It is clear that a sum of ?418 crores has been paid by FMO, the Dutch company, to Vinca for purchase of shares as well as compulsorily convertible debentures. This transaction by itself is not alleged to be violative of the FEMA regulations. 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. 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. 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. At the stage that FMO wishes to repatriate such funds, RBI permission would be necessary. If RBI permission is not granted, then again there would be no infraction of FEMA Regulations. The judgment in Immami Appa Rao’s case would be attracted only if the illegal purpose is fully carried out, and not 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 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 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, to the satisfaction of the Prothonotary and Senior Master, 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.

                                 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.

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 cause of action of the  suit
as well as the facts necessary to decide this appeal. They are as follows:
“3.    In  2009  and  2010,  Nederlandse   Financierings-Maatschappij   voor
Ontwikkelingslanden N.V. (hereinafter referred  to  as  “FMO”)  invested  in
certain equity shares and compulsorily convertible  debentures  (hereinafter
referred to as the “CCDs”) of Vinca Developer Private  Limited  (hereinafter
referred to as “Vinca”).  As a result of the said investment, FMO  currently
holds (i) 10% of the equity of Vinca through Class A shares and is  entitled
to 10% of the voting  rights  and  economic  interest  in  Vinca  by  virtue
thereof; and (ii) 3 CCDs in Vinca. Further, as on date, the  Defendant  owns
49% of the equity of Vinca through Class A shares and is entitled to 49%  of
the voting rights and economic interest in Vinca  by  virtue  thereof.   The
remaining 41% Class A equity shares in Vinca are  owned  by  the  individual
promoters of the Defendant,  being  Hemant  Shah  and  Vyomesh  Shah,  which
entitles them to 41% of the voting rights and economic  interest  in  Vinca.
Hemant Shah and Vyomesh Shah together  also  own  100%  of  Class  B  equity
shares of  Vinca,  which  carry  with  them  collective  voting  rights  and
dividend entitlement not exceeding 0.01%.  Upon conversion, the  3  CCDs  in
Vinca will entitle FMO to 99% of  the  equity  of  Vinca  (by  allotment  of
additional Class A shares), thereby entitling it to 99% of  the  voting  and
economic rights of Vinca.  The said monies invested by FMO into  Vinca  were
then used by Vinca to subscribe to certain optionally partially  convertible
debentures (hereinafter referred to as “OPCDs”), as specified below.

4.    The Plaintiff is India’s largest Trusteeship Company  and  provides  a
wide spectrum of Trusteeship Services.  The Plaintiff has been appointed  as
the Debenture Trustee under (i) the  Debenture  Subscription  and  Debenture
Trust Deed dated 1st December, 2009 executed by  Amazia  Developers  Private
Limited (hereinafter referred to as “Amazia”),  Vinca,  Brainpoint  Infotech
Private Limited (hereinafter referred to  as  “Brainpoint”),  the  Defendant
and the Plaintiff; and (ii) the Debenture Subscription and  Debenture  Trust
Deed dated 1st December, 2009 executed  by  Rubix  Trading  Private  Limited
(hereinafter  referred  to  as  “Rubix”),  Vinca,  the  Defendant  and   the
Plaintiff as amended by OPCD Amendment Agreement dated 8th 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;

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.

7.    The Plaintiff states that the proceeds obtained by  Amazia  and  Rubix
from the issue of the OPCD’s to Vinca were to be applied towards inter  alia
projects which are compliant with Indian foreign direct  investment  law  as
applicable to townships, housing, built-up infrastructure  and  construction
development projects, as provided more particularly under clause I, Part  C,
Schedule 7 of the Debenture Trust Deeds.

