The Bombay High Court has refused to reject a ₹339.57 crore commercial recovery suit filed by the National Stock Exchange of India Ltd (NSE) against Guiness Securities Ltd and its directors, Kamal Kumar Kothari and Dharmendra Kothari (defendants) holding that the defendants cannot invoke the mandatory pre-institution mediation requirement under Section 12A of the Commercial Courts Act after the Court has already found grounds to grant ad-interim relief.
In an order last week, the bench of justice Sandeep V Marne dismissed an application filed by Guiness Securities and its directors under Order 7 Rule 11 of the Code of Civil Procedure (CPC), which sought rejection of NSE's plaint on the ground that the exchange had not complied with Section 12A.
"The suit is filed by NSE (the plaintiff) for protecting the interests of the investors who are clients of Guiness Securities. NSE is attempting to recover amounts due and payable by Guiness Securities to its clients through the present suit...SEBI's order dated 30 June 2022 was not sufficient protection for NSE and it is justified in seeking further interim reliefs against the defendants. In my view, therefore considering the nature and subject matter of the suit, the cause of action as well as conduct of NSE, a clear case of contemplation of urgent interim relief in the suit is made out," the bench said.
The Court held that Section 12A is mandatory for commercial suits in which no urgent interim relief is contemplated. However, the provision itself creates an exception where the suit genuinely requires urgent interim protection. In the present case, the High Court found that the requirement was met because it had already granted ad-interim relief after considering the urgency pleaded by NSE.
The Court said that once such relief has been granted, it cannot re-examine the same question at the stage of deciding an application under Order 7 Rule 11.
“Once ad-interim relief is granted by the Court considering the nature of urgency involved, it cannot sit in appeal over the findings recorded in the ad-interim order while deciding an application under Order 7 Rule 11 of the CPC,” justice Marne observed.
Dispute over ₹339.57 Crore
NSE's suit seeks recovery of ₹339.57 crore, along with interest, from Guiness Securities and its directors. The claim arose after 5,393 investors submitted claims aggregating to this amount following the declaration of Guiness Securities as a defaulter and its subsequent expulsion from NSE membership.
Guiness Securities has been a trading member of the NSE since July 2000 in the capital market and futures & options (F&O) segments, and since October 2008 in the currency derivatives segment. It was also a self-clearing member in the capital market and F&O segments.
During a routine inspection in March 2018, NSE detected irregularities in the company's books and records. This was followed by a show-cause notice issued on 9 November 2018.
The Exchange's disciplinary action committee subsequently directed Guiness Securities to make good the shortages of funds and securities and to suspend its trading membership across all segments.
NSE later expelled the company from membership on 6 May 2019. Three days later, it issued a public notice inviting affected clients to submit their claims within three months.
The recovery proceedings followed the identification of substantial claims by investors whose funds and securities were allegedly affected by the conduct of the trading member.
SEBI Action and Allegations of Fraud
The case also involved regulatory proceedings by the Securities and Exchange Board of India (SEBI). SEBI had passed an ad-interim order restraining Guiness Securities and certain individuals from accessing the securities market, dealing in securities or disposing of their assets without prior permission. The order also required them to disclose their assets.
A forensic audit subsequently reported alleged misappropriation of client securities, misrepresentation and falsification of books of account.
SEBI passed its final order on 30 June 2022. It restrained Guiness Securities and one of the concerned individuals from dealing in securities for seven years, while another individual was restrained for five years. SEBI also ordered the freezing of Guiness Securities' holdings and imposed monetary penalties of ₹2 crore, ₹1 crore and ₹75 lakh on three of the entities or individuals concerned.
The Bombay High Court took note of these regulatory findings while considering the defendants' challenge to NSE's suit.
The Court noted that, despite SEBI's final order requiring disclosure of assets and restraining their disposal, Guiness Securities had provided an inventory only up to December 2018. This, the Court said, provided a basis for NSE to seek additional disclosures and protective orders through the commercial suit.
Court Had Already Granted Interim Protection
The High Court had granted ad-interim relief to NSE on 8 February 2024. The order covered prayers seeking disclosure of financial returns, bank statements and details of assets, besides restrictions on the defendants' dealing with their assets.
This earlier order became central to the dispute over Section 12A.
Guiness Securities and its directors argued that NSE should have first gone through the mandatory pre-institution mediation process under Section 12A before instituting the commercial suit. They sought rejection of the plaint under Order 7 Rule 11 on that basis.
Justice Marne, however, held that Section 12A, while mandatory, cannot be applied mechanically where the suit genuinely contemplates urgent interim relief.
The judge relied on the Supreme Court's ruling in Patil Automation Private Limited & Ors. v. Rakheja Engineers Private Limited, which established the mandatory character of Section 12A.
At the same time, the Court considered subsequent Supreme Court decisions explaining the scope of the urgent-relief exception.
Urgency Cannot Be Merely Manufactured
The Supreme Court in Yamini Manohar vs T K D Keerthi had cautioned that a plaintiff cannot simply insert a prayer for urgent interim relief into a plaint as a device to avoid pre-institution mediation. Courts are required to examine whether the urgency is genuine and whether the relief sought is being used as a camouflage to bypass Section 12A.
The Bombay High Court also considered the Supreme Court's more recent judgement in Dhanbad Fuels Pvt Ltd vs Union of India, which examined how courts should determine whether a suit genuinely contemplates urgent interim relief.
Justice Marne said the relevant assessment has to be made from the plaintiff's standpoint and by examining the nature and subject matter of the dispute, the cause of action, and the circumstances existing before the suit was instituted.
The Court held that the exception applies where the request for interim protection is not merely an unfounded device to avoid mediation. Importantly, the Court said that the fact that interim relief may ultimately be refused does not necessarily mean that the plaintiff was required to undertake pre-institution mediation. What matters is whether urgent interim relief was genuinely contemplated when the suit was filed.
In the present case, however, the Court went further and granted ad-interim relief.
Defendants Cannot Reopen Urgency at Plaint-rejection Stage
The defendants relied on observations in Dhanbad Fuels case to argue that the question of urgency could still be examined after an interim order had been passed.
The High Court rejected that interpretation.
Justice Marne held that the relevant observations in Dhanbad Fuels concern a situation where interim relief has been refused. They do not authorise a defendant to reopen the issue of urgency after a court has already granted ad-interim protection upon considering the circumstances pleaded by the plaintiff.
The Court said that allowing such a challenge would effectively permit the defendants to sit in appeal over the earlier ad-interim order while the Court was considering an application under Order 7 Rule 11.
The judgment also took into account the serious findings recorded by SEBI against the defendants.
The Court observed that where a regulator has recorded findings of fraud and the plaintiff is seeking to protect investors who allegedly lost money and securities because of the conduct of a defaulting trading member, it would be unconscionable to allow the defendants to rely on Section 12A as a procedural shield against the recovery proceedings.
Recovery Suit To Continue
The Bombay High Court, therefore, declined to reject NSE's plaint and dismissed the application filed by Guiness Securities and its directors.
The ruling clarifies an important procedural issue for commercial litigation: while pre-institution mediation under Section 12A is mandatory in ordinary commercial suits, a genuine requirement for urgent interim relief falls within the statutory exception. Once a Court has considered the pleaded urgency and granted ad-interim or interim protection, that finding cannot ordinarily be reopened as a ground for rejection of the plaint under Order 7 Rule 11.
For NSE, the decision allows its ₹339.57 crore recovery claim, arising from thousands of investor claims, to proceed on the merits rather than be defeated at the threshold on the issue of pre-institution mediation.
