Companies Act Case Law Canbank Financial Services Ltd.Vs The Custodian & Others

CASE NO.:
Appeal (civil) 164 of 1994

PETITIONER:
Canbank Financial Services Ltd.

RESPONDENT:
The Custodian & Others

DATE OF JUDGMENT: 03/09/2004

BENCH:
N. Santosh Hegde,S.B. Sinha & A.K. Mathur

JUDGMENT:
J U D G M E N T
With C.A. No. 165 of 1994

S.B. SINHA, J:

BACKGROUND FACTS:

Andhra Bank (Respondent No. 3) is a nationalized bank. Andhra
Bank Financial Services Limited (Respondent No. 4) is a company wholly
owned by Andhra Bank. Canbank Mutual Fund (CBMF) is a subsidiary
company of Canara Bank, another nationalized bank. The Appellant herein
is also a subsidiary of Canara Bank. In or about 1989, Canbank Mutual
Fund floated an open ended investment scheme known as CANCIGO on an
assured return of 12.5% p.a. payable half yearly; the lock in period wherefor
was one year. A stipulation was also made to the effect that transfers are not
permitted. Hiten P. Dalal (Respondent No. 2) was a registered stock broker.
Respondent No. 3 at his request applied for CANCIGO units of face value of
Rs. 11 crores. Similarly, Respondent No. 4 also at the request of
Respondent No. 2 applied for CANCIGO units of face value of Rs. 22
crores. Indisputably, the payment of application money for purchase of said
CANCIGO units was to be made, out of the monies lying in the bank
account of Respondent No. 2. The Respondent Nos. 3 and 4 complied with
said request of Respondent No.2. The CANCIGO certificates received by
the Respondent Nos. 3 and 4 were handed over to the Respondent No. 2.
The interest accruing from the CANCIGO received by the Respondent Nos.
3 and 4 was also credited to the account of Respondent No. 2. The said
Respondents did not claim any right, title or interest therein. There had been
diverse dealings by and between the Appellant herein and the said
Respondent No. 2 in respect of the purchase and sale of shares and securities
of various companies. A sum of Rs. 25,01,67,129/- was due and payable by
the Respondent No. 2 to the Appellant herein in respect of the said
transactions as on 6th February, 1992. Respondent No. 2 offered the
aforementioned CANCIGOs to the Appellant herein as a beneficiary thereof.
The said offer of the Respondent No. 2 was accepted in discharge of his
aforementioned liabilities to the Appellant. The Appellant on 6th February,
1992 paid the balance amount of consideration of the said CANCIGOs, viz.,
a sum of Rs. 7,98,32,871/- by a cheque dated 11th February, 1992 drawn in
favour of the Respondent no.3 but the same was to be credited in the account
of Respondent No. 2.

In or about May, 1992 serious irregularities in security transactions
were discovered whereupon the Reserve Bank of India constituted a
Committee known as ‘Jankiraman Committee’ to look into the real nature of
the transactions and to ascertain the true facts. Investment in CANCIGO by
Respondent No. 3 found place in the report of the said Committee wherein it
was contended that it had made an application dated 28th August, 1991 for
investment in CANCIGOs on behalf of Respondent No. 2 for 11 crores.
Pending investigation, the Appellant was advised not to part with the two
sets of CANCIGO certificates without the consent of the Reserve Bank of
India.

The President of India promulgated an ordinance known as “The
Special Courts (Trial of Offences Relating to Transactions in Securities)
Ordinance, 1992”. It was repealed and replaced by ‘The Special Courts
(Trial of Offences Relating to Transactions in Securities) Act, 1992 (“the
Act”), the Statement of Objects and Reasons wherefor are as under:-

“(1) In the course of the investigations by the
Reserve Bank of India, large scale irregularities
and malpractices were noticed in transactions in
both the Government and other securities, indulged
in by some brokers in collusion with the
employees of various banks and financial
institutions. The said irregularities and
malpractices led to the diversion of funds from
banks and financial institutions to the individual
accounts of certain brokers.

(2) To deal with the situation and in
particular to ensure speedy recovery of the huge
amount involved, to punish the guilty and restore
confidence in and maintain the basic integrity and
credibility of the banks and financial institutions
the Special Court (Trial of Offences Relating to
Transactions in Securities) Ordinance, 1992, was
promulgated on the 6th June, 1992. The Ordinance
provides for the establishment of a Special Court
with a sitting Judge of a High Court for speedy
trial of offences relating to transactions in
securities and disposal of properties attached. It
also provides for appointment of one or more
custodians for attaching the property of the
offenders with a view to prevent diversion of such
properties by the offenders.”
On or about 6th June, 1992 the Respondent No. 2 was declared to be a
‘notified person’ under the Act.

