M/S L.R. BUILDERS PVT. LTD. & ORS. vs M/S P.P. JEWELLERS PVT. LTD. & ORS.

$~J-2
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Pronounced on: 22.03.2024
+ CS(OS) 581/2023
M/S L.R. BUILDERS PVT. LTD. & ORS ….. Plaintiffs
Through: Mr. Amit Sibal, Sr. Advocate alongwith Ms. Jyoti Taneja, Ms. Kanika Singhal and Ms. Aarzoo Aneja, and Ms. Ishita, Advocates.
versus

M/S P.P. JEWELLERS PVT. LTD. & ORS. …. Defendants
Through: Mr. Ratan K. Singh, Sr. Adv. alongwith Ms. Pallavi Anand, Mr. Gautam Dhamija, Mr. Parth Dixit and Ms. Saloni Sharma, Advocates for defendant nos. 1 to 7
Mr. Sandeep Sethi, Sr. Advocate along with Mr. Himanshu Satija, Mr.Karan Khanna, Ms. Simran Mulchandani and Mr. Harshit, Advocates for defendant nos. 8 &10.
Ms. Malvika Trivedi, Sr. Adv. alongwith Mr. Harshit Khanduja, Mr.Pulkit Khanduja, Mr. Shailendra Slaria and Ms. Sujal Gupta, Advocates for defendant no.9.
CORAM:
HON’BLE MR. JUSTICE SACHIN DATTA

JUDGMENT

I.A. 18220/2023 (Exemption)

Allowed, subject to all just exceptions.
Application stands disposed of.
CS(OS) 581/2023

