IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION NOTICE OF MOTION NO.2327 OF 2008 IN SUIT NO.1959 OF 2008 Bharatpur Investment Ltd & Ors. .. Plaintiffs Versus L & T Finance Limited & Ors. .. Defendants WITH CONTEMPT PETITION NO.49 OF 2008 IN NOTICE OF MOTION NO.2327 OF 2008 IN SUIT NO.1959 OF 2008 Bharatpur Investment Ltd & Anr. .. Petitioners Versus L & T Finance Limited & Ors. .. Respondents Mr.Gaurav Joshi a/w Anoshak Daver i/by Pankaj Thatte for the plaintiffs and for petitioners in Contempt Petition. Mr.D.D.Madon, Sr.Advocate a/w Shakuntala Joshi for the 1st defendant in the Suit and for the 1st and 3rd to 8th respondents in Contempt Petition. CORAM CORAM CORAM : A.S.OKA, J. : A.S.OKA, J. : A.S.OKA, J. DATE DATE DATE : 25th & 26th November 2008. : 25th & 26th November 2008. : 25th & 26th November 2008. P.C.: . The aforesaid Notice of Motion was placed before this Court for final disposal. I had heard the 2 submissions of the learned submissions appearing for the parties in said Notice of Motion prior to November vacation and further submissions were heard after vacation. I have also heard the submissions of the learned counsel appearing for the petitioner (original plaintiff) in Contempt Petition No.49 of 2008. 2. On the requests made by the 2nd to 4th defendants from time to time, the 1st to 5th plaintiffs created a pledge of shares of M/s.GTC Industries Ltd in favour of the 1st defendant. The concerned plaintiffs executed necessary pledge agreements/pledge forms. A pledge was created in respect of total 17,43,000 shares of the said company in favour of the 1st defendant by different plaintiffs. The particulars of the pledge have been set out in Exhibit A to the plaint. The pledge was by way of security for the finance granted by the 1st defendant to the concerned defendants. 3. The case of the plaintiffs is that the 2nd and 3rd defendants informed them that the 1st defendant had called upon the said defendants to increase amount of security to secure the indebtedness of the 2nd and 3rd defendants as the security had fallen below the required 3 margin. The 2nd and 3rd defendants informed the plaintiffs that if this was not done immediately, the 1st defendant would enforce the pledge effected by the plaintiffs by selling the pledged shares. Reliance is placed on two separate letters dated 10th June 2008 addressed by the 1st defendant to the 2nd and 3rd defendants stating that unless additional security in the sum of Rs.2.50 crores each was immediately furnished, the 1st defendant would sell required number of pledged shares. The suit is filed on apprehension that the shares of the plaintiffs were likely to be sold. Prayers (a) to (c) of the plaint are the substantive reliefs claimed in the suit which read thus: "(a) that this Hon’ble Court be pleased to make and issue the following declarations: (i) that this Hon’ble Court be pleased to declare that the 12,54,000 shares more particularly described in Part I of Exhibit A hereto have been pledged only for the due repayment of the sum of Rs.10 crores advanced by defendant no.1 to defendant nos.2 and 3 4 and for no other purpose; (ii) that this Hon’ble Court be pleased to declare that 4,89,000 shares more particularly described in Part II of Exhibit A hereto are not pledged and defendant no.1 is liable to release and/or return the same on account of failure of consideration and/or non release of the loan of Rs.5 crores in anticipation of which they were pledged; (iii) that this Hon’ble Court be pleased to declare that no event of default pertaining to the suit shares more particularly described in Exhibit A hereto has arisen; (iv) that this Hon’ble court be pleased to declare that defendant no.1 is not entitled to proceed against all or any of the shares more particularly described in Exhibit A hereto. 5 (b) this Hon’ble Court be pleased to pass a permanent order and injunction restraining defendant no.1, whether by itself or through its servants or agents or otherwise, from in any manner enforcing the pledge of the suit shares, more particularly described in Exhibit A hereto and/or selling or transferring or appropriating or creating third party rights or encumbering or otherwise dealing with the suit shares more particularly described in Exhibit A hereto or any part thereof. (c) this Hon’ble Court be pleased to pass a permanent order and injunction directing defendant no.1, whether by itself or through its servants or agents or otherwise, to return to the respective plaintiffs, the 4,89,000 shares and the Pledge Forms relating thereto, more particularly set out in Part II of Exhibit A hereto." 