M/s Rajshree Sugars and Chemicals v. M/s Axis Bank Limited (2019)

Quick Summary

This case tests whether a currency-derivative deal under an ISDA Master Agreement is a valid hedge or an illegal wager. The Court treated the deal as part of normal banking activity. Because it served a real risk-management purpose, it was not betting, not against public policy, and fell within RBI-permitted practice. Questions about recovery connect to the Debt Recovery Tribunal (DRT), which is not subordinate to the High Court.

Issues

• Is the disputed derivative contract void as a wager, or valid as a hedge?
• Do civil courts have jurisdiction when the dispute overlaps with bank recovery, or should it move to the DRT?
• Can the High Court restrain proceedings before the DRT?

Rules

• A derivative exposure can amount to a “debt” for banking law purposes; banks may transact derivatives as part of ordinary business.
• Civil suits can lie despite banking recovery frameworks, but where disputes are intertwined with recovery, the DRT is the proper forum.
• The DRT is not subordinate to the High Court; hence HC cannot stay DRT proceedings.
• A wagering agreement needs four elements: opposite views on an uncertain future event; one wins/one loses; no real interest in the event; and no intention to create legal relations.
• What law expressly permits cannot be treated as against public policy.

Arguments

Judgment

• The derivative transaction was not a wager. It hedged currency risk and served a real commercial purpose.
• Such contracts fall within banking business and are recognized by law; therefore, not against public policy.
• Civil suit is not automatically barred, but disputes linked with bank recovery should be addressed by the DRT.
• The DRT is not subordinate to the High Court; the High Court cannot stay DRT proceedings.

Ratio

Where a derivative deal is entered to manage genuine currency exposure under permitted frameworks, it is a valid commercial contract, not a wager. Statutorily allowed activities cannot be labeled as contrary to public policy.

Why It Matters

• Gives comfort to corporates using ISDA for hedging forex risks.
• Separates hedging from gambling through the wagering test.
• Clarifies that DRT is the forum when disputes overlap with recovery.

Key Takeaways

Mnemonic + 3-Step Hook

Mnemonic: “HEDG-E R-U-L-E”

• Hedge purpose, not bet
• Exposure real
• DRT for recovery disputes
• Governed by permitted rules
• Express permission ≠ public policy breach

3-Step Hook:

1. Ask: “Hedge or bet?”
2. Check: underlying exposure + RBI/ISDA framework
3. Route: civil court or DRT, depending on recovery link

IRAC Outline

Glossary

ISDA Master Agreement

Global standard contract for derivatives between a bank and a counterparty.

Wagering Agreement

A bet on an uncertain event where parties have no real interest and intend no legal relations.

DRT

Debt Recovery Tribunal—forum for speedy bank debt recovery cases.

Hedging

Protecting against financial risk (here, currency movements) using permitted instruments.

FAQs

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