1. Let the plaint be registered as a suit.
2. Issue summons in the suit.
3. Learned counsel, as aforesaid, accept summons on behalf of the defendants
4. Let the defendants file written statement to the plaint within 30 days from today, alongwith affidavit of admission/denial of the documents filed by the plaintiffs. The plaintiffs may file replication to the written statement within 30 days thereafter, alongwith affidavit of admission/denial of the documents filed by defendants.
5. List before the Joint Registrar for completion of pleadings, for admission/denial of documents and marking of exhibits on 03.05.2024.
I.A. 18219/2023 (Order 39 Rule 1 and 2 CPC)
6. Issue notice. Learned counsel, as aforesaid, accept notice on behalf of the defendants
7. Let reply be filed by the defendants/ non-applicants within a period of 3 weeks; rejoinder thereto, if any, be filed within 2 weeks thereafter.
8. The present suit has been filed by the plaintiff companies through its authorized representative Mr. Rahul Gupta seeking a declaration that the Family Settlement Deeds (‘FSDs’) dated 20.06.2015 and 09.07.2019 are non-est, null and void, and seeking consequent permanent injunction/s. The present application seeks an interim injunction restraining the defendants from acting upon the impugned FSDs in any manner whatsoever.
9. It is averred in the plaint that the purported FSDs were entered between the defendant nos. 2 to 9, who are trying to alienate and transfer the properties that are legally owned by the plaintiff companies. It is further averred in the plaint that the defendants through collusive proceedings are seeking to refer their inter se disputes arising out of illegal FSDs to arbitration. It is submitted that FSDs being nullity in the eyes of law cannot be referred to arbitration.
10. Learned senior counsel for the plaintiff companies has submitted that the consideration and object of the FSDs is unlawful in terms of Section 23 of the Indian Contract Act, 1872. He has submitted that it is impermissible in law for the defendants to divide the assets of the plaintiff companies. He submitted that the FSDs involve injury to the property of the plaintiff companies, who are not signatories to the FSDs. He emphasised that plaintiff no.2 company is the shareholder of defendant no.1 company, who in law has a right to object to the scheme of arrangement/amalgamation under Section 230 of the Companies Act, 2013. It is submitted that assets of plaintiffs and defendant no.1 are being transferred under the FSDs without any consideration to the companies, and therefore the substratum of FSDs is ex-facie unlawful. He has further submitted that implementation of the FSDs will result in violation of restraint orders, issued qua the plaintiffs’ properties, by the Ld. DRT. It is submitted that plaintiff no.2 company has filed a contempt petition against the defendant no.2 inter alia alleging that FSDs and joint memorandum (whereby the defendants seek to refer their disputes to arbitration) violate the order dated 22.03.2017 passed Ld DRT in O.A. 292/2017. It is emphasised that notice has been issued in the said petition. He further submitted that defendant no.1 company as well as defendant nos. 2 to 7, have made admissions that FSDs are a nullity in the eyes of law. Attention has been drawn to replication filed by the defendant no.1 in its prior suit filed before Ld. Judge, Tis Hazari Courts. Attention has also been drawn to reply filed by the defendant nos. 1 to 7 in the petition filed by defendant nos. 8 and 9 under Section 11 of the Arbitration and Conciliation Act, 1996. It is submitted that in the prior suit filed by the defendant no.1 inter alia alleging infringement of its trademark, Ld. Judge, Tis Hazari Court vide order dated 26.07.2021 in CS(Comm) 1551/2021 has given a prima facie finding that FSDs are a nullity in the eyes of law. In support of these submissions reliance has been placed on Bacha F. Guzdar v. Commissioner of Income Tax, Bombay1, Su-Kam Power Systems Ltd. v. Kunwer Sachdev.2, Globe Motors Limited v Mehta Teja Singh & Co.3, Umadevi Nambiar v. Thamarasseri Roman Catholic Diocese4, Pralhad Jaganath Jawale v. Sitabai Chander Nikam5, Keshrimal Jivji Shah v. Bank of Maharashtra6, Satyabrata Biswas & Ors. v. Kalyan Kumar Kisku & Ors.7 and Keshrimal Jivji Shah v. Bank of Maharashtra.8
11. I have perused the record and heard learned senior counsel for the parties.
12. The plaintiff companies prima facie fail to meet the triple test i.e., (i) a prima facie case; (ii) balance of convenience; and (iii) irreparable injury for grant of an ad-interim injunction. The reasons are enumerated hereunder.
13. The defendant nos. 2 to 9 are closely related family members involved in the family business of P.P. Jewellers Group. They have entered into two FSDs. The FSD dated 09.07.2019 has been entered between the Pawan Gupta Group (defendant nos. 8 and 9) and Kamal Gupta Group (defendant nos. 2 to 7). The said FSD recites “out of the common funds, various companies were incorporated wherein the shareholdings have been held by the family members; various firms were constituted by the family members and out of the common funds from these businesses, various immovable and moveable assets were purchased/acquired in the names of family members and/or above companies, while continuing the operations of all such companies and businesses under the flagship “P.P. Jewellers Private Limited””.
14. I have perused the FSDs; prima facie, the same do not purport to create or extinguish any rights in the properties of the plaintiff companies (or for that matter in the properties of the defendant no.1 company). By way of the FSDs, the defendant nos. 2 to 9 (signatories to the FSDs) have only resolved to take certain action/s in pursuance of the family arrangement. Therefore, the FSDs cannot be said to cause any injury to the property of plaintiff companies. The FSDs are not a scheme under the Companies Act through which the plaintiff companies are being divided between the family members.
15. No doubt certain family properties which are in the name of companies including plaintiff companies have been sought to be allocated between the family members. However, only the signatories family members, who are the shareholders/directors in the said companies, are bound by the FSDs. Properties of the companies can only be transferred after following the procedure under the Companies Act. The day to day management of a company is run through its Board of Directors while major decisions of a company are taken by its shareholders. Since shareholders/directors of the said companies are the family members themselves they can give effect to (or reject) the FSDs.
16. The defendants cannot transfer the properties of the companies dehors the procedure under the Companies Act. However, the stage to transfer a property would only arise after inter se disputes between the defendants are adjudicated. It is only after passing of the arbitral award (in the proposed arbitration between the defendants) that the plaintiff companies may be aggrieved if their immovable properties are being dealt with.
17. Notably, the plaintiff companies nos. 2 to 9 are specifically mentioned in Annexure ‘A’ of the FSD dated 09.07.2019. These are the companies of Mr. Rahul Gupta which were excluded from the implementation of the FSD. With respect to the plaintiff company no.1 i.e., L.R. Builders Pvt. Ltd., it was specifically mentioned in the FSD dated 09.07.2019 as under:
“11. All parties shall work together to retain control of L. R. Builders Pvt. Ltd. and initiate proceedings as advised, in accordance with law, against Mr. Rahul Gupta for depriving the other family members of their share and interest in L.R. Builders Pvt. Ltd., by unlawfully usurping control of the affairs of L.R. Builders Pvt. Ltd. PG will cooperate and work as common group with KG Group with regard to the assets identified and mentioned in Annexure B. Out of these assets (Annexure B), once the dispute relating to the affairs of L.R. Builders. Pvt. Ltd. is settled, PG Group will be allocated/given space along with ownership rights for office in PP Tower, C-123, Pitampura, Netaji Subhash Place, New Delhi, in the same ratio i.e. 23% in this property. In the event of any assistance sought by KG Group, Pawan Gupta shall cooperate with him without any financial responsibility.”