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 Guarantee Deed,  dated  9th  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:

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 been subsisting since 15th June,  2011,  on  the  interest
accrued on the OPCDs since 16th March, 2011;

Defaults by Amazia and Rubix in payment of default interest accrued  on  the
OPCDs since 16th June, 2011;

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;

Failure on the part of Rubix, Amazia and  the  Defendant  in  providing  the
financial statements required to be  provided  as  per  Entry  I  (Financial
Statements) of Part A of Schedule 7 (Covenants of the Obligors and  Security
Providers) of the Debenture Trust Deeds;

Failure on the part of the Defendant in maintaining the Net Debt  to  EBITDA
Ratio, the Debt Service Cover Ratio and the Interest Coverage Ratio  as  per
the provisions of Part B of  Schedule  7  (Covenants  of  the  Obligors  and
Security Providers)    of the Debenture Trust Deeds, for  the  Ratio  period
from 1st April, 2011 to 30th September, 2011;

Failure on the part of Rubix, Amazia and the Defendant in complying  with  a
number of the Positive Covenants which were  required  to  be  fulfilled  by
them as per the provisions of  Part  C  of  Schedule  7  (Covenants  of  the
Obligors and Security Providers) of the  Debenture  Trust  Deeds,  including
the failure to apply the proceeds from the issue of  OPCD’s  in  the  manner
contemplated in the abovementioned Schedule i.e. towards projects  that  are
compliant with the Indian foreign direct investment  law;

Failure on the part of Rubix, Amazia and the Defendant in complying  with  a
number of the Negative  Covenants  as  per  the  provisions  of  Part  D  of
Schedule 7 (Covenants  of  the  Obligors  and  Security  Providers)  of  the
Debenture Trust Deeds.

10.   In view of the aforesaid defaults, the Plaintiff  was  constrained  to
issue notices dated 2nd 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  the
Debenture Trust Deeds, setting out  inter  alia  (i)  the  payment  defaults
subsisting as on the said date; (ii) the default  by  Amazia  and  Rubix  in
crediting the designated account with lease rental proceeds; and  (iii)  the
failure to provide information, and breach of certain identified  covenants.
 However, no response was forthcoming from Amazia and/or Rubix.  A  copy  of
the notices dated 2nd May, 2012 is annexed hereto and marked Exhibits  “C-1”
and “C-2”.

11.   Consequently, and further to the Plaintiff’s letters  dated  2nd  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  2nd  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  Amazia  and  Rubix  on  27th  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 all the OPCDs at par value on 3rd  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”.

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 terms of the said Guarantee, to the  Defendant  on  3rd
August, 2012.   A copy of the Demand Certificate dated 3rd August,  2012  is
annexed hereto and marked Exhibit “E”.

13.   No reply has been received to the  aforementioned  Demand  Certificate
from the Defendant till date. The Defendant therefore failed  and  neglected
to make payment of the amounts due to the Plaintiff under the Guarantee.

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
interest on the Revised Principal Amount, at the rate of  14.75%  per  annum
from March 5, 2013 till May 6, 2013, as per Clause 3 of  the  Guarantee  and
thereafter, such  further  interest  @  14.75%  per  annum  on  the  Revised
Principal Amount being 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  Paise  only),  till  the  date  of  actual  payment   or
realization.”


3.    The affidavit-in-reply to the aforesaid Summons  for  Judgment  raised
the following defence, as recorded by the Ld. Single Judge in  the  impugned
judgment dated 8th 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.

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  invest  in  the  said  projects  on  the  basis   of   an
assured/fixed return, which was  and  is  not  permissible  under  the  FEMA
Regulations/FDI  Policy.  To  enable  FMO  to  bypass/circumvent  the   said
FEMA/FDI prohibitions and get a fixed return  of  14.5%  per  annum  on  its
investment of Rs. 418 crores, the investment structure  (i.e  investment  by
way of CCDs in Vinca and Vinca purporting to  invest  the  said  amounts  in
OPCDs of Amazia and Rubix) was devised/adopted as follows:

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%.

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 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.

v) Accordingly  though  Vinca  was  an  “Indian  Company”  and  the  nominal
recipient of the FDI, the transaction was so structured that:

(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.

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 purpose of which was  to  enable  FMO
to  secure  a  fixed  rate   of   return   on   its   FDI   investments   in
townships/construction of housing, notwithstanding the FEMA  Regulations/FDI
Policy which permit only an equity investment without any fixed/agreed  rate
of return in the said sector. The said structure was and is not  lawful  and
was and is opposed to public policy as it was designed to defeat  and  would
defeat the provisions of  law,  the  FEMA  Regulations  read  with  the  FDI
Policy.

