Madras HC: Unconditional Leave to Defend Granted if Triable Issues Exist in Order XXXVII Suit; Compromise-Based Recovery Not Necessarily a 'Commercial Dispute' Under Commercial Courts Act - 2025-06-18

Madras High Court Sets Aside Onerous Condition for Leave to Defend in Recovery Suit, Clarifies Scope of "Commercial Dispute"

Chennai: The Madras High Court, presided over by Justice P.T.Asha , has ruled that defendants in a summary suit are entitled to unconditional leave to defend when they raise triable issues, and that a suit for recovery of money based on a joint compromise agreement, even if stemming from erstwhile partnership dealings, does not automatically fall under the definition of a "commercial dispute" under the Commercial Courts Act , 2015.

The Court allowed two Civil Revision Petitions (C.R.P.Nos.1203 & 1421 of 2025) filed by defendants, setting aside orders of the III Additional District Court, Coimbatore, which had granted conditional leave to defend and subsequently revoked it. A third petition (C.R.P.No.1412 of 2025) seeking to strike off the plaint as an abuse of process was dismissed.

Background of the Dispute

The original suit (O.S.No.1014 of 2024) was filed by A.K.Saravanan for the recovery of Rs.23,84,11,886/- with 24% interest from M.Pandithurai and others. The claim was based on a Memorandum of Joint Compromise Agreement dated 18.10.2021.

The plaintiff contended that he had arranged financial assistance for the partnership firm 'Sri Saravana Constructions ', in which his son and cousin were partners along with defendants 1 and 2. Following differences, it was agreed his son and cousin would retire, and the defendants would settle dues owed to the plaintiff (both personal funds and those sourced from third parties). The defendants allegedly breached this compromise agreement.

The defendants, upon entering appearance in the summary suit, sought unconditional leave to defend (I.A.No.4 of 2024), denying the allegations and arguing the suit was not maintainable under Order XXXVII CPC. They also contested the plaintiff's locus standi to claim monies for third parties and raised issues of non-joinder of necessary parties (including the firm and plaintiff's son).

The trial court initially granted leave on 18.12.2024, conditional upon the defendants furnishing security for the entire suit claim. This leave was subsequently revoked on 13.03.2025 due to non-compliance with the condition, as the security offered was deemed insufficient.

Arguments Before the High Court

Petitioners/Defendants argued: * The trial court, having found triable issues, erred in imposing an onerous condition (security for the full suit amount). * The plaintiff lacks locus standi to recover amounts due to third parties without authorization. * The dispute is commercial in nature (arising from a partnership agreement and the plaintiff acting as a 'financier') and the suit should be struck off for bypassing pre-mediation mandated by Section 12A of the Commercial Courts Act . * They claimed to have paid amounts exceeding what was due directly to the plaintiff as per the compromise.

Respondent/Plaintiff countered: * The defendants, having undertaken to provide security, could not challenge the conditional leave. * The compromise agreement was admitted by the defendants in another related suit. * The suit is a simple recovery based on the compromise agreement, not a commercial dispute. * The security offered by defendants was inadequate as the properties were already mortgaged.

High Court's Analysis and Findings

The High Court first addressed C.R.P.No.1412 of 2025, which sought to strike off the plaint.

1. Nature of the Dispute – Not "Commercial": Justice Asha examined Section 2(1)(c) of the Commercial Courts Act , particularly sub-clauses (i) (ordinary transactions of financiers) and (xv) (partnership agreements). * The Court found that the Memorandum of Joint Compromise Agreement clearly indicated that the plaintiff had lent money or arranged loans for the firm. The Court noted, "Therefore, it is clear that the amounts have been given as a loan to the firm 'Sri Saravana Constructions '. ...the suit filed is simplicitor a suit for recovery of money due under the memorandum of joint compromise agreement dated 18.10.2021 and would therefore, not be covered by the provisions of Section 2(1)(c)(xv) of the Act." * Rejecting the argument that the plaintiff was a 'financier', the Court observed, "Even this argument has to be rejected as the defendants have themselves described the plaintiff as a Highways Contractor and it is not their case that the plaintiff is ordinarily carrying on business as a financier." Consequently, C.R.P.No.1412 of 2025 was dismissed.

2. Conditional Leave to Defend – Onerous and Unjustified: Turning to C.R.P.Nos.1203 & 1421 of 2025, the Court analysed the trial court's orders regarding leave to defend. * The High Court acknowledged the trial judge's observation that the defendants had raised valid defenses, including the plaintiff's locus standi to recover third-party dues and non-joinder of necessary parties (like the firm, retiring partners, and the third-party lenders). * Justice Asha stated, "Therefore, there are several triable issues that arise in the above suit and the defense is neither illusory nor a moonshine. Therefore, the order directing the deposit of the entire suit claim as a condition for granting leave to defend appears onerous especially when the right of the plaintiff to recover amounts due to third parties is in issue." * The Court noted the lack of reasoning in the trial court's order dated 18.12.2024 for imposing such a condition after identifying triable issues.

3. Application of Legal Principles for Granting Leave: The High Court referred to established Supreme Court precedents, including Mechelec Engineers & Manufacturers Vs. Basic Equipment Corporation, (1976) 4 SCC 687 and Sify Ltd. Vs. First Flight Couriers Ltd., (2008) 4 SCC 246 , which lay down principles for granting leave in summary suits. * The Court emphasized the principle: "(a) If the defendant satisfies the court that he has a good defence to the claim on its merits the plaintiff is not entitled to leave to sign judgment and the defendant is entitled to unconditional leave to defend." and "(b) If the defendant raises a triable issue indicating that he has a fair or bona fide or reasonable defence although not a positively good defence the plaintiff is not entitled to sign judgment and the defendant is entitled to unconditional leave to defend." * Based on these principles, the Court concluded: "On a reading of these principles, it is clear that where the defendant has been able to establish a valid defense, which is neither illusory nor a moonshine, leave should be granted unconditionally. Therefore, the order dated 18.12.2024 has to be set aside..."

Final Orders and Directions

The Madras High Court issued the following orders:

1. C.R.P.No.1412 of 2025 (to strike off plaint) was dismissed.

2. C.R.P.Nos.1203 of 2025 (challenging conditional leave) and C.R.P.No.1421 of 2025 (challenging revocation of leave) were allowed.

3. The properties described in the defendants' affidavit of undertaking (dated 09.01.2025) and valuation report shall not be alienated, transferred, or otherwise dealt with without court orders until the suit's disposal.

4. The defendants were directed to file their written statement within fifteen days .

5. The trial Judge was directed to endeavour to dispose of the suit (O.S.No.1014 of 2024) within four months thereafter.

This judgment reiterates the importance of granting unconditional leave to defend in summary suits where genuine triable issues are presented, and clarifies that disputes, even with commercial underpinnings, may not qualify as "commercial disputes" under the Commercial Courts Act if their immediate basis is a simple agreement for recovery of dues.