18. Prima facie, the FSDs do not create right in specific properties or assets of the family and/or family owned companies, in favour of specific persons, in the manner suggested by the plaintiffs.
19. The reliance placed on the order dated 26.07.2021 passed by Ld. Judge, Tis Hazari Courts is misplaced. The said order was passed in an interim application in suit filed by the defendant no.1 company alleging infringement of its trademark and passing off. The issue of whether the FSDs are nullity was not directly in issue before the concerned court. Further, the interim injunction granted by the said court was later stayed in appeal by a Division Bench of this Court vide order dated 30.07.2021 in FAO (Comm) 120/2021.
20. Furthermore, the objective of the family settlements viz. to preserve peace and goodwill within the family is recognized by courts, and it has been held in numerous judgments that it is the duty of the courts to uphold and give full effect to such an arrangement instead of disturbing the same on technical or trivial grounds. It has also been held that the consideration for such a settlement, is the expectation that such a settlement will result in establishing or ensuring amity and goodwill amongst persons bearing relationship with one another. In Kale & Ors. v. Director of Consolidation & Ors.9, it has been held as under:
“9. … By virtue of a family settlement or arrangement members of a family descending from a common ancestor or a near relation seek to sink their differences and disputes, settle and resolve their conflicting claims or disputed titles once for all in order to buy peace of mind and bring about complete harmony and goodwill in the family. The family arrangements are governed by a special equity peculiar to themselves and would be enforced if honestly made. In this connection, Kerr in his valuable treatise Kerr on Fraud at p. 364 makes the following pertinent observations regarding the nature of the family arrangement which may be extracted thus:
“The principles which apply to the case of ordinary compromise between strangers do not equally apply to the case of compromises in the nature of family arrangements. Family arrangements are governed by a special equity peculiar to themselves, and will be enforced if honestly made, although they have not been meant as a compromise, but have proceeded from an error of all parties, originating in mistake or ignorance of fact as to what their rights actually are, or of the points on which their rights actually depend.”

The object of the arrangement is to protect the family from long-drawn litigation or perpetual strifes which mar the unity and solidarity of the family and create hatred and bad blood between the various members of the family. Today when we are striving to build up an egalitarian society and are trying for a complete reconstruction of the society, to maintain .and uphold the unity and homogeneity of the family which ultimately results in the unification of the society and, therefore, of the entire country, is the prime need of the hour. A family arrangement by which the property is equitably divided between the various contenders so as to achieve an equal distribution of wealth instead of concentrating the same in the hands of a few is undoubtedly a milestone in the administration of social justice. That is why the term “family” has to be understood in a wider sense so as to include within its fold not only close relations or legal heirs but even those persons who may have some sort of antecedent title, a semblance of a claim or even if they have a spessuccessionis so that future disputes are sealed for ever and the family instead of fighting claims inter se and wasting time, money and energy on such fruitless or futile litigation is able to devote its attention to more constructive work in the larger interest of the country. The courts have, therefore, leaned in favour of upholding a family arrangement instead of disturbing the same on technical or trivial grounds. Where the courts find that the family arrangement suffers from a legal lacuna or a formal defect the rule of estoppel is pressed into service and is applied to shut out plea of the person who being a party to family arrangement seeks to unsettle a settled dispute and claims to revoke the family arrangement under which he has himself enjoyed some material benefits. The law in England on this point is almost the same. In Halsbury’s Laws of England, Vol. 17, Third Edition, at pp. 215-216, the following apt observations regarding the essentials of the family settlement and the principles governing the existence of the same are made:
“A family arrangement is an agreement between members of the same family, intended to be generally and reasonably for the benefit of the family either by compromising doubtful or disputed rights or by preserving the family property or the peace and security of the family by avoiding litigation or by saving its honour.
The agreement may be implied from a long course of dealing, but it is more usual to embody or to effectuate the agreement in a deed to which the term “family arrangement” is applied.
Family arrangements are governed by principles which are not applicable to dealings between strangers. The court, when deciding the rights of parties under family arrangements or claims to upset such arrangements, considers what in the broadest view of the matter is most for the interest of families, and has regard to considerations which, in dealing with transactions between persons not members of the same family, would not be taken into account. Matters which would be fatal to the validity of similar transactions between strangers are not objections to the binding effect of family arrangements.”
xxx xxx xxx

19. Thus it would appear from a review of the decisions analysed above that the courts have taken a very liberal and broad view of the validity of the family settlement and have always tried to uphold it and maintain it. The central idea in the approach made by the courts is that if by consent of parties a matter has been settled, it should not be allowed to be reopened by the parties to the agreement on frivolous or untenable grounds.

