1 IN THE HIGH CORT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION NOTICE OF MOTION NO.2379 OF 2008 IN SUIT NO.1935 OF 2008 AND NOTICE OF MOTION NO.2308 OF 2008 IN SUIT NO.1935 OF 2008 Sudhakar Kashinath Bokade .... Plaintiff - Versus - 1. Richie Rich Resorts Limited 2. Mr. Bharat Champaklal Shah .... Defendants Shri Robin Jaisinghani a/w Ms Jacinta D'Silva for the Plaintiff. Sarvasri D.D. Madon, Senior Counsel a/w Chetan Kapadia and Sanjay Jain i/b M/s. A.V. Jain & Associates for the Defendant No.1. Shri Mahendra Ghelani i/b M/s. Law Charter for the Defendant No.2. CORAM: SHRI A.V. NIRGUDE, J. DATED: APRIL 04, 2009 COURT'S ORDER:- 1. In this suit, the defendant No.1 took out Notice of 2 Motion No.2379 of 2008 for seeking stay of further hearing of the suit till the hearing and final disposal of the arbitration proceedings or for dismissal of the suit, whereas the plaintiff took out Notice of Motion No.2308 of 2008 for appointment of Court Receiver in respect of the suit property and to restrain the defendants from alienating, disposing of, etc., of the suit property. 2. The facts leading to the litigation are as under: It is a common ground that the plaintiff has development rights in respect of the suit plot of land. In 2003 the plaintiff had partly constructed a new hotel building on the suit plot. In 2003-2004, the defendant No.1's director came in contact with the plaintiff. On 22-11-2004 the plaintiff mortgaged (English mortgage with right to sell the property without intervention of the court) the suit plot in favour of the defendant No.1 for securing loan of Rs.10 crore from them. On 26-6-2005 the parties entered into a deed of rectification wherein the principal amount was reduced to Rs. 5.5 crore. However, soon thereafter from October, 2005 disputes arose between the parties in respect of how the building should be constructed; who should be appointed as the architect; whether the defendant No.1 could get a better plan for the proposed hotel sanctioned, etc. 3. The plaintiff started making grievance that the 3 defendant No.1 was not disbursing the loan installments. On the other hand, the defendant No.1 was complaining about the plaintiff's lack of co-operation in the construction and also failure repay the loan. The defendant No.1 started demanding repayment of the loan also threatened that they would exercise their right to sell the property in the event of the plaintiff committing default in the repayment of the loan. 4. On the other hand, on 26-6-2007 the plaintiff, through his Advocate's letter pointed out to the defendant No.1 they had committed default in effecting the payments of agreed loan, and therefore, the project could not be completed and that he had suffered monetary loss. 5. On 10-7-2007 the defendant No.1 through their Advocate's letter reiterated that they were entitled to exercise their right to sell the property and even forwarded a draft of the public notice proposed to be issued inviting public offers from the prospective purchasers. 6. On 11-7-2006 the defendant No.1 demanded repayment of the loan together with compensation, interest, etc. 7. It is clear that -though the plaintiff claimed that he was not aware of the fact- the defendant No.1 actually exercised their 4 right to sell the property and in fact effected the sale through a sale deed in favour of the defendant No.2 on 4th September 2006. It is their case that before selling the property, they obtained a valuation report from a Government approved valuer. They also stated that they received three offers and they accepted the highest one, made by the defendant No.2. They stated that they immediately put the defendant No.2 in possession and the defendant No.2 claimed that he started the construction of the hotel. 8. On 8-9-2007 the plaintiff, through his Advocates letter asserted that since the disputes had arisen, he would invoke the arbitration clause and had appointed an arbitrator. He even called upon the defendant No.1 to nominate one arbitrator from their side. On 3-10-2007 the defendant No.1 asked the plaintiff as to which of the two arbitration clauses were being invoked. On 30-10-2007 the plaintiff informed that he had invoked the Clause 12 of the mortgage deed. 9. In this background, let me now narrate the case of the plaintiff. The plaintiff states that he was not aware till March, 2008 that the suit property was already sold to the defendant No.2. He learned about it, according to him, on 27-3-2008 when the defendant No.1 informed him about it. The plaintiff soon thereafter 5 protested but in vain. The plaintiff said the defendant No.2 is in collusion with the defendant No.1 