2016 (5) TMI 1606 - HC - Indian Laws

Rejection of plaint for want of a cause of action - averments in the plaint indicate that this is a composite suit where the plaintiff has sought reliefs of recovery of the money claimed against the defendants on contract as also by way of damages being a liability under the torts - Order 7 Rule 11 read with Order 1 Rule 10(2) of the Code of Civil Procedure - It is the case of the Plaintiff that there were defaults committed on the plaintiff s exchange by Defendant No. 1 and the same have occurred with the active participation knowledge and connivance between the defendants. HELD THAT - A holistic reading of the plaint would demonstrate that the plaintiff has impleaded defendant Nos. 14 and 15 who were directors and shareholders of defendant No. 4 so as to seek a relief against these defendants. The plaintiffs have made averments in the plaint that at the relevant time defendant Nos. 14 and 15 were in-charge and responsible for the affairs of defendant No. 4 and as such they were also liable to jointly and/or severally pay amounts due from defendant Nos. 1 to 4 to the plaintiff which was in fact the moneys of the counter-parties dealing on the exchange as set out in para 7 (zz) of the plaint. It is pertinent that the plaintiff in para 7 (zz) of the plaint has made categorical averments that defendant Nos. 1 to 4 in collusion with erstwhile managing director of the plaintiff and some of the managerial staff who directly reported to him have orchestrated and played a fraud on the plaintiff and counter parties to the outstanding trades by seeking to represent and assure that the commodities held thereunder have been duly deposited in warehouses designated by the plaintiff which representations were false to their own knowledge and which were deliberately and with an intent to defraud the plaintiff and counter parties and have thereby caused the counter-parties to part their moneys and enter into outstanding trades on the basis of such fraudulent representations and assurances and further have compounded the fraud so played by refusing an access to the designated warehouses for parties of accepting commodities that were purportedly deposited and/or taken possession thereof for the purpose of sale and realization of the amounts due from defendant Nos. 1 to 4 under outstanding trades. The plaintiff have stated that defendant Nos. 1 to 4 in connivance with defendant Nos. 5 to 16 would deal with the assets in their control and possession and therefore exhaust monies and/or assets in such a manner to defeat the claim of plaintiff s exchange. It is stated that defendant Nos. 5 to 16 as Directors/shareholders are in effective control of defendant Nos. 1 to 4 and are therefore in-charge of day-to-day affairs of defendant Nos. 1 to 4 and that enquiry of the Economic Offences wing clearly indicates that persons in charge of defendant Nos. 1 to 4 have utilized their monies for ulterior motives and/or are seeking to defeat and defraud the claim of the plaintiffs. This was borne out by the fact that the Economic Offences wing had arrested Mr. Surendra Gupta Managing Director of defendant No. 1. From the reading of the plaint thus it is borne out that although a contract was between the plaintiff and defendant No. 1 defendant Nos. 2 to 4 had also a role to play in the transactions being related companies of defendant No. 1. The defendant Nos. 2 to 4 are largely controlled by the same management. The defendant No. 1 admittedly had executed various trades in commodities for itself and on behalf of its clients including defendant Nos. 2 to 4 on the plaintiff s exchange - The specific allegation is that defendant Nos. 1 to 16 had already disposed/siphoned/shifted off the commodities located in the warehouses whereby committed a grave breach of trust and thereby willfully defaulted towards its obligations on the plaintiff s exchange. The plaintiff have further stated that this large scale defaults and fraud was also a subject matter of investigation of Economic Offences wing (EOW). Articles appeared in newspapers on this investigation of the EOW which further high-lighted that defendant Nos. 1 to 4 and their management namely defendant Nos. 5 to 16 were responsible for siphoning the amount outstanding to the plaintiff. The case of the plaintiff that these acts of defendants committing fraud on the plaintiff s exchange could not have occurred without the knowledge and active participation of the defendants. The present case is not a case which merely rests on the contractual terms but according to the plaintiffs it is a collusion fraud and the defendants becoming beneficiaries of such acts. It is for these reasons the normal role of a Director in the normal course as canvassed on behalf of the defendant Nos. 14 and 15/Appellant would not become applicable in the facts of the present case. In considering such pleas the facts and circumstances as borne out in the pleadings in each case are required to be considered so as to determine as to whether any cause of action is made out or otherwise before exercising power as conferred under Order 7 Rule 11(a) of C.P.C. The Appellants reliance on the decision of the Supreme Court in the case of S.M.S. Pharmaceuticals Ltd. v. Neeta Bhalla anr) 2005 (9) TMI 304 - SUPREME COURT is in support of their submission that merely because the Appellants were Directors of Defendant No. 4 Company there cannot be any monetary liability on the Directors and the liability would be of the company. The Supreme court observed that there is no universal rule that a Director of a company would be in-charge of its day-to-day affairs. However the Supreme Court at the same time observed that as to what was the role of the Director of a Company is a question of fact depending on the peculiar facts in each case. This decision arose out of the proceedings initiated under sections 141 138 of the Negotiable Instruments Act 1881 and in that context the Supreme Court had made these observations that to fasten a criminal liability a specific case should be spelt out in the complaint against the person who has sought to be made liable. Parameters of the pleadings in a criminal complaint case cannot be made applicable to the facts of the present case where the issue is under Order 7 Rule 11(a) and Order 1 Rule 10(2) of the Code of Civil Procedure. The plaint in the present case contains a statement of all the material circumstances constituting fraud. It is trite law that an application under Order 7 Rule 11 read with Order 1 Rule 10 (2) can be moved at any stage of the suit - the appeal lacks merit and is rejected.

