1 sj455-10 IN THE HIGH COURT OF JUDICATURE AT BOMBAY ORDINARY ORIGINAL CIVIL JURISDICTION rpa SUMMONS FOR JUDGMENT NO. 455 OF 2007 IN SUMMARY SUIT NO. 1100 OF 2007 Chimanlal U. Shah & Ors. .. Plaintiffs V/s. Reliable Forwarders & Ors. .. Defendants .... Mr. D.D.Madon, Senior Counsel a/w Mr. Hemang Raythatha i/b. M/s. R.M.G. Law Associates for the plaintiffs. Mr. N. engineer i/b. Mr. Ashok Purohit for defendant no. 2. Ms. Rajani Iyer, Senior Counsel, a/w. Mr. Y. V. Divekar, Ms. G. S. Bhagat i/b. M/s. Divekar & Co. for defendant no.3. .... CORAM : A. S. OKA, J. DATE : JANUARY 21, 2011. P.C. Submissions of the learned counsel appearing for the parties was heard on the earlier date. With a view to appreciate the submissions made by the learned counsel appearing for the parties, it will be necessary to make reference to the facts of the case. 2. The suit is filed for recovery of a sum of Rs.95,35,000/- alongwith interest at the rate of Rs.24% per annum as per the 2 sj455-10 particulars of the claim set out in the plaint. 3. The plaintiffs claim to be executors appointed under the Will of late Mrs. Sadguna C. Shah (hereinafter referred to the said “Sadguna”). The said Sadguna died on 13th March, 2004. The first defendant is a partnership firm of which 2nd and 3rd defendant companies have been partners. The suit is filed by the plaintiffs for recovery of the amount advanced by the said Sadguna to the first defendant in her individual capacity. It is alleged that the first defendant firm had agreed to pay interest on the said amount at the rate of 24% per annum. The first plaintiff is the husband of the said Sadguna. The case of the plaintiff is that one Rohit Shah, who is the son-in-law of the first plaintiff and said Sadguna, is a director of the second defendant company and was incharge of the management of the first defendant firm. The case made out in the plaint is that during the subsistence of the business of first defendant partnership firm, at various points of time, loan was advanced by the said Sadguna to first defendant firm, and, there was an understanding between the said Sadguna and first defendant to pay the interest on the loan at the rate of 24% per annum. It is stated that the payments of the loan amounts were 3 sj455-10 made to the first defendant by account payee cheques. 4. The plaintiffs are relying upon an account which according to them shows that a sum of Rs.1,17,66,914/- was due and payable by the first defendant to the said Sadguna as on 31st March, 2004 inclusive of interest upto March 2002. The case of the plaintiffs is that a letter was written by the first defendant firm to the said Sadguna seeking confirmation of the account, and, accordingly, the amount due was confirmed. It is an accepted position that the first plaintiff is also a director of the second defendant company. It is stated in the plaint that at the time of dissolution of the first defendant firm, Mr. Rohit Shah, the director of the second defendant company for and on behalf of the first defendant by letter dated 24th March, 2004 addressed to the first plaintiff in his capacity as the executor of the Will of deceased Sadguna acknowledged liability to pay a sum of Rs. 95,35,000/- together with interest thereon at the rate of 24 % per annum from 12th February, 2002. A reference is made in the plaint as regards Arbitration Proceedings between the parties as regards the first defendant firm which is stated to be dissolved. Reliance is placed on alleged admission in the pleadings of the third defendant in the 4 sj455-10 arbitration proceedings. 5. The learned senior counsel appearing for the plaintiffs pointed out that the amounts have been advanced by the said Sadguna by account payee cheques to the first defendant. He submitted that there is no dispute that the amounts were received by the first defendant firm. He pointed out that the only contention raised by the third defendant was that the loan was thrust upon first defendant firm to enable the directors of the second defendant namely the said Sadguna and Rohit Shah to earn interest at the exorbitant rate of 24 % per annum. He submitted that there is no dispute as regards the principal amount advanced by the said Sadguna to the first defendant, and as regards the claim in respect of the principal amount, there is no defence. He submitted that even as regards interest, the case made out by the plaintiffs has been established by the letter of confirmation of account dated 24th March, 2004 (Exhibit-“D” to the plaint). He, therefore, submitted that the defendants have no defence. 6. The learned senior counsel appearing for the plaintiffs also 5 sj455-10 invited attention of this Court of the TDS Certificates, the accounts and balance sheet of the first defendant firm, which are annexed to rejoinder dated 3rd September, 2010, which according to him establish the liability of the first defendant firm. 7. The learned senior counsel appearing for the third defendant pointed out that the said Sadguna as well as the first plaintiff were the directors of the second defendant company. She pointed out that the signatory to Exhibit-“D” Mr. Rohit Shah is the son-in-law of the first plaintiff and Ms. Sadguna. She submitted that the authority of Mr.Rohit Shah to sign an acknowledgment of debt on behalf of the first defendant firm has been seriously disputed. The learned senior counsel pointed out that there are triable issues involved. Inviting attention of this Court to Exhibits-“D” and “E”, the learned counsel submitted that the letter dated 24th March, 2004 (Exhibit “D”) proceeds on the footing that as on 12th February, 2000, a sum of Rs. 95,35,000/- was due and payable. But, Exhibit-“E” shows that much lesser amount was payable. The learned counsel also invited attention of the Court to the findings recorded by the Arbitral Tribunal and in particular the finding in paragraph No.23 of the Award. 