and is nothing but an alter-ego of the defendant No.1 and that the sale transaction was not a genuine one. He asserted that the property was sold with gross undervaluation. On this cause of action, the suit came to be filed for a declaration that the sale deed dated 4-9-2007 was bad in law, and for an order seeking accounts to be taken of what is due and payable by the plaintiff to the defendant No.1 under the deed of mortgage and also for recovery of documents, etc.. The plaintiff also sought an order that on his paying the amount found due to the defendant No.1, they be directed to re-transfer the suit property to him. In the alternative, the plaintiff also sought damages in the sum of Rs.23,49,00,000/-. In the further alternative, the plaintiff also sought that the defendant No.1 should pay to the plaintiff the surplus of the sale proceeds out of the consideration of the suit property. 10. As said above, the plaintiff took out his notice of motion for appointment of Court Receiver in respect of the suit property. 11. On the other hand, the defendant No.1 took out their notice of motion seeking stay of further proceedings of the suit till the parties go for arbitration. 6 12. The first question that is required to be decided is whether the suit should be stayed and the parties should be directed to go for arbitration. The answer is in the negative. 13. The suit and its consequences now involves three parties, the third one is the purchaser and is not a party to the deed of mortgage in which there is a provision for arbitration. Earlier when the plaintiff and the defendant No.1, were only parties to the disputes i.e., during October, 2005 till July, 2007, particularly when the defendant No.1 issued threat of exercising their right to sell the suit property by forwarding a draft public notice, the plaintiff had ample scope of invoking the arbitration clause. Apparently the defendant No.1 never felt need to invoke arbitration clause of the agreement. They had effective weapon of right of sale. 14. The demand of the defendant No.1 that the suit should be stayed and the parties should be directed to go for arbitration is a futile attempt to stall the proceedings. As said above, there is a third party involved now and the arbitrator cannot pass an award in respect of the third party's rights. Assuming that the parties are still sent for arbitration, the scope before the arbitrator would be limited to the extent of agitation on accounts. They would get an award as to what amount is due against the plaintiff and whether the plaintiff is entitled to any damages, etc.. The arbitrator obviously will not 7 be able to declare the sale dated 4-9-2007 bad in law, etc.. He will neither be able to direct the defendant No.2 to deliver the possession back to the plaintiff. The defendant No.1's demand to send the matter for arbitration would result into severing of the causes of action between the parties whereas this suit would be able to decide all the causes of action between the parties and would decide the disputes comprehensively. 15. A similar situation was considered by the Supreme Court in the case of Sukanya Holdings Pvt. Ltd. v. Jayesh H. Pandya and another, reported in 2003 AIR SCW 2209 and refused to bifurcate the causes of action. The Supreme Court considered the relevant language used in Section 8 of the Arbitration and Conciliation Act,. 1996 and held that when the Court is required to refer the parties to arbitration, the suit should be in respect of a matter which the parties have agreed to refer and which comes within the ambit of the arbitration agreement. It further held that when a suit is commenced as to a matter which lies outside the arbitration agreement and is also between the same parties who are not parties to the arbitration agreement, there is no possibility of application of Section 8 to such a situation. The Supreme Court held that the words “a matter” used in Section 8 indicates the entire subject-matter of the suit. The Supreme Court further held that it 8 would be difficult to give an interpretation to Section 8 under which bifurcation of the cause of action is possible. This would, it is said, lay down a totally new procedure not contemplated under the Act. It is further said that such bifurcation of a suit in two parts would inevitably delay the proceedings which would frustrate the purpose of arbitration. Besides, it is said, it would lead to conflicting judgments and orders by two different forums. In view of this clear statement of law on this subject, there is practically no force in the defence of the notice of motion and so the reliance on the judgment in