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Punjab National Bank Finance Limited Vs. Shital Prasad JaIn and ors. - Court Judgment

LegalCrystal Citation
CourtDelhi High Court
Decided On
Case NumberFirst Appeal Order No. 9 of 1980
Reported inAIR1982Delhi125; [1983]54CompCas66(Delhi); 19(1981)DLT368
ActsCode of Civil Procedure (CPC), 1908 - Sections 151 - Order xxxviii, Rules 1 and 5 - Order xxxix, Rules 1 and 2
AppellantPunjab National Bank Finance Limited
RespondentShital Prasad JaIn and ors.
Advocates: K.K. Jain,; D.K. Aggarwal,; P. Dayal,;
Cases ReferredGopal Krishnati Ketkar v. Mohamed Haji Latif
.....that money in question diverted by defendant no. 1 to other defendants - also alleged that by said loan defendants bought properties - whether trial court's order of attachment of said properties of defendants justified - defendants had no other business activity - companies formed by defendants for purchase of properties in question - allegation of diversion of funds made by plaintiff justified - held, order of attachment justified. - - he has pointed out that notwithstanding specific averment made by the plaintiff to that effect, defendants 3 to 5 have not come out with detailed particulars of their shareholding, capital investment and the like even though the entire information bearing on the subject was within their special knowledge. reliance in this context has been placed by..........that in a matter of this description the income-tax authorities are entitled to pierce the veil of corporate entity and to look at the reality of the transaction. it is true that from the juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. but in certain exceptional cases the court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade. for example, the court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation.'similarly, his lordship observed in juggi lal kamlapat v. commissioner of.....

J.D. Jain, J.

(1) The facts giving rise to the above mentioned cross appeals against order of the Single Judge dated 16th November, 1979, succinctly are that in December, 1976 the plaintiff-PNB Finance Limited (a public limited company) instituted a suit for recovery of Rs. l9,55,890/37p. against Shital Prasad Jain (defendant No. 1), his son Mukul Jain (defendant No. 2), Rajadhani Vanijya Ltd. (defendant No. 3), Poorvanchal Projects Ltd. (defendant No. 4) (both defendants 3 & 4) being public limited company) and Emnjay Overseas (Private) Limited (defendant No. 5) on the averments that defendant No. 1 had been Financial Adviser of the plaintiff from 1st February, 1972 to 11th June, 1975. Pursuant to a request made by defendant No. I on 7th November, 1974, a loan of Rs. 5,00,000.00 (rupees five lakhs only) was given to him on 23rd December, 1974, at 16% per annum as interest. Defendant No. I executed a promissory note on the same day in consideration of his having obtained the loan. Thereafter, on the request of defendant No. I vide letter dated 15th January, 1975, the plaintiff advanced another loan of Rs. l0,00,000.00 (rupees ten lakhs only) on 29th January, 1975. It was represented by defendant No. I that he would utilise the said amount for the purchase of immoveable property in Delhi and the Directors of the plaintiff- company sanctioned the grant of the loan on the following terms ;

(I)the loan amount of Rs. 10,00,000.00 would carry interest @ 16% per annum payable quarterly on the last day of each quarter :

(II)the loan would be repaid in twelve monthly Installments commencing from April 1975 ; and

(III)the loan would be secured by deposit of the title deed of the property as soon as the property was registered in the name of the Defendant No. 1.

(2) A pronote with regard to the same was also executed by defendant No. 1 on the aforesaid date viz. 29th January, 1975. He did not pay anything either towards the principal amount or towards interest, instead he diverted the amount of both the loans to defendants 2 to 5. A part of the loan was also diverted to M/s. Dabri & Company, a sole proprietary concern of one Kundanmal Dabriwalla of Calcutta. It was further averred that the companies-defendants 3 to 5 were floated by defendants 1 & 2 and were controlled by them, the majority of shares in these companies being held by defendants 1 & 2 and other members of their family and close relatives. Thus, they are family concerns of defendants 1 & 2. These defendants in turn applied the amount of loans so diverted to them. in purchasing immoveable properties at New Delhi. Defendant No. 3 purchased he property bearing No. 10, Panchsheel Marg, New Delhi at the price of Rs. 10,00,000.00 approximately while defendants 4 &5 purchased flats bearing Nos. 101 & 102 comprised in New Delhi House, 27, Barakhamba Road, New Delhi, respectively, each priced at about Rs. 3,00,000.00 . It was further averred that the said properties were being held by the said defendants on behalf of defendant No. I inasmuch as the latter did not apply the amount of loans directly for the purchase of immoveable properties in his own name in order to defraud the plaintiff although the loan had been given to him for the specific purpose of purchasing immoveable property at Delhi. Hence defendants 3 to 5 are sought to be made fiddle for repayment of loans on the ground that the properties were held by them for the benefit of the plaintiff.