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.

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 return. It is submitted  that
this would be contrary to law, public policy and public interest.”

Based on this defence,  the  Ld.  Single  Judge  in  the  impugned  judgment
arrived at the following conclusions:
“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
transaction (based on return of  the  FDI/principal  amount  invested  along
with a fixed rate of return thereon)  is  not  permissible/prohibited  under
the FDI policy and  the  FEMA  Regulations,    neither    IDBI    nor    FMO
can seek the assistance of the Court to effectuate/implement/enforce such  a
prohibited/illegal transaction.

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 the  value/benefit  of  the  FDI  amount  and
interest at 14.5 per cent thereon.

33. However, I must also  state  that  I  do  not  find  substance  qua  the
following defences raised by the Defendant:

33.1 That the  Suit  deserves  to  be  dismissed  on  the  ground  that  the
guarantee as well as trusteeship of IDBI has been discharged/terminated;

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

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  view  that  the
Defendant's guarantee (which is the basis of the Company Petition  No.   644
of 2013) though ostensibly in favour of Vinca, an Indian Company,  was  part
of the aforesaid illegal structure/scheme and was given to ensure  that  FMO
received back its FDI amount with interest as aforesaid through  Vinca.  The
Guarantee was therefore part of the aforesaid illegal structures/scheme  and
therefore prima facie illegal and unenforceable.

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 in 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.”

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 lifting of the corporate veil...” Even  if  it
is assumed that the corporate veil is not to be lifted or Vinca, Amazia  and
Rubix are to be treated as one Company, as has been  mentioned  hereinabove,
Vinca interposed as the holding Company of Amazia and  Rubix  only  for  the
purpose of structuring FMO's FDI investment into Amazia and  Rubix,  through
Vinca   as the nominal   recipient. The SSA and the annexed Debenture  Trust
Deed, specifically provided that the FDI amount  to  be  received  by  Vinca
from FMO against issuance of CCDs and equity shares by Vinca, was not to  be
retained by Vinca or used by Vinca in its own projects. The  SSA  and  Trust
Deed in fact expressly stipulated that the  FDI  amount  received  by  Vinca
from FMO, was to be immediately passed on by  Vinca  to  Amazia  and  Rubix,
against issuance   by   them   of   OPCDs.   Accordingly   the    SSA    and
 the   Trust   Deed   itself established  that  Vinca  had  been  interposed
only to provide a facade of compliance with the FEMA Regulations/FDI  policy
and was only a nominal recipient of the FDI and that Vinca  was  immediately
required to route the entire amount received from FMO  to Amazia and  Rubix,
against issuance by them of OPCDs.”

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;

(iii)  The hearing of the suit is expedited and the Court will endeavour  to
dispose of the suit within a period of  one  year  from  the  date  of  this
order.  It is clarified  that  the  Suit  shall  be  decided  without  being
influenced by any of the observations made in the present order.

(iv) Place the suit for framing of issues on 29th June, 2015.”

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 of Corporate Guarantee cum Mortgage,  dated  9th  December,  2009,  was
made by Ackruti City Ltd. as guarantor. Ackruti City Ltd. has  since  become
Hubtown Ltd., the 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  OPCD
subscription and debenture trust deed. The very opening clause of  the  Deed
of Corporate Guarantee states as follows:
“A.   GUARANTEE

In  consideration  of  the  premises,  the  Surety  hereby  unconditionally,
absolutely and irrevocably guarantees  to  and  agrees  with  the  Debenture
Trustee for the benefit of the Debenture Holder and  the  Security  Trustee,
for the benefit of the Lender, respectively, that:

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.

