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IN THE HIGH COURT OF KARNATAKA, BANGALORE

ON THE 3RD DAY OF SEPTEMBER 2012

BEFORE

THE HON’BLE MR.JUSTICE RAVI MALIMATH

WRIT PETITION NOS.40725-40726/2010 (GM-CPC)

BETWEEN:

1. M/s. United Estate,No.16, Railway Parallel Road,

Kumara Park East,Bangalore – 560 001,(Represented by its Director,Mr. Santosh Kumar C.L.)

2. H V Gowthama,

Chartered Accountant,Gowthama and Company,23/57, 41st Cross, East End,C Main Road, 9th Block,Jayanagar,Bangalore – 560 059. … PETITIONERS

(By Sri K. Anandarama for M/s.Anandaram PrashanthVikram, Adv.)

AND:

1. M/s. Pebble Bay Developers Pvt. Ltd.,Raheja Chambers, Linking Road,& Main Avenue, Santa Cruz (West)Mumbai – 400 054.

Branch Office at: Onyx Centre,

No.5, 4th Floor, Museum Road,

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Bangalore – 560 001,Rep. by its Managing Director,Mr. Deepak Bhagwandas Raheja.

2. Mr. Aditya Raheja,Director,M/s. Pebble Bay Developers Pvt. Ltd.,Raheja Chambers, Linking Road,& Main Avenue, Santa Cruz (West)

Mumbai – 400 054.

Also available atOnyx Center, No.5, 4th Floor,Museum Road,Bangalore- 560 001.

3. Avani V. Raheja,Director,Raheja Chambers, Linking Road,& Main Avenue, Santa Cruz (West)Mumbai – 400 054,

Branch office at:Onyx Center, No.5, 4th Floor,Museum Road,Bangalore- 560 001.

4. Vijay Bhagwandas Raheja,

Director,Raheja Chambers, Linking Road,& Main Avenue, Santa Cruz (West)Mumbai – 400 054,Branch office at:Onyx Center, No.5, 4th Floor,

Museum Road,Bangalore- 560 001.

4. Wachovia Securities,Functioning in the name ofWellsfargo Bank,

No.301, Windsor, Kalina,

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Santa Cruz East, Mumbai,Rep. by its Nominee Director:James Hillyer Boice III. … RESPONDENTS

(By Sri Ajesh Kumar.S. for M/s. A K S Law Associates,Adv. for R1 & R2. R3 & R4 – Served.Shri P. Udaya Shankar Rai, Adv. for R5)

These writ petitions are filed under Articles 226

and 227 of the Constitution of India praying to call forrecords in O.S.No.25412/2010 and further pleased toset aside the orders passed on I.A.No.II dated18.09.2010 at Annexure – F in O.S.No.25412/2010 onthe file of the City Civil Judge, Bangalore.

These writ petitions coming on for Preliminaryhearing in B-Group this day, the Court passed thefollowing:

ORDER

The petitioners/plaintiffs filed a suit in OS

No.25412/2010 seeking recovery of a sum of

Rs.12,05,56,134/- along with interest thereon. During

the pendency of the suit, the 5th defendant filed an

application - IA-2 under Order I Rule 10 read with

section 151 of CPC on behalf of Wells Fargo Bank,

National Association, seeking deletion of its name from

the array of parties. By the impugned order, the same

was allowed. The 5th defendant was ordered to be

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deleted from the cause title. Aggrieved by the same, the

plaintiffs have filed these Writ Petitions.

2. The learned counsel for the petitioners

contends that the impugned order is bad in law and

liable to be set aside. That the Trial Court mis-directed

itself in allowing IA 2. The citation relied upon, while

passing the impugned order is not applicable to the case

on hand. The Trial Court has erroneously held that the

defendant No.5 is neither a necessary nor a proper

party to the suit. He further contends that defendant

No.5 is not only a proper but he is also a necessary

party. In support of his contention, he relies on the

plaint averments to contend that defendant No.5 is a

proper party. In support of his case, he relies on the

judgment reported in (2012) 6 SCC 613 in the case of

Vodafone International Holdings B.V. Vs. Union of

India and another, with reference to para 274 of the

order to contend that the control of a company vests in

the voting powers of its shareholders. Shareholders

holding a controlling interest can determine the nature

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of the business, its management, enter into contract,

borrow money, buy, sell or merge the company. In so

relying, he contends that the reliance placed by the Trial

Court on the decision reported in 1984(55) Company

Cases 737 Calcutta in the case of Purna Investment

Ltd., Vs. Bank of India Ltd., and others is a wrong

reliance.