(3) An application) being I.A. 2897/76, was also made by the plaintiff under Order xxxviii Rules 1 & 5, and Order Xxxix Rules 1 & 2 read with Section 151 of the Code of Civil Procedure (hereinafter n ferred to as the Code) praying for attachment before judgment/ad-interim injunction restraining the defendants from transferring, alienating or disposing of the whole or part of the aforesaid properties, as also some properties and amounts held by defendant No. 1 in some banks etc. detailed therein. The application was resisted by defendants 2 to 5, who put in separate replies categorically denying that the loan amounts were diverted by defendant No. 1 as alleged or that they had purchased properties out of the amount of the loans in question. While it was denied that defendant No. 4 had acquired any immoveable property whatsover it was admitted that defendant No. 3 had purchased the property known as 10, Panchsheel Marg) New Delhi and that defendant No. 5 had purchased the flats bearing Nos. 101 &102, situated at 27, Barakhamba Road, New Delhi. However, they asserted that the said properties had been purchased by defendants 3 & 5 out of their own funds and being bodies corporate they were owner of the same in their own right. Further all these defendants took up the stand that there is no privity of contract between the plaintiff and any of them and as such the suit against them was not at all maintainable and was misconceived.

(4) Faced with this situation, the plaintiff came forth with some details in the rejoinders to the replies filed by defendants 2 to 5. It was contended that as per information available with the plaintiff) out of Rs. 5,00,000.00 taken on loan on 23rd December) 1974, defendant No. I transferred a sum of Rs. 3,10,000.00 to defendant No. 2 on that very day and certain amounts were paid to M/s. Dabri & Company subsequently. Further the entire amount of Rs. 10,00,000.00 received by defendant No. 1 as loan from the plaintiff on 29th January, 1975, was diverted to defendant No. 2 partly on the same day and partly on the next following day. They refuted the assertion of the defendants that defendants 3 & 5 had paid for the properties purchased by them respectively out of the funds belonging to them and reaffirmed that the same had been purchased out of the loan amounts advanced by the plaintiff-company to defendant No. 1 which had been diverted directly or indirectly by him to other defendants. The plaintiff further asserted that defendants 3 & 4 had been floated by defendants 1 & 2 and were also control by them) they holding majority of shares in both these companies Along with their family membesr, close relatives and friends. It was specifically printed out that Rajdhani Vanijya Limited-defendant No. 3 was incorporated on 2nd February, 1975, with an authorised capital of Rs. 10,00)000.00 and defendant No. 1 and his wife Smt.Pramod Jain together held about 410 out of total 500 shares of Rs. 10.00 each issued initially and as far as the plaintiff was aware there was no public issue of defendant No. 3 so far. As for the purchase of property bearing No. 10, Panchsheel Marg, New Delhi, it was alleged that transaction of purchase with respect to the same was completed on or before 14th February, 1975, i.e. soon after the loan of Rs. 10,00,000.00 was received by defendant No. 1 and defendant No. 3 was floated by him. It was pointed out that defendant No. 3 could not possibly purchase such a big property on the basis of subscribed capital of Rs. 5,000.00 only at the relevant time. Similarly, it was alleged that defendant No. 4 was incorporated on 22nd April, 1975, with an initial subscribed and paid up capital of Rs. 5,000.00 only. The majority of shares in the said company were held by defendants 1 & 2 and Smt.Pramod Jain, wife of defendant No. 1. It was asserted that so far as the plaintiff was aware, there had been no public issue of defendant No. 4 either. Further, according to the plaintiff, defendant No. 4 had advanced sums totalling Rs. 6,00,000.00 to defendant No. 5 towards the acquisition of the above mentioned two flats viz. 101 & 102 in New Delhi House, 27, Barakhamba Road, New Delhi. As for defendant No. 5, the plaintiff alleged that the paid-up capital thereof was only Rs. 7,000.00 which again was held by defendants 1 & 2 and their close relatives and friends, although its authorised capital was Rs. 5,00,000.00 . Thus, the plaintiff reiterated that the properties in question had been purchased by defendants 3 to 4 out of the amounts advanced by the plaintiff to defendant No. 1 which were ultimately diverted to those defendants.