2.    The Surety guarantees to the Debenture Trustee acting for the  benefit
of the Debenture Holder and the Security Trustee acting for the  benefit  of
the Lender, jointly and severally, the due and punctual  payment  by  Amazia
of the Amaxia  Secured  Obligations  and  by  Rubix  of  the  Rubix  Secured
Obligation and  Rubix  Facility  Secured  Obligations,  which  are  due  but
unpaid, and  irrevocably  and  unconditionally  agrees  and  undertakes  (as
primary obligor and not only as (sic.)  to  pay  to  the  Debenture  Trustee
and/or the Security Trustee forthwith on demand (which demand shall be  made
in terms of the Transaction Documents) as stated in Clause  31  herein  (and
in any event within five (5) Business Days of the demand) and indemnify  and
keep indemnified the  Debenture  Trustee  acting  for  the  benefit  of  the
Debenture Holder and the Security Trustee acting  for  the  benefit  of  the
Lender against all losses,  damages,  claims,  charges,  fees  and  expenses
whatsoever which the Debenture Trustee/Security Trustee may incur by  reason
of or in connection with any default on the part of the Guarantor or on  the
part of the Issuers in making such payment and including in connection  with
legal proceedings  taken  against  the  Issuers  and/or  the  Guarantor  for
recovery of the moneys referred to in this Guarantee.  In  this  regard  the
Debenture Trustee’s and/or the Security  Trustee’s  independent  opinion  of
default of the Issuers and the  amounts  comprising  shortfall  amounts,  as
indicated in the Demand Certificate (as defined hereinafter  in  Clause  31)
shall be final and binding on the Guarantor  and  the  Guarantor  shall  not
dispute the same.  This Guarantee shall be continuing and  shall  remain  in
full  force  and  effect  until  all  the  Secured  Obligations  have   been
discharged  in  full  to  the  satisfaction  of   the   Debenture   Approved
Instructions) and the Security Trustee certify the same in writing.

3.    If the Guarantor delays in making payments in  full  pursuant  to  the
demand being made on it, then it shall pay interest at the  rate  of  14.75%
per annum (“Default Interest Rate”) on  the  outstanding  amount,  till  the
same is discharged in full to the  satisfaction  of  the  Debenture  Trustee
(acting on Approved Instructions) or the Security Trustee and the  Guarantor
agrees that the Default Interest Rate agreed, is a genuine  pre-estimate  of
the loss likely to be suffered by the Debenture Holder, Debenture  Trustees,
Security Trustee and/or  the  Lender  on  account  of  any  default  by  the
Guarantor in discharging its obligations as agreed herein.

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
available  to  the  Debenture  Trustee/  the  Debenture  Holder  and/or  the
Security Trustee/ the Lender.

31.   The Guarantor agrees  that  the  amount  hereby  guaranteed  shall  be
payable to the Debenture Trustee and/or  the  Security  Trustee  immediately
upon the Debenture Trustee and/or the Security Trustee/ Lender  serving  the
Guarantor with a notice requiring payment of the  amount  due  (the  “Demand
Certificate”), in the form and manner set out in Schedule I hereto,  at  the
address and details specified in  Clause  34  below.   Save  and  except  as
provided  above,  prior  to  making  any  demand  hereunder,  the  Debenture
Trustee/ the Debenture Holder and/or the Security Trustee/ the Lender  shall
not be required to take  any  step,  make  any  demand  upon,  exercise  any
remedies or obtain any judgment against any of the Obligors, give notice  to
the Obligors  or  any  other  person  under  the  Transaction  Documents  or
otherwise and howsoever arising, or make or file any claim or proof  in  the
dissolution or winding-up of any of the  Obligors  or  enforce  or  seek  to
enforce any  Security  now  or  hereafter  held  by  any  of  the  Debenture
Trustee/Debenture Holder and/or the Security Trustee/ Lender in  respect  of
the when sent (with the correct answerback), (ii) if sent by fax, when  sent
(on receipt of a confirmation to the correct fax number), (iii) if  sent  by
person, when delivered, (iv) if sent by courier, one (1) Business Day  after
deposit with an overnight courier, and (v) if  sent  by  registered  letter,
when the registered letter  would,  in  the  ordinary  course  of  post,  be
delivered whether actually delivered or not.  An  original  of  each  notice
and communication sent by telex or telecopy shall be  dispatched  by  person
or overnight  courier  and,  if  such  person  or  courier  service  is  not
available, by registered first class mail  with  postage  prepaid,  provided
that  the  effective  date  of  any  such  notice  shall  be  determined  in
accordance with paragraphs (i) or (ii) of this Clause 31, as  the  case  may
be, without regard to the dispatch of such original.