4. Notice of Motion came up before this Court on 18th June 2008 for consideration of prayer for 6 ad-interim relief. On that day, the learned counsel appearing for the 1st defendant sought short adjournment on the ground that the 1st defendant has not been served by the plaintiffs. This Court granted time till 20th June 2008 and in the meanwhile granted ad-interim relief in terms of prayer clause a(ii) of Notice of Motion till 23rd June 2008. On 20th June 2008, when the Notice of Motion was placed for consideration of ad-interim relief, the learned counsel appearing for the 1st defendant subject to his objection that the dispute be referred to arbitration by virtue of the arbitration clause in the agreement made a statement that the 1st defendant shall not transfer any more shares till 27th June 2008. The said statement made by the 1st defendant was extended from time to time. The 1st defendant had taken out Notice of Motion No.2354 of 2008 invoking section 8 of the Arbitration and Conciliation Act, 1996. The said notice of motion was dismissed by order dated 16th July 2008. On 18th July 2008, this Court passed an order on the present notice of motion rejecting the prayer for grant of ad-interim relief. 5. There is a reply dated 26th June 2008 filed by the 1st defendant to this Notice of Motion. The case 7 made out in the reply is that under the arrangement between the 1st defendant on one hand and 2nd and 3rd defendants on the other hand, the 2nd and 3rd defendants were under an obligation to maintain a security twice the amount of loan/outstanding together with interest etc. Reliance is placed on terms and conditions incorporated in Loan against security agreements. The case of the 1st defendant is that the 2nd and 3rd defendants were recipients of loan aggregating Rs.20 crores. Reliance has been placed on sub clause (h) and (i) of clause 8 of the Pledge Agreements executed by the plaintiffs. Reliance is also placed on the relevant clause of the loan against Security Agreements executed by the 2nd and 3rd defendants. 6. The case of the 1st defendant is that from 14th March 2008 onwards the price of the shares of G.T.C.Industries Ltd started falling and the level of margin required went below fifty percent. According to the 1st defendant, 2nd and 3rd defendants were required to replenish shortfall by an adequate security by way of shares. It is contended that at the instance of the 2nd and 3rd defendants, the plaintiffs pledged additional 4,89,000 shares of G.T.C. Industries Ltd to replenish 8 the security margin of 50%. It is contended that despite the pledge of said additional shares, the margin requirement went below level of 40%. The contention is that the additional 4,89,000/- shares were not in respect of any future loans to be advanced as contended by the plaintiffs but the pledge was by way of additional security in respect of loan already advanced. It was contended that as the pledge of 4,89,000/- shares was effected by way of additional security, only pledge forms were executed and agreements were not executed. It is contended that as and when the pledged shares were sold, intimation thereof has been given to the 2nd and 3rd defendants by the 1st defendant. It was contended that upto 18th June 2008 i.e the date on which the ad-interim relief was granted by this Court, 9,59,378 shares were sold by the 1st defendant and a sum of Rs.14,63,22,902.33/- was realised. It is contended that the 1st defendant has not invoked pledge in respect of 6,88,000 shares. Reliance was placed on annexure 7 in the compilation of documents filed by the 1st defendant. The case made out in the said affidavit is that the 2nd and 3rd defendants still owe a sum of Rs.5,33,76,097.70/-. 9 7. Reference will have to be made to further affidavit filed by the 1st defendant setting out the details of the sale of shares effected by the 1st defendant. The said affidavit is dated 01st September 2008. It will be necessary to refer to the statements made by the 1st defendant in the said affidavit dated 01st September 2008. It is stated that after prayer for ad-interim relief was rejected by this Court, additional 05,05.622 pledged shares were sold by the 1st defendant. Thus, it was contended that the 1st defendant had sold total 14,65,000 shares out of 17,43,000 pledged shares and realised a sum of Rs.20,23,44,784.45/-. It is contended that after adjusting principal outstanding amount of Rs.20 crores and as well as the amount towards the costs and expenses, a sum of RS.12,88,334.45/- remained balance with the 1st defendant. A contention was raised that the 1st defendant had already incurred expenditure of Rs.10,46,450/- on the litigation. It was stated that the present suit is pending and the Contempt Petition filed by the 