Case: Hsbc Bank Omas S.A.O.G Vs. Rockline Construction Company and Others

a conspiracy on part of the petitioner with four other parties who are in the business of buying/selling properties and who are compensated for offering their services to the petitioner in successful bidding and acquiring the property and it is not known as to what is that which the four parties could have done which the petitioner could not have. It can only be seen as a conspiracy which is always hatched in the darkness of secrecy, no direct evidence being available as a proof of the same. It necessarily has thus to be determined on preponderance of probability and all the relevant facts which Section 10 of the Indian Evidence Act would be sufficiently considered as an evidence for the things said or done by a conspirator in regards to common design, as a relevant fact should be looked into. The escrow document refers to a Pay Order of 250 lakhs dated 11 th May 2007 issued by the Oriental Bank of Commerce, JVPD Scheme Branch, Mumbai and by the agreement the petitioner company deposited the said Pay Order with the Advocates and Solicitors to hold and invest it in a scheduled Bank in escrow. Surprising to note that the auction process was over by 4.30 p.m. and if we accept the contention of the learned counsel for the petitioner that after the bidding process was over, the escrow agreement was entered into, which would convey that the Pay Order was obtained from the Oriental Bank of Commerce after 4.30 p.m. We may only take judicial note of the fact that the Banks close its dealing before lunch time and no business is transacted post lunch except effecting the book entries, which is a part of its internal working. The petitioners were able to procure a Pay Order by depositing an amount of 2.50 crores and this all happened pursuant to the agreement being executed, accompanied with a Pay Order. We are surprised at the agile pace at which the things have worked out. We need not say anything more.29. From the record, the case of the petitioner which can be discerned and this is going as per the pleadings of the petitioner company before the Debt Recovery Tribunal in Appeal No.5 of 2001 that Mr.Mahendra Kawad through his agent Mr.Mohinder Pal Singh (one of the parties of the escrow agreement) through Mr.Singh started claiming the share of 76 lakhs payable to Mr.Singh under the agreement and when it was informed that the obligations under the agreement dated 11th May 2007 has not yet been complied with by the four parties, Mr.Mahendra Kawad thought of this innovative and malicious idea to create a nuisance for the appellant who had purchased the property from the Recovery Officer by following the procedure of DRT. This assertion speaks for itself. Worth it to note that Mr.Mahendra Jain did not participate in the re-bidding process on 11th May 2007 on the pretext of certain ambiguity as regards the title of the property. However, no attempt was made to resolve the so-called alleged ambiguity when it was clearly mentioned in the sale notice that some third party is in occupation/possession of the land and the same was sold by the High Court of Bombay. The purpose of the escrow agreement being to compensate the four parties for their consultancy and getting the things done, could have been done prior to 29th March 2007 when Mr.Jain participated in the auction. Mr. Kawad chose not to bid on 11th May 2007 at the fresh auction and then suddenly surfaced alleging fraud by moving an application on 15th November, 2007 praying for setting aside the auction sale. The effect of the escrow agreement in the proceedings can very well be seen to be reflective of pegging down the price of the secured asset and Mahendra Jain himself has appeared before the Recovery Officer and even deposited an amount of 1 crore to prove his bonafides when he made a statement that he has a buyer of 12 crores for the said property. The amount of 1 crore was taken back and the buyer for 12 crore was never brought. The property was therefore required to be sold for an amount of 9.56 crores. The cartel agreement enabled the parties to peg down the prices at the auction and the amount of 2.50 crores would be shared by the four participants for not participating in the bid. We have no hesitation in holding that the escrow arrangement was not for any consultancy being offered but to keep the four parties to the agreement who are in the business of development out of the competition. This clearly falls within the catch situation perceived by the Apex Court in case of Gurmukh Singh (supra). Such an agreement being opposed a public policy and against public interest, is therefore, hit by Section 23 and is void.30. The Recovery Officer in his order dated 22nd October, 2009 found that the Agreement dated 11th May, 2007 was entered into with an object to peg down the price and held that the sale was vitiated and set it aside. In appeal, this Order of Recovery Officer was set aside by the DRT, though holding that there was a cartel agreement but it is not fraudulent and/or in breach of public policy. The DRAT by order dated 7th July, 2014 restored the order of the Recovery Officer permitting the Rockline Construction Company to withdraw the entire amount. As we have noted that the attack mounted about the said order by the Bank is for a limited purpose and so also the challenge of M/s. Lodestar to the impugned order. In the backdrop of the observations made by us, we do not find the view taken by the DRAT to be erroneous, in contrast, we record that the order passed by the DRT, the Fora of original jurisdiction on 20th October, 2010 suffers from egregious flaws and has been rightly set aside by the Appellate Fora.