3. On the other hand, the learned counsel for the

5th defendant defends the impugned order and contends

that there is no error committed by the Trial Court that

calls for interference. He submits that while

considering an application under Order 1 Rule 10 of

CPC, it is the plaint averments that is to be considered

and nothing beyond that. In support of his case, he

relies upon the judgment reported in JT 1992(2) SC 116

in the case of Ramesh Hiranand Kundanmal Vs.

Municipal Corporation of Greater Bombay and others,

in particular refers to para 13 and 14. He further

contends that what makes a person, a necessary party

is not merely that he has relevant evidence to give on

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some of the questions involved, that would only make

him a necessary witness. What is necessary is that a

person must be directly or legally interested in the

action i.e. he can say that the litigation may lead to a

result which will affect him legally i.e. by curtailing his

legal rights.

4. He also relies on the judgment in the case of

Purna Investment Ltd., Vs. Bank of India and Others

reported in 1984(55) Comp.Cas. 737 Calcutta, which

has been relied upon by the trial court, in support of his

case. Reliance is also placed on the judgment of the

Supreme Court reported in 1955(XXV) Comp.Cas. page

1 in the case of Mrs. Bacha F. Guzdar, Bombay Vs.

Commissioner of Income Tax, Bombay wherein the said

view was affirmed. He further contends that a

discretion having been exercised by the trial court, the

same should not be interfered by the appellate court. In

support thereof, he relies on the judgment reported in

1990 (Supplement) SCC 727 in the case of Wander Ltd.,

& another Vs. Antox India Pvt. Ltd., in particular refers

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to para 14 and contends that the appellate court would

normally not be justified in interfering with the exercise

of discretion in appeal solely on the ground that if it had

considered the matter at the trial stage, it would have

come to a contrary conclusion.

5. Reliance is also placed on the judgment dated

18.4.2012 passed by the learned Single Judge of this

court in Criminal Petition No.2090/2011 and connected

matters, in particular with reference to para 3 of the

order. In the said proceeding under the Negotiable

Instruments Act, defendant No.5 herein was issued with

process. The same was quashed by this court holding

that the averments of the complaint, accepted at their

face value does not bring the petitioner namely the 5th

defendant within the purview of Section 141 of the

Negotiable Instruments Act. Hence, he pleads that he

needs to be deleted from these proceedings.

6. The learned counsel for the respondents 1 & 2

supports the case of defendant No.5. He too relies on

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various judgments in support of his case. The first one

is the judgment of the Supreme Court reported in

MANU/SC/0663/2012 in the case of Vidur Impex and

Traders Pvt. Ltd., and Others Vs. Tosh Apartments

Pvt.Ltd., and others. He relies on para 36 of the

judgment to re-iterate the broad principles which

should govern disposal of an application for

impleadment. Reliance is also placed on the judgment

of the Supreme Court reported in

MANU/SC/0427/2010 in the case of Mumbai

International Airport Pvt. Ltd., Vs. Regency Convention

Centre and Hotels Pvt. Ltd., and Others, in particular

reference to para 8 & 12 of the judgment. With

reference to para 8 of the judgment, his contention is

that it is only a proper and necessary party who can be

impleaded. With reference to para 12 of the judgment,

he contends that a ‘discretion’ when applied to courts of

justice, would mean discretion guided by law. It must

be governed by rule, and not by humour; it must not be

arbitrary, vague and fanciful, but legal and regular.

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7. Heard learned counsels.