1st and 2nd plaintiffs was also pending. It was contended that balance 2,78,000 pledged shares were in possession of the 1st defendant in order to meet the costs and expenses of the legal proceedings filed by the plaintiffs. It was stated that the 1st 10 defendant is entitled to retain the said balance shares pledged until all litigations are over. A reply dated 09th September 2008 was filed by the authorised signatory of the plaintiffs to the said affidavit dated 01st September 2008. It was contended that though on their own showing the 1st defendant recovered the amounts allegedly due from the 2nd and 3rd defendants, 2,78,000 shares have been illegally withheld by the 1st defendant. It was contended that as on 05th September 2008 the price of the said shares were Rs.3,69,18,400/-. It was contended that the 1st defendant is not entitled to use sale proceeds of the pledged shares for meeting the legal expenses. It was, therefore, submitted that 1st defendant was duty bound to return balance 2,78,000 shares which were admittedly in possession of the 1st defendant. Therefore, it is submitted that the plaintiffs are entitled to ad-interim relief as prayed for. 8. The learned counsel appearing for the plaintiff submitted that admittedly entire loan amount has been recovered by the 1st defendant by the sale of pledged shares and therefore for recovery of costs and charges of the present suit, the 1st defendant cannot continue 11 to withhold the pledged shares. He pointed out that in respect of 4,89,000 shares admittedly no pledge Agreement was executed. He stated that the said shares were not pledged as a security for the loan which was already granted and it was by way of security for the loan to be advanced in future. 9. The learned senior counsel appearing for the 1st defendant invited my attention to the relevant clauses in Pledge Agreements executed by the plaintiffs. He submitted that the pledge was made by the plaintiffs in order to secure the due payment of the loan and other obligations of the borrowers. He also invited my attention to relevant clauses of the Loan against Securities Agreements executed by 2nd and 3rd defendants. Inviting my attention to clause Nos.1.10 and 3.5 thereof he submitted that the loan balance includes all expenses, charges and costs incurred by the lender i.e the 1st defendant for receipt or recovery of the sums payable by the borrower towards the loan balance. Inviting my attention to the affidavit dated 01st September 2008 filed by the 1st defendant he stated that after adjusting the sale proceeds of the shares against the principal outstanding amount and against 12 costs and expenses, a sum of Rs.12,88,334.45/- remained balance with the 1st defendant. It is stated that the 1st defendant has alredy incurred expenditure of Rs.10,56,000/- towards costs and expenses of the present litigation. He submitted that as costs and expenses incurred by the 1st defendant for receipt or recovery of the loan forms part of loan balance, the 1st defendant was entitled to retain the balance 2,78,000 shares in order to meet the costs and expenses of the legal proceedings filed by the plaintiffs. He stated that without prejudice to rights and contentions of the 1st defendant, the 1st defendant has instructed him to make a statement that till the disposal of the suit, the said defendant will not sale the said balance pledge shares. 10. In the Contempt Petition filed by the plaintiffs, they have alleged the breach of order dated 18th June 2008 passed by this Court in the Notice of Motion. By the said order ad-interim relief in terms of prayer clause (a)(ii) was granted by which the 1st defendant was restrained from enforcing the pledge of shares and from selling or transferring or creating third party rights or otherwise dealing with the suit shares. The case of the plaintiffs in the said Contempt 13 Petition is that the ad-interim order was passed on 18th June 2008 at 11.40 a.m after hearing the learned counsel appearing for the 1st defendant. It is pointed out that the counsel for the 1st defendant stated before this Court that she had instructions to appear for the 1st defendant (1st respondent in contempt petition) and sought time on the ground that the 1st defendant was not served. It is stated that immediately after the order was passed, a letter was forwarded by the plaintiffs to the 1st defendant recording therein what transpired in the Court and the fact that ad-interim order as aforesaid was passed. It is stated that 1st defendant refused to accept the proceedings at its Bandra office. Reliance is placed on office copy of the letter dated 18th June 2008. It is alleged in the Contempt Petition that in