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1 IN THE HIGH COURT OF KARNATAKA, BANGALORE ON THE 3RD DAY OF SEPTEMBER 2012 BEFORE THE HON’BLE MR.JUSTICE RAVI MALIMATH WRIT PETITION NOS.40725-40726/2010 (GM-CPC) BETWEEN: 1. M/s. United Estate, No.16, Railway Parallel Road, Kumara Park East, Bangalore – 560 001, (Represented by its Director, Mr. Santosh Kumar C.L.) 2. H V Gowthama, Chartered Accountant, Gowthama and Company, 23/57, 41st Cross, East End, C Main Road, 9th Block, Jayanagar, Bangalore – 560 059. … PETITIONERS (By Sri K. Anandarama for M/s.Anandaram Prashanth Vikram, Adv.) AND: 1. M/s. Pebble Bay Developers Pvt. Ltd., Raheja Chambers, Linking Road, & Main Avenue, Santa Cruz (West) Mumbai – 400 054. Branch Office at: Onyx Centre, No.5, 4th Floor, Museum Road,
2 Bangalore – 560 001, Rep. by its Managing Director, Mr. Deepak Bhagwandas Raheja. 2. Mr. Aditya Raheja, Director, M/s. Pebble Bay Developers Pvt. Ltd., Raheja Chambers, Linking Road, & Main Avenue, Santa Cruz (West) Mumbai – 400 054. Also available at Onyx Center, No.5, 4th Floor, Museum Road, Bangalore- 560 001. 3. Avani V. Raheja, Director, Raheja Chambers, Linking Road, & Main Avenue, Santa Cruz (West) Mumbai – 400 054, Branch office at: Onyx Center, No.5, 4th Floor, Museum Road, Bangalore- 560 001. 4. Vijay Bhagwandas Raheja, Director, Raheja Chambers, Linking Road, & Main Avenue, Santa Cruz (West) Mumbai – 400 054, Branch office at: Onyx Center, No.5, 4th Floor, Museum Road, Bangalore- 560 001. 4. Wachovia Securities, Functioning in the name of Wellsfargo Bank, No.301, Windsor, Kalina,
3 Santa Cruz East, Mumbai, Rep. by its Nominee Director: James Hillyer Boice III. … RESPONDENTS (By Sri Ajesh Kumar.S. for M/s. A K S Law Associates, Adv. for R1 & R2. R3 & R4 – Served. Shri P. Udaya Shankar Rai, Adv. for R5) These writ petitions are filed under Articles 226 and 227 of the Constitution of India praying to call for records in O.S.No.25412/2010 and further pleased to set aside the orders passed on I.A.No.II dated 18.09.2010 at Annexure – F in O.S.No.25412/2010 on the file of the City Civil Judge, Bangalore. These writ petitions coming on for Preliminary hearing in B-Group this day, the Court passed the following: ORDER The petitioners/plaintiffs filed a suit in OS No.25412/2010 seeking recovery of a sum of Rs.12,05,56,134/- along with interest thereon. During the pendency of the suit, the 5th defendant filed an application - IA-2 under Order I Rule 10 read with section 151 of CPC on behalf of Wells Fargo Bank, National Association, seeking deletion of its name from the array of parties. By the impugned order, the same was allowed. The 5th defendant was ordered to be
4 deleted from the cause title. Aggrieved by the same, the plaintiffs have filed these Writ Petitions. 2. The learned counsel for the petitioners contends that the impugned order is bad in law and liable to be set aside. That the Trial Court mis-directed itself in allowing IA 2. The citation relied upon, while passing the impugned order is not applicable to the case on hand. The Trial Court has erroneously held that the defendant No.5 is neither a necessary nor a proper party to the suit. He further contends that defendant No.5 is not only a proper but he is also a necessary party. In support of his contention, he relies on the plaint averments to contend that defendant No.5 is a proper party. In support of his case, he relies on the judgment reported in (2012) 6 SCC 613 in the case of Vodafone International Holdings B.V. Vs. Union of India and another, with reference to para 274 of the order to contend that the control of a company vests in the voting powers of its shareholders. Shareholders holding a controlling interest can determine the nature
5 of the business, its management, enter into contract, borrow money, buy, sell or merge the company. In so relying, he contends that the reliance placed by the Trial Court on the decision reported in 1984(55) Company Cases 737 Calcutta in the case of Purna Investment Ltd., Vs. Bank of India Ltd., and others is a wrong reliance. 3. On the other hand, the learned counsel for the 5th defendant defends the impugned order and contends that there is no error committed by the Trial Court that calls for interference.
