Research on SUMMARY TRIAL PROCUDURE with special reference to IDBI Trusteeship

Services Ltd. Vs. Hubtown Ltd1

By Harshvardhan Melanta, Intern, SRB-OJAS, Pune
 Introduction
The Order XXXVII of the Code of Civil Prodecure, 1908 mentions about “Summary
Procedure”

 What is Summary Procedure?

Summary process refers to an immediate process, issuing and taking effect without
intermediate applications or delays. It is a legal procedure used for enforcing a right that takes
effect faster and more efficiently than ordinary methods. The term summary process is also
used to refer to the legal documents used to achieve an expeditious resolution of the
controversy.2

 What is the objective of Summary Procedure?

The objective of a summary trial is to prevent unnecessary obstruction by a defendant who has
no defence and come to a conclusion in an expeditious manner

 Courts and Classes of Suits to which this order Applies [According to Order XXXVII,
Rule 1]

a) This order applies to

 High Court, City Civil Courts and Courts of Small Causes and
 Other Courts

b) The High Court may restrict, enlarge or vary the categories of suits to be brought under
this orders it thinks fit

c) Summary suit is filed in a court having pecuniary jurisdiction upon the subject matter

 Summary Procedure are applied to following kind of Suits

a) Suits upon Negotiable Instruments:

 Bills of exchanges: written unconditional order by one party (the drawer) to
another (the drawee) to pay a certain sum either immediately or on a fixed date
for payment of goods and/or services received3
 Hundies: Similar to Bills of excnage but mainly evolved on the Indian sub-
continent and used for trade and credit purposes.

1
Civil Appeal No: 10860 of 2016; Supreme Court; Decided on 15 th Nov 2016
2
Summary Process Law and Legal Definition; https://definitions.uslegal.com/s/summary-process/
3
bill of exchange (BOE): Definition; http://www.businessdictionary.com/definition/bill-of-exchange-BOE.html
  Promissory note: unconditional promise to pay a certain sum to the order of a
specifically named person or to bearer—that is, to any individual presenting the
note

b) Suits for recovery of debtor liquidated amount arising out of-

 written contract
 in case of an enactment wherein the amount to be recovered is a fixed amount
of money, or a debt other than a penalty
 a guarantee, where the claim against the principal is in respect of a debt or for
money only.

 Institution of Summary Proceedings [Order XXXVII Rule 2]

a) A summary suit is instituted by presenting a plaint in the court by the plaintiff

containing the following specification;
• It must mention that the suit is filed under summary procedure
• It must state that no relief, which does not fall within the ambit of this rule,
has been claimed.

b) Then the summons of the suit are to be issued to the defendant, which should be in
prescribed from no. 4, accompanied with a copy of plaint and Annexures.

c) When the defendant appears, he is required to enter his appearance within 10 days of
receipt of summons.

d) On default of his appearance it is assumed that he has admitted the allegations made in
the plaint.

e) The plaintiff gets entitled to a final order granting him the sum as mentioned in the
plaint along with interest at the specified date and costs if the Court thinks it
appropriate.

 Procedure for Appearance of Defendant [Order XXXVII Rule 3]

a) Where the defendant enters an appearance within the prescribed time, the plaintiff is
required to serve on him the summons for judgement in Form no. "4A) accompanied
with
 an affidavit verifying the cause of action and the amount which is claimed in
the plaint
 a statement to the effect that there is no defence to the suit.

b) Then, the defendant may apply for leave to defend the suit within 10 days from the date
of service of summons, disclosing by way of an affidavit facts which may entitle him
of the right to defend himself.
 c) The Court shall not refuse permission to the defendant to defend the suit unless it
believes that the disclosure by the defendant does not show that he has any substantial
defence to raise or that it is frivolous

 Power to Set Aside Decree-[Order XXXVII Rule 4]

The Court has the power to set aside the decree or grant stay or set aside execution or to grant
any leave to the defendant to appear to the summons and to defend the suit, if it seems
reasonable to the Court.
In Goyal MG Gases Ltd. v Premium International Finance Ltd4 there was sufficient cause was
shown by the defendant for delay. In this case there was a summary trial of the case. Service
of the summons was not accompanied with the copy of plaint and documents or annexures
relied upon by the plaintiff. The Court condoned the delay in filing the Memo of Appearance
by the defendants.5

 Power to Order the Negotiable Instrument to Be Deposited With Court [Order XXXVII
Rule 5]
The Court may order the negotiable instrument in dispute to be deposited with the officer of
the Court.
The Court may also require the plaintiff or defendant to deposit some security by way of costs
to ensure the bonafide of the plaintiff or defendant

 Procedure in Suits-[Order XXXVII Rule 7]

The procedure of ordinary Civil Suit is applicable to the summary proceedings also.

Case analysis of IDBI Trusteeship Services Ltd. Vs. Hubtown Ltd6

Facts of the case
 A Dutch based development bank called as Nederland se Financierings Maatschappiji
Voor Ontwikkelingslandeo N.V. (also known as FMO) subscribed to 10% equity and
convertible debentures in Vinca Developer Private Limited, which would come to total
and upon conversion would entitle FMO to 99% shareholding in Vinca.