In terms of the provisions of the Act, a Special Court was established.
The Special Court was conferred with exclusive jurisdiction in relation to the
matters specified therein as also trial of offences arising thereunder.

CLAIM OF THE PARTIES BEFORE THE SPECIAL COURT:
Both the Custodian and the Appellant filed applications before the
Special Court which were registered as Misc. Application Nos. 13 of 1993
and 55 of 1993 respectively.

In its application, the Appellant prayed for the following reliefs:

“(a) that it be declared by this Hon’ble Court that:
(i) that the property/ debt in the CANCIGO
covered under the two certificates issued
by Canbank Mutual Fund are the
property of the petitioners;
(ii) that the CANCIGOs covered under the
said two certificates are not within the
purview of the Notification dated 6th June
1992 notifying Respondent No. 2 issued
by Respondent No. 1 under sub-section
(2) of Section 3 of the said Act.
(iii) In the alternative to prayer (ii) above, the
Respondent No. 1 subject to the
directions of this Hon’ble Court is
entitled to deal with, dispose of and
encash the CANCIGOs under the said
two Certificates, pay the same to the
Petitioners and permit the Petitioners to
appropriate and/ or adjust the net
realization thereof in or towards the
satisfaction of Petitioners dues from the
Responent No. 1;

(b) Without prejudice to prayer (a) above
and in the alternative, in the event of this
Hon’ble Court coming to the conclusion
that CANCIGOs under the said two
certificates are not the property of the
Petitioners and/ or the Petitioners are not
entitled to encash them, the Respondent
No. 1 and/ or Respondent No. 2 be
ordered and directed to pay to the
Petitioners a sum of Rs. 40,83,32,054/-
as per particulars more particularly
described in Exhibit “F” hereto with
further interest at the rate of 24% per
annum on the principal amount of Rs. 33
crores from the date hereof till payment
and/ or realization;
(c) that pending the hearing and final
disposal of the petition, the Respondent
be directed not to deal with, dispose of
and/ or encash the CANCIGOs covered
under the said two Certificates.”
However, the Custodian, in its application, prayed for the following
reliefs:

“(a) that Canfina or any other Respondent who
may be in possession of the said CANCIGOS
worth Rs. 33 crores be ordered and directed by this
Hon’ble Court to handover to the Applicant the
said CANCIGOS together with any accrued
interest thereon.

(b) that the CMF be ordered and directed by this
Hon’ble Court to handover to the Applicant the
accrued interest of Rs. 2,06,43,836/- and all future
sums of interest that may accrue on the said
CANCIGOS worth Rs. 33 crores.

(c) that pending the hearing and final disposal
of his application CMF be ordered and directed by
this Hon’ble Court to handover to the Applicant
the said accrued interest of Rs. 2,06,43,836/- and
all further sums of interest that may accrue on the
said CANCIGOS worth Rs. 33 crores.

(d) that pending the hearing and final disposal
of this application the Respondents be directed to
file an affidavit showing how the transactions
relating to the said CANCIGOS are reflected in
their respective books/ accounts.”

The Respondent Nos. 2, 3 and 4 did not claim any interest in the said
CANCIGOS before the Special Court.

By reason of the impugned judgment, the Special Court allowed the
application filed by the Custodian and rejected that of the Appellant herein.
Hence these appeals.

JUDGMENT:
Before the learned Special Judge a contention was raised by the
Respondent No.1 to the effect that as the CANCIGOS were allotted in the
names of the Respondent Nos. 3 and 4, Respondent No.2 did not have any
interest therein. A further contention was, however, raised that as the
Respondent No. 2 was the real owner thereof, he in view of the said
restriction on transfer could not have transferred any interest whatsoever
(whether limited or absolute) in favour of the Appellant.

The learned Special Judge noticed that although in its application the
Appellant had made out a case to the effect that the CANCIGOs worth 33
crores were held by them by way of security but a different stand was taken
before it that they are the absolute owners thereof. It was held that the
Appellant having claimed that possession of CANCIGOs were delivered by
the Respondent No. 2 as security, they were not and could not have become
owners thereof as the Respondent No. 2 had no beneficial interest therein,
having regard to the fact that such interest was not admitted by the
Custodian and in that view of the matter the question of passing any right,
title or interest, legal or beneficial, in the CANCIGOS in favour of the
Appellant by the said Respondent would not arise. Relying on a decision of
this Court in V.B. Rangaraj Vs. V.B. Gopalakrishnan & Ors. [AIR 1992 SC
453: (1992) 1 SCC 160], the learned Judge opined that the said decision is
an authority for the proposition that any transfer contrary to the Articles of
Association or terms of issue would not be valid. The learned Judge held
that having regard to the fact that the transaction was illegal, the right, title
and interest of CANCIGOs remained with Respondent No. 2 and, thus,
stood attached in terms of Section 3 of the Act, observing:

“Under Section 3 of the Special Court Act, any
property, movable or immovable, or both,
belonging to any person notified stands attached.
Therefore there is a statutory attachment of “any
property belonging to the person notified”. The
definition “any property belonging to the person
notified” must necessarily include property in
which a person notified has a beneficial interest.
By virtue of Section 13 of the Special Courts Act,
the provisions of the Special Courts Act prevail
notwithstanding anything to the contrary in any
other law or contract. Therefore, the Custodian is
making a claim under a statutory provision which
allows him to do so. That statutory provision
creates no right in favour of third parties, including
the 5th Respondent. Therefore, merely because the
Custodian claims on the footing of the 1st
Respondent is the beneficial owner does not ipso
facto give a right to the 5th Respondent to claim
that the beneficial interest in these CANCIGO’S is
transferable.”

Analysing the provisions of Section 4(2) of the Benami Transactions
Act and Section 13 of the Act, the learned Judge opined:

“Therefore, so far as the Custodian is concerned,
he can make a claim to any property even though
the same is held benami in some other person. The
same can’t be done by the 5th Respondent. The
provisions of the Benami Transactions Act would
squarely apply to the 5th Respondent. It is the 5th
Respondent who can’t make a claim or bring an
action to enforce any right in respect of the
CANCIGO’s either against 1st or 2nd or 3rd
Respondent or the Custodian. Also, by virtue of
Section 4(2) of the Benami Transactions Act the
5th Respondent can’t be allowed to raise a defence
in respect of the CANCIGO’s even to the extent
of claiming a beneficial interest.”

Repelling the contentions of the Appellant as regard applicability of
Section 58 of the Trusts Act, it was held that the expressions “any interest”
are of very wide amplitude and would, thus, include a beneficial interest.

It was further held:

“It is thus clear that Respondent No.5 could not
have purchased the CANCIGO’s nor could the
beneficial interest in the CANCIGO’s be
transferred to them. Respondent No.5 have got
thus no right, title or interest in the CANCIGO’s
and cannot be allowed to hold on to them. This is
particularly so as they have now given up their
claim that these were deposited with them, as and
by way of security. The claim, if any, of
Respondent No.5, against the 1st Respondent, is a
mere money claim. The CANCIGO’s remain the
property of Respondent No.1 and stand attached.
They must be handed over by Respondent No.5 to
the Custodian. It must be mentioned that, even if
the 5th Respondent had claimed that the
CANCIGO’s were deposited with them as security
for repayment of debts due by the 1st Respondent,
the terms of issue would still have prevented any
interest being created in their favour.

It was directed:

“Under these circumstances, Application No.55
of 1993 is made absolute in terms of prayers (a).
Clarified that it is the 5th Respondent who must
hand over the concerned CANCIGO’S to the
Custodian. Application No.55 of 1993 is also
made absolute in terms of prayer (b). Prayer (a)
of Application No. 13 of 1993 stands rejected.
So far as prayer (b) of Application No. 13 of
1993 is concerned, the claim of 5th Respondent
being a money claim, the same will have to be
taken up at time of distribution of assets. As set
out in Judgment dated 22nd July, 1993 in Misc.
Application No. 96 of 1993, the distribution
would have to be in the manner laid down under
Section 11 of the Special Courts Act. Therefore
so far as prayer (b) is concerned, this Petition is
adjourned sine die. Office is directed to put this
Petition on board when the Court is considering
distribution of assets of Respondent No.1.”
SUBMISSIONS:
Mr. Rohit Kapadia, learned senior counsel appearing on behalf of the
Appellant would submit that in the facts and circumstances of this case,
Respondent No. 2 having transferred the CANCIGO units in favour of the
Appellant, he had no interest therein warranting attachment under the Act. It
was urged that the rights of the Custodian are the same as that of the notified
person. The learned counsel would contend that as Respondent Nos. 3 and 4
claimed no right, title or interest of any nature whatsoever in the
CANCIGOs despite the fact that they were registered in their names, the
Respondent No. 2 must be held to have an interest therein by reason of his
having made payment therefor and obtained possession thereof. It was
pointed out that even the custodian contended before the Special Court that
the Respondent No. 2 had a beneficial interest and in that view of the matter
the question of the Custodian’s application seeking to enforce attachment
was not maintainable.