8. Reliance was placed by the trial court on the

decision rendered by the Calcutta High Court in the

case of Purna Investment Ltd., Vs. Bank of India Ltd.,

and Others reported in 1984(55) Comp.Cas. 737

Calcutta, which followed the judgment reported in

1955(XXV) Comp.Cases page 1, in the case of Mrs.

Bacha F. Guzdar, Bombay Vs. Commissioner of Income

Tax, Bombay. By placing reliance on the said judgment,

the Trial Court concluded that defendant No.5 is neither

a necessary party nor a proper party to the present suit.

Placing reliance on the said judgment, the reasoning

has been assigned by the Trial Court. 1955 Volume

XXV Comp.Cas. page 1, arose out of a question referred

by the Tribunal to the High Court of Judicature

at Bombay on a substantial question of law as

to: ‘Whether 60% of the dividend amounting to

Rs.2,750/- received by the assessee from the

two tea companies is agricultural income and as such

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exempt under section 4(3)(viii) of the Indian Income Tax

Act.” It was a substantial question of law, that was

required to be answered by the High Court and the

question was taken up in appeal to the Supreme Court.

In so deciding the question of law, the Hon’ble Supreme

Court incidentally referred to the right of a share holder

in the property of the Company. In relying on page 5 of

the said judgment, the trial court extracting a part of

paragraph, concluded that in view of the observations

made, the share holder in a company on buying shares,

becomes entitled to participate in the profits of the

company in which he held the shares if and when the

company declared dividends subject to articles of

association. That the profits or any portion thereof

should be distributed by way of dividends among the

shareholders.

9. The question before the Supreme Court was a

question of law. It was not concerned with the rights of

the share holders. The issue involved pertained to the

question of availment of dividend. It had nothing to do

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with the rights of the share holders. Therefore, the

entire basis on which the trial court has passed the

impugned order is erroneous.

10. A reading of the entire judgment, would

appear that it was the only consideration of the trial

court. There is no other reasoning given by the Trial

Court, except placing reliance on the said judgment.

Even though in the next para, the Trial Court states

thus:

“13. Admittedly, the entire claim of the

plaintiff is against defendant No.1 – Company

and directors of defendant No.1 Company i.e.

defendant No.2 to 4 are already impleaded in

this case, either as an investor or share

holder. Defendant No.5 is not either

necessary party nor a proper party to the

present suit.”

11. The relief sought for by the plaintiffs is for a

judgment and decree against the defendants jointly and

severally. The trial court held that admittedly, the

entire claim of the plaintiffs is against defendant No.1

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Company and its directors. It is incorrect. By so

holding, the Trial Court further states that since the

entire claim is against defendant No.1 – Company i.e.,

defendant Nos.2 to 4 were already impleaded in this

case, either as an investor or share holder, defendant

No.5 is not either a necessary party nor a proper party

to the proceedings. The material on record is different.

The finding of the Trial Court that the claim is only

against defendant No.1 is incorrect. The prayer in the

plaint is contrary to the finding of the Trial Court.

Hence, on this ground also, I’m of the considered view

that the Trial Court has mis-directed itself in passing

the impugned order.

12. In appreciating the scope and in considering

the provisions of Order I, Rule 10 of CPC with regard to

deletion of defendant No.5, the averments of the plaint

would necessarily have to be considered. In paragraphs

5, 6, 10, 11 and 31 of the plaint, it is averred that:

“5. The Fifth Defendant Company is a

foreign investor in the First Defendant

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Company holding 49% share in the First

Defendant Company. Since the Fifth

Defendant is a share holder in the company it

is represented by a Nominee Director in the

First Defendant Company to look after its

interest in the said company. The First

Defendant is also in charge of and

responsible for the affairs, administration of

the Fifth Defendant Company in the matter of

conduct of the Fifth Defendant business

affairs. Further, it was mainly on account of

the investments made by the said foreign

investor into the Project, that the Second and

Fourth Defendants were able to undertake

execution of the Pebble Bay Project.