(5) Thereupon, defendant No. 2 with the leave of the Court filed detailed counter-affidavits on behalf of himself and defendants 3 & 5 in his capacity as Secretary of the former and Director of the latter. While admitting that on 23rd December, 1974, he received two cheques, one for Rs. 40,00,000.00 and the other for Rs. 2,50,000.00 from defendant No. 1, he asserted that the former cheque was in repayment of the amount due and owing by defendant No. I to him and that the other amount of Rs. 2,50,000.00 was duly repaid by him by means of three account payee cheques mentioned therein and as such no amount remained outstanding between him and defendant No. 1 as on 31st December, 1974. Similarly, while admitting that he had received certain amounts aggregating Rs. 6,70,000.00 from defendant No. 1 on different dates during January 1975 up to 29th Jan. 1975, he asserted that the same stood squared up finally by payments made by him to defendant No 1, the major payment being of Rs. 6,00,000.00 vide cheque dated 29th January, 1975. Subsequently, he received one single cheque for Rs. 20,03,000.00 from defendant No. I and he repaid the same through various account payee cheques issued in favor of defendant No. 1, as per details given in the affidavit, the last payment being of Rs. 7,75,000.00 vide cheque dated 14th July, 1975. This defendant further affirmed that his grandfather late Shri Ram Sarup Jain had gifted Rs. 3,00,000.00 to him in or about 1954 and he owned wealth/assets worth several lakhs of rupees because of accretions thereto and appreciation of the gifted amount and income from his own business. Thus, according to him, the investments made by him in the shares of defendants 3 & 5 were financed out of his own resources without having anything to do with defendant No. 1. As for defendant No. 3, he swore that the issued, subscribed and paid-up capital of the said company was Rs. 10,50,000.00 and the company had invested in purchasing property bearing No. 10, Panchsheel Marg, out of its own share capital. However, public issue of the capital was not made as the shares of the company were not sought to be listed on Stock Exchange in line with numerous public limited companies carrying on business in that manner. Thus, initial capital of Rs. 5,000.00 for mere incorporation of the company had no bearing on the subject. He further clarified that purchase of the property 10, Punchsheel Marg, was completed only on 16th July, 1975, although agreement to purchase the same had been entered into by one Rajendra Prasad Jain, a promoter of defendant No. 3 in February, 1975 on payment of Rs. 25,000.00 as earnest money which had been arranged by him. He further asserted that the defendant-company was receiving rent of the said property and being a distinct legal entity was its exclusive owner. Similarly, on behalf of defendant No. 5, he swore that the paid-up share capital of defendant No. 5 was Rs. 6,00,000.00 as the same had been increased by issue of further shares during the financial year 1974-75 i.e. the year in which defendant No. 4 also purchased the aforesaid flats at an investment of Rs. 6,00,000.00 . He asserted that there was no borrowing by defendant No. 5 except a deposit of Rs. 10.000.00 from a director/shareholder. He further clarified that defendant No. 1 did not hold any share in the capital of defendant No. 5 and was not a member thereof even at the time of the institution of the suit. He filed a copy of balance-sheet of defendant No. 5 as on 31st October, 1975, in support of this contention.