the case of Bharat Karsondas Thakkar v. M/s. Kiran Construction Co. & Ors., reported in AIR 2008 SC 2134, is futile and there is no need to discuss the same. It must, however, be stated as regards this judgment that the judgment has practically no application to the facts of the case. 16. Let me now turn to the Notice of Motion No.2308 of 2008 taken out by the plaintiff for seeking appointment of Court Receiver in respect of the suit property. The plaintiff also sought to restrain the defendants from alienating, disposing of or creating third party rights, etc., of the suit property during the pendency of the suit. The question is whether the plaintiff makes out a prima facie case in support of this prayer. The facts are mentioned above. In order to answer this question the plaintiff has to prima facie 9 succeed in showing that the defendant No.1 had no lawful right to put the property in question for sale and secondly the sale that was effected was not lawful and genuine. I have narrated the facts above and what is pertinent to notice in the chain of events that took place before 4-9-2007, when the sale deed was executed in favour of the defendant No.2, is the correspondence that took place between the plaintiff and the defendant No.1 in between 3-3-2007 till 10-7-2007. By the plaintiff's letter dated 3-3-2007 the plaintiff admitting having received a loan of Rs.2,26,07,295/-. The plaintiff raised several objections in respect of all the matters relating to the construction of the hotel, the appointment of contractor and the appointment of architect, etc.. The plaintiff even denied having received Rs.33,72,155/-, as alleged by the defendant No.1 and then at the end of the letter the plaintiff stated that the demand of the defendant No.1 for repayment of the loan was mischievous and wrongful. The plaintiff stated boldly that he was ready and willing to refund the amount of Rs.2,26,07,295/- along with reasonable compensation thereon, against the defendant No.1 signing the deed of re-conveyance of the suit property. The defendant No.1 sent a suitable reply to this and reiterated their claim and this time they demanded repayment for Rs.8,85,63,437/-. To this, the plaintiff's Advocate sent reply to the defendant that the defendant No.1 10 should refrain from taking any steps in furtherance of the threat to sell the immovable property allegedly mortgaged to you failing which the plaintiff would be constrained to adopt suitable legal proceedings including invocation of the arbitration clause contained in the mortgaged deed. Admittedly, despite this situation where the parties had almost reached the peak of their dispute, the plaintiff did not take steps to invoke the arbitration clause. Nothing happened between the parties for a fortnight. On 10-7-2007 the defendant No.1 reiterated their stand that they were entitled to exercise their right to sell the property as per the agreement and they were in the process of doing so. So saying, the defendant No.1 also sent a draft of the advertisement proposed to be issued for advertising public notice, inviting offers for the suit property. This indeed again was a precipitous threat of the defendant No.1 which, in my view, should have prompted the plaintiff to take evasive action. He should have taken serious note of the defendants' action that they were about to publish in the newspapers a public notice inviting offers from prospective purchasers of the suit property. The copy of the public notice says that the property would be sold on as is where is basis, etc.. This, in my view, was clear and present danger to the plaintiff and this should have prompted the plaintiff to take prompt action which he 11 indicated in his earlier letter dated 26-11-2006. But admittedly, nothing happened from the plaintiff's side till 8-9-2007. This indolence on the part of the plaintiff is really surprising and probably would affect the strength of the plaintiff's case. The plaintiff's letter dated 8-9-2007 invoking the arbitration clause of the mortgaged deed and appointing Shri Justice S.N. Variava, retired Judge of the Supreme Court, as an arbitrator from his side, also appears to be a belated action. I strongly believe that this letter was sent as a futile and feeble attempt to stop the defendant No.1 from going ahead with the proposed sale of the suit property. I have my own doubts as to whether by then the plaintiff really did not know about the publication of the public notice in the newspapers and resist the offers from the prospective purchasers. The defendant No.1, as usual, sent immediately their response to the plaintiff's letter dated 8-9-2007 and pointed