6. It is pertinent to note that the Fifth

Defendant is a foreign investor, whose main

aim and purpose is to invest in the Fifth

Defendant Company in order to enable the

second and the fourth defendant to execute

the project. Post execution of the Project and

after realisation of the investor returns, the

Fifth Defendant has no other long term

interest in the project. However, the 5th

defendant as long as it remains as the

Investor in the Fifth Defendant Company,

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would hold the post of a nominee director and

is therefore responsible for all the major

decisions of the First Plaintiff Company.

Currently the nominee director of the Fifth

Defendant Company is Mr. James Hillyer

Boice III.

10. The Pebble Bay project is situated

at A 11, PID No.100/12/A-11-Ward No.100,

NTI Layout, 1st Stage, Nagashettyhalli Sy.

No.6, 17, 18, 19/1 to 19/11, 20/1 and 35,

Bangalore-560 094 and is proposed to be a

luxurious high end residential apartment

(‘Project’). The Project was initially

conceptualised in January 2006 and the

construction work on the Schedule Property

was launched around March 2006. The First

Defendant right from day one of the Project

has been incurring various problems on the

Project. On account of various problems

countered by the Defendant’s and also being

unable to successfully resolve the said issues

the defendant No.2 and defendant No.4

approached the First Plaintiff in the October

2006. The defendants were keen to utilise

the experience and expertise of the First

Plaintiff (i.e. United Estates) with respect to

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successful investment of the foreign funds by

the Fifth Defendant into the First Defendant

Company, so as to enable the Second and the

Fourth Defendant to execute the Project (i.e.

Pebble Bay”). The First Plaintiff was informed

by the defendant No.2 and defendant No.4

that the project to be constructed under the

name of Pebble Bay Developers Private

Limited was a very important highly

prestigious Project for the First Defendant

Company and that the Project was also one of

the first of its kind being undertaken by the

Defendants in the city of Bangalore. After

much of negotiations and discussions, the

First plaintiff agreed to render its services to

the First Defendant as regards the said

project.

11. The First Plaintiff agreed to render

its services to the second and the Fourth

Defendant and accordingly, the First Plaintiff

carried out a series of meetings and

negotiations with the Fifth Defendant during

the period October 2006 to January 2007.

The Fifth Defendant based on the various

meetings and negotiations carried out

between the First Defendant Company and

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the First Plaintiff, agreed to invest in the First

Defendant Company. It is pertinent to note

that it was based on the said assurance of

investment into the First Defendant, that the

second and fourth defendants were able to

undertake investment in the Pebble Project

wherein the said cost of the Project is not less

than a sum of Rs.150 crores (Rupees One

hundred and fifty crores).

31. The First Defendant Company is

registered under the provisions of the

Companies Act and the Defendant No.2 to 5

are the directors of the first Defendant

Company and are responsible and in charge

for the day to day affairs and the conduct of

the business of the first Defendant Company.

The cheques have been issued with the

consent and knowledge of the defendant No.2

to 5 hence all the Defendants are jointly and

severally liable to pay the Plaintiff’s the

following sums.

A First Plaintiff Rs.11,95,18,812/-

B Second Plaintiff Rs.10,37,502/-

C Interest @ 18% perannum from

12.6.2009 till date ofsuit.

Rs.1.44,46,940/-

TOTAL Rs.13,50,3,254/-

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The defendants are jointly and severally

liable to pay the aforesaid sums along with

interest as claimed as on the date of

payment.

13. On a careful reading of these paragraphs, it is

evident that the case of the plaintiffs is that the 5th

defendant is a Foreign investor in the first defendant –

Company holding 49% of shares and as a share holder

in the first defendant – Company, where the main object

of the 5th defendant is to invest in first defendant –

Company in order to enable the 4th and 5th defendant to

undertake to execute the first defendant’s project. On

such execution, 5th defendant would not have any other

long term interest in the project. As long as 5th

defendant remains as an investor in the first defendant

Company, he would hold the post of a nominee director

and therefore, responsible for all major decisions of the

first plaintiff. The defendants were keen to utilise the

experience and expertise of the first plaintiff i.e. United

Estates with respect to the successful investment of the

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foreign funds by the fifth defendant into the first