He submits that while considering an application under Order 1 Rule 10 of CPC, it is the plaint averments that is to be considered and nothing beyond that. In support of his case, he relies upon the judgment reported in JT 1992(2) SC 116 in the case of Ramesh Hiranand Kundanmal Vs. Municipal Corporation of Greater Bombay and others, in particular refers to para 13 and 14. He further contends that what makes a person, a necessary party is not merely that he has relevant evidence to give on
6 some of the questions involved, that would only make him a necessary witness. What is necessary is that a person must be directly or legally interested in the action i.e. he can say that the litigation may lead to a result which will affect him legally i.e. by curtailing his legal rights. 4. He also relies on the judgment in the case of Purna Investment Ltd., Vs. Bank of India and Others reported in 1984(55) Comp.Cas. 737 Calcutta, which has been relied upon by the trial court, in support of his case. Reliance is also placed on the judgment of the Supreme Court reported in 1955(XXV) Comp.Cas. page 1 in the case of Mrs. Bacha F. Guzdar, Bombay Vs. Commissioner of Income Tax, Bombay wherein the said view was affirmed. He further contends that a discretion having been exercised by the trial court, the same should not be interfered by the appellate court. In support thereof, he relies on the judgment reported in 1990 (Supplement) SCC 727 in the case of Wander Ltd., & another Vs. Antox India Pvt. Ltd., in particular refers
7 to para 14 and contends that the appellate court would normally not be justified in interfering with the exercise of discretion in appeal solely on the ground that if it had considered the matter at the trial stage, it would have come to a contrary conclusion. 5. Reliance is also placed on the judgment dated 18.4.2012 passed by the learned Single Judge of this court in Criminal Petition No.2090/2011 and connected matters, in particular with reference to para 3 of the order. In the said proceeding under the Negotiable Instruments Act, defendant No.5 herein was issued with process. The same was quashed by this court holding that the averments of the complaint, accepted at their face value does not bring the petitioner namely the 5th defendant within the purview of Section 141 of the Negotiable Instruments Act. Hence, he pleads that he needs to be deleted from these proceedings. 6. The learned counsel for the respondents 1 & 2 supports the case of defendant No.5. He too relies on
8 various judgments in support of his case. The first one is the judgment of the Supreme Court reported in MANU/SC/0663/2012 in the case of Vidur Impex and Traders Pvt. Ltd., and Others Vs. Tosh Apartments Pvt.Ltd., and others. He relies on para 36 of the judgment to re-iterate the broad principles which should govern disposal of an application for impleadment. Reliance is also placed on the judgment of the Supreme Court reported in MANU/SC/0427/2010 in the case of Mumbai International Airport Pvt. Ltd., Vs. Regency Convention Centre and Hotels Pvt. Ltd., and Others, in particular reference to para 8 & 12 of the judgment. With reference to para 8 of the judgment, his contention is that it is only a proper and necessary party who can be impleaded. With reference to para 12 of the judgment, he contends that a ‘discretion’ when applied to courts of justice, would mean discretion guided by law. It must be governed by rule, and not by humour; it must not be arbitrary, vague and fanciful, but legal and regular.