total disregard to the ad-interim order passed by this Court the 1st defendant through 2nd to 8th contemnors proceeded to sell 97,000 shares of the plaintiffs through Bombay Stock Exchange and 01,73,000 shares through National Stock Exchange. In the Contempt Petition, a reference has been made to the reply filed by the 1st defendant to the Notice of Motion and in particular the averments made in paragraph 39 thereof. It is pointed out in the Contempt Petition that up to 14 18th June 2008 i.e before the order of injunction was passed by this Court, the 1st defendant had invoked pledge of 10,55,000 shares out of which 09,59,378 shares were sold by the 1st defendant. It is submitted that on 18th June 2008 itself the 1st defendant dealt with the shares in complete violation of ad-interim injunction granted by this Court. The case is that the 1st respondent and other respondents to the Contempt Petition have committed flagrant violation of the ad-interim order passed by this Court though the 1st defendant was having full knowledge of the order of injunction. 11. The submission of the learned counsel appearing for the plaintiffs in support of Contempt Petition is that when at 11.40 a.m ad-interim relief was granted, the 1st defendant was represented by an advocate and therefore the 1st defendant shall be deemed to have the knowledge of the said order as the knowledge of an advocate is the knowledge of his or her client. It is submitted that the transactions have been made by the 1st defendant on the very day few hours after the order of this Court knowing fully well that ad-interim relief was granted by this Court. He submitted that the shares 15 were sold or transferred within few hours of the order passed by this Court. It is, therefore, submitted that action deserves to be initiated under the Contempt of Courts Act, 1971 against the respondents in the Contempt Petition including the 1st defendant. 12. I have given carefully consideration to the submissions made by the learned counsel appearing for the parties. It is not in dispute that on the request made by the 2nd and 3rd defendants, from time to time the plaintiffs had pledged total 12,54,000 shares with the 1st defendant as set out in the plaint. Subsequently, the plaintiffs pledged in favour of 1st defendant 04,89,000 shares. There is a dispute between the parties as to on what account further 04,89,000 shares were pledged by the plaintiffs. 13. It will be necessary to refer to the relevant terms and conditions of the various Pledge Agreements executed by different plaintiffs in favour of the 1st defendant. Under the said Agreement "loan" has been defined to mean the maximum amount that may be advanced to the borrower under each schedules under the Master Agreement. The "loan balance" has been defined to mean 16 the principal amount of each loan advanced to the borrower alongwith interest due, interest tax default interest and other dues. Clause 2 of the said Agreements provides that the plaintiffs have pledged the shares in order to secure due payment of loan and obligations of the borrower under the Agreement. The said clause 2 also covers even the shares pledged at a future date. Necessary reference will have to be also made to the Loan against Securities Agreement between the 2nd and 3rd defendants and the 1st defendant. Clause 3.5 of the said Agreement provides that the 1st defendant will have absolute discretion to appropriate any money received from the borrowers as follows: (i) Firstly, towards costs, charges and expenses incurred by the lender for receipt or recovery of such sums; (ii) Secondly, for overdue charges and other money demanded but unpaid; (iii) Thirdly, towards loan instalments due and payable; and 17 (iv) Lastly the balance, if any, due by the borrower under any other agreement entered into by with the lender. Thus, the 1st defendant is entitled to recover from the borrower costs, charges and expenses incurred by the 1st defendant for the receipt or recovery of such sums. The Pledge Agreements executed by the plaintiffs specifically record that pledge has been made in order to secure the due payment of the loan and obligations of the borrower under the aforesaid Agreement. As pointed out earlier, under the Loan against Securities Agreement executed by the 2nd and 3rd defendants it is provided that the 1st defendant will have absolute discretion to appropriate any monies received from the borrower firstly against the charges and expenses incurred by the 1st defendant for receipt or recovery of such sums. The pledge has been made to secure the repayment of dues by the concerned defendants. As stated earlier, loan balance defined under the Pledge Agreement