defendant Company, so as to enable the second and 4th

defendant to execute the project. Various meetings and

negotiations were held between the first plaintiff and 5th

defendant during the period October 2006 to January

2007 and on the basis of which, the 5th defendant

agreed to invest in the first defendant Company and

that the cost of the project is not less than a sum of

Rs.150 crores. It is the further case of the plaintiffs that

the 5th defendant along with other defendants are

responsible and incharge of the day to day affairs and to

the conduct of the business of the first defendant

Company. Therefore, all the defendants are jointly and

severally liable to pay the plaintiffs. On these and other

pleadings, the suit was filed seeking for a judgment and

decree against the defendants jointly and severally. The

provisions of Order 1 Rule 10 of CPC, provides that only

a necessary or a proper party may be added. A

necessary party is one without whom no order can be

made effectively. A proper party is one in whose

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absence an effective order can be made but whose

presence is necessary for a complete and final decision

on the question involved in the proceeding. 5th

defendant would be a proper and a necessary party to

the adjudication of the suit. The provisions of Order 1

Rule 10 CPC refer to the presence of such defendant

which may be necessary in order to enable the court to

effectually and completely adjudicate upon and settle all

the questions involved in the suit. The court would

necessarily consider the averments in the plaint. The

averments in the plaint culled out above show that the

5th defendant is a necessary and proper party for the

adjudication of the suit.

14. As held in the case of Mumbai International

Airport Pvt. Ltd., Vs. Regency Convention Centre and

Hotels Pvt. Ltd., & Others reported in

MANU/SC/0427/2010, the exercise of discretion

should be sound. It should be governed by Rule of law

and not humour. A reading of the plaint averments

would lead to a conclusion that the discretion exercised

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by the trial court would not satisfy any of these

requirements to show that the 5th defendant would not

be necessary for the just and final adjudication of the

suit. On a reading of the plaint averments it would not

show that there have been either vague or fanciful

claims against the 5th defendant. The claim is legal and

regular. Even applying the said judgment, I’m of the

considered view that the trial court has committed error

in rejecting the application.

15. With reference to the judgment reported in

1990 (Supp) SCC 727 in the case of Wander Ltd., and

another Vs. Antox India Pvt. Ltd., what is sought to be

pleaded is that an exercise of discretion, should not be

interfered lightly by the Appellate Court. If the

discretion has been exercised by the trial court

reasonably and in a judicial manner, the fact that the

appellate court would have taken a different view, may

not justify interference with the trial court’s exercise of

discretion and the Appellate Court is refrained from

reversing the same. Firstly, the jurisdiction exercised

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by this court is a supervisory jurisdiction under Article

227 of the Constitution of India. It is not exercising any

appellate court jurisdiction. Further, as held

hereinabove, the entire reliance placed by the trial court

is based on the judgment reported in 1984(55) Company

Cases 737 Calcutta. As detailed herein above, the

reliance was totally misplaced. The discretion therefore

in real terms has not been exercised by the trial court.

It has merely followed the dicta of the Supreme Court in

the said judgment and therefore, allowed the

application. Under these circumstances, applying a

different discretion that what the trial court has

exercised would therefore not arise. No second

discretion is exercised by this court which is contrary to

the discretion of the trial court. The order of the trial

court is wholly based on a judgment and not its

discretion.

16. On the other hand, the learned counsel for

the petitioner by relying on the judgment reported in

(2012) 6 SCC 613 in the case of Vodafone International

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Holdings BV Vs. Union of India, the judgment reported

in 1955(XXV) Comp.Cases 1 was also considered,

wherein it was held at para 257 as follows:

“257. The legal relationship between a

holding company and WOS is that they are

two distinct legal persons and the holding

company does not own the assets of the

subsidiary and, in law, the management of

the business of the subsidiary also vests in

its Board of Directors. In Bacha F. Guzdar

Vs. Commissioner of Income Tax (AIR 1955

SC 74), this Court held that shareholders’

only right is to get dividend if and when the

company declares it, to participate in the

liquidation proceeds and to vote at the

shareholders’ meeting. Refer also to Carew

and Co.Ltd., Vs. Union of India [ (1975) 2

SCC 791 ] and Carrasco Investments Ltd., Vs.