(6) Upon these facts the learned counsel for the plaintiff has canvassed with considerable favor that defendants 3 to 5 were merely dummy companies having been created by defendant No. I in collusion with defendant No. 2 and other close relations and friends to have a corporate facade and to take the properties in question which had, in fact, been purchased by him although in the names of defendants 3 & 5 out of the loan amounts beyond the reach of the plaintiff. It is contended that intent to divert on the part of defendant No. 1 is writ large, in that, he did not purchase any property in his own name, as given out by him while applying for loan of Rs. 10,00,000.00 to the plaintiff and instead he devised the scheme of purchasing properties in the names of defendants 3 & 5 surreptitiously by diverting the loan amount to them directly or indirectly. He has pointed out that notwithstanding specific averment made by the plaintiff to that effect, defendants 3 to 5 have not come out with detailed particulars of their shareholding, capital investment and the like even though the entire information bearing on the subject was within their special knowledge. In particular, he has pointed out that defendant No. 3 has deliberately suppressed the information with regard to its share capital i.e. how and when it was raised and the fact whether defendants 1 & 2 had any interest or share therein at the relevant time i.e. purchase of property No. 10, Panchsheel Marg. Thus, the bald assertion of defendant No. 3 and that matter of defendant No. 5 that the aforesaid properties were purchased and owned by them as body corporate does not load us anywhere. He has, thereforee, urged that this court, as indeed he did submit before the learned Single Judge, tear off the corporate veil and go behind the corporate personality to the individual members. He has emphasised that the veil of incorporation does not mean that the internal affairs of the company are completely concealed from view and the court should be reluctant to lift the veil by having dogmatic approach to the problem, viz. that a company being a distinct juristic person is capable of owing or owns property in its own right. Reliance in this context has been placed by him on some decisions of Supreme Court as well as English Courts. In The Commissioner of Income-tax Madras v. Shri Meenakshi Mills Limited, Madurai, : [1967]63ITR609(SC) , Ramaswami J. speaking for the Court observed that :

'It is well established that in a matter of this description the Income-tax authorities are entitled to pierce the veil of corporate entity and to look at the reality of the transaction. It is true that from the juristic point of view the company is a legal personality entirely distinct from its members and the company is capable of enjoying rights and being subjected to duties which are not the same as those enjoyed or borne by its members. But in certain exceptional cases the Court is entitled to lift the veil of corporate entity and to pay regard to the economic realities behind the legal facade. For example, the Court has power to disregard the corporate entity if it is used for tax evasion or to circumvent tax obligation.'

Similarly, his Lordship observed in Juggi Lal Kamlapat v. Commissioner of Income-tax, U.P., : [1969]73ITR702(SC) that :

'FROM a juristic point of view the Corporation may be a legal personality distinct from its members. But the Court is entitled to lift the mask of corporate entity if the conception is used for tax eviction, Or to circumvent tax obligation, or to perpetrate a fraud.'

(7) Both these cases, no doubt, relate' to tax assessment as noticed by the learned Single Judge. However, there is a catena of English decisions to warrant the conclusion that the doctrine of lifting the corporate veil or cracking open tile corporate shell, as it is very often said, is not confined only to cases of tax evasion and the Court would be well within its right and indeed be justified in lifting even the curtain rather than the veil and see what goes on behind it, concealed from the public gaze. Surely, the Courts will refuse to allow the corporate entity principle to be used as an instrument of fraud.

(8) In Gilford Motor Company Limited v. Horns, (1933) Gh. 935, Home a former employee of the plaintiff had covenanted not to solicit its customers. However, shortly afterwards he attempted to evade this obligation by forming a company which undertook the soliciting by carrying on parallel business for the sale of spare parts of Gilford vehicles. An injunction was sought by tile plaintiff against Home as well as his newly formed company on the ground that the latter was merely a creature of the former and he was committing breaches of the covenant by the agency of the defendant- company. The Court of Appeal granted an injunction against both him and the company, notwithstanding, that it was not a party to the covenant. Observed Lord Hanworth M.R. that :

'I have not any doubt on the evidence I have had before me that the defendant company was the channel through which the defendant Home was carrying on his business. Of course, in law the defendant company is a separate entity from the defendant Home, but I cannot help feeling quite convinced that at any rate one of the reasons for the creation of that company was the fear of Mr. Home that he might commit breaches of the covenant in carrying on the business, as, for instance, in sending out circulars as he was doing, and that he might possibly avoid that liability if he did it through the defendant company.'