9 7. Heard learned counsels. 8. Reliance was placed by the trial court on the decision rendered by the Calcutta High Court in the case of Purna Investment Ltd., Vs. Bank of India Ltd., and Others reported in 1984(55) Comp.Cas. 737 Calcutta, which followed the judgment reported in 1955(XXV) Comp.Cases page 1, in the case of Mrs. Bacha F. Guzdar, Bombay Vs. Commissioner of Income Tax, Bombay. By placing reliance on the said judgment, the Trial Court concluded that defendant No.5 is neither a necessary party nor a proper party to the present suit. Placing reliance on the said judgment, the reasoning has been assigned by the Trial Court. 1955 Volume XXV Comp.Cas. page 1, arose out of a question referred by the Tribunal to the High Court of Judicature at Bombay on a substantial question of law as to: ‘Whether 60% of the dividend amounting to Rs.2,750/- received by the assessee from the two tea companies is agricultural income and as such
10 exempt under section 4(3)(viii) of the Indian Income Tax Act.” It was a substantial question of law, that was required to be answered by the High Court and the question was taken up in appeal to the Supreme Court. In so deciding the question of law, the Hon’ble Supreme Court incidentally referred to the right of a share holder in the property of the Company. In relying on page 5 of the said judgment, the trial court extracting a part of paragraph, concluded that in view of the observations made, the share holder in a company on buying shares, becomes entitled to participate in the profits of the company in which he held the shares if and when the company declared dividends subject to articles of association. That the profits or any portion thereof should be distributed by way of dividends among the shareholders. 9. The question before the Supreme Court was a question of law. It was not concerned with the rights of the share holders. The issue involved pertained to the question of availment of dividend. It had nothing to do
11 with the rights of the share holders. Therefore, the entire basis on which the trial court has passed the impugned order is erroneous. 10. A reading of the entire judgment, would appear that it was the only consideration of the trial court. There is no other reasoning given by the Trial Court, except placing reliance on the said judgment. Even though in the next para, the Trial Court states thus: “13. Admittedly, the entire claim of the plaintiff is against defendant No.1 – Company and directors of defendant No.1 Company i.e. defendant No.2 to 4 are already impleaded in this case, either as an investor or share holder.
Defendant No.5 is not either necessary party nor a proper party to the present suit.” 11. The relief sought for by the plaintiffs is for a judgment and decree against the defendants jointly and severally. The trial court held that admittedly, the entire claim of the plaintiffs is against defendant No.1
12 Company and its directors. It is incorrect. By so holding, the Trial Court further states that since the entire claim is against defendant No.1 – Company i.e., defendant Nos.2 to 4 were already impleaded in this case, either as an investor or share holder, defendant No.5 is not either a necessary party nor a proper party to the proceedings. The material on record is different. The finding of the Trial Court that the claim is only against defendant No.1 is incorrect. The prayer in the plaint is contrary to the finding of the Trial Court. Hence, on this ground also, I’m of the considered view that the Trial Court has mis-directed itself in passing the impugned order. 12. In appreciating the scope and in considering the provisions of Order I, Rule 10 of CPC with regard to deletion of defendant No.5, the averments of the plaint would necessarily have to be considered. In paragraphs 5, 6, 10, 11 and 31 of the plaint, it is averred that: “5. The Fifth Defendant Company is a foreign investor in the First Defendant