out that they had exercised their right (read: right of sale of the suit property) and that they did it by giving the plaintiff a notice as well as by issuing public notices. They thereby clearly indicated to the plaintiff that they had taken the dreaded action of sale of the suit property. Even after this letter, the plaintiff pretended to have not taken notice of the fact that the suit property was already sold. The plaintiff again complained about the latter's tacitness of the letter of the defendant 12 No.1 dated 3-10-2007 in which obviously they did not make clear mention of the sale of the suit property and the name of the purchaser, the defendant No.2. The plaintiff had ample indication through this letter that a third party had already entered between him and the defendant No.1. Through his Advocates letter dated 31-10-2007 the plaintiff reiterated his rather empty and ineffective stand in respect of invoking of the arbitration clause. By this time, the plaintiff had already lost the suit property to the defendant No.2. It is clear that the plaintiff was feigning ignorance in respect of the event that took place between July and August, 2007. So the plaintiff has no equity in his favour when he said that the defendant No.1 kept him in dark before effecting the sale of the suit property. As said above, in this fateful period between 10-7-2007 to 8-9- 2007, the defendant No.1 actually published the public notice inviting offers from the prospective buyers and it is said they received offers and accepted the highest one which was given by the defendant No.2. They even executed the sale deed on 4-9- 2007. It is said that they put the defendant No.2 in possession on the same day. This was then informed to the plaintiff by the defendant No.1 by their letter. 17. The next question is whether the act of sale was prima facie illegal? The answer to this question is also in the negative. 13 As said above, the defendant No.1 initially published notice in the newspapers on 18-7-2007. He choose two newspapers to publish this advertisement. The defendant No.1 also obtained a valuation report from a Government approved valuer. The defendant No.1 then received three offers, the highest one was from the defendant No.2 and was in the amount of Rs.9,25,00,000/-. So far I think there was nothing amiss in the actions of the defendant No.1. 18. The defendant No.1 then executed the sale deed in respect of the suit property on 4-9-2007 in favour of the defendant No.2 and also put him in possession. However, the defendant No.1 has to justify their action of accepting only Rs.25,00,000/- on that day from the defendant No.2 towards the consideration of the suit property. The defendant No.1 has explained this saying that on that day he gave to the plaintiff full credit of Rs.925 lakh and absolved the plaintiff of all the liabilities under the mortgage. It is then a matter between the defendant No.1 and the defendant No.2 as to how the defendant No.2 would effect the payment of the remaining portion of the consideration. I think the plaintiff cannot raise objection to this part of the deal. 19. The plaintiff tried to place reliance on the judgment of Supreme Court in the case of Gajraj Jain v. State of Bihar & others, 14 reported in AIR 2004 SC 3392. The situation in that case was a little different; where a financial corporation who had first charge on the suit property had put the suit property on sale by issuing tenders, but before completing the process of sale by public auction, the financial corporation sold the property to a party and recovered its dues, etc.. The Supreme Court held that the right of such creditor to recover the due amount out of the proceeds of the sale of the property, as provided under Section 69 of the Transfer of Property Act, 1882 under which it is stipulated that a mortgagee exercising power of sale is a trustee of the surplus sale proceed and he must act in a manner which protects not only his own interest but also the interest of others, including the mortgagor. The Supreme Court further held that the mortgagee in such a situation is bound to obtain the best possible price for the mortgaged assets and the best possible price means fair market value. In that reported case the mortgagee had not obtained the valuation report before transferring the assets to a purchaser and so the Supreme Court held that the impugned sale was in violation of the relevant provisions of the said Financial Corporation Act which is almost similar to Section 69 of the Transfer of Property Act. The plaintiff's reliance on this judgment is rather far-fetched because the Supreme Court was considering