It was argued that having regard to the provisions contained in Section
58 of the Indian Trusts Act the beneficial interest of Respondent No.2 was
transferable. The purported bar to the effect that a CANCIGO holder cannot
create ‘any interest’ therein or transfer them to a third person would not
apply to transfer of a beneficial interest keeping in view the fact that
restriction on transfer was on the Respondent Nos. 3 and 4 and not on the
beneficial owner. No interest having been created in the Respondent No. 2
by any act or deed of Respondent Nos. 3 and 4, the beneficial interest
accrued in him by way of operation of law was transferable. It was
contended that in the event it be held that the Respondent Nos. 3 and 4 could
not validly transfer any interest in favour of the Respondent No. 2, the
question of enforcing attachment would not arise as the legal title thereof
would remain vested in the Respondent Nos. 3 and 4. In any event such an
absolute restriction on transfer is void under Section 10 of the Transfer of
Property Act and, thus, cannot be acted upon.

The learned counsel would contend that findings of the Special Court
to the effect that Respondent No. 2 had an interest therein which could not
have been transferred in terms of Section 6(d) of the Transfer of Property
Act is not correct. It was urged that the question of repeal of Section 82 of
the Indian Trust Act by reason of The Benami Transactions (Prohibition)
Act, 1988 (for short ‘The Benami Transactions Act’) would be of no
consequence as the provisions of the Indian Trusts Act, 1882 are not
exhaustive. It was argued that Section 82 embodied a principle of equity
underlying creation of a “Resulting Trust” which was held to be applicable
even prior to enactment of the Indian Trusts Act. Reliance in this
connection has been placed on Mussumat Ameeronnissa Khanum and
Mussumat Parbutty Vs. Mussumat Ashrufoonnisa [(1871) 14 MooIndApp
433].

Mr. Subramonium Prasad, learned counsel appearing on behalf of the
Respondent No.1, on the other hand, would submit that no implied trust was
created by and between Respondent No. 2, on the one hand, and Respondent
Nos. 3 and 4, on the other, and in that view of the matter, no beneficial
interest could be created in favour of the Respondent No.2.

In absence of any trust, Mr. Prasad would argue, Section 58 of the
Indian Trusts Act would not apply particularly having regard to the
provisions contained in Section 7 of the Benami Transactions Act whereby
and whereunder Section 82 of the Trusts Act has been repealed and, thus, the
question of there being an implied trust between Respondent No. 2, on the
one hand, and Respondent Nos. 3 and 4 on the other, would not arise.

Having regard to the objects and reasons of the Benami Transactions
Act, Mr. Prasad would submit, the right, title and interest in the CANCIGO
remained in the Respondent Nos. 3 and 4 and furthermore having regard to
the term of issue CANCIGOs s being non-transferable, no title passed on to
the Appellant herein in relation thereto. Respondent Nos. 3 and 4, it was
contended, were bound by the conditions restricting transfer and in that view
of the matter the purported transfer in favour of the Appellant was void.

Section 4 of the Benami Transactions Act prohibits an action by the
beneficiary for recovery of the property and, in that view of the matter, the
Appellant herein could not have filed an application for the Custodian
claiming an interest therein. But the said provision would not apply in the
case of the Custodian having regard to the fact that he had a duty to attach
the property belonging to a notified person and further in view of the fact
that in terms of Section 13 of the said Act, the provisions thereof had an
overriding effect over any other law for the time being in force as a result
whereof the provisions of the Act would prevail over the Benami
Transactions Act. Reliance in support of the said contention has been placed
on Solidaire India Ltd. Vs. Fairgrowth Financial Services Ltd. & Ors. [2001
(2) SCALE 1].

ISSUE:
The primal issue which arises for consideration is as to whether the
Respondent No. 2 had any transferable interest in respect of the securities in
question.

RESTRICTIONS ON TRANSFER :

The relevant provisions of the CANCIGO Scheme are as under:

“12(a) Only the holder or any person specifically
authorized in this behalf by him and recognized as
such by the Trustee, shall be entitled to deal with
the Cancigos held by the holder thereof.

12(b) *** *** ***

12(c) A Cancigo-holder may dispose of or encash
Cancigos only by means of encashment slips in the
form prescribed by the Trustee.

12(d) A Cancigo holder desirous of encashing ten
or more Cancigos held by him shall apply to the
Authorised Office for the purpose in the prescribed
form. Upon such a request being found in order,
the number of Cancigos desired to be encashed
shall be paid to the holder thereof on signing a
duly stamped receipt for the amount.

13. The contract for allotment of Cancigo with
an Applicant by the Trustees shall be deemed to
have been concluded on the Acceptance Date. On
such conclusion of the contract for allotment, the
Trustees may deliver or send to the Applicant an
acknowledgement therefor. The Trustees shall
thereafter issue to the Applicant one Cancigo
credit sheet representing the Cancigo allotted to
the Applicant, or, if the Applicant so desires and
the Trustees agree, such number of certificates in
such denominations as the Applicant may specify.

