Hungerford Investment Trust Ltd (in voluntary liquidation) v. Haridas Mundhra & Ors.

The decision in Hungerford Investment Trust Ltd v. Haridas Mundhra & Ors. is a significant judgement in Indian law on specific performance and rescission of contracts. The case deals with the legal principles governing rescission of a decree for specific performance, especially when no time is fixed for the performance of contractual obligations. It also explains the scope of the power of courts after the repeal of the Specific Relief Act, 1877 and the enactment of the Specific Relief Act, 1963.

The judgement is particularly important for its discussion on whether a court retains control over a decree for specific performance after passing it, and under what circumstances such a decree can be rescinded when the party in whose favour it was passed fails to perform essential obligations.

Background of the Dispute

Hungerford Investment Trust Limited (the appellant) was the owner of 100% shares of a company referred to as Company ‘A’. On 30 October 1956, an agreement was entered into between the appellant and Haridas Mundhra (the respondent). Under this agreement, the respondent purchased 49% of the shares of Company ‘A’ and was also given an option to purchase the remaining 51% shares at a later stage.

The respondent exercised this option, but the shares were not transferred to him. As a result, the respondent filed a suit seeking specific performance of the agreement. The suit was decreed in favour of the respondent. The decree directed the appellant to deliver the remaining 51% shares to the respondent against payment of their value. Along with this, an injunction was granted restraining the appellant from exercising voting rights except in accordance with the respondent’s instructions.

However, except for the injunction, execution of the decree was stayed by the trial court. This stay was continued by the appellate court until the appeal was ultimately dismissed in 1965.

Events After the Decree

After the dismissal of the appeal in 1965, the appellant filed an application requesting that the respondent be directed to pay the consideration amount within a time fixed by the court. This application was dismissed.

During this period, attachment orders were passed in respect of the decree. These orders restrained the respondent from transferring, alienating, or charging his rights under the decree or from obtaining satisfaction of it. Further, in February 1965, a company referred to as ‘B’, which had obtained a decree against a holding company of the appellant, sought execution of its decree. In that execution proceeding, the 51% shares of Company ‘A’ held by the appellant were attached.

The executing court directed that these shares should be produced and delivered to the respondent against payment of the consideration mentioned in the decree for specific performance.

Around the same time, Company ‘A’ itself filed a suit against the appellant in relation to payments made by it to income-tax authorities on behalf of the appellant. Company ‘A’ claimed a lien on the 51% shares and sought their possession and sale. A receiver was appointed in respect of these shares. The court further directed that the receiver would be at liberty to deliver the 51% shares to the respondent on payment of the consideration amount.

Correspondence Between the Parties

The appellant conveyed this order regarding the receiver to the respondent by a letter dated 11 January 1967. Even prior to this, the appellant had written letters asking the respondent to remain ready with the purchase money and to take delivery of the shares.

The respondent, however, refused to accept these communications. In reply to the letter dated 11 January 1967, the respondent objected on the ground that the appellant was not in a position to deliver the shares and that the order permitting delivery by the receiver was not binding upon him since he was not a party to that suit.

By a letter dated 11 February 1967, the appellant informed the respondent that he had forfeited his right to purchase the 51% shares under the decree for specific performance, as he had failed to fulfil his obligation to pay the consideration and take delivery of the shares.

Thereafter, in March 1967, the appellant filed an application seeking rescission of both the agreement of sale dated 1956 and the decree for specific performance.

Decision of the Trial Court

The trial court examined the conduct of the respondent and found that he was not willing to pay the purchase money and take transfer of the 51% shares. The court noted that due to the injunction restraining the appellant from voting except under the respondent’s instructions, the respondent was virtually enjoying full control over Company ‘A’ despite not paying for the remaining shares.

The trial court concluded that the respondent had committed breach of the contract which he was directed to specifically perform. It also found that the respondent had created a situation making it impossible for himself to perform his obligation. On this basis, the court held that the decree for specific performance was liable to be rescinded.

