2008 (10) TMI 594 - HC - Indian Laws

Derivatives contracts are challenged as illegal and void - Held that - Transactions in derivatives, fall within the category of business activity undertaken by the Bank as they are covered by Section 6(1) of the Banking Regulation Act, 1949. Therefore no difficulty in coming to the conclusion that if the transaction in question gives rise to a claim by the Bank, of any liability, on the part of the plaintiff, the defendant-Bank may certainly be able to invoke the provisions of Act 51 of 1993. Therefore derivatives transactions ceased to be purely speculative deals, long time ago. The pricing of the deals, follows a scientific pattern on the basis of Financial Mathematics. Just as Actuaries scientifically determine the value of insurance risks and the premium payable, Financial Mathematicians (or Portfolio Managers) evaluate the price of these derivatives. Hence they cannot be termed as wagers. The Master circulars A.D.(M.A.Series) 21 and 26 dated 23-12-1994, extracted in paragraph-97 above, expressly permit customers to hedge their receivables and payables against a third currency instead of Indian rupee, subject only to 2 conditions namely (1) that such third currency should be a permitted currency and (2) that it should be actively traded in the market. Swiss Franc satisfies both conditions. Therefore the first ground of attack is unsustainable. Asit is the admitted case of the plaintiff (para 4 of the plaint) that they had export orders to the tune of ₹ 111 crores for the period upto 31-12-2007 and that they had foreign currency loans to the tune of USD 30 million. It is only by showing their foreign currency receivables and payables that the plaintiff entered into the ISDA Master Agreement. Therefore, they cannot now contend that this particular deal alone had no underlying exposure. The Board of Directors of the company cannot feign ignorance of the declaration and risk disclosure statement made by Mr.P.K.Viswanathan, while confirming the deal OPT 727. In such circumstances, the plaintiff cannot be heard to contend that the Bank failed to ensure the existence of a risk management policy, after having allowed Mr.P.K.Viswanathan to sign the declaration and risk disclosure statement. It was the fate of the US Dollar, which has brought the plaintiff to the cliff. Therefore the plaintiff which had the benefit of a push, up the ladder in 9 out of 10 deals, cannot duck when it comes to a pull, down the ladder in the remaining 1 deal. Every business venture provides a roller-coaster ride at some point of time or the other and the validity of contracts cannot be judged on the basis of the success or failure of the venture. Therefore the plaintiff is not entitled to any injunction restraining the bank from enforcing the contract OPT 727. The suit is maintainable, the application to revoke the leave A.No.1926 of 2008 and the application to reject the plaint A.No.1927 of 2008 are dismissed. The jurisdiction clause contained in the ISDA Master Agreement does not confer exclusive jurisdiction upon the courts in Mumbai, by the use of the words only or alone .

Summary

Issues Involved:
1. Maintainability of the suit.
2. Entitlement to injunctive relief under Section 41(b) of the Specific Relief Act, 1963.
3. Whether the contract is a wager.
4. Whether the deal was unlawful and opposed to public policy.

Issue-Wise Detailed Analysis:

1. Maintainability of the Suit:
The defendant-Bank argued that the suit is not maintainable under Section 18 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, as the claim would fall within the definition of "debt." The plaintiff countered that the transaction is null and void, and thus no rights and obligations arise, making the bar under Section 18 inapplicable. The court concluded that transactions in derivatives fall under "business activity undertaken by the Bank" and thus can be claimed as a "debt." However, the court held that the present suit is maintainable, citing precedents where civil suits were allowed despite the jurisdiction of the Debt Recovery Tribunal (DRT).

2. Entitlement to Injunctive Relief under Section 41(b) of the Specific Relief Act, 1963:
The defendant-Bank contended that the plaintiff's prayer for an interim injunction is barred by Section 41(b) of the Specific Relief Act, which prohibits restraining any person from instituting or prosecuting any proceeding in a court not subordinate to that from which the injunction is sought. The court agreed, citing the Supreme Court's decision in Cotton Corporation of India Ltd Vs. United Industrial Bank Ltd, which held that injunctions cannot impede access to justice. The court concluded that the DRT is not subordinate to the High Court and hence, no injunction can be granted to restrain the Bank from initiating proceedings before the DRT.

3. Whether the Contract is a Wager:
The plaintiff argued that the contract is a wagering contract under Section 30 of the Indian Contract Act, 1872. The court analyzed the essential features of a wagering contract and concluded that the transaction does not satisfy these criteria. The contract was intended to hedge the plaintiff against foreign currency fluctuations, similar to an insurance contract. The court also noted that there was no common intention to wager between the parties. The plaintiff's declaration that the transaction was for hedging foreign currency exposure further invalidated their claim. Thus, the court rejected the argument that the contract was a wager.

4. Whether the Deal was Unlawful and Opposed to Public Policy:
The plaintiff contended that the contract was illegal, violative of FEMA, 1999, and RBI guidelines, and opposed to public policy. The court reviewed the historical background and legal framework governing derivatives, including the Reserve Bank of India (Amendment) Act, 2006, and various RBI Master Circulars. The court found that the transaction was permitted by law and not opposed to public policy. The plaintiff's specific grounds of attack, such as the absence of underlying exposure and the Bank's failure to ensure a risk management policy, were also rejected. The court noted that the plaintiff had made declarations regarding the existence of a risk management policy and underlying exposure, which the Bank was entitled to rely upon.

Conclusion:
The court dismissed the applications for injunction filed by the plaintiff and vacated the interim injunction. The defendant-Bank's counter applications for injunctions were also rejected, allowing the Bank to pursue remedies as per the law. The applications to revoke the leave and reject the plaint were dismissed, affirming the suit's maintainability and the jurisdiction of the court.