Summary

Issues Involved:
1. Rejection of the plaint under Order 7 Rule 11 read with Order 1 Rule 10(2) of the Code of Civil Procedure.
2. Allegations of fraud and collusion against Defendant Nos. 14 and 15.
3. Liability of nominee directors.
4. Immunity claimed under the International Finance Corporation (Status, Immunities and Privileges) Act, 1958.

Issue-wise Detailed Analysis:

1. Rejection of the plaint under Order 7 Rule 11 read with Order 1 Rule 10(2) of the Code of Civil Procedure:
The appellants (Defendant Nos. 14 and 15) sought rejection of the plaint on the grounds that it did not disclose a cause of action against them. The court emphasized that the plaint must be read as a whole to determine if it discloses any cause of action. The allegations in the plaint indicated a composite suit involving claims based on both contract and tort. The court noted that the provisions of Order 1 Rule 3 allow for joinder of defendants when the right to relief arises out of the same act or transaction or series of acts or transactions. The court found that the plaint contained sufficient averments to disclose a cause of action against Defendant Nos. 14 and 15.

2. Allegations of fraud and collusion against Defendant Nos. 14 and 15:
The appellants argued that the allegations of fraud in the plaint were vague and lacked particulars, thus failing to meet the requirements of Order 6 Rule 4 of the CPC. The court held that the allegations of fraud, collusion, and siphoning of funds were sufficiently detailed in the plaint. It was averred that Defendant Nos. 5 to 16, including the appellants, were in charge of and responsible for the affairs of Defendant Nos. 1 to 4 and had benefited from the fraudulent activities. The court emphasized that the averments in the plaint must be read holistically, and the allegations were sufficient to meet the requirements of Order 6 Rule 4.

3. Liability of nominee directors:
The appellants contended that as nominee directors, they could not be held liable for the actions of the company. The court rejected this argument, stating that there is no absolute proposition that nominee directors can never be held liable. The court noted that the allegations in the plaint indicated that the appellants were involved in the day-to-day affairs of the company and had benefited from the fraudulent activities. The court held that the role of directors must be determined based on the specific facts of each case, and the allegations in the plaint were sufficient to establish a cause of action against the appellants.

4. Immunity claimed under the International Finance Corporation (Status, Immunities and Privileges) Act, 1958:
Defendant No. 15 claimed immunity under the International Finance Corporation (Status, Immunities and Privileges) Act, 1958, arguing that the acts were performed in an official capacity. The court rejected this contention, stating that the fraudulent actions alleged in the plaint could not be considered acts performed in an official capacity. The court held that the issue of immunity could not be decided at the stage of an application under Order 7 Rule 11(a) and would need to be determined at trial.

Conclusion:
The court concluded that the plaint disclosed a cause of action against Defendant Nos. 14 and 15 and that the allegations of fraud and collusion were sufficiently detailed. The court rejected the appellants' arguments regarding their liability as nominee directors and the claim of immunity under the International Finance Corporation (Status, Immunities and Privileges) Act, 1958. Consequently, the appeals were dismissed, and the notices of motion taken out by the appellants were disposed of.