21. In K.K. Modi & Anr. v. K.N. Modi & ors. 10, it has been held that a family settlement arrived at between two groups belonging to the same family regarding division of assets should not be lightly interfered with by a Court especially when it has been substantially acted upon by the parties.
22. In Hari Shankar Singhania (2) v. Gaur Hari Singhania11, it has been held as under:
“Family arrangement/family settlement
42. Another fact that assumes importance at this stage is that, a family settlement is treated differently from any other formal commercial settlement as such settlement in the eye of the law ensures peace and goodwill among the family members. Such family settlements generally meet with approval of the courts. Such settlements are governed by a special equity principle where the terms are fair and bona fide, taking into account the well-being of a family.

43. The concept of “family arrangement or settlement” and the present one in hand, in our opinion, should be treated differently. Technicalities of limitation, etc. should not be put at risk of the implementation of a settlement drawn by a family, which is essential for maintaining peace and harmony in a family. Also it can be seen from decided cases of this Court that, any such arrangement would be upheld if family settlements were entered into to allay disputes existing or apprehended and even any dispute or difference apart, if it was entered into bona fide to maintain peace or to bring about harmony in the family. Even a semblance of a claim or some other ground, as say affection, may suffice as observed by this Court in Ram Charan Das v. Girjanandini Devi. 

44. In Lala Khunni Lal v. Kunwar Gobind Krishna Narain the Privy Council examined that it is the duty of the courts to uphold and give full effect to a family arrangement.

45. In SahuMadho Das v. Pandit Mukand Ram (Vivian Bose, Jagannadhadas and B.P. Sinha, JJ.) placing reliance on Clifton v. Cockburnand Williams v. Williams this Court held that a family arrangement can, as a matter of law, be implied from a long course of dealings between the parties. It was held that: (SCR p. 43)
“[S]o strongly do the courts lean in favour of family arrangements that bring about harmony in a family and do justice to its various members and avoid, in anticipation, future disputes which might ruin them all, that we have no hesitation in taking the next step (fraud apart) and upholding an arrangement.…”

46. The real question in this case as framed by the Court was whether the appellant-plaintiff assented to the family arrangement. The Court examined that “the family arrangement was one composite whole in which the several dispositions formed parts of the same transaction”.

47. In Ram Charan Das v. Girjanandini Devi this Court observed as follows: (SCR pp. 850 G-851 B)
“Courts give effect to a family settlement upon the broad and general ground that its object is to settle existing or future disputes regarding property amongst members of a family. … The consideration for such a settlement, if one may put it that way, is the expectation that such a settlement will result in establishing or ensuring amity and goodwill amongst persons bearing relationship with one another.”

48. In Maturi Pullaiah v. Maturi Narasimham this Court held that: (AIR p. 1841, para 17)
“[T]hough conflict of legal claims inpraesenti or in future is generally a condition for the validity of a family arrangement, it is not necessarily so. Even bona fide disputes, present or possible, which may not involve legal claims will suffice. Members of a joint Hindu family may, to maintain peace or to bring about harmony in the family, enter into such a family arrangement. If such an arrangement is entered into bona fide and the terms thereof are fair in the circumstances of a particular case, courts will more readily give assent to such an arrangement than to avoid it.”

49. Further, in Krishna Beharilal v. Gulabchand this Court reiterated the approach of the courts to lean strongly in favour of family arrangements to bring about harmony in a family and do justice to its various members and avoid in anticipation future disputes which might ruin them all. This approach was again re-emphasised in S. Shanmugam Pillai v. K. Shanmugam Pillaiwhere it was declared that this Court will be reluctant to disturb a family arrangement.