                                 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.

All amounts due should be paid to the account [details of account]  entitled
[.] under the [.] 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:
“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:-                                        |
|   |                                                                     |
|Provided that the Reserve Bank may, on an application made to it and for |
|sufficient reasons, permit an entity to issue any security to a person   |
|resident outside India or to record in its books transfer of security    |
|from or to such person, subject to such conditions as may be considered  |
|necessary.                                                               |
|Permission for purchase of shares by certain persons resident outside    |
|India :-                                                                 |
|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.”                              |


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 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  Regulation,  the
ultimate repose of the funds being for the 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  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   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 any case the Appellant-plaintiff should be  fully  secured
for the 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  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,  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
illegality, the court would be justified, in the larger public 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 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 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 Judge’s judgment under Article 136 as there was  nothing
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)

“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.”

O.XXXVII, Rule 3 (post amendment)

“3. Procedure for the appearance of defendant.—(1) In a suit to  which  this
Order applies, the plaintiff shall, together with the summons under Rule  2,
serve on the defendant a copy of the plaint and annexures  thereto  and  the
defendant may, at any time  within  ten  days  of  such  service,  enter  an
appearance either in person or by pleader and,  in  either  case,  he  shall
file in Court an address for service of notices on him.

(2) Unless otherwise ordered, all  summonses,  notices  and  other  judicial
processes, required to be served on the defendant, shall be deemed  to  have
been duly served on him if they are left at the address  given  by  him  for
such service.

(3) On the day of entering the appearance, notice of such  appearance  shall
be given by the defendant to the plaintiff's pleader, or, if  the  plaintiff
sues in person, to the plaintiff himself, either by notice delivered  at  or
sent by a prepaid letter directed to the address of the plaintiff's  pleader
or of the plaintiff, as the case may be.

(4) If the defendant enters an appearance, the  plaintiff  shall  thereafter
serve on the defendant a summons for judgment in Form 4-A in Appendix  B  or
such other Form as may be prescribed from time to time, returnable not  less
than ten 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.

(5) 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 such suit, and leave to defend may  be  granted  to  him
unconditionally or upon such terms as may appear to the Court  or  Judge  to
be just:

Provided that leave to defend shall not  be  refused  unless  the  Court  is
satisfied that the facts disclosed by the defendant do not indicate that  he
has a substantial defence to raise or that the defence intended  to  be  put
up by the defendant is frivolous or vexatious:

Provided further that, where a part of the amount claimed by  the  plaintiff
is admitted by the defendant to be due from him, leave to  defend  the  suit
shall not be granted unless the amount so admitted to be  due  is  deposited
by the defendant in Court.

(6) At the hearing of such summons for judgment,—
(a) if the defendant has not  applied  for  leave  to  defend,  or  if  such
application has been made and is refused, the plaintiff  shall  be  entitled
to judgment forthwith; or
(b) if the defendant is permitted to defend as to the whole or any  part  of
the claim, the Court or Judge may direct  him  to  give  such  security  and
within such time as may be fixed by the Court or Judge and that, on  failure
to give such security within the time specified by the Court or Judge or  to
carry out such other directions as may have  been  given  by  the  Court  or
Judge, the plaintiff shall be entitled to judgment forthwith.

(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.”