Directorate of Enforcement [ (1994) 79 Comp.

Cases 631 (Del) ].

17. He further relies on para 274 of the judgment

which reads as under:

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“274. Shares, we have already

indicated, represent congeries of rights and

controlling interest is an incident of holding

majority shares. Control of a company vests

in the voting powers of its shareholders.

Shareholders holding a controlling interest

can determine the nature of the business, its

management, enter into contract, borrow

money, buy, sell or merge the company.

Shares in a Company may be subject to

premiums or discounts depending upon

whether they represent controlling or minority

interest. Control, of course, confers value but

the question as to whether one will pay a

premium for controlling interest depends upon

whether the potential buyer believes that one

can enhance the value of the company.”

Therefore, in the said paragraph, even the extent of the

right of the share holders has been clarified in the said

judgment. That the share in the company should be

subject to the premiums or discounts depending upon

whether they represent controlling or minority interest.

Hence, even on that ground also, the discretion

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exercised by the trial court in relying on the said

judgment is erroneous.

18. The 5th defendant has also placed reliance on

the judgment passed by the learned Single Judge of this

court on 18.4.2012 in Crl. Petition No.2090/2011 and

connected matters. He relies on para 3 therein which

reads as follows:

“3. The learned Counsel for petitioner

submits that petitioner M/s. Wells Fargo

Bank is a company registered under the

Companies Act and it can not be a Director of

first accused M/s. Pebble Bay Developers Pvt.

Ltd., The averments of complaint, accepted at

their face value do not bring petitioner within

the purview of Section 141 of the Negotiable

Instruments Act. Therefore, the learned Trial

Judge should not have issued process to

petitioner.”

Therefore, he pleads that a finding has been recorded

that the 5th defendant cannot be a nominee director.

However, as could be seen from the said paragraph,

that is not, what this court has held. With specific

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reference to para 3, the court has only held that in so

far as the averments of the complaint is concerned, they

do not bring the 5th defendant herein within the purview

of section 141 of the NI Act. Hence, the judgment would

be of no avail to the 5th defendant.

19. In considering an application filed under

Order I Rule 10 of CPC, the parameters as laid down by

the Hon’ble Supreme Court in the case reported in

MANU/SC/0663/2012 would have to be followed. In

para 36 of the judgment, the parameters are so

mentioned. It is stated therein that at any stage of the

proceedings, the court can direct impleadment of any

person as a plaintiff or a defendant or whose presence is

necessary for the effective and complete adjudication of

the issues involved. That such a person is necessary for

an effective decree to be passed. That the proper party

is one whose presence would enable the court to

completely and effectively and properly adjudicate on all

matters and not necessarily a person against whom a

decree is to be made. That if a person is not found to be

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a proper or necessary party, the court cannot have the

jurisdiction to order for impleadment against the wishes

of the plaintiffs. That in a suit for specific performance,

the court cannot order impleadment of a purchaser

whose conduct is above board and who files an

application for being joined as party within reasonable

time etc., and lastly, that if the applicant is guilty of

contumacious conduct or is a beneficiary of a

clandestine transaction or a transaction made by the

owner of the suit property in violation of the restraint

order passed by the Court or the application is unduly

delayed then the court would be fully justified in

declining the prayer for impleadment.

20. All these facts would necessarily follow that

these para meters stands attracted to the 5th defendant.

The plaint averments would indicate that 5th defendant

has invested a sum of Rs.150 crores. That he has an

active role in the decision making of the first defendant.

He is a proper and necessary party in terms of the

aforesaid judgment. Hence, I’m of the considered view

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that applying the parameters, necessarily the

application requires to be rejected.

For the aforesaid reasons, the petitions are

allowed. The order dated 18.9.2010 passed in OS

No.25412/2010 on IA No.II by the XXVI Addl. City Civil

Judge at Mayohall, Bangalore is set aside. IA No.II filed

by the 5th defendant is rejected.

Sd/- JUDGE

PL