IN THE SUPREME COURT OF INDIA

(Civil Appellate Jurisdiction)

Civil Appeal No. 959 of 2020

Bluebird Ltd

…Appellant

versus

Mehul Khurana

Diya Gole

Ravi Khurana

Megaloprepis Europe Ltd

…Respondents

1. Mehul Khurana was, for many years, a force to be reckoned with in India’s business
circles. Indeed, before the events giving rise to this litigation, it was not uncommon to
encounter (sometimes rather hagiographic) commentary in the media that painted his
success as an example of India’s own success following economic liberalisation in
1991.

2. Mr Khurana had begun his career in the early 1960s as an assistant jeweller in one of
India’s jewellery houses. Undeterred by this modest position, he was from the outset
eyeing opportunities to start a business of his own. This he did only a few years later,
when he established a company now known as Megaloprepis India Pvt Ltd.

3. Initially, MIPL specialised in the refinement and sale of high-end jewellery and
provided associated services. By the late 1970s, MIPL had expanded its reach into
luxury products more generally and soon came to be the leader in what was then a
niche market in India for such products. It was generally regarded as the first (and often
only) port of call for any discerning buyer in the Indian market who wished to acquire
rare paintings, vintage cars, high-end jewellery or classic watches.
4. MIPL’s operations, however, were very much local and it did not, until the mid-1990s,
have a footprint in any other country, with the exception of a small branch in the United
Arab Emirates, catering largely to the expatriate Indian community based there.

5. Following the liberalisation of India’s economy in 1991, Mr Khurana decided that the
time was right to make Megaloprepis not merely an Indian but a global brand. He
focused his energies on the United States, the United Kingdom and Europe, on the basis
that the number of HNWs or UNHWs in these markets was especially high. Initially,
MIPL entered into franchise or other collaboration agreements with leading jewellers or
luxury companies in these markets. This generally involved MIPL selling its products
to those companies, which would in turn sell them but under MIPL’s brand, thereby
ensuring that Megaloprepis achieved a degree of brand recognition in those countries.

6. This strategy proved to be a success. By the early 2000s, MIPL’s turnover had grown
very substantially, with nearly 40% of its revenue coming from the UK and Europe. Mr
Khurana felt that MIPL had now achieved sufficient brand recognition to have its own
presence in as many of these markets as possible, thereby reducing its reliance on
franchise or collaboration agreements. He was in no doubt that London should serve as
MIPL’s base, both because the UK was probably the most important foreign market
and because it was easier to do business in Europe with a base in one of its Member
States (which, at the time, the UK was). Accordingly, in 2007, a company called
Megaloprepis Europe Ltd (‘MEL’) was incorporated in the UK with its registered
office in Hatton Garden in London.

7. All of MEL’s shares were at the time registered in the name of Citco Services Ltd, a
private trust company incorporated in the Cayman Islands. Citco held those shares on
trust for Mr Khurana and two of his children, Diya Gole (née Khurana) and Ravi
Khurana, who had joined the family business many years before the UK company was
established. The articles of association provided that the company would have no more
than three directors. Mr Khurana, Ravi Khurana and Ms Gole were appointed as the
first directors of MEL and have served as its directors ever since, until the events
described below. All of them have, at all material times, resided in Mumbai and none of
them has property or any other significant assets in the UK.

2
8. Establishing itself in the European market proved to be more difficult for MEL than the
Khuranas had anticipated, mainly because MEL had to contend with well-established
competitors (some of whom were global brands), which was not a challenge it faced in
its Indian operations. As a result, it was in some financial difficulty in 2015. This made
it necessary to decide whether to abandon the UK business or invest a very significant
additional sum as capital to allow the business to compete more effectively in these
markets.

9. The Khuranas were unwilling to abandon the business, not least because it had
generated favourable press coverage in India for Mehul Khurana. Equally, they did not
wish to put more of their own money at risk or sacrifice control over the company.
They decided therefore to explore the possibility of obtaining ‘venture debt’ of about
£200 million, which would be used for introducing new product lines and revamping
the business in other ways to help it compete. MEL instructed well-known consultant
firms and banks to assist in obtaining such funding.