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, in paragraph 4,  the  Court  stated
that the only question 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  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 down in Kiranmoyee  Dassi
Smt v. Dr J. Chatterjee, AIR 1949 Cal 479, as follows:
“In Kiranmoyee Dassi Smt v. Dr J. Chatterjee [AIR 1949  Cal  479  :  49  CWN
246, 253 : ILR (1945) 2 Cal 145.] Das, J., after a comprehensive  review  of
authorities on the  subject,  stated  the  principles  applicable  to  cases
covered by Order 37 CPC in the form of the  following  propositions  (at  p.
253):
“(a) If the defendant satisfies the court that he has a good defence to  the
claim on its merits the plaintiff is not entitled to leave to sign  judgment
and the defendant is entitled to unconditional leave to defend.

(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.

(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 judgment and  the  defendant  is  not  entitled  to  leave  to
defend.

(e) If the defendant has no defence or the defence is illusory  or  sham  or
practically moonshine then although ordinarily the plaintiff is entitled  to
leave to sign  judgment,  the  court  may  protect  the  plaintiff  by  only
allowing the defence to proceed if the amount claimed is paid into court  or
otherwise secured and give leave to the defendant  on  such  condition,  and
thereby show mercy to the defendant by  enabling  him  to  try  to  prove  a
defence.” [para 8]


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 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 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  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 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:
“Learned  counsel  relied  upon  a  decision  of  this  court   in   Santosh
Kumar v. Bhai Mool Singh [ (1958) SCR 1211] and particularly upon a  passage
at p. 1216. That was a case in which the  Court  of  Commercial  Subordinate
Judge, Delhi, had held that the defence raised  a  triable  issue  but  that
defence was vague and was not bona fide because the defendant  had  produced
no evidence to prove his assertion. For  these  reasons  the  court  granted
leave to defend the suit on the condition of the defendant  giving  security
for the entire claim in the suit and costs thereon.  This  court  held  that
the test is to see whether the defence raises a real issue and  not  a  sham
one, in  the  sense  that,  if  the  facts  alleged  by  the  defendant  are
established, there would be a good, or even a  plausible  defence  on  those
facts.  If  the  court  is  satisfied  about  that,  leave  must  be   given
unconditionally. This Court further held that the trial court was  wrong  in
imposing a condition about giving security on the  ground  that  documentary
evidence had not been adduced by the defendant. This Court pointed out  that
the stage of proof can only arise after leave to  defend  has  been  granted
and that the omission to adduce documentary evidence would not  justify  the
inference the defence sought to be raised  was  vague  and  not  bona  fide.
While dealing with the matter Bose, J., who spoke  for  the  Court  observed
(p. 1216):

“Taken by and large, the object is  to  see  that  the  defendant  does  not
unnecessarily  prolong  the  litigation  and  prevent  the  plaintiff   from
obtaining an early decree by raising untenable and frivolous defences  in  a
class of cases where speedy decisions are  desirable  in  the  interests  of
trade and commerce. In general, therefore, the test is to  see  whether  the
defence raises a real issue and not a sham one, in the sense  that,  if  the
facts alleged by the defendant are established, there would be  a  good,  or
even a plausible, defence on those facts.”

The latter part of the observations of the learned Judge have to  be  under-
stood in the background of the facts of the case this Court was called  upon
to consider. The trial  Judge  being  already  satisfied  that  the  defence
raised a triable issue was not justified in  imposing  a  condition  to  the
effect that the defendant must deposit security because he had  not  adduced
any documentary evidence in support of the defence. The stage  for  evidence
had not been reached. Whether the defence raises a triable issue or not  has
to be ascertained by  the  court  from  the  pleadings  before  it  and  the
affidavits of parties and it is not open to it to call for evidence at  that
stage. If upon consideration of material placed before it  the  court  comes
to the conclusion that the defence is a sham one or is fantastic  or  highly
improbable it would be justified in putting the defendant upon terms  before
granting  leave  to  defend.  Even  when  a  defence  is  plausible  but  is
improbable the court would be justified in coming  to  the  conclusion  that
the issue is not a triable issue  and  put  the  defendant  on  terms  while
granting leave to defend. To hold otherwise  would  make  it  impossible  to
give effect to the provisions of  Order  37  which  have  been  enacted,  as
rightly pointed out by Bose, J., to  ensure  speedy  decision  in  cases  of
certain types. It will be seen that Order 37 Rule 2 is  applicable  to  what
may be compendiously described as commercial causes. Trading and  commercial
operations are liable to be  seriously  impeded  if,  in  particular,  money
disputes between the parties are not adjudicated upon expeditiously.  It  is
these considerations which have to be borne  in  mind  for  the  purpose  of
deciding whether leave to defend should be given or withheld  and  if  given
should be subjected to a condition.