6 sj455-10 The learned senior counsel further pointed out that though the Award of the Arbitration Tribunal is a subject matter of challenge, the finding recorded in Award shows that the defendants have a valid defence. The learned senior counsel invited attention of this Court to various assertions in the reply filed to the Summons for Judgment. 8. I have carefully considered the submissions. It is not in dispute that deceased Sadguna was a director of the second defendant company which is a partner in the first defendant firm. Similarly, the first plaintiff who is the husband of the deceased Sadguna is also one of the directors of the second defendant company. Mr. Rohit Shah who has allegedly signed letter of acknowledgment dated 24th March, 2004, is the son-in-law of the said Sadguna and the first plaintiff. Reliance has been placed on the letter of confirmation of accounts dated 1st April, 2003, which is at Exhibit-“B”. This is a letter purportedly addressed by the first defendant to the said Sadguna by which the said Sadguna was called upon to confirm the account. At this stage, it must be noted that in the reply filed by the third defendant, the said document at Exhibit-“B” has been dealt with. In paragraph No. 30 of the 7 sj455-10 reply, it is specifically stated by the third defendant that the said defendant is not aware of as to who has executed the said letter being Exhibit-“B” to the plaint and a specific case had been made out that it was never shown to the third defendant when the same was executed. In the plaint, the name of the person signing the said letter purportedly on behalf of the first defendant firm has not been disclosed. The second document on which reliance is placed is the letter dated 24th March, 2004. The material part of the letter is thus :- “We acknowledge and confirm that as on date a principal sum of Rs.95,35,000/- together with interest thereon @ 24% p.a. from 12/2/2000 is due and payable to you by us. We would also like to inform you that our firm is in the process of being dissolved. We assure you that as and when accounts are settled and funds become available, we shall repay the amount immediately. 9. It is pertinent to note that the said letter appears to have been signed by Mr. Rohit Shah, the son-in-law of the said Sadguna on behalf of the second defendant describing the second defendant as a partner of the first defendant. There is a serious dispute about the authority of the said Mr. Rohit Shah to acknowledge the debt allegedly payable by the first defendant 8 sj455-10 firm. As set out earlier, the said letter records confirmation of principal amount of Rs. 95,35,000/- together with interest there on at the rate of 24% per annum from 12th February, 2000. Exhibit-“E” annexed to the plaint shows particulars of the loan advanced. It discloses that between 1st April, 1999 to 31st March, 2000, loan of Rs. 28,00,000/- was advanced. Therefore, the statement in the alleged acknowledgment that interest at the rate of 24% per annum was payable from 12th February, 2000 on the amount of Rs. 95,35,000/- appears to be totally inconsistent with Exhibit-“E”. The amount of Rs. 95,35,000/- was not payable in February 2000 as evidenced by Exhibit “E” to the plaint. The said document shows that loan of Rs.28,00,000/- was advanced to the first defendant upto 31st March, 2000. 10. It will also necessary to make a reference to the findings recorded by the Arbitral Tribunal. The dispute between the second and third defendant companies as regards dissolution of the first defendant firm was referred to the arbitration. It must also be noted that the said findings are subject matter of challenge. The third issue framed by the Arbitral Tribunal read thus : 9 sj455-10 “3. Do the Respondents prove that the Claimants, from time to time, created loan entries from the Director of the Claimants for earning interest and for giving donations ?” It must be noted that the second defendant company was claimant before the Arbitration Tribunal and the third defendant was the respondent. The Arbitral Tribunal in paragraph No.23 of the Award held thus : “23. We have heard the parties and perused the records. As stated above the answer to question whether the Respondents are liable to pay, the Suit Firm, the sum of Rs. 1,18,47,000/- will depend on the answer to the questions whether the Claimants, from time to time, created loan entries from the Director of the Claimants for earning interest and for giving donations and whether the donations paid out from the 'Suit Firms' account were not genuine and were given in order to siphon off funds. Undoubtedly the initial burden, to prove, that the loans were not necessary and whether the donations were not genuine is on the Respondents. However, burden of proof is always shifting. Once the initial burden is discharged the onus shifts. We are unable to accept submissions that the signing of the Balance Sheets dated 31 st March, 2000, 31 st March, 2001 amounts to an admission/ acknowledgment of the entries therein. In our view the signing is only for purposes of filing the returns. Even otherwise singing only indicates that the entries therein are correctly made. In this matter there is no dispute that the entries, as made, correctly