Provided that in that event the Trustees may charge
such fee for issuing more than one certificate as
the Trustees may consider appropriate.

19. Except in the cases hereafter mentioned, no
Cancigo shall be transferable, nor shall any holder
thereof be entitled to create any interest therein,
whether by way of charge or otherwise, or assign
or transfer any part thereof, and the Trustee shall
not be bound to take any notice of any purported
transfer, assignment, charge, encumbrance, trust,
or any other interest sought to be created by the
holder. Accordingly the Trustee shall recognize
only the holder thereof as having any right title or
interest in the Cancigo held by such holder.

22. The Trustee shall not be required to
maintain any register of Cancigo holders.

25. The Trustee shall not be bound by any
notice or take notice of execution of any trust in
respect of any Cancigos and they shall recognize
only the Cancigo holders in whose name the same
shall have been entered as the holder or holders of
the Cancigos.”

In the Brochure for offer of CANCIGOS, the restriction on transfer of
CANCIGOS was stated in the following terms:

“Transfer of CANCIGO: Transfer of CANCIGO
holding from one person to another person is not
permitted. However, in deserving cases Trustees
may permit addition of name/s to the existing
CANCIGO holding after duly considering the
same. However, deletion of name of a CANCIGO
holder is permitted, generally, in the event of his
death and not otherwise.”
It is not in dispute that the CANCIGOS stood in the names of
Respondent No. 3 and Respondent No. 4.

Note 4 appended to CANCIGO Credit sheet states:

“Cancigo holders cannot create any interest in
Cancigos or transfer them to a third person.”

 

PROVISIONS OF THE RELEVANT STATUTES:

Indian Trusts Act:
Sections 58, 82 (as it then stood), and 88 of the Indian Trusts Act,
1882 read as under:
“58. Right to transfer beneficial interest.–The
beneficiary, if competent to contract, may transfer
his interest, but subject to the law for the time
being in force as to the circumstances and extent in
and to which he may dispose of such interest:

82. Transfer to one for consideration paid by
another.  Where property is transferred to one
person for a consideration paid or provided by
another person, and it appears that such other
person did not intend to pay or provide such
consideration for the benefit of the transferee, the
transferee must hold the property for the benefit of
the person paying or providing the consideration.

Nothing in this section shall be deemed to
affect the Code of Civil Procedure, section 317, or
Act NO.XI of 1859 (to improve the law relating to
sales of land for arrears of revenue in the Lower
Provinces under the Bengal Presidency), section
36.
88. Advantage gained by fiduciary  Where a
trustee, executor, partner, agent, director of a
company, legal advisor, or other person bound in a
fiduciary character to protect the interests of
another person, by availing himself of his
character, gains for himself any pecuniary
advantage, or where any person so bound enters
into any dealings under circumstances in which his
own interests are, or may be, adverse to those of
such other person and thereby gains for himself a
pecuniary advantage, he must hold for the benefit
of such other person the advantage so gained.”

Transfer of Property Act:
Sections 6(d) and 10 of Transfer of Property Act read as under:
“6.What may be transferred. Property of any
kind may be transferred, except as otherwise
provided by this Act or by any other law for the
time being in force, 
(a) ***
(b) ***
(c) ***
(d) An interest in property restricted in its
enjoyment to the owner personally cannot be
transferred by him.
10. Condition restraining alienation. Where
property is transferred subject to a condition or
limitation absolutely restraining the transferee or
any person claiming under him from parting with
or disposing of his interest in the property, the
condition or limitation is void, except in the case
of a lease where the condition is for the benefit of
the lessor or those claiming under him: provided
that property may be transferred to or for the
benefit of a women (not being a Hindu,
Muhammadan or Buddhist), so that she shall not
have power during her marriage to transfer or
charge the same or her beneficial interest therein.”

Sale of Goods Act:
Sections 4, 19 and 20 of Sale of Goods Act read as under:
“4. Sale and agreement to sell.(1) A contract of
sale of goods is a contract whereby the seller
transfers or agrees to transfer the property in goods
to the buyer for a price. There may be a contract of
sale between one part-owner and another.
(2) A contract of sale may be absolute or
conditional.
(3) Where under a contract of sale the property in
the goods is transferred from the seller to the
buyer, the contract is called a sale, but where the
transfer of the property in the goods is to take
place at a future time or subject to some condition
thereafter to be fulfilled, the contract is called an
agreement to sell.
19. Property passes when intended to pass(1)
Where there is a contract for the sale of specific or
ascertained goods the property in them is
transferred to the buyer at such time as the parties
to the contract intend it to be transferred.
(2) For the purpose of ascertaining the intention of
the parties regard shall be had to the terms of the
contract, the conduct of the parties and the
circumstances of the case.
(3) Unless a different intention appears, the rules
contained in Sections 20 to 24 are rules for
ascertaining the intention of the parties as to the
time at which the property in the goods is to pass
to the buyer.
20. Specific goods in a deliverable state.Where
there is an unconditional contract for the sale of
specific goods in a deliverable state, the property
in the goods passes to the buyer when the contract
is made, and it is immaterial whether the time of
payment of the price or the time of delivery of the
goods, or both, is postponed.”

