice, like Equality, another cardinal constitutional value, on the one hand, and arbitrariness on the 42 Page 42 other, are sworn enemies. The discretion that a Judge exercises under Order XXXVII to refuse leave to defend or to grant conditional or unconditional leave to defend is a discretion

baffling alternatives present themselves. The life of the law not being logic but the experience of the trial Judge, is what comes to the rescue in these cases; but at the same time informed by guidelines or principles that we propose to lay down to obviate exercise of judicial discretion in an arbitrary manner. At one end of the spectrum is unconditional leave to defend, granted in all cases which present a substantial defence. At the other end of the spectrum are frivolous or vexatious defences, leading to refusal of leave to defend. In JUDGMENT between these two extremes are various kinds of defences raised which yield conditional leave to defend in most cases. It is these defences that have to be guided by broad principles which are ultimately applied by the trial Judge so that justice is done on the facts of each given case. 43 Page 43 18. Accordingly, the principles stated in paragraph 8 of Mechelec’s case will now stand superseded, given the amendment of O.XXXVII R.3, and the binding decision of four

a. If the defendant satisfies the Court that he has a substantial defence, that is, a defence that is likely to succeed, the plaintiff is not entitled to leave to sign judgment, and the defendant is entitled to unconditional leave to defend the suit; b. if the defendant raises triable issues indicating that he has a fair or reasonable defence, although not a positively good defence, the plaintiff is not entitled to sign judgment, and the defendant is ordinarily entitled to unconditional leave to defend; c. even if the defendant raises triable issues, if a doubt is left JUDGMENT with the trial judge about the defendant’s good faith, or the genuineness of the triable issues, the trial judge may impose conditions both as to time or mode of trial, as well as payment into court or furnishing security. Care must be taken to see that the object of the provisions to assist expeditious disposal of commercial causes is not defeated. Care must also be taken to 44 Page 44 see that such triable issues are not shut out by unduly severe orders as to deposit or security; d. if the Defendant raises a defence which is plausible but

mode of trial, as well as payment into court, or furnishing security. As such a defence does not raise triable issues, conditions as to deposit or security or both can extend to the entire principal sum together with such interest as the court feels the justice of the case requires. e. if the Defendant has no substantial defence and/or raises no genuine triable issues, and the court finds such defence to be frivolous or vexatious, then leave to defend the suit shall be refused, and the plaintiff is entitled to judgment forthwith; JUDGMENT f. if any part of the amount claimed by the plaintiff is admitted by the defendant to be due from him, leave to defend the suit, (even if triable issues or a substantial defence is raised), shall not be granted unless the amount so admitted to be due is deposited by the defendant in court. 45 Page 45 19. Coming to the facts of the present case: a. It is clear that a sum of 418 crores has been paid by ₹ FMO, the Dutch company, to Vinca for purchase of shares as

itself is not alleged to be violative of the FEMA regulations. b. The suit is filed only on invocation of the Corporate Guarantee which on its terms is unconditional. It may be added that it is not the defendant's case that the said Corporate Guarantee is wrongly invoked. c. Payment under the said Guarantee is to the debenture trustee, an Indian company, for and on behalf of Vinca, another Indian company, so that prima facie again there is no infraction of the FEMA Regulations. JUDGMENT d. Since FMO becomes a 99% holder of Vinca after the requisite time period has elapsed, FMO may at that stage utilise the funds received pursuant to the overall structure agreements in India. If this is so, again prima facie there is no breach of FEMA Regulations. e. At the stage that FMO wishes to repatriate such funds, RBI permission would be necessary. If RBI permission is not 46 Page 46 granted, then again there would be no infraction of FEMA Regulations. f. The judgment in Immami Appa Rao’s case would be

otherwise. 20. Based on the aforesaid, it cannot be said that the defendant has raised a substantial defence to the claim made in the suit. Arguably at the highest, as held by the learned Single Judge, even if a triable issue may be said to arise on the application of the FEMA Regulations, nevertheless, we are left with a real doubt about the Defendant’s good faith and the genuineness of such a triable issue. 418 crores has been ₹ JUDGMENT stated to be utilized and submerged in a building construction project, with payments under the structured arrangement mentioned above admittedly being made by the concerned parties until 2011, after which payments stopped being made by them. The defence thus raised appears to us to be in the realm of being ‘plausible but improbable’. This being the case, the plaintiff needs to be protected. In our opinion, the defendant will 47 Page 47 be granted leave to defend the suit only if it deposits in the Bombay High Court the principal sum of 418 crores invested ₹ by FMO, or gives security for the said amount of 418 crores, ₹

Bombay High Court within a period of three months from today. The appeal is accordingly allowed, and the judgment of the Bombay High Court is set aside. 21. We further direct that the suit be tried expeditiously, preferably within a period of one year from the date of this judgment, uninfluenced by any observations made by us herein. ……………………J. (Kurian Joseph) JUDGMENT ……………………J. New Delhi; (R.F. Nariman) November 15, 2016 48 Page 48