reflect the transactions undertaken. Therefore the submissions that the auditor should not have certified the accounts 10 sj455-10 are without any substance. The auditor is merely concerned with seeing whether the accounts correctly reflect the transactions of the Suit Firm. It is not for the auditor to question whether or not loans should have been taken or whether donations should have been made. That loans were taken from Claimants directors at 24@ p.a. interest is not in dispute. The question is whether it was necessary to take loans. The fact that donations were made is not in dispute. The question is whether the donations were authorized and whether they are made to siphon off funds of the firm. Mere signing of the Balance Sheets does not prove that loans were necessary and/or that the donations were authorized. Signing merely signifies that the Balance Sheet contains correct entries as per the books of the Suit Firm. That does not amount to an acknowledgment that all the transactions reflected therein were necessary. This has to be proved by the person who contracted the loans and made the donations. The Claim is for amounts due at the foot of the accounts. Admittedly, the accounts were maintained only by the Claimants. ”. (underlines supplied) In the same paragraph the Arbitral Tribunal observed thus : “Thus, during the period of its existence, the Suit Firm had a total business expense (without donations and interest) of Rs. 4,61,03,037/- whereas, the total infusion of funds, for this period, was Rs.4,82,16,000/-. These figures indicate that there was an excess of income over expenditure in a sum of Rs.21,12,963/-. These figures could not be denied. Mr. Purandhare however submitted that for the Financial Year ending 31st March, 2001, the total expenses were in the region of Rs.2,48,78,056/- whereas the income was only Rs. 1,51,11,896/- . He submitted that for the previous year there was a shortfall of Rs. 61,25,758/-. He 11 sj455-10 submitted that this itself shows that there was a shortfall of income over expenditure. He submitted that this showed that it was necessary that loans be taken for meeting the liabilities of the firm. The figures relied upon by Mr. Purandhare have been taken from the Balance Sheet and Profit & Loss Account. They do not indicate as to when payments became due to creditors and/or whether payment made to creditors were before the credit period was over. If the expenses have been incurred without waiting for the credit period was over. If the expenses have been incurred without waiting for the credit period to be over, then the expense could not be justified and it could genuinely be argued that the payments are being made in order to create an artificial shortage for the purposes of taking loans. These figures also include donations made. Also the Respondents are right in their submission that if there was need for monies the partners should first have been asked to bring in the monies. The Respondents have shown that they had sufficient resources to bring in funds if they were required by the Suit Firm. No explanation is given as to why the Respondents were not informed that there was shortage of funds and/or that the partners were required to infuse funds into the Suit Firm. Further if monies are required they would have been available from financial institutions who would have charge a much lower rate of interest. It has not even been suggested that loans would not be available from financial institutions. It has not been stated that attempts were made to obtain loans from financial institutions and that they could not be obtained.”. (underlines supplied) 11. Apart from what is held above, in paragraph No. 24 of the Award, the Arbitral Tribunal, observed that it was for the second 12 sj455-10 defendant to show that loan to the extent of Rs. 2,19,50,000/- was required to be taken from the said Sadguna and Rohit Shah. It is also observed that this could have been done by producing the accounts of the suit firm and showing that at the time loans were taken, there was a necessity for the loans. It is true that there is an observation made therein as regards the present suit. In paragraph No. 36, the Arbitral Tribunal had given a direction to the Auditor to debit all entries regarding loan and interest thereon (including amounts paid out as interest on loans) and amounts paid as donations to the capital account of the second defendant company. 12. Apart from the issue regarding the and authority of Mr. Rohit Shah to sign the acknowledgment, the amount mentioned in Exhibit-“D” dated 24th March, 2004 is not consistent with Exhibit “E”. There is a serious challenge to the authority of Mr. Rohit Shah to admit and acknowledge the liability of the first defendant firm. Unless the authority of Mr. Rohit Shah to sign the letter of acknowledgment is established, the suit cannot be within limitation as the same has been lodged in March, 2007. 13 sj455-10 13. Considering the aforesaid aspects and the observations made by the Arbitral Tribunal, it is very clear that there are triable issues arising in the suit. Therefore, this is a case where unconditional leave will have to be granted to the third defendant. As far as first and second defendants are concerned, it is for the plaintiffs to apply for a decree. 14. Subject to what is observed above, the Summons for Judgment is disposed of by granting unconditional leave to defend the suit. Written statement shall be filed within a period of 12 weeks from today. 15. Suit shall be transferred to the list of commercial causes. JUDGE