It  may  be  mentioned  that   this   Court   relied   upon   the   decision
in Jacobs v. Booth's Distillery Co. [(1901) 85 LT 262] in  which  the  House
of Lords held that whenever a defence raises a triable issue leave  must  be
given and also referred to two subsequent decisions where it was  held  that
when such  is  the  case  leave  must  be  given  unconditionally.  In  this
connection we may refer  to  the  following  observations  of  Devlin,  L.J.
in Fieldrank Ltd. v. Stein [ (1961) 3 AELR 681 at pp 682-3] :
“The broad principle, which is founded on Jacob v.Booth's Distillery  Co. is
summarised on p. 266 of the Annual Practice (1962  Edn.)  in  the  following
terms:
‘The principle on which the court acts is that where the defendant can  show
by affidavit that there is a bona fide triable issue, he is  to  be  allowed
to defend as to that issue without condition.'”

If that principle were mandatory, then the concession  by  counsel  for  the
plaintiffs that there is here a triable issue would mean at  once  that  the
appeal ought to be allowed; but counsel for the  plaintiffs  has  drawn  our
attention  to  some  comments  that  have  been  made   on Jacobs v. Booth's
Distillery Co. [(1901) 85 LT 262] They will be found at pp. 251 and  267  of
the Annual Practice, 1962. It is suggested (see p. 251)  that  possibly  the
case, if it is closely examined, does not go as far as it has hitherto  been
thought to go; and on the top of p. 267 the learned editors  of  the  Annual
Practice have this note: “The condition of payment  into  court,  or  giving
security, is nowadays more often imposed than formerly, and not  only  where
the defendant consents but  also  where  there  is  a  good  ground  in  the
evidence for believing that the defence set up is a  sham  defence  and  the
master ‘is prepared very nearly to give judgment for the plaintiff.”

It is worth noting also that in Lloyd's Banking Co. v.Ogle 1 Ex.  D.  at  p.
264 in a  dictum  which  was  said  to  have  been  overruled  or  qualified
by Jacob v. Booth's Distillery Co.[ (1901) 85  LT  262]  Bramwell,  B.,  had
said that
“....those conditions (of bringing money  into  court  or  giving  security)
should  only  be  applied  when  there  is  something  suspicious   in   the
defendant's mode of presenting his case.”
I  should  be  very  glad  to  see  some  relaxation  of  the  strict   rule
in Jacob v. Booth's Distillery Co. I think that any Judge  who  has  sat  in
chambers in RSC, Order 14 summonses has had the  experience  of  a  case  in
which, although he cannot say for  certain  that  there  is  not  a  triable
issue, nevertheless he is left with a real doubt about the defendant's  good
faith, and would like to protect the plaintiff, especially if there  is  not
grave hardship on the defendant in being made to pay  money  into  court.  I
should be prepared to accept that there has been a tendency in the last  few
years to use this condition more often than it has been used  in  the  past,
and I think that that is a good tendency;”