Decision (1 = appeal accepted, 0 = rejected): 0

Explanation:
0[ds]20. In the backdrop of the aforesaid chain of events, we are called upon to examine the correctness of the impugned order through two writ petitions, Writ Petition No.8572/14 being filed by Rockline Construction Company and Writ Petition No.9078/14 being filed by the Bank. We have extensively heard the learned senior counsel Shri Shroff representing the Petitioner in WP No.8572/14 and learned counsel Shri Samdhani representing the lender Bank in the said Petition and the Petitioner Bank in WPmay accept the contention of the petitioner to that effect since the very first paragraph of the escrow agreement record that M/s.Rockline construction Company have been declared as a successful bidder of the secured property mortgaged with the Bank. Recital No.2 of the said document proceeds to state that four individuals named therein are in the business of buying/selling properties and they have offered their services to M/s.Rockline Construction co, in venturing successful bidding and acquiring the property and securing its demarcation and possession. Recital No.3 convey that M/s. Rockline Constructions have agreed to pay the four parties mentioned in Recital No.2, a fixed sum as brokerage, consultancy fees plus compensation for services subject to the understanding which is drawn in Recital Nos.4 to 8. Going by the first recital that Rockline Construction is declared as a successful bidder in the rebidding which took place on 11th May 2007, stipulation no.4 which set out that M/s.Rockline Construction Co. is depositing with Mulla and Mulla & Craigie Blunt & Caroe, an amount of  2.50 crore by Pay Order to hold and to be invested in the scheduled Bank in escrow and to pay the amount carved out against the name of each of the party against happening of the events being (a) confirmation and completion of sale of the above property in favour of Rockline Construction Co. (b) issuance of sale certificate and (c) demarcation at site and delivery of actual and physical possession. Pertinent to note that the sale certificate came to be issued in favour of the petitioner on 4th June 2007 and on 13th June 2007 possession of the property was handed over to the petitioner and the possession receipt is placed on record. All the three contingencies of confirmation and completion of sale resulted into issuance of sale certificate and possession of the property being handed over did happen within a period of 33 days of executing the escrow agreement. On the three stipulations contemplated in the escrow agreement occurring, it is not the case of the petitioner that the amount came to be disbursed in favour of the four parties. On the other hand, we have noted that it is pleaded by the petitioners that on account of some dispute between the parties, the matter has been referred to an arbitrator and an Award is also passed in the year 2009agreement dated 11th May, 2007 is in the nature of a consultancy agreement. The Agreement is to provide service and it refers to compliance of conditions before the amount deposited with the escrow agent can be released to the four parties nominated in the escrow agreement. All four parties to the escrow agreement were not the bidders at any point of time for the property in question. Argument in the alternative was that assuming but not conceding that the amount kept in escrow is to be treated as payment for preventing the four persons nominated in the escrow agreement, even then the escrow agreement is not hit by the provisions of Section 17 of the Contract Act read with Section 23 of the Contract Act.An agreement which is merely an honest combination between two bidders to purchase the property at an advantageous price and when this agreement was prompted out of necessity, that individual bidders could not afford the bid or do not possess the expertise to enforce the agreement, the agreement may not be hit by Section 23 but where an agreement goes further by resorting to secret artifice for the purpose of defrauding a third person, such an agreement would surely fall within the preface of Section 23 and being fraudulent is void. An agreement between two bidders not to bid against each other at an auction, being not opposed to public policy is not illegal.The position of law which flows from the aforesaid binding precedent neatly answers the question raised before us. An agreement entered into by the parties not to bid against each other is not opposed to public policy and, therefore, it is not void. Further, the agreements which are likely to prevent the property put up for sale in not realizing its fair value and to pin down the value which could be realized at the auction, would certainly be against public good and therefore is void, being opposed to public