The company was described in the judgment as 'a device, a cloak or sham' enabling Home to continue to commit breaches of the agreement.

(9) In Wallersteiner v. Moir, (1974) 3 AIIER 217,theplaintiff-Dr. Wallersteiner had issued a writ for libel against the defendant who had earlier issued a circular to the shareholders of the company staling that manoeuvres of the plaintiff look distinctly fraudulent and represent the culmination of a series of unlawful activities in the company's affairs since control of it was acquired by him i.e. the plaintiff. Lord Denning M.R. while dealing with the subject of corporate veil observed that :

'IT is plain that Dr. Wallersteiner used many companies, trusts, or other legal entities as if they belonged to him. He was in control of them as much as any 'one-man company' is under the control of the one man who owns all the shares and is the chairman and managing director. He made contracts of enormous magnitude on their behalf on a sheet of note paper without reference to anyone Counsel as amices curiae suggested that all these various concerns were used by Dr. Wallersteiner as a facade, so that each could be treated as his alter ego. Each was in reality Dr. Wallersteiner wearing another hat. Counsel for Dr. Wallersteiner repudiated this suggestion. It was quite wrong, he said, to pierce the corporate veil. The principle enunciated in Soloman v. Saloman & Co. Ltd., (1897) Ac 22, was sacrosant. If we were to treat each of these concerns as being Dr. Wallersteiner himself under another hat, we should not, he said, be lifting a coiner of the corporate veil. We should be sending it up in flames. I am prepared to accept that the English concerns - those governed by English company law or its counterparts in Nassau or Nigeria-were distinct legal entities............................................. Even so, I am quite clear that they were just the puppets of Dr. Wellersteiner. Be controlled their every movsment. Each danced to his bidding. Be pulled the strings. No one else got within reach of them. Transformed into legal language, they were his agents to do as he commanded. He was the principal behind them. I am of the opinion that the court should pull aside the corporate veil and treat these concerns as being his creatures - for whose doings he should be, and is, responsible. At any rate, it was up to him to show that any one else had a say in their affairs and he never did so.'

(10) Yet another judicial decision which illustrates that the Court may left the veil to prevent the corporators from perpetrating a fraud is Jones v. Lipman, (1962) 1 W.L.R. 832, where the first defendant attempted to avoid completing the sale of the house to the plaintiff by conveying it to a company (defendant No. 2 in the case) formed for the purpose. In an action for specific performance of the contract, the Court treated the company as a mere sham and ordered both the defendant and his company specifically to perform the contract with the plaintiff. Russel J. adverting to Gilford Motor Co. Ltd. v. Home (supra) observed :

'THOSE comments on the relationship between the individual and the company apply even more forcibly to the present case. The defendant company is the creature of the first defendant, a device and a sham, a mask which he holds before his face in an attempt to avoid recognition by the eye of equity. The Gilfords's case illustrates that an equitable remedy is rightly to be granted directly against the creature in such circumstances.'

(11) The subject to lifting the veil and looking behind the company as legal persona has been dealt with at some length in Palmer's Company Law, Vol. I, 22nd Edition, at pages 160 to 162 and it is stated that generally speaking, the courts are more inclined, in appropriate circumstances, to 'lift the veil' of corporate ness where questions of control are in issue than where a question of ownership arises. However, certain instances have been stated in which the veil of corporate ness was lifted. Some of these are as follows:

1.In certain matters pertaining to the law of taxes, death duties and stamps, particularly where the question of the 'controlling interest' is in issue.

2.The courts have further shown themselves willing to 'lift the veil' where the device of incorporation is used for some illegal or improper purpose.

In the same para certain judicial instances have been cited which include case of Jones v. Lipman (supra). It will be thus seen that the doctrine of piercing the corporate veil is not confined to cases of tax assess- ment etc. only and the Court may invoke this doctrine, wherever necessary, in the interest of justice to prevent the corporate entity from being used as an instrument of fraud. In other words the fundamental principle of corporate personality itself may be disregarded having regard to the exigencies of the situation and for the ends of justice.

