Important Point
Mere allegation of drawal of monies without movement of goods does not amount to a cause of action based on ‘fraud’, therefore, the Bank cannot take shelter under the words ‘fraud’ or ‘misrepresentation’ used in the plaint.

Headnote:(i) Civil Procedure Code, 1908 -Order 7, Rule 11-Rejection of plaint -Whether power to reject plaint under Order 7 Rule 11 can be exercised even after framing of issues, and when matter is posted for evidence ? -(Yes) (Para 12)
       (ii) Banking Law - Principles regarding payment of amounts covered by Bank guarantees or Irrevocable Letters of Credit-Bank has to honour Bank guarantee or Letter of Credit subject to two exceptions where there was fraud or irretrievable injury. (Para 14)
       (iii) Civil Procedure Code, 1908 -Order 7, Rule 11-Suit for recovery filed by Bank against defendants 1 to 4 and the appellant-Defendants, buyers approached plaintiff Bank for issue of a Letter of Credit in favour of appellant company for purpose of securing payment towards supply of Cigarettes manufactured by appellant-Plaintiff Bank sanctioned LC facility - Appellant appropriated amounts drawn as against goods purportedly despatched by appellant to buyers-Plaintiff demanded reimbursement of amounts by buyers-Buyers allegedly informed that there was no movement of goods by appellant-Allegation of ‘fraud or misrepresentation’-Whether allegation in the plaint regarding absence of movement of goods by the seller amounted to plea of ‘fraud’ ?-(No)-By merely characterising alleged non movement of goods as ‘fraud’, the Bank cannot claim that there was a cause of action based on fraud or misrepresentation.
       Held that an allegation of non-supply of goods by the sellers to the buyers did not by itself amount, in law, to a plea of ‘fraud’ as understood in this branch of the law and hence by merely characterising alleged non-movement of goods as ‘fraud’, the Bank cannot claim that there was a cause of action based on fraud or misrepresentation. Nor is the case before us one where there is an allegation of presentation of forged or fraudulent documents. (Para 22)
       Further held : It is true, we are also dealing with a question whether the plaint disclosed a cause of action. But here the allegation in the plaint is only one relating to absence of movement of goods by the seller. As pointed in the decided cases and in particular in the U.P. Cooperative Federation Case and other cases decided by this Court and also Courts elsewhere, mere absence of movement has never been, in this branch of law, treated as amounting to fraud. Such non-movement, even if the allegation is to be treated as true, could be for good reasons or for reasons which were not good. But that is not ‘fraud’. (Para25)
       Non-movement of goods by the seller could be due to a variety of tenable or untenable reasons, the seller may be in breach of the contract but that by itself does not permit a plaintiff to use the word ‘fraud’ in the plaint and get over any objections that may be raised by way of filing an application under Order 7 Rule 11 CPC. As pointed out by Krishna Iyer, J. in T. Arivandandam’s case, the ritual of repeating a word or creation of an illusion in the plaint can certainly be unravelled and exposed by the Court while dealing with an application under Order 7 Rule 11 (a). Inasmuch as the mere allegation of drawal of monies without movement of goods does not amount to a cause of action based on ‘fraud’, the Bank cannot take shelter under the words ‘fraud’ or ‘misrepresentation’ used in the plaint. (Para 26)

Judgment

M. Jagannadha Rao, J.-Leave granted.

2. The appellant has preferred this appeal against the judgment of the High Court of Karnataka dated 14.8.1997 in Writ Appeal No. 2876 of 1997. The Writ Appeal was filed against the judgment of the learned Single Judge dated 9.4.1997 dismissing the Writ Petition filed by the appellant against the orders of the Debt Recovery Tribunal and Appellate Tribunal rejecting the application of the appellant filed under Order 7 Rule 11 of the Code of Civil Procedure.

3. The appellant was the 5th defendant in the suit filed by the 3rd respondent, namely, the Corporation-Bank which has its zonal office at Bangalore. The suit was filed in the year 1985 by the said Bank against defendants 1 to 4 belonging to Tadikonda family residing at Guntur in Andhra Pradesh and against the appellant I.T.C. Limited. The relief claimed in the suit was for a sum of Rs. 52, 59, 639.66. The defendants 1 to 4 above mentioned are respondents 4 to 7 in this appeal. The first respondent is the Debt Recovery Appellate Tribunal and the 2nd respondent is the Debt Recovery Tribunal. After the suit was filed in the Civil Court it was transferred to the Debt Recovery Tribunal on 9.10.1995. Before the said Tribunal the appellant filed an application under Order 7 Rule 11 of the Civil Procedure Code for rejecting the plaint so far as the appellant was concerned on the ground that no valid cause of action had been shown against the appellant. The said application was rejected by the Tribunal on 12.12.1996 holding as follows :

“Objection filed. Heard. Cause of action is a mixed question of fact and law. Hence I.A. 3 cannot be entertained at this stage. Post for evidence”.

4. Against the said order, the appellant filed an appeal before the Appellate Tribunal which was dismissed by the said Tribunal on 3.3.1997 holding that in view of the averments in the plaint and particularly para 12, the question about the liability of the appellant was to be determined at the trial on merits. It stated that the appellant had admittedly received Rs. 32 lacs under the Bills of Exchange or Letters of Credit and the question whether the appellant was justified in receiving the said amount or not and whether plaintiff-Bank was entitled to recover the said amount from the appellant - were to be determined only at the trial. Accordingly the appeal was dismissed in limine.

5. The appellant filed Writ Petition 8564/1997 in the Karnataka High Court which was again dismissed by an order dated 9.4.1997 holding that the question has to be decided at the trial and that it could not be stated that there was no cause of action at all disclosed in the plaint against the appellant. Against the said judgment the appellant filed Writ Appeal 2876/1997 which was dismissed on 14.8.1997 holding that at the stage of an application under Order 7 Rule 11 C.P.C. in order to find out whether the plaint did not disclose a cause of action, the Court should not look into anything else except the plaint. Further, after the issues were framed and the case was posted for evidence, it was not desirable to consider the application filed under Order 7 Rule 11, C.P.C.

6. We shall refer to the facts of the case as set out in the plaint. The first defendant belonging to Tadikonda family (hereinafter called the buyers) approached the plaintiff Bank in December 1979 for the issue of a Letter of Credit in favour of the appellant- Company for an amount of Rs. 32 lacs for the purpose of securing the payment towards supply of Cigarettes manufactured by the appellant and for certain other facilities. The plaintiff-Bank sanctioned L.C. facility for the said sum and agreed to open the L.C. and issued a “revolving Letter” of Credit No. 1/1980 dated 12.1.1980 in favour of the appellant for Rs. 32 lacs available against demand bills of the appellant at sight, “without recourse” to the full invoice value of the goods purporting to be supply of Cigarettes by the appellant. At the request of the

Click Here to Read the rest of this document

1997 Supreme(SC) 1702

Important PointMere allegation of drawal of monies without movement of goods does not amount to a cause of action based on ‘fraud’, therefore, the Bank cannot take shelter under the words ‘fraud’ or ‘misrepresentation’ used in the plaint.

Cases Referred (3)

Important Point
Mere allegation of drawal of monies without movement of goods does not amount to a cause of action based on ‘fraud’, therefore, the Bank cannot take shelter under the words ‘fraud’ or ‘misrepresentation’ used in the plaint.