13 Company holding 49% share in the First Defendant Company.
Since the Fifth Defendant is a share holder in the company it is represented by a Nominee Director in the First Defendant Company to look after its interest in the said company. The First Defendant is also in charge of and responsible for the affairs, administration of the Fifth Defendant Company in the matter of conduct of the Fifth Defendant business affairs. Further, it was mainly on account of the investments made by the said foreign investor into the Project, that the Second and Fourth Defendants were able to undertake execution of the Pebble Bay Project. 6. It is pertinent to note that the Fifth Defendant is a foreign investor, whose main aim and purpose is to invest in the Fifth Defendant Company in order to enable the second and the fourth defendant to execute the project. Post execution of the Project and after realisation of the investor returns, the Fifth Defendant has no other long term interest in the project. However, the 5th defendant as long as it remains as the Investor in the Fifth Defendant Company,
14 would hold the post of a nominee director and is therefore responsible for all the major decisions of the First Plaintiff Company. Currently the nominee director of the Fifth Defendant Company is Mr. James Hillyer Boice III. 10. The Pebble Bay project is situated at A 11, PID No.100/12/A-11-Ward No.100, NTI Layout, 1st Stage, Nagashettyhalli Sy. No.6, 17, 18, 19/1 to 19/11, 20/1 and 35, Bangalore-560 094 and is proposed to be a luxurious high end residential apartment (‘Project’).
The Project was initially conceptualised in January 2006 and the construction work on the Schedule Property was launched around March 2006. The First Defendant right from day one of the Project has been incurring various problems on the Project. On account of various problems countered by the Defendant’s and also being unable to successfully resolve the said issues the defendant No.2 and defendant No.4 approached the First Plaintiff in the October 2006. The defendants were keen to utilise the experience and expertise of the First Plaintiff (i.e. United Estates) with respect to
15 successful investment of the foreign funds by the Fifth Defendant into the First Defendant Company, so as to enable the Second and the Fourth Defendant to execute the Project (i.e. Pebble Bay”). The First Plaintiff was informed by the defendant No.2 and defendant No.4 that the project to be constructed under the name of Pebble Bay Developers Private Limited was a very important highly prestigious Project for the First Defendant Company and that the Project was also one of the first of its kind being undertaken by the Defendants in the city of Bangalore. After much of negotiations and discussions, the First plaintiff agreed to render its services to the First Defendant as regards the said project. 11. The First Plaintiff agreed to render its services to the second and the Fourth Defendant and accordingly, the First Plaintiff carried out a series of meetings and negotiations with the Fifth Defendant during the period October 2006 to January 2007. The Fifth Defendant based on the various meetings and negotiations carried out between the First Defendant Company and
16 the First Plaintiff, agreed to invest in the First Defendant Company. It is pertinent to note that it was based on the said assurance of investment into the First Defendant, that the second and fourth defendants were able to undertake investment in the Pebble Project wherein the said cost of the Project is not less than a sum of Rs.150 crores (Rupees One hundred and fifty crores). 31. The First Defendant Company is registered under the provisions of the Companies Act and the Defendant No.2 to 5 are the directors of the first Defendant Company and are responsible and in charge for the day to day affairs and the conduct of the business of the first Defendant Company. The cheques have been issued with the consent and knowledge of the defendant No.2 to 5 hence all the Defendants are jointly and severally liable to pay the Plaintiff’s the following sums. A First Plaintiff Rs.11,95,18,812/- B Second Plaintiff Rs.10,37,502/- C Interest @ 18% per annum from 12.6.2009 till date of suit. Rs.1.44,46,940/- TOTAL Rs.13,50,3,254/-
17 The defendants are jointly and severally liable to pay the aforesaid sums along with interest as claimed as on the date of payment. 13. On a careful reading of these paragraphs, it is evident that the case of the plaintiffs is that the 5th defendant is a Foreign investor in the first defendant – Company holding 49% of shares and as a share holder in the first defendant – Company, where the main object of the 5th defendant is to invest in first defendant – Company in order to enable the 4th and 5th defendant to undertake to execute the first defendant’s project. On such execution, 5th defendant would not have any other long term interest in the project. As long as 5th defendant remains as an investor in the first defendant Company, he would hold the post of a nominee director and therefore, responsible for all major decisions of the first plaintiff. The defendants were keen to utilise the experience and expertise of the first plaintiff i.e. United Estates with respect to the successful investment of the