policy and hit by Section 23 of the Contract Act. Further, an Agreement between the intending bidder, that one should keep away from bidding is neither unlawful nor opposed to public policy. However, an agreement by the prospective bidders at an auction forming a ring to share the profit resulting into the knock out is against public policy. Thus a pure business agreement where two parties join to purchase anything at an auction cannot fall within the mischief of Section 23 if it was a bona fide business arrangement, benefiting the parties involved and not intended to harm the seller, selling the property.The escrow agreement which is a tell-tale of the intention of the parties came to be executed on the very same day i.e. 11th May 2007. The events preceding this Agreement, which emerge from the facts placed before us, bring forth that the Special Court by an Order dated 24th November, 2004 had sold the structure on the property subject to the mortgage of the Bank and the Petitioner Rockline Construction Company was one of the bidders. It can thus be inferred that it had the knowledge of the mortgage and the Recovery Certificates in favour of the Bank. The Petitioner emerged as the highest bidder on the auction of the secured assets held on 29th March, 2007 as well as on 11th May, 2007. The intervening developments, though strage, but are important. On 1st May, 2007, the Recovery Officer received an offer from one Blessing Biotech Limited represented by Mr. Mahendra Jain. Direct bidding took place between the Petitioner and Blessing Biotech Limited represented by Mr. Mahendra Jain. On 11th May, 2007, on re-bidding between the Petitioner and the Blessing Biotech Limited, Rockline emerges as the highest bidder. It is an admitted position that Blessing Biotech Limited was represented through Mr. Mahendra Jain, who participated in the bidding on 29th March, 2007 and in the auction on 11th May, 2007 he was representing Blessing Biotech Pvt. Limited though in personal capacity remained out of the fray. Another character of great significance is Mr. Mohinder Pal Singh, Sole Proprietor of M/s. Preet Enterprises, an Agent of Mr. Mahendra Jain, who was a signatory to the cartel agreement. Mr. Mahendra Jain remained out of the re-bidding which took place on 11th May, 2007 on a flimsy ground. Very surreptitiously on the sale being confirmed in favour of M/s. Rockline Construction Company, he filed an Application approximately after six months for setting aside the sale and raised an alarm about the cartel agreement. The reason being apparent that something went wrong with the cartelescrow agreement creates a doubt as to the exact time of its execution. Subjected to criticism as a conspiracy on part of the petitioner with four other parties who are in the business of buying/selling properties and who are compensated for offering their services to the petitioner in successful bidding and acquiring the property and it is not known as to what is that which the four parties could have done which the petitioner could not have. It can only be seen as a conspiracy which is always hatched in the darkness of secrecy, no direct evidence being available as a proof of the same. It necessarily has thus to be determined on preponderance of probability and all the relevant facts which Section 10 of the Indian Evidence Act would be sufficiently considered as an evidence for the things said or done by a conspirator in regards to common design, as a relevant fact should be looked into. The escrow document refers to a Pay Order of 250 lakhs dated 11  th May 2007 issued by the Oriental Bank of Commerce, JVPD Scheme Branch, Mumbai and by the agreement the petitioner company deposited the said Pay Order with the Advocates and Solicitors to hold and invest it in a scheduled Bank in escrow. Surprising to note that the auction process was over by 4.30 p.m. and if we accept the contention of the learned counsel for the petitioner that after the bidding process was over, the escrow agreement was entered into, which would convey that the Pay Order was obtained from the Oriental Bank of Commerce after 4.30 p.m. We may only take judicial note of the fact that the Banks close its dealing before lunch time and no business is transacted post lunch except effecting the book entries, which is a part of its internal working. The petitioners were able to procure a Pay Order by depositing an amount of  2.50 crores and this all happened pursuant to the agreement being executed, accompanied with a Pay Order. We are surprised at the agile pace at which the things have worked out. We need not say anything more.From the record, the case of the petitioner which can be discerned and this is going as per the pleadings of the petitioner company before the Debt Recovery Tribunal in Appeal No.5 of 