10. Since it was well-known in the industry that MEL was in difficulties, obtaining funding
would be far from straightforward. Due in no small part to the contacts and efforts of its
advisors, MEL’s proposal nonetheless attracted interest from a relatively new fund,
Bluebird Ltd, which specialised in funding higher risk projects than its competitors,
calculating that while the potential for losses was greater, so too was the potential for
profit. Given this business model, it had an especially rigorous assessment procedure
before investing in a company, whether in the form of equity or debt. One of the most
important factors it took into account was the skill, competence and probity of senior
management, since that is in the long run generally more important than the strength of
the brand or the state of the market at any given time. Where it funded a company
through debt rather than equity, it charged a significantly higher interest rate than
competitors, but this was nonetheless attractive to its customers because it did not
usually require personal guarantees or other security from the promoters of the
company.

11. Numerous meetings were arranged between Bluebird’s representatives and the
Khuranas. At these meetings, all three directors of MEL made a number of
representations about the state of MEL’s finances and its business. Following further
discussion and due diligence, Bluebird agreed to invest in MEL. Bluebird and MEL

3
 entered into a Facility Agreement dated 14 October 2016, which provided that Bluebird
would lend £200 million to be used for certain specified corporate purposes. The
Facility Agreement contained numerous provisions to protect Bluebird’s interest, such
as a floating charge over Bluebird’s assets, restrictions on the amount of dividends
payable to the shareholders and the right of a Bluebird representative to attend board
meetings. It also provided that all disputes arising out of or in connection with the
Facility Agreement would be subject to the exclusive jurisdiction of the English courts.
Bluebird was also allotted a 6% shareholding in MEL.

12. Over 2017 and 2018, MEL’s business rapidly deteriorated. This was a cause of real
concern for Bluebird, as its investment was at risk. Although there were differences of
opinion with the directors, Bluebird did not at this stage have reason to criticise the key
decisions that management had made over the past two years. Further, as at 5 April
2018, MEL had net assets of approximately £150 million, which gave Bluebird some
comfort that it had a measure of protection should MEL not be able to turn things
around.

13. However, on 19 July 2018, Bluebird’s CFO was told confidentially by a former MEL
employee (who had been fired following a disagreement with Ravi Khurana) that MEL
was in fact on the verge of insolvency, that some of its assets had been misappropriated
by the Khurana family with a view to putting them beyond the reach of creditors and
that MEL’s European business model was unsustainable. Since this employee had only
recently been sacked by MEL, Bluebird was initially sceptical, but it caused careful
enquiries to be made to ascertain whether there was anything in these allegations.

14. Bluebird’s investigation (conducted under the cover of asking for documents for
reviewing MEL’s eligibility for further funding) revealed that a number of these
allegations were substantially true. Bluebird immediately invoked an acceleration
clause under the Facility Agreement (clause 14.2), which required the entire amount
outstanding to be repaid immediately. MEL contended in correspondence that Bluebird
was not entitled, as a matter of construction, to invoke clause 14.2 in these
circumstances and that the entire amount outstanding was not therefore payable.

15. In August 2018, Bluebird commenced proceedings in the Commercial Court in London,
seeking the entire amount due under the Facility Agreement, on the ground that this

4
 sum had become payable pursuant to clause 14.2. Although the claim form was validly
served on MEL, it did not enter appearance. On 28 November 2018, Bluebird issued an
application for summary judgment pursuant to CPR Part 24. This application was duly
served and MEL was also informally notified of it, and of the hearing date; but MEL
chose again not to participate in the proceedings. Following a hearing on 11 January
2019, Clayton J granted Bluebird’s application and entered judgment for Bluebird in
the sum of £196,754,000, which was the sum outstanding under the Facility
Agreement. MEL did not seek permission to appeal that judgment.

16. It emerged soon after Clayton J’s judgment had been handed down that MEL did not
have any real assets. This came as a surprise to Bluebird because MEL had assets of
some £150 million in April 2018. Pursuant to its rights under the Facility Agreement, it
required MEL to provide information about all recent asset transfers or significant
transactions. This statement disclosed that, between May 2018 and January 2019, MEL
had made a number of very significant payments to Citco, Mehul and Ravi Khurana
and Diya Gole. Some of the payments to Citco were described as dividends and the
payments to the individuals as loans or fees for consultancy services. By January 2019,
MEL’s sole asset was a balance of some £35,000 in its UK bank account.