50. In Kale v. Dy. Director of Consolidation (V.R. Krishna Iyer, R.S. Sarkaria and S. Murtaza Fazal Ali, JJ.) this Court examined the effect and value of family arrangements entered into between the parties with a view to resolving disputes for all. This Court observed that: (SCC pp. 125-26, para 9)
“By virtue of a family settlement or arrangement members of a family descending from a common ancestor or a near relation seek to sink their differences and disputes, settle and resolve their conflicting claims or disputed titles once for all in order to buy peace of mind and bring about complete harmony and goodwill in the family. The family arrangements are governed by a special equity peculiar to themselves and would be enforced if honestly made. … The object of the arrangement is to protect the family from long drawn litigation or perpetual strives which mar the unity and solidarity of the family and create hatred and bad blood between the various members of the family. Today when we are striving to build up an egalitarian society and are trying for a complete reconstruction of the society, to maintain and uphold the unity and homogeneity of the family which ultimately results in the unification of the society and, therefore, of the entire country, is the prime need of the hour. … The courts have, therefore, leaned in favour of upholding a family arrangement instead of disturbing the same on technical or trivial grounds. Where the courts find that the family arrangement suffers from a legal lacuna or a formal defect the rule of estoppel is pressed into service and is applied to shut out plea of the person who being a party to family arrangement seeks to unsettle a settled dispute and claims to revoke the family arrangement…. The law in England on this point is almost the same.”

51. The valuable treatise Kerr on Fraud at p. 364 explains the position of law:
“The principles which apply to the case of ordinary compromise between strangers do not equally apply to the case of compromises in the nature of family arrangements. Family arrangements are governed by a special equity peculiar to themselves, and will be enforced if honestly made, although they have not been meant as a compromise, but have proceeded from an error of all parties originating in mistake or ignorance of fact as to what their rights actually are, or of the points on which their rights actually depend.”

Halsbury’s Laws of England, Vol. 17, 3rd Edn. at pp. 215-16.
52. In K.K. Modi v. K.N. Modi (Sujata Manohar and D.P. Wadhwa, JJ.) it was held that the true intent and purport of the arbitration agreement must be examined (para 21). Further, the Court examined that: (SCC pp. 594-95, para 52)
“[A] family settlement which settles disputes within the family should not be lightly interfered with especially when the settlement has been already acted upon by some members of the family. In the present case, from 1989 to 1995 the memorandum of understanding has been substantially acted upon and hence the parties must be held to the settlement which is in the interest of the family and which avoids disputes between the members of the family. Such settlements have to be viewed a little differently from ordinary contracts and their internal mechanism for working out the settlement should not be lightly disturbed.”

53. Therefore, in our opinion, technical considerations should give way to peace and harmony in the enforcement of family arrangements or settlements.”

23. In the circumstances, the plaintiff companies have failed to make out a prima facie case for the purpose of grant of an ad-interim injunction. The balance of convenience is also not in favour of the plaintiff companies.
24. Further, the plaintiff companies have failed to show any irreparable harm/loss that would be suffered by them if an interim injunction is not granted. The FSDs, in itself do not transfer the properties of the plaintiff companies. The proposed arbitration and the resultant arbitral award between the defendants will also not cause any irreparable harm/loss to the plaintiff companies. In view of Section 35 of the A&C Act, the resultant arbitral award would not be binding on the plaintiff companies. The plaintiff companies thus can be permitted to intervene in enforcement proceedings and raise necessary pleas to resist execution/enforcement of the arbitral award affecting its right. Further, as already stated above, a property owned by a company, can only be transferred after following the procedure under the Companies Act.
25. In view of the aforesaid, no ground is made out for passing an ad-interim injunction in favour of the plaintiff companies.
26. It is clarified that the aforesaid view is only a prima facie view for the purpose of considering whether a case has been made out for grant of an ad-interim injunction; it would be open to the parties to make further submissions for the purpose of final disposal of this application, which shall be duly considered in accordance with law. It is clarified that the observations made hereinabove would not prevent the court from taking a different view, if so warranted, after hearing the parties at length.
27. List before the roster bench on 28.05.2024.

MARCH 22, 2024/hg SACHIN DATTA, J
1 (1955) 1 SCR 876
2 2019 SCC Online Del 10764
3 1983 SCC Online Del 193
4 (2022) 7 SCC 90.
5 2011 (4) Mah. LJ 137
6 2004 (3) Mah. LJ 893
7 (1994) 2 SCC 266
8 (2004) 3 Mah LJ 893
9 (1976) 3 SCC 119
10 (1998) 3 SCC 573
11 (2006) 4 SCC 658
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