18 foreign funds by the fifth defendant into the first defendant Company, so as to enable the second and 4th defendant to execute the project. Various meetings and negotiations were held between the first plaintiff and 5th defendant during the period October 2006 to January 2007 and on the basis of which, the 5th defendant agreed to invest in the first defendant Company and that the cost of the project is not less than a sum of Rs.150 crores. It is the further case of the plaintiffs that the 5th defendant along with other defendants are responsible and incharge of the day to day affairs and to the conduct of the business of the first defendant Company. Therefore, all the defendants are jointly and severally liable to pay the plaintiffs. On these and other pleadings, the suit was filed seeking for a judgment and decree against the defendants jointly and severally. The provisions of Order 1 Rule 10 of CPC, provides that only a necessary or a proper party may be added. A necessary party is one without whom no order can be made effectively. A proper party is one in whose
19 absence an effective order can be made but whose presence is necessary for a complete and final decision on the question involved in the proceeding. 5th defendant would be a proper and a necessary party to the adjudication of the suit. The provisions of Order 1 Rule 10 CPC refer to the presence of such defendant which may be necessary in order to enable the court to effectually and completely adjudicate upon and settle all the questions involved in the suit. The court would necessarily consider the averments in the plaint. The averments in the plaint culled out above show that the 5th defendant is a necessary and proper party for the adjudication of the suit. 14. As held in the case of Mumbai International Airport Pvt. Ltd., Vs. Regency Convention Centre and Hotels Pvt. Ltd., & Others reported in MANU/SC/0427/2010, the exercise of discretion should be sound. It should be governed by Rule of law and not humour. A reading of the plaint averments would lead to a conclusion that the discretion exercised
20 by the trial court would not satisfy any of these requirements to show that the 5th defendant would not be necessary for the just and final adjudication of the suit. On a reading of the plaint averments it would not show that there have been either vague or fanciful claims against the 5th defendant. The claim is legal and regular. Even applying the said judgment, I’m of the considered view that the trial court has committed error in rejecting the application. 15. With reference to the judgment reported in 1990 (Supp) SCC 727 in the case of Wander Ltd., and another Vs. Antox India Pvt. Ltd., what is sought to be pleaded is that an exercise of discretion, should not be interfered lightly by the Appellate Court. If the discretion has been exercised by the trial court reasonably and in a judicial manner, the fact that the appellate court would have taken a different view, may not justify interference with the trial court’s exercise of discretion and the Appellate Court is refrained from reversing the same. Firstly, the jurisdiction exercised
21 by this court is a supervisory jurisdiction under Article 227 of the Constitution of India. It is not exercising any appellate court jurisdiction.
Further, as held hereinabove, the entire reliance placed by the trial court is based on the judgment reported in 1984(55) Company Cases 737 Calcutta. As detailed herein above, the reliance was totally misplaced. The discretion therefore in real terms has not been exercised by the trial court. It has merely followed the dicta of the Supreme Court in the said judgment and therefore, allowed the application. Under these circumstances, applying a different discretion that what the trial court has exercised would therefore not arise. No second discretion is exercised by this court which is contrary to the discretion of the trial court. The order of the trial court is wholly based on a judgment and not its discretion. 16. On the other hand, the learned counsel for the petitioner by relying on the judgment reported in (2012) 6 SCC 613 in the case of Vodafone International
