2019 (7) TMI 1668 - HC - Indian Laws

Grant of ad interim temporary injunction - Money decree for an unliquidated sum of damages - Whether the plaintiff is entitled to be secured for such a fraud that has been played on it - HELD THAT - In various judgements, Supreme Court has held that Section 94 read with Order 39, Rule 1 is not exhaustive and circumstances may be present that are beyond the provisions. In such circumstances, the Courts have held that power may be exercised by the Civil Courts under Section 151 of the Code for the ends of justice and to prevent the abuse of the process of the Court - The MANOHAR LAL CHOPRA VERSUS BAHADUR RAO RAJA SETH HIRALAL 1961 (11) TMI 59 - SUPREME COURT judgment clearly enunciates the ratio that Civil Courts have the power to fill in the loopholes/ gaps that may be there in the Code for the ends of justice. According to the above judgment, this power is inherent and is not stultified when it comes to delivering justice. In rare and exceptional cases, Civil Courts may grant injunctions with regard to the procedural and substantial rights of the parties in fit cases for the ends of justice. The only exception is that the Civil Courts cannot in the guise of inherent powers available under Section 151 of the Code pass orders that are in conflict and are in contravention to the provisions of the Code. In the present scenario, the petitioner has brought down the threshold required for the subjective satisfaction of this Court required under Rule 1(b) by prima facie proving a case of collusion and fraud by the defendants. Furthermore, the conduct of the defendants as established in the prima facie findings gives further credence to the threat and perception of the petitioner that the defendants shall alienate their property in such a manner that the fruits of the decree shall not be available to the petitioner. It is to be further noted that the claim of the plaintiff is not predicated on a claim of simpliciter damages and losses caused to him but specific sums of money that have been passed on in an illegal and fraudulent manner by the employee to the distributors. The reports of KPMG and BDO are based on a careful audit of the documents in relation to the transactions. Upon such audit, the exact figures of excess credit have been ascertained, and therefore, the claim of the plaintiff is of an ascertained sum of money that has been illegally and fraudulently siphoned off by the employee in favour of the distributors. Ergo, in my view this is a fit case for granting an ad interim injunction against the defendants, in the manner discussed hereinafter, to secure the claim of the plaintiff. Thus, the petitioner has been able to prove a prima facie case of collusion and fraud by the respondents, the conduct of the respondents and the irreparable loss and injury that would be caused to the petitioner, the three tests for grant of ad interim temporary injunction are satisfied in the instant case, and accordingly, distributor no. 1 and distributor no. 2 are restrained from transferring and/or alienating and/or creating any third party interest in the properties. In the commercial world as exists today, the citizens have a right to expect that the judiciary shall come to their rescue at the very first instance when a fraud is committed on them. The law cannot be so narrow minded that it shall wait for umpteen years to give relief to a plaintiff that approaches the court and prima facie proves that fraud has been committed on him. It is a well established principle that fraud unravels all and no man can be allowed to take advantage of such fraud - the High Court has a duty to use its inherent powers, in appropriate cases for the ends of justice, equity and good conscience. Furthermore, in the commercial world of today it is the duty of the High Court to protect the honest businessman against persons who use unscrupulous means to cheat such a businessman. Failure to do so, would amount to eroding the confidence of the citizens in the High Court.

Summary

Issues Involved:
1. Fraudulent issuance of excess credit notes.
2. Admission and subsequent retraction of excess credit by distributors.
3. Legality and necessity of issuing an ad interim injunction.
4. Application of inherent powers of the court under Section 151 of the Code of Civil Procedure (CPC).
5. Applicability of Order 38 Rule 5 and Order 39 Rule 1(b) of the CPC.
6. Consideration of delay in approaching the court for relief.
7. Determination of substantive versus procedural rights in issuing injunctions.

Detailed Analysis:

1. Fraudulent Issuance of Excess Credit Notes:
The petitioner, a company engaged in manufacturing and marketing industrial chemicals and fertilizers, discovered that its employee had issued credit notes to distributors in excess of their entitlement. This was initially discovered in October 2016 and again in July 2017. The employee admitted to these errors, which were later found to be deliberate acts of fraud involving substantial amounts of money. The fraudulent activity was confirmed through internal reviews and investigations by audit firms KPMG and BDO, which quantified the excess credits issued.

2. Admission and Subsequent Retraction of Excess Credit by Distributors:
Distributors initially admitted to receiving excess credits and even made partial repayments. However, one distributor retracted the admission, claiming it was made under duress. The court found the retraction unconvincing, especially given the long-standing business relationship and the clear documentation of the excess credits.

3. Legality and Necessity of Issuing an Ad Interim Injunction:
The court considered whether an ad interim injunction was necessary to protect the petitioner from further harm. The petitioner argued that without such an injunction, the respondents might alienate their properties, making any future decree unenforceable. The court agreed, noting the fraudulent conduct and the need to secure the petitioner’s claim.

4. Application of Inherent Powers of the Court under Section 151 of the CPC:
The court examined whether it could use its inherent powers under Section 151 of the CPC to issue an injunction. It referred to the Supreme Court’s decision in Manohar Lal Chopra, which affirmed that courts have inherent jurisdiction to issue temporary injunctions in circumstances not covered by Order 39 of the CPC if it is necessary for the ends of justice.

5. Applicability of Order 38 Rule 5 and Order 39 Rule 1(b) of the CPC:
The court analyzed whether the conditions for attachment before judgment under Order 38 Rule 5 were met. It found that the tests laid down in Raman Tech were not fulfilled, but noted that under Order 39 Rule 1(b), an injunction could be issued if there was a threat of the defendant disposing of property to defraud creditors. Given the established fraud, the court found sufficient grounds to issue an injunction under Order 39 Rule 1(b).

6. Consideration of Delay in Approaching the Court for Relief:
The respondents argued that the petitioner delayed approaching the court, which should preclude equitable relief. The court found that the petitioner acted promptly upon discovering the fraud, conducting thorough investigations before filing the suits within the limitation period. Therefore, the delay argument was rejected.

7. Determination of Substantive Versus Procedural Rights in Issuing Injunctions:
The court discussed whether issuing an injunction affects the substantive rights of the respondents. It concluded that in cases of fraud, the court’s inherent powers could be invoked to issue injunctions affecting substantive rights to prevent further injustice and protect the petitioner’s interests.

Conclusion:
The court issued an ad interim injunction restraining the respondents from transferring or alienating their properties to secure the petitioner’s claim. The injunction was limited to specific amounts for each respondent and would continue until the disposal of the interlocutory applications or further orders. The court emphasized the duty to protect honest businesses from fraudulent practices and the necessity of using inherent powers to ensure justice.