Madras High Court: G. Jayachandran, J., with the lens of this decision addressed the Power under Order XXXVIII, Rule 5 of the Civil Procedure Code.
In the present matter, the plaintiff a Non-banking Finance Company (NBFC) and the First defendant a Micro Level Finance Company were the parties, and the first defendant borrowed a loan from the plaintiff. Other defendants i.e. 2 and 3 were the Director/Chief Executive Officer and Director-cum-Chairman of the first defendant’s company.
It was stated that the defendants failed to repay the loan and it was alleged that the second defendant fraudulently diverted the funds of the first defendant and had misappropriated the first defendant’s fund which led to the default in repayment after September 2020.
Further, it was alleged that the second defendant committed gross fraud by inflating the assets under management by showing fictitious disbursement, withdrawal and deposits as collections.
Liability of Defendants
Due to complete and abject failure of the corporate governance and financial collapse, the corporate veil is to be lifted and defendants 2 and 3 are to be held personally liable for the default of the first defendant.
Defendants had admitted the liability on several occasions and admitted the findings of fraud by the Forensic Auditors. The chance of the defendants fleeing away from the country was imminent.
In view of the above background, present application was filed to furnish security or bank guarantee equal to the suit claim.
It was noted that the 3rd defendant father of second defendant died, and the defendant company was under liquidation. The administrator was appointed to take over the assets and liabilities.
Analysis, Law and Decision
High Court expressed that,
“Power under Order XXXVIII, Rule 5 of the Civil Procedure Code has to be sparingly used and only when, there is sufficient reason to believe that the defendant is about to dispose his property, Attachment or Order to furnish security shall be ordered.”
Madras High Court’s decision in W. Pappammal v. I Chidambaram, 1984 Mad 70, was referred, wherein the Court held that,
“6. The essential requirements for invoking the power of court to effect an attachment under 0. 38, R. 5 (1), C.P.C., are that the Court must be satisfied that the defendant is about to dispose of the whole or any part of his or her property, or the defendant is about to remove the whole or any part of his or her property from the local limits of the jurisdiction of the court and the defendant is intending so to do with a view to cause obstruction or delay the execution of any decree that may be pawed against him or her. it is incumbent that the plaintiff should state precisely the grounds on which the belief or apprehension is entertained that the defendant is likely to dispose of or remove the property. It may even be necessary in some cases to give the source of information and belief. A mere mechanical repetition of the provisions in the Code or the language therein without any basic strata of truth underlying the allegation or vague and general allegations that the defendant is about to dispose of the property or remove it beyond the jurisdiction of the court totally unsupported by particulars would not be sufficient compliance with the first part of 0. 38, R. 5 (1), C.P.C.”
In view of the above, High Court held that the second defendant, who stood as guarantor for the term loan availed in the name of the first defendant, cannot be segregated or delinked from the defendant company, which is now under restructuring.
As far as the question of whether the second defendant mismanaged the company and appropriated the funds, the same would be proved through the investigation which was under progress and through trial.
Coming to the issue regarding Order Attachment before Judgment or to furnish security equal to the suit claim, the second defendant though found in a bad light and unacceptable antecedents were all not reasons to allow application under Order XXXVIII, Rule 5 of the Civil Procedure Code.
Lastly, the bench concluded by expressing that,
“…affidavit filed along with the application does not disclose adequate reasons for ordering furnish security that the property available now with the defendant will be disposed or removed from the local limits to cause obstruction or delay the execution of the decree.”
In view of the above application was dismissed. [Northern ARC Capital Ltd. v. Sambandh Finserve Pvt. Ltd., 2021 SCC OnLine Mad 5511, decided on 6-10-2021]
Advocates before the Court:
For Applicant: Mr Anirudh Krishnan
For Respondents :Mr Supriyo Ranjan Mahaptra for R1
Mr Prashant Rajagopal for R2