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High Court Of Delhi
PNB FINANCE LIMITED - Appellant
Versus
SHITAL PRASAD JAIN - Respondent
First Appeal Order 9 of 1980
Decided On : 02/19/1981
COMPANY LAW - LIFTING CORPORATE VEIL - FRAUD - INJUNCTION - ATTACHMENT BEFORE JUDGMENT - Held, the doctrine of lifting the corporate veil is not confined to cases of tax assessment 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.
Fact of the Case:
PNB Finance Limited instituted a suit for recovery of Rs. 19,55,890/37p. against Shital Prasad Jain, his son Mukul Jain, Rajadhani Vanijya Ltd., Poorvanchal Projects Ltd., and Emnjay Overseas (Private) Limited. The plaintiff alleged 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. 10,00,000. 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 instalments 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. 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 and 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 and 2 and were controlled by them, the majority of shares in these companies being held by defendants 1 and 2 and other members of their family and close relatives. Thus, they are family concerns of defendants 1 and 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 and5 purchased flats bearing Nos. 101 and 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 fiadle for repayment of loans on the ground that the properties were held by them for the benefit of the plaintiff.
Finding of the Court:
The Court found that the defendants had not divulged all the essential facts truly and in a straight forward manner. The Court also found that the entire share capital of defendants 3 and 5 had been apparently invested in the purchase of aforesaid properties and it was nobody's case that they have any other business activity. Prima facie, therefore, it would appear that these companies were formed by defendants 1 and 2 etc. for purchase of the properties in question and the allegation of diversion of funds made by the plaintiff could not be brushed aside lightly at this stage.
Issues: Whether the doctrine of lifting the corporate veil is confined to cases of tax assessment etc. only?
Ratio Decidendi: The Court held that the doctrine of lifting the corporate veil is not confined to cases of tax assessment 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.
Final Decision: The Court allowed the appeal and ordered ad-interim relief to the plaintiff by restraining defendants 3 and 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 and 102 in new Delhi House at 27, Barakhamba Road, New Delhi, till the disposal of the suit.
Key Points: - The doctrine of lifting the corporate veil is not confined to tax assessment cases only; the court may invoke it wherever necessary to prevent fraud (!) (!) (!) (!) . - The court found prima facie that companies 3 and 5 were formed to purchase properties using diverted loan amounts, and they had no other business activity (!) (!) . - The plaintiff is entitled to ad-interim relief restraining defendants 3 and 5 from alienating or disposing of the properties in question until the suit is disposed of (!) (!) . - The court rejected the cross-appeal because the defendant failed to file a reply and provided vague, evasive counter-affidavits (!) (!) . - The judgment emphasizes that corporate entity principle may be disregarded in the interest of justice to prevent fraud (!) (!) (!) .
( 1 ) THE facts giving rise to the above mentioned crossappeals 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 and 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 instalments 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 and 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 and 2 and were controlled by them, the majority of shares in these companies being held by defendants 1 and 2 and other members of their family and close relatives. Thus, they are family concerns of defendants 1 and 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 and5 purchased flats bearing Nos. 101 and 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 fiadle 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 and 5, and Order XXXIX Rules 1 and 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
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