22 Holdings BV Vs. Union of India, the judgment reported in 1955(XXV) Comp.Cases 1 was also considered, wherein it was held at para 257 as follows: “257. The legal relationship between a holding company and WOS is that they are two distinct legal persons and the holding company does not own the assets of the subsidiary and, in law, the management of the business of the subsidiary also vests in its Board of Directors. In Bacha F. Guzdar Vs. Commissioner of Income Tax (AIR 1955 SC 74), this Court held that shareholders’ only right is to get dividend if and when the company declares it, to participate in the liquidation proceeds and to vote at the shareholders’ meeting. Refer also to Carew and Co.Ltd., Vs. Union of India [ (1975) 2 SCC 791 ] and Carrasco Investments Ltd., Vs. Directorate of Enforcement [ (1994) 79 Comp. Cases 631 (Del) ]. 17. He further relies on para 274 of the judgment which reads as under:
23 “274. Shares, we have already indicated, represent congeries of rights and controlling interest is an incident of holding majority shares. Control of a company vests in the voting powers of its shareholders. Shareholders holding a controlling interest can determine the nature of the business, its management, enter into contract, borrow money, buy, sell or merge the company. Shares in a Company may be subject to premiums or discounts depending upon whether they represent controlling or minority interest. Control, of course, confers value but the question as to whether one will pay a premium for controlling interest depends upon whether the potential buyer believes that one can enhance the value of the company.” Therefore, in the said paragraph, even the extent of the right of the share holders has been clarified in the said judgment. That the share in the company should be subject to the premiums or discounts depending upon whether they represent controlling or minority interest. Hence, even on that ground also, the discretion
24 exercised by the trial court in relying on the said judgment is erroneous. 18. The 5th defendant has also placed reliance on the judgment passed by the learned Single Judge of this court on 18.4.2012 in Crl. Petition No.2090/2011 and connected matters. He relies on para 3 therein which reads as follows: “3. The learned Counsel for petitioner submits that petitioner M/s. Wells Fargo Bank is a company registered under the Companies Act and it can not be a Director of first accused M/s. Pebble Bay Developers Pvt. Ltd., The averments of complaint, accepted at their face value do not bring petitioner within the purview of Section 141 of the Negotiable Instruments Act. Therefore, the learned Trial Judge should not have issued process to petitioner.” Therefore, he pleads that a finding has been recorded that the 5th defendant cannot be a nominee director. However, as could be seen from the said paragraph, that is not, what this court has held. With specific
25 reference to para 3, the court has only held that in so far as the averments of the complaint is concerned, they do not bring the 5th defendant herein within the purview of section 141 of the NI Act. Hence, the judgment would be of no avail to the 5th defendant. 19. In considering an application filed under Order I Rule 10 of CPC, the parameters as laid down by the Hon’ble Supreme Court in the case reported in MANU/SC/0663/2012 would have to be followed. In para 36 of the judgment, the parameters are so mentioned. It is stated therein that at any stage of the proceedings, the court can direct impleadment of any person as a plaintiff or a defendant or whose presence is necessary for the effective and complete adjudication of the issues involved. That such a person is necessary for an effective decree to be passed. That the proper party is one whose presence would enable the court to completely and effectively and properly adjudicate on all matters and not necessarily a person against whom a decree is to be made. That if a person is not found to be
26 a proper or necessary party, the court cannot have the jurisdiction to order for impleadment against the wishes of the plaintiffs. That in a suit for specific performance, the court cannot order impleadment of a purchaser whose conduct is above board and who files an application for being joined as party within reasonable time etc., and lastly, that if the applicant is guilty of contumacious conduct or is a beneficiary of a clandestine transaction or a transaction made by the owner of the suit property in violation of the restraint order passed by the Court or the application is unduly delayed then the court would be fully justified in declining the prayer for impleadment. 20. All these facts would necessarily follow that these para meters stands attracted to the 5th defendant. The plaint averments would indicate that 5th defendant has invested a sum of Rs.150 crores. That he has an active role in the decision making of the first defendant. He is a proper and necessary party in terms of the aforesaid judgment. Hence, I’m of the considered view
27 that applying the parameters, necessarily the application requires to be rejected. For the aforesaid reasons, the petitions are allowed. The order dated 18.9.2010 passed in OS No.25412/2010 on IA No.II by the XXVI Addl. City Civil Judge at Mayohall, Bangalore is set aside. IA No.II filed by the 5th defendant is rejected. Sd/- JUDGE PL