BENAMI TRANSACTIONS ACT:

Sub-Section (1) of Section 3 of the Benami Act provides that no
person shall enter into any benami transaction. Sub-Section (3) of Section 3
thereof provides that whoever enters into any benami transaction shall be
punishable with imprisonment for a term which may extend to three years or
with fine or with both. Section 4 provides for a prohibition to the right to
recover property held benami either by way of claim or by way of defence.
Section 5 provides that all properties held benami shall be subject to
acquisition by such authority, in such manner and after following such
procedure, as may be prescribed.

In terms of Section 7 inter alia Section 82 of the Indian Trusts Act,
1882 stood repealed.

 
THE ACT:
Sections 2(c), 3, and 4 of Special Courts Act read as under:
“2(c) “securities” includes–
(i) shares, scrips, stocks, bonds, debentures,
debenture stock, units of the Unit Trust of India or
any other mutual fund or other marketable
securities of a like nature in or of any incorporated
company or other body corporate;
(ii) Government securities; and
(iii) rights or interests in securities;
3. Appointment and functions of Custodian.–
(1) The Central Government may appoint one or
more Custodians as it may deem fit for the
purposes of this Act.
(2) The Custodian may, on being satisfied on
information received that any person has been
involved in any offence relating to transactions in
securities after the 1st day of April, 1991 and on
and before 6th June, 1992 notify the name of such
person in the Official Gazette.
(3) Notwithstanding anything contained in the
Code and any other law for the time being in force,
on and from the date of notification under sub-
section (2), any property, movable or immovable,
or both, belonging to any person notified under
that sub-section shall stand attached
simultaneously with the issue of the notification.
(4) The property attached under sub-section (3)
shall be dealt with by the Custodian in such
manner as the Special Court may direct.
4. Contracts entered into fraudulently may be
cancelled.–
(1) If the Custodian is satisfied, after such inquiry
as he may think fit, that any contract or agreement
entered into at any time after the 1st day of April,
1991 and on and before the 6th June, 1992in
relation to any property of the person notified
under sub-section (2) of section 3 has been entered
into fraudulently or to defeat the provisions of this
Act, he may cancel such contract or agreement and
on such cancellation such property shall stand
attached under this Act;
Provided that no contract or agreement shall be
cancelled except after giving to the parties to the
contract or agreement a reasonable opportunity of
being heard.
(2) Any person aggrieved by a notification issued
under sub-section (2) of section 3 or any
cancellation made under sub-section (1) of section
4 or any other order made by the Custodian in
exercise of the powers conferred on him under
section 3 or section 4 may file a petition objecting
to the same within thirty days of the assent to the
Special Court (Trial of Offences Relating to
Transactions in Securities)Bill, 1992 by the
President before the Special Court where such
notification, cancellation or order has been issued
before the date of assent to the Special Court (Trial
of Offences Relating to Transactions in Securities)
Bill, 1992 by the President and where such
notification, cancellation or order has been issued
on or after that day, within thirty days of the
issuance of such notification, cancellation or order,
as the case may be; and the Special Court after
hearing the parties, may make such order as it
deems fit.

The Special Court exercises all jurisdiction, powers and authority as
were exercisable, immediately before such commencement by any Civil
Court in relation to a matter or claim specified therein.
CANBANK MUTUAL FUND (CANCIGO) SCHEME, 1988:

Canbank Mutual Fund framed a scheme known as CANCIGO
Scheme. The said Scheme came into force on 22nd April, 1988. The
provisions of the CANCIGO Scheme are applicable to the issue of units
called CANCIGOS by Canara Bank acting in its capacity as Trustee of the
Canbank Mutual Fund.

Condition 2(k) defines ‘Cancigo Scheme’ to mean the Cancigo
Mutual Fund (Cancigo) Scheme, 1988 under which Cancigos are issued by
the Trustee. ‘Holder’ in terms of Condition 2(r) to mean a person who has
made an application to the Trustee and to whom not less than five Cancigos
have been issued or any person or persons nominated by the Trustee in this
behalf for the purpose of participating in the Cancigo Scheme. Condition
No. 5 provides as to the person eligible to apply for the issue of Cancigos.
Condition No. 10 provides that all allotments should be at the discretion of
the Trustee.