the act of a statutory body, the 15 Financial Corporation of a State, that too, under Article 226 of the Constitution of India. The Supreme Court did mention that the provisions of sub-sections (1) and (4) of Section 29 of the State Financial Corporation Act, 1951 are similar to Section 69 of the Transfer of Property Act. But the comparison between the two provisions in the overall discussion in the judgment is quite limited and besides, the facts of that case were quite different. Here we have a mortgagee who is trying to assert his right to sell embodied in the contract of mortgage. Nonetheless, there are certain aspects which are discussed in the Supreme Court judgment which are relevant to the present case also and I will deal with them in subsequent paragraphs. Shri Jaisinghani made his submissions and I will deal with them one by one. (a) He said that the mortgage deed is not lawful as it is not seen to have been attested by two eye-witnesses which is a necessary ingredient, as provided under Section 59 of the Transfer of Property Act, which reads as under: “59. Mortgage when to be by assurance.- Where the principal money secured is one hundred rupees or upwards, a mortgage, {other than a mortgage by deposit of title deeds}, can be effected only by a registered instrument signed by the mortgagor and attested by at least two witnesses. Where the principal money secured is less than one hundred rupees, a mortgage may be effected 16 either by {a registered instrument} signed and attested as aforesaid, or {except in the case of a simple mortgage} by delivery of the property.” The document which is annexed to the plaint does not show attestation. So he asserted that the mortgage deed is void. So the defendant No.1 did not get any right to sell the property. The defendants' Advocate placed reliance on two judgments, reported in AIR 1925 PC 203 {Mt. Hira Bibi and others v. Ram Hari Lal and others} and 1905 Vol-7 BLR 934 {Narayan Babaji v. Lakshmandas Harakchand} to buttress his submission that in the absence of attestation, the mortgage deed is void. This submission is devoid of merit. It is not the plaintiff's case in the pleadings that the mortgage deed is not a valid document for want of attestation. In fact, the plaintiff admitted the legality of this transaction and based on this basic premise, his grievance in the plaint is made. This argument is even self-destructive and is not tenable. The entire claim of the plaintiff in the suit is based on his assertions on lawful contract of mortgage deed. The plaintiff admitted that he executed such deed and he is not permitted to object to the manner in which the agreement was executed. Besides, I have examined the photo-stat copy of the original mortgage deed and I find that two witnesses have signed the mortgage deed, although it is not 17 clearly stated there that they were the attesting witnesses, nonetheless, their presence before the Sub-Registrar at the time of execution of this document was for no other purpose than to attest the document. The second argument is that the plaintiff mentioned in the plaint that although he executed the mortgage deed, he is actually not the owner of the property. He does not have clear title to the property. All that he has is the right to develop the property and so he could not have executed the mortgage deed. This argument is also self-defeating in as much as in that case the plaintiff could not have filed the suit. The reliance on the judgments reported in AIR 1938 Allahabad 22 {Kabul Chand v. Badri Das}, 1952 Vol-LIV BLR 519 {Prahlad Dalsukhrai v. Maganlal Muljibhai Tewar} and AIR 2007 SC 3169 {Syndicate Bank v. Estate Officer & Manager, A.P.I.I.C . Ltd. & Ors. } is unnecessary though in the reported judgments it is held that if the mortgagor's title is imperfect to the knowledge of the mortgagee at the time of execution of the mortgage deed, even after the mortgagor's title is perfected, the mortgagee would not get right to sell and at the most he would have charge on the mortgaged property. In the case of the Supreme Court judgment mentioned above, the question as to whether mortgagor's title to the property is required to be complete 18 and perfect in order to create a mortgage by depositing the title deed, is referred to a larger Bench. The plaintiff, as said above, has no scope to advance this argument because in that case the very basis of the suit would be destroyed. (b) Shri Jaisinghani then raised two objections to the sale; the first being that the sale was not valid. He placed reliance on Section 69 of the Transfer or Property Act which reads as under: “69. Power of sale when valid. -