17. The consequence of this was that MEL had in effect rendered itself judgment proof. On
14 March 2019, Bluebird presented a winding-up petition in the Chancery Division in
London seeking the compulsory winding-up of MEL on the ground that it was unable
to pay its debts. But it became apparent to Bluebird that the only practical means of
enforcing its judgment was to bring proceedings against the directors of MEL, rather
than MEL itself, and to do so in India, since none of them had any significant assets in
the UK.

18. Bluebird accordingly commenced a civil suit in the Bombay High Court against Mehul
and Ravi Khurana and Diya Gole. MEL was also named as a pro forma defendant.
Bluebird made two claims. The first was a claim against the three individuals for
damages for the torts of: (i) causing loss by unlawful means; (ii) unlawful means
conspiracy; and (iii) inducing the breach by MEL of its obligations to Bluebird under
the Facility Agreement and/or Clayton J’s judgment. Bluebird’s case was that the three
individuals had committed these torts by stripping MEL of its assets, in the knowledge
that judgment may be given against it in the Commercial Court proceedings, and with a

5
 view to putting those assets beyond Bluebird’s reach should it prevail in those
proceedings, as in the event it did. The second claim was a derivative action, for which
the Court’s permission was sought, to assert MEL’s claim against the three directors for
breach of their fiduciary duties.

19. The three individual defendants entered appearance. MEL did not. Following a lengthy
hearing, the single judge found in favour of Bluebird. In summary:

(1) As to the first claim, he made factual findings that the three directors had
systematically stripped MEL of its assets for the purpose of putting them beyond
Bluebird’s reach. He held that all of the torts on which Bluebird relied had
thereby been committed. He rejected the defendants’ contention that Bluebird’s
claim was barred by the reflective loss rule on the ground that (a) this issue is
governed by English law, not Indian law; (b) as a matter of English law,
Bluebird’s claim does not fall within the scope of the reflective loss rule; and (c)
even if it does, the rule admits of an exception where the company’s inability to
sue is caused by the defendants’ own wrongdoing, as it was in this case.

(2) As to the second claim, he held that Bluebird, in its capacity as a minority
shareholder of MEL, has standing to bring a derivative action; that the Bombay
High Court had jurisdiction to entertain it; that the permission of the Court to
bring such a claim is required under the Letters Patent of the Bombay High Court
and/or the Indian Code of Civil Procedure 1908 and should be granted in this
case.

20. Both claims therefore succeeded. The single judge held, however, that the individual
defendants could not be ordered to compensate both Bluebird and the company and that
judgment should therefore be entered in Bluebird’s favour in relation to the tort claim
only.

21. The individual defendants appealed to the Division Bench of the Bombay High Court.
The Division Bench concluded that the single judge had erred in principle and allowed
the appeal. It held, in summary that:

(1) The issue of whether Bluebird’s claim against the individual defendants is barred
by the reflective loss rule is governed by Indian law, not by English law.

6
 (2) As a matter of Indian law, the claim falls within the reflective loss rule and is
barred by it. There is no relevant exception to that rule which Bluebird can
invoke.

(3) The Bombay High Court does not have jurisdiction to entertain the derivative
action; alternatively, it is not the forum conveniens to do so and in any event
permission to pursue the claim, which is required, should be refused.

22. The Division Bench therefore dismissed all of Bluebird’s claims.

23. Bluebird filed a special leave petition before the Supreme Court of India seeking to
challenge the Division Bench’s order. The Supreme Court granted leave. At the
admission hearing, it indicated to counsel that it wishes to hear argument on the
following issues at the final hearing:

(1) What is the law governing the issue of whether Bluebird’s tort claim against the
individual defendants is barred by the reflective loss rule?

(2) Applying that law:

(a) Does Bluebird’s claim fall within the scope of the reflective loss rule (if
any)?

(b) If so, is there any exception to that rule which would allow Bluebird
nonetheless to pursue the claim?

(3) Was the Division Bench correct to reverse the single judge’s conclusion that
Bluebird’s derivative action should succeed?

(4) If both the tort claim against the individual defendants and the derivative claim on
behalf of the company would in principle succeed, should judgment be entered
against the defendants in both claims? If not, what is the correct order to make?

24. In view of the importance of the issues of law that arise, the Chief Justice of India has
directed that Bluebird’s appeal be listed for final hearing before a bench comprising
seven judges.