IS THE CLOG ON TRANSFER ABSOLUTE?

The Rules and Regulations framed by the Canbank Mutual Fund in
relation to the issuance of CANCIGO certificates do not have any statutory
backing. The CANCIGOs had a lock in period of one year which means that
the holder thereof must not encash the securities within the aforementioned
period. The question as regard the non-transferability of the units will have
to be construed upon reading the scheme in its entirety and in particular the
Condition No. 22 thereof, in terms whereof the Trustees were not required
to maintain any register of CANCIGO holders. In terms of Condition No.
24, the person whose name is shown in a CANCIGO Certificate would be
the only person to be recognized by the Trustees as the holder of such
Cancigo and as having any right, title or interest in or to such securities. No
Trust created was also to be recognized.

Condition No. 19 creating a bar on transfer has to be construed in the
aforementioned context. The bar on transfer created was to have the effect
that the same would not be binding on Canbank Mutual Fund as it was not
bound to take any notice thereof and only the holder shall be recognized as
having the right, title or interest on the CANCIGO.

The expressions contained in Condition No. 19 of CANCIGO Scheme
differ in material particulars from the expressions used in the Brochure in
terms whereof transfer of CANCIGO from one person to another person is
not permitted. Permission is not a legal restriction. However, in deserving
cases Trustees may permit addition of names to the existing CANCIGO
holding after duly considering the same. Permission/Approval subsequently
granted would validate the grant. [See Graphite India Ltd. and Another vs.
Durgapur Projects Ltd. and Others  (1999) 7 SCC 645]. CANCIGOs
indisputably are valuable securities. They are otherwise capable of being
transferred in terms of the established business practice, the Sale of Goods
Act or Transfer of Property Act. No legal bar has been created in transfer of
the said securities. The scheme, thus, does not and could not have created an
absolute legal bar on transfer of the CANCIGOs so as to invalidate the same.

EFFECT OF THE BAR:

The Rules and Regulations framed by Canbank Mutual Fund and the
notes appended to the CANCIGO Credit Sheet differ in material particulars.
Rules and Regulations explain as to why an embargo in transfer has been
placed, i.e., not to recognize the Respondent No. 3 for the dividends or for
other liabilities arising out of transfer. A transfer violating the rules and
regulations would only have the effect of the same being not binding the
Canbank Mutual Fund. No other legal consequence flows therefrom. We
have also noticed that the Brochure merely states that the transfer is not
permitted but provisions exist for grant of such permission. The Appellant
Bank as well as Canbank Mutual Fund are the subsidiaries of the Canara
Bank. The Appellant cannot be estopped from raising either a limited or
absolute title in them keeping in view of the fact that they had paid a sum of
33 crores of rupees by way of consideration for transfer of interest of the
Respondent No. 2 herein in the said CANCIGOS.

EFFECT OF SECTION 10 OF TRANSFER OF PROPERTY ACT:

As would appear from the discussions made hereinafter that by reason
of the legal consequences of the relationship of the banker and the customer,
vis-`-vis, the transaction in question, a beneficial trust has been created. The
same would, thus, be transferable as otherwise it would be hit by Section 10
of the Transfer of Property Act. When there exists such a condition; in
terms of Section 10, an absolute restrain is void whereas partial restraint is
not. Section 10 would not be attracted only when the restriction as to
alienation is only partial. (See Mohammad Raza and Others Vs. Mt. Abbas
Bandi Bibi, AIR 1932 PC 158). A stipulation taking away the whole power
of alienation substantially is a question of substance and not of form.
Section 10 limits the application of such stipulation.

TRUST WHETHER CREATED:

Chapter IX of the Indian Trusts Act provides for certain obligations in
the nature of trusts. A Trust is an obligation annexed to the ownership of
property, and arising out of a confidence reposed in and accepted by the
owner or declared and accepted by him, for the benefit of another, or of
another and the owner. A trust in terms of Section 4 of the Trust Act may be
created for any lawful purpose.

When a real or personal property is purchased in the name of another,
a presumption of resulting trust arises in favour of the person who is proved
to have paid the purchase money as a result whereof a beneficial interest in
the property results to the true purchaser. Law relating to trust has not
recognized only a resulting trust but other kinds of trust as well. When an
express trust is created by reason of an agreement between the parties and
one of them being a beneficiary thereof, the same would be transferable.