 The remaining equity was held by Hubtown Limited (also the defendant)

 The proceeds from the FMO investment were utilised by Vinca to subscribe to
optionally partially convertible debentures (OPCDs) of its subsidiaries who were
engaged in real estate development. The full redemption of such OPCDs was
guaranteed by Hubtown

4
II (2007) BC 147, 138 (2007) DLT 259; Decided on 31 July 2006
5
Para 50; Highlighted (pg. 14)
6
Civil Appeal No: 10860 of 2016; Supreme Court; Decided on 15th Nov 2016
 'Optionally Convertible Debentures'
Definition: Optionally convertible debentures are debt securities which
allow an issuer to raise capital and in return the issuer pays interest to the
investor till the maturity.

Description: The investor of such debentures has a right to convert the debt
into equities of the issuing company at a price which is normally decided at
the time of the issue.7

 IDBI Trusteeship Services Ltd (IDBI Trustee) was the debenture trustee of these
OPCDs. Upon failure of the investments made by Vinca, IDBI Trustee held Hubtown
(guarantor/respondent) liable according to guarantee provided by the latter.

 Hubtown (guarantor/respondent) resisted the payment. They argued that

1. Hubtown (guarantor/respondent) went in for a Summary trial. They argues that
since they raised defences at the trial stage, full freedom be granted to them to
unconditionally pursue their defence and hence they were not liable to pay the
guaranteed amounts.

2. Indian exchange control regulations permits making offshore investment without

any assured returns. This investment in OPCD by FMO via an Indian company
(i.e. Vinca) was structured to circumvent this requirement

Held
Though the issue is to be finally decided by the Bombay High Court. The SC held that
a) The judgment sets aside the finding of Bombay High Court, which allowed
unconditional leave to defend to Hubtown in view of “triable issues which require
adjudication on further evidence”.
b) The guarantee between IDBI and Hubtown (guarantor) was valid8
c) Vinca is to entitled to receive funds from the subsidiaries upon OPCD redemption
d) Vinca-FMO relationship is valid and thus FMO would be entitled to 99% ownership of
Vinca; FMO did not violate any exchange control regulations9
e) Based on the above, the Supreme Court held that the defence raised by Hubtown
(guarantor/respondent) is ‘plausible but improbable’ and hence to protect IDBI Trustee
(who was acting for Vinca), the SC required Hubtown (guarantor/respondent) to deposit
the amount of Rs. 418 crores invested by FMO and any delays by guarantor shall invite
an interest of 14.75% per annum
f) The investment by an Indian company in OPCD issued by Vinca would amount to an
external commercial borrowing10

When a leave to defend is granted according to the case – Milkhiram, Mechelec, IDBI
Trusteeship

7
Definition of 'Optionally Convertible Debentures'; Economic Times;
https://economictimes.indiatimes.com/definition/optionally-convertible-debentures
8
Para 33.1 (Pg. 8)
9
Para 33.2 (Pg. 8)
10
Para 33.3 (Pg. 8)
The court in this case has considered the guidelines set out in Mechelec Engineers &
Manufacturers v M/s Basic Equipment Corporation (1976)11 and provisions prior to 1976.

The court also discussed the judgment in Milkhiram (India) (P) Ltd v Chamanlal Bros (1965)12,
which was decided in accordance with order XXXVII rule 3. The SC was of view that in
Milkhiram case – which allows trial judges to exercise their discretionary powers in granting
leave to defend, the Supreme Court recognized the need to frame guidelines to obviate the
exercise of judicial discretion in an arbitrary manner13 14. The IDBI Trusteeship case
superseded the guidelines in Mechelec case and the SC has set out the following guidelines:

The following principles are applicable in the matter of grant or refusal of leave to defend in
summary suits15 16

a) If the defendant satisfies the court that he has a substantial defence, the defendant is
entitled to an unconditional leave of appeal.

b) If the defendant raises triable issues indicating that he has a fair or reasonable defence,
although not a positively good defence, the defendant is ordinarily entitled to
unconditional leave to defend.

c) Even if the defendant raises triable issues, if a doubt is left with trial judge about the
defendant’s good faith, conditional leave to defend is granted.

d) If the defendant raises a defence which is plausible but improbable, the trial judge may
grant conditional leave to defend with conditions as to time or mode of trial, as well as
payment into court, or furnishing security.

e) If the defendant has no substantial defence and raises no genuine triable issue, then no
leave to defend is granted.

f) Where part of the amount claimed by the plaintiff is admitted by the defendant to be
due from him, leave to defend shall not be granted unless the amount so admitted to be
due is deposited by the defendant in Court.

Implications
a) Benefits to structured private equity transactions with assured cash flow
b) Gives boost to mixed investment instruments and deal structures
c) Assures the confident to foreign investors that their investment won’t be subjected
to literal interpretations of exchange rules
d) It ensures that the guarantors in this case and in any other subsequent cases will be
disincentivised to avoid their liability to pay to investors

11
1977 AIR 577, 1977 SCR (1)1060
12
AIR 1965 SC 1698
13
Para 17 (Pg. 19); IDBI Trusteeship
14
Summmary Trial should be left to the discretion of judges: Milkhiram case (Para 6; Pg. 6)
15
Para 18 (Pg. 20); IDBI Trusteeship
16
Guidelines for Summary Suits laid down in Mechelec Case (Highlighted Pg. 4)