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Invoking inherent powers under Section 151 CPC in cases involving fraud, What Calcutta HC held

Invoking inherent powers under Section 151 CPC in cases involving fraud, What Calcutta HC held

Meera Emmanuel

A commercial case involving claims of fraud before the Calcutta High Court recently prompted Justice Shekhar B Saraf to opine that High Courts must exercise its inherent powers under Section 151 of the Code of Civil Procedure (CPC) on equitable considerations, rather than confine to a narrow, pedantic view. The case before the Court involved a prayer for the grant of ad interim injunction to restrain the defendants in the suit from alienating their property.

In the judgment passed on Wednesday, Justice Saraf opined that in cases where a litigant is able to show that, prima facie, fraud has been committed against him, the Court should invoke its inherent powers in his favour if there are no express provisions under the CPC providing for the same. As recorded in the judgment,

The question I ask to myself is whether the court is required to restrain itself in spite of the plaintiff having demonstrated a prima facie case of fraud having been committed by the defendants? Is the plaintiff entitled to no security and/or protection till the completion of trial and passing of a decree when the past conduct of the defendants clearly point to fraud and collusion?

I am of the view that in the commercial world as exists today, the citizens have a right to expect that the judiciary shall come to their rescue at the very first instance when a fraud is committed on them. The law cannot be so narrow-minded that it shall wait for umpteen years to give relief to a plaintiff that approaches the court and prima facie proves that fraud has been committed on him.”

Inter alia, the judge highlights that owing to the slow pace characteristic of civil litigation, decrees often become non-executable and infructuous. It is also noted that the Chartered High Courts derive their powers from the Constitution of India, including its inherent jurisdiction.

“… accordingly, the High Court is the repository of power enabling it to reach its arms to do justice,” the Court observed.

In this backdrop, Justice Saraf said,

“… I am of the view that the High Court has a duty to use its inherent powers, in appropriate cases for the ends of justice, equity and good conscience. Furthermore, in the commercial world of today, it is the duty of the High Court to protect the honest businessman against persons who use unscrupulous means to cheat such a businessman. Failure to do so, would amount to eroding the confidence of the citizens in the High Court.”

In the case before the Court, a chemicals company dubbed Tata Paras alleged that its distributors had colluded with a former employee to avail excess “credit notes”, by which they had been given discounts and rebates by the company.

The employee in question was fired, and the distributors confronted by the company. Two distributors initially agreed to repay the excess amount claimed by them. However, subsequently, one of the distributors retracted the admission of having availed excess credit notes, whereas the other did not make good on repayments. This led to a criminal complaint being filed against them, as well as the delinquent former employee. Further, the company also had account audits carried out in relation to the excess credit note scam.

Before the High Court, the company sought an interim injunction to prevent the distributors from alienating their property pending the trial. In this regard, Section 94 of the CPC read with Order 39, Rule 1(b) was invoked. By Order 39, Rule 1(b), civil courts are empowered to pass temporary injunctions to restrain defendants from disposing of property not subject matter to the suit if it appears that the defendant intends or threatens to dispose of the property with a view to defraud his creditors.

Dismissing arguments to the contrary, the Court eventually ruled that, “… this is a fit case for granting an ad interim injunction against the defendants, in the manner discussed hereinafter, to secure the claim of the plaintiff.”

It was observed that if a case prima facie involves fraud, the threshold for proving that the defendant is likely to dispose of property to defraud creditors, as required under Order 39 Rule 1(b), would be lowered.

The petitioner in the present case has clearly demonstrated the prima facie case of fraud having been committed on him by the defendants. The petitioner has also averred and made pleadings in the plaint and the interlocutory applications with regard to the grave apprehension of disposal of the properties by the defendants in continuation of the fraud that has been committed on the petitioner. In my view, in a case of fraud the threshold to be crossed to come to a subjective finding of the above threat to alienate property is significantly reduced.

… the petitioner has brought down the threshold required for the subjective satisfaction of this Court required under Rule 1(b) by prima facie proving a case of collusion and fraud by the defendants. Furthermore, the conduct of the defendants as established in the prima facie findings gives further credence to the threat and perception of the petitioner that the defendants shall alienate their property in such a manner that the fruits of the decree shall not be available to the petitioner.

Therefore, the Court found that Order 39, Rule 1 (b) could be invoked to allow the company’s plea for ad interim injunction.

The Court also added that where there is no specific provision expressly providing for the grant of an injunction under the CPC, the Court has the power to invoke Section 151, CPC. However, it also cautioned that the exercise of such powers cannot violate the provisions of the Code. As noted in the judgment,

“ rare and exceptional cases, Civil Courts may grant injunctions with regard to the procedural and substantial rights of the parties in fit cases for the ends of justice.

The only exception is that the Civil Courts cannot in the guise of inherent powers available under Section 151 of the Code pass orders that are in conflict and are in contravention to the provisions of the Code.”

As for the plea at hand, the Court passed an injunction order restraining defendants from transferring properties beyond certain limits, and set timelines for filing respective affidavits and other documents.

[Read the Judgment]