These  observations  as  well  as  some  observations   of   Chagla,   C.J.,
in Rawalpindi Theatres Private Ltd. v. Film Group Bombay [ (1958)  BLR  1373
at p 1374] may well be borne in mind by the court  sitting  in  appeal  upon
the order of the trial Judge granting conditional leave  to  defend.  It  is
indeed not easy to say in many cases whether the defence is  a  genuine  one
or not and therefore it should be left to the discretion of the trial  Judge
who has experience of such matters both at the bar and  the  bench  to  form
his own tentative conclusion about the quality or nature of the defence  and
determine the conditions upon which leave to defend may be granted.  If  the
Judge is of opinion that the case raises a triable issue, then leave  should
ordinarily be granted unconditionally. On  the  other  hand,  if  he  is  of
opinion that the defence raised is frivolous, or false, or sham,  he  should
refuse leave to defend altogether. Unfortunately, however, the  majority  of
cases cannot be dealt with in a clear cut way like this and  the  judge  may
entertain a genuine doubt on the question  as  to  whether  the  defence  is
genuine or sham or in other words whether it raises a triable issue or  not.
It is to meet such cases that the amendment to Order 37 Rule 2 made  by  the
Bombay High Court contemplates  that  even  in  cases  where  an  apparently
triable issue is raised the Judge may impose conditions  in  granting  leave
to defend. Thus this is a matter in the discretion of the  trial  Judge  and
in dealing with it, he ought to exercise his  discretion  judiciously.  Care
must be taken to see that the object of the rule to assist  the  expeditious
disposal of commercial causes to which the Order applies, is  not  defeated.
Care must also be taken to see that real and genuine triable issues are  not
shut out by unduly severe orders as to deposit. In a matter  of  this  kind,
it would be undesirable and inexpedient to lay  down  any  rule  of  general
application.” [paras 7 – 12]

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., (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 10; Wada Arun Asbestos (P) Ltd. v. Gujarat Water Supply  &  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 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  the  court  from  the  pleadings  before  it  and  the
affidavits of parties.

(b) If the court is satisfied that the facts disclosed by the  defendant  do
not indicate that he has a substantial defence to raise or that the  defence
intended to be put up by the defendant is  frivolous  or  vexatious  it  may
refuse   leave   to   defend    altogether. Kiranmoyee    Dassi v. Dr.    J.
Chatterjee [AIR 1949 Cal 479 : 49 CWN 246] (noted and  approved  in Mechelec
case [(1976) 4 SCC 687 : AIR 1977 SC 577] ).

(c) In cases where the court entertains a genuine doubt on the  question  as
to whether the defence is genuine or sham or whether  it  raises  a  triable
issue or not, the court may impose conditions in granting leave to  defend.”
[para 13]

16.   In Southern Sales & Services v.  Sauermilch  Design  &  Handels  GMBH,
(2008) 14 SCC 457, this Court was squarely asked to render its  decision  on
whether the judgment in Mechelec’s case  was  to  a  large  extent  rendered
ineffective in view of the amended O.XXXVII. This Court found:
“Having considered the submissions made on behalf of the respective  parties
and  the  decisions  cited,  there  appears  to  be  force  in  Mr  Sharma's
submissions  regarding  the  object  intended  to   be   achieved   by   the
introduction of sub-rules (4), (5) and (6) in Rule 3, Order 37 of the  Code.
Whereas in the unamended provisions of Rule 3, there was no  compulsion  for
making any deposit as a condition precedent to grant of leave  to  defend  a
suit by virtue 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 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 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  akin  to
Joseph’s multi-coloured coat –  a  large  number  of  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
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.

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 judges in Milkhiram’s case, as follows:
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;
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;
even if the defendant raises triable issues, if a doubt  is  left  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 see that such triable issues are not shut out by  unduly  severe
orders as to deposit or security;
if the Defendant raises a defence which is  plausible  but  improbable,  the
trial Judge may impose conditions as to time or 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.
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;
 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.


19.   Coming to the facts of the present case:
It is clear that a sum of ?418 crores  has  been  paid  by  FMO,  the  Dutch
company,  to  Vinca  for  purchase  of  shares  as  well   as   compulsorily
convertible debentures. This transaction by itself  is  not  alleged  to  be
violative of the FEMA regulations.
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.
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.
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.
At the stage that FMO wishes to repatriate such funds, RBI permission  would
be necessary. If RBI permission is not granted, then again  there  would  be
no infraction of FEMA Regulations.
The judgment in Immami Appa Rao’s  case  would  be  attracted  only  if  the
illegal purpose is fully carried out, and not 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  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  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, to the satisfaction of the Prothonotary and  Senior  Master,  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)







                                        ……………………J.

New Delhi;                              (R.F. Nariman)

November 15, 2016