includes the principal amount with interest, interest tax default interest and other dues. The terminology used in the Pledge Agreement thus prima facie shows that the pledge has been effected even for securing of costs and charges 18 incurred for receipt or recovery of the amount forming part of the loan balance. Prima facie it appears to me that the pledge can be enforced by the 1st defendant for recovery of "loan balance". The amount recovered by enforcing the pledged can be firstly appropriated towards charges and expenses incurred by the 1st defendant for receipt or recovery of loan amount. It will be necessary to refer to paragraphs 3 and 4 of the affidavit dated 01st September 2008 filed by the 1st defendant. Paragraphs 3 and 4 of the said affidavit read thus: "3. I further say that, the defendant no.1 has sold 14,65,000 numbers of shares out of the total pledged shares of 17,43,000 and realised a sum of Rs.20,23,44,784.45 and after adjusting principle outstanding amount of Rs.20,00,00,000/- and towards the costs and expenses a sum of Rs.12,88,334.45 remained balance with the defendant no.1. The defendant no.1 apprehends that in view of pendency of the suit filed by the plaintiffs and Notice of Motion therein as well as Contempt Petition filed by the plaintiff nos.1 and 2, the 19 defendant no.1 will have to incur further costs and expenses and defendant no.1 had already incurred a sum of Rs.10,56,450/- towards costs and expenses. Hereto annexed and marked as Exhibit A is the copy of the statement of accounts giving the details about sale of shares. 4. I further say that, as of today 2,78,000 number of shares out of pledged shares are in possession and custody of this defendant no.1. The defendant no.1 states that, in order to meet the costs and expenses of legal proceedings filed by the plaintiffs, the defendant no.1 will have to retain said balance shares pledged until all the litigations are over." 14. In view of the relevant clauses in the Loan Agreement as well as Pledge Agreement, at this stage when prima facie case is to be considered, it cannot be accepted that the 1st defendant has been illegally withholding any shares. Admittedly 2,78,000 shares out of the pledged shares are now in possession of the 1st 20 defendant. The 1st defendant has stated in the aforesaid affidavit that expenses of more than Rs.10 lacs have been already incurred on the litigation and therefore the 1st defendant will have to withhold the balance shares until the litigations are over. Prima facie, the amount spent on defending this suit and contempt petition by the 1st defendant by way of costs and charges is an amount spent for receipt/recovery of the loan amount. 15. Prima facie, it appears from the documents produced alongwith compilation and especially clause 2 of the loan against Security Agreement that the said 04,69,000 shares are also pledged in favour of the 1st defendant. As stated earlier, the pledge was for securing the repayment of the loan balance by the concerned defendants and the loan balance includes the costs and expenses incurred by the 1st defendant on the litigation relating to recovery or receipt of loan amount. It is stated that expenses in the sum of Rs.10,56,450/- have been already incurred by the 1st defendant. The suit is still pending. Therefore, the plaintiffs have failed to make out a prima facie case for grant of interim relief. 21 16. Moreover, even if the balance shares are sold, at highest there will be a monetary loss to the plaintiffs which can be always quantified in terms of money and can be recovered. If any amount is recovered by the 1st defendant from the plaintiffs, certainly the plaintiffs have remedy available against the borrowers i.e 2nd and 3rd defendants. Apart from all this, a statement has been made by the learned counsel appearing for the 1st defendant that 1st defendant will not transfer the balance 2,78,000 pledged shares. 17. As the plaintiffs have not made out prima facie case, the Notice of Motion will have to be dismissed. However, the statement made by the learned counsel appearing for the 1st defendant will have to be accepted. 18. Now turning to the Contempt Petition filed by the plaintiffs, it must be stated that there is no authentic recording of the time at which ad-interim relief was granted on 18th June 2006. Even according to the case of the plaintiffs, the Advocate for the 1st defendant sought time on the ground that the 1st 22 defendant was not served. The case of the plaintiffs is that the shares about which grievance has been made were sold within few hours from 11.40 a.m. It is true that the 1st defendant was represented by an advocate. However, it is not the case of