2001 that Mr.Mahendra Kawad through his agent Mr.Mohinder Pal Singh (one of the parties of the escrow agreement) through Mr.Singh started claiming the share of 76 lakhs payable to Mr.Singh under the agreement and when it was informed that the obligations under the agreement dated 11th May 2007 has not yet been complied with by the four parties, Mr.Mahendra Kawad thought of this innovative and malicious idea to create a nuisance for the appellant who had purchased the property from the Recovery Officer by following the procedure of DRT. This assertion speaks for itself. Worth it to note that Mr.Mahendra Jain did not participate in the re-bidding process on 11th May 2007 on the pretext of certain ambiguity as regards the title of the property. However, no attempt was made to resolve the so-called alleged ambiguity when it was clearly mentioned in the sale notice that some third party is in occupation/possession of the land and the same was sold by the High Court of Bombay. The purpose of the escrow agreement being to compensate the four parties for their consultancy and getting the things done, could have been done prior to 29th March 2007 when Mr.Jain participated in the auction. Mr. Kawad chose not to bid on 11th May 2007 at the fresh auction and then suddenly surfaced alleging fraud by moving an application on 15th November, 2007 praying for setting aside the auction sale. The effect of the escrow agreement in the proceedings can very well be seen to be reflective of pegging down the price of the secured asset and Mahendra Jain himself has appeared before the Recovery Officer and even deposited an amount of 1 crore to prove his bonafides  when he made a statement that he has a buyer of 12 crores for the said property. The amount of 1 crore was taken back and  the buyer for 12 crore was never brought. The property was  therefore required to be sold for an amount of 9.56 crores. The  cartel agreement enabled the parties to peg down the prices at the auction and the amount of 2.50 crores would be shared by the  four participants for not participating in the bid. We have no hesitation in holding that the escrow arrangement was not for any consultancy being offered but to keep the four parties to the agreement who are in the business of development out of the competition. This clearly falls within the catch situation perceived by the Apex Court in case of Gurmukh Singh (supra). Such an agreement being opposed a public policy and against public interest, is therefore, hit by Section 23 and is void.The Recovery Officer in his order dated 22nd October, 2009 found that the Agreement dated 11th May, 2007 was entered into with an object to peg down the price and held that the sale was vitiated and set it aside. In appeal, this Order of Recovery Officer was set aside by the DRT, though holding that there was a cartel agreement but it is not fraudulent and/or in breach of public policy. The DRAT by order dated 7th July, 2014 restored the order of the Recovery Officer permitting the Rockline Construction Company to withdraw the entire amount. As we have noted that the attack mounted about the said order by the Bank is for a limited purpose and so also the challenge of M/s. Lodestar to the impugned order. In the backdrop of the observations made by us, we do not find the view taken by the DRAT to be erroneous, in contrast, we record that the order passed by the DRT, the Fora of original jurisdiction on 20th October, 2010 suffers from egregious flaws and has been rightly set aside by the Appellate Fora.Section 23 of the Indian Contract Act, 1872 adumbrates that the consideration or object of an Agreement is lawful unless it is forbidden by law or is of such nature that if permitted, it would defeat the provisions of any law or is fraudulent or involves or implies injury to a person or property of another or when the Courts regard it as immoral or opposed to public policy. In each of these cases, the consideration or object of an agreement is unlawful. The three well settled principles by the application of which the enforceability of a contract can be determined are viz. a contract is void if its purpose is to commit an illegal act; a contract which is expressly or impliedly prohibited by law and the contract which cannot be performed without disobedience to law. If the consideration or object of an agreement is opposed to public policy, the agreement becomes invalid. In Halsbury Laws of England, 4th Edition, Vol.9 in para 392, the principle is stated as Any agreement which tends to be injurious to public or against the public good is invalidated on the grounds of public policy. The question whether a particular agreement is contrary to public policy is a question of law to be determined like any other question by proper application of prior decisions.