(12) Coming to the case in hand, we find that despite specific allegation of fraud and diversion of funds by defendant No. I to defendants 2 to 5, these defendants do not appear to have divulged all the essential facts truly and in a straight forward manner. No doubt defendant No. 2 has given sufficient details of the various amounts received by him from defendant No. 1 during the relevant period and he has also furnished the particulars of repayments mace by him during that period, thus indicating that no part of the loans in question could be said to be outstanding against him but he is singularly silent with regard to the affairs of defendants 3 & 5 in which he holds an important position, vis-a-vis defendant No. 1. His bald assertion that the issued subscribed and paid-up capital of defendant No. 3 was Rs. 10,50,000.00 and that the investment in property bearing No. 10, Panchsheel Marg, New Delhi, was financed out of its share capital, does not lead one anywhere inasmuch as it does not disclose what interest defendant No. 1 and his other close relatives had in the share-holding of defendant No. 3 at the relevant time. Further, the mere fact that defendant No. 1 has ceased to be a member/shareholder of defendant No. 3 is of no consequence. We are left guessing as to what was the share-holding and when did he walk out of defendant No. 3. The learned counsel for the defendants contended with considerable fervour that it was for the plaintiff to place on the record some material to justify an inference of diversion of loans in question by defendant No. 1 to other defendants but barring the bald assertion made in the rejoinder or even the plaint to that effect, nothing has come on the record to countenance this plea. Hence, no obligation was cast upon the defendants to supply the necessary material. We do not think that the defendants can derive any benefit by relying upon the abstract doctrine of onus of proof. As explained by the learned counsel for the appellant, they could possibly not have any access to the records and accounts of the defendants and as such it was. for them to furnish the requisite information to the Court in order to substantiate their contention that defendant No. 1 had not diverted the loans in question, wholly or partly, to anyone of them. As observed by the Supreme Court in Gopal Krishnati Ketkar v. Mohamed Haji Latif, : [1968]3SCR862

'EVEN if the burden of proof does not lie on a party the Court may draw an adverse interference if he withholds important documents in his possession which can throw light on the farts at issue. It is not, in our opinion, a sound practice for those desiring to rely upon a certain state of facts to withhold from the Court the best evidence which is in their possession which could throw light upon the issues in controversy and to rely upon the abstract doctrine of onus of proof.'

(13) We are, thereforee, of the view that the counter-affidavits filed by the defendants, being vague and evasive, an inference may be well- warranted that the relevant information, if furnished, would not have supported their case. It is also noticed that the entire share capital of defendants 3 & 5 has been apparently invested in the purchase of aforesaid properties and it is nobody's case that they have any other business activity. Prima facie, thereforee, it would appear that these companies were formed by defendants 1 & 2 etc. for purchase of the properties in question and the allegation of diversion of funds made by the plaintiff cannot be brushed aside lightly at this stage. It is, of course, a different matter that the defendants may satisfy the court about bonafide nature of the dealings and transactions in question at trial. Hence, we consider it to be a fit case to grant and do grant ad-interim relief to the plaintiff by restraining defendants 3 & 5 from in any manner alienating, transferring, disposing or of encumbering the properties in question viz. 10 Panchsheel Marg, New Delhi and flats Nos. 101 & 102 in 'New Delhi House' at 27, Barakhamba Road, New Delhi, till the disposal of the suit.

(14) This brings us to the cross-appeal filed by Shri S.P. Jain, defendant No. 1. Having regard to his overall conduct as reflected by various circumstances adverted to above and the fact that he did not even consider it necessary to file a reply to I, 2897/76, we consider that the order of attachment before judgment of various assets, ostensibly held by him, by the learned Single Judge is perfectly justified. Strangely enough his counsel Shri C.N. Murthy made a categorical statement on 6th April, 1977 that he did not wish to file a reply to the said application. Subsequenly, an application was moved by defendant No. 1, being I.A. 669/78, to file a reply to I.A. 2397/76 but the same was disallowed by the Court vide order dated 10th March, 1978, for valid reasons. Hence, we find no merit in this cross-appeal.

(15) Consequently, we allow F.A.O. (OS) No. 9/80 and order as above, with costs.

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