However, the court adopted a conditional approach. It appointed the receiver already in possession of the shares as receiver in the present proceedings and directed the respondent to pay the consideration money to the receiver within a fortnight. It further ordered that upon such payment, the shares were to be handed over to the respondent. In default of such payment, the contract and the decree would stand rescinded and the appellant would be absolved from all obligations under them.

Decision of the Appellate Court in Hungerford Investment Trust Ltd (in voluntary liquidation) v. Haridas Mundhra & Ors.

The appellate court reversed the decision of the trial court. It held that the appellant’s application for rescission of the contract and the decree was not maintainable under either the Specific Relief Act, 1877 or the Specific Relief Act, 1963. Aggrieved by this decision, the appellant approached the Supreme Court.

Issues Considered by the Supreme Court

The Supreme Court considered several legal questions, including:

• Whether the appellant had an accrued right under Section 35 of the Specific Relief Act, 1877 to apply for rescission at the time the Act was repealed.
• Whether an application for rescission of a decree for specific performance of a contract relating to movable property was maintainable under Section 28 of the Specific Relief Act, 1963.
• Whether a court retains control over a decree for specific performance even after passing it.
• Whether failure to fix time in the decree prevented rescission.
• Whether the decree for specific performance could be executed as a money decree.
• Whether the respondent had disabled himself from performing his obligations under the decree.

Findings of the Supreme Court

The Supreme Court held that the Specific Relief Act, 1877 had been repealed by the Act of 1963 and that no accrued right had arisen in favour of the appellant under Section 35 of the 1877 Act at the time of repeal. A right to rescind under that provision arises only when the purchaser defaults in paying the amount within a reasonable time. Since execution of the decree was stayed until 1965, no such default had occurred before repeal.

The Court further held that Section 28 of the Specific Relief Act, 1963 applies only to contracts for sale or lease of immovable property. As the present case related to sale of shares, which are movable property, no application lay under that section.

However, the Court clarified that the Specific Relief Act, 1963 is not an exhaustive code. Under the general law relating to specific relief, a court retains control over a decree for specific performance even after passing it. If it is shown that a party has positively refused to perform its obligations, the court is competent to entertain an application and order rescission of the decree.

Time for Performance and Reasonable Time

The Court addressed the argument that since no time was fixed in the decree for payment of consideration, the decree could not be rescinded. Rejecting this contention, the Court relied on Section 46 of the Indian Contract Act, which provides that when no time is specified, performance must take place within a reasonable time.

It was held that a contract for which a decree for specific performance has been passed does not get extinguished by the decree. The obligations under the contract continue unless expressly varied. Therefore, the parties remained bound to perform within a reasonable time, and either party could make time essential by giving notice after a reasonable period.

The Court concluded that the respondent, by his letters and conduct, clearly evinced an intention not to perform his part of the contract.

Nature of Rescission

The Supreme Court clarified that when a court adjudges rescission of a contract or a decree, it is not itself creating rights. The court merely decides whether the rescission already effected by one party was justified. In this case, the appellant had already treated the contract and decree as rescinded by its letter dated 11 February 1967. The court was only called upon to pronounce on the validity of that rescission.

Other Contentions

The Court rejected the respondent’s contentions that:

• The appellant was not in a position to deliver the shares, since the receiver had custody of the shares and had been authorised by court orders to deliver them on payment.
• The appellant was obliged to execute the decree as a money decree. The Court held that a decree for specific performance cannot be executed as a money decree and must follow the procedure prescribed under the Code of Civil Procedure.

Attachments by creditors and claims of lien were also held not to excuse the respondent from his obligation to pay the purchase money.

Conclusion

The Supreme Court allowed the appeal and restored the substance of the trial court’s decision. The judgement firmly establishes that courts retain inherent control over decrees for specific performance and can order rescission when one party clearly refuses or disables itself from performing its obligation, even if no time is fixed in the decree.