A beneficial interest in the trust is created in different situations. (See,
for example, Barclays Bank Vs. Quistclose Investments [1970] AC 567)

In Barclays Bank (supra) a company which was substantially indebted
to the bank needed funds in order to pay a dividend on its shares. Quistclose
Investments advanced the necessary funds on the basis that they were only
to be used for this purpose and they were paid into a separate account at the
bank, which was made aware of the arrangement. The company went into
liquidation before the dividend had been paid. If Quistclose Investments
were no more than a creditor of the company, then the funds in the bank
would belong to the company and the bank would be entitled to set off the
credit balance of the account against the substantially greater indebtedness
of the company. If, on the other hand, the funds were held on trust for
Quistclose Investments, its proprietary interest therein would enjoy priority
over the rights of the bank. The House of Lords held that arrangements for
the payment of a person’s creditors by a third person give rise to “a
relationship of a fiduciary character or trust, in favour as a primary trust, of
the creditors, and secondarily, if the primary trust fails, of the third person”.
Once the primary purpose was fulfilled, the third person would be no more
than an unsecured creditor. However, there was “no difficulty in
recognizing the co-existence in one transaction of legal and equitable rights
and remedies”. Since the purpose for which the funds had been advanced
had failed, the funds were still held on trust for Quistclose Investments,
whose beneficial interest was binding on the bank because it had been aware
of the basis on which the funds had been transferred.”
[See Equity & Trusts, 2nd Edition by Alastair Hudson, page 307]

In that case the common intention of both the parties was that the fund
in question should be held on trust. The principle in Barclays Bank (supra)
has been applied both where part of the funds advanced had indeed been
used for the specific purpose in question, holding that the creditor was
entitled to recover whatever was left (See Re EVTR (1987) B.C.L.C. 647) as
also where the funds, although advanced for a specific purpose, were paid
not by way of loan but rather in satisfaction of a contractual debt. [See
Carreras Rothmans Ltd. V. Freeman Mathews Treasure Ltd. [(1985) Ch.
207]

In this case, the Respondent Nos. 3 and 4 acted in consonance of the
confidence reposed upon them.

Had Respondent Nos. 3 and 4 not disclosed that the applications for
allotment of CANCIGOs were for the benefit of the 2nd Respondent herein,
Section 88 of the Indian Trusts Act would have been attracted..

A transaction which falls within the purview of Section 88 of the
Indian Trusts Act does not fall within the category of benami transaction in
terms of the provisions of the Benami Transactions Act. (See P.V. Sankara
Kurup Vs. Leelavathy Nambiar, AIR 1994 SC 2694).

The list of persons specified in Section 88 of the Indian Trusts Act is
not exhaustive. The expression ‘other person bound in fiduciary character to
protect the interests of other persons’ includes a large variety of relationship.
The heart and soul of the matter is that wherever as between two persons one
is bound to protect the interests of the other and the former availing of that
relationship makes a pecuniary gain for himself, the provisions of Section 88
would be attracted, irrespective of any designation which is immaterial. The
said principle would also apply for a banker holding the customer’s money.

A fiduciary would not be liable for any action if there is no
concealment by him or no advantage taken by him.

A civilized society furthermore always provides for remedies for
cases of what was been called unjust enrichment or unjust benefit derived
from another which it is against conscience that he should keep. (See
Fibrosa Spolka v.Akcyjna Vs. Fairbairn Lawson Combe Barbour, Ltd.
(1942) 2 All ER 122)]

In Carreras Rothmans Ltd. V. Freeman Mathews Treasure Ltd.
[(1985) Ch. 207 at page 222], it is stated :

“.equity fastens on the conscience of the person
who receives from another property transferred for
a specific purpose only and not therefore for the
recipient’s own purposes, so that such person will
not be permitted to treat the property as his own or
to use it for other than the stated purpose.”
The parties to the transactions cannot enter into any benami
transaction so as to get any property transferred in their names for
consideration, i.e., paid by a third party. A presumption, thus, arises that the
parties never intended that the transaction would be a benami one. By
reason of the said transaction, a cestui qui trust was created, inasmuch as the
Respondent Nos. 3 and 4 applied for allotment of CANCIGOs on behalf of
the Respondent No. 2 and not on their own behalf. The trust was created for
a purpose, namely, the benefit arising therefrom would be appropriated by
the Respondent No. 2. The principle of cestui qui trust is a synonym of a
beneficiary. The said principle is not confined to the ingredients of Sections
82 of the Indian Trusts Act. It also covers cases falling under Section 88
thereof. Thus if it be held that the properties were acquired by the
Respondents Nos. 3 and 4 in their own names in breach of their obligations
while acting as an agent of the Respondent No. 2, the case would be covered
under Section 88 of the Indian Trusts Act. Section 88 of the Trusts Act has
not been repealed by Section 7 of the Benami Transaction Act. In such a
case the Benami Transactions Act would not operate.

A beneficial interest indisputably can be transferred. For the said
purpose, the only legal requirement will be essence of a trust. The right of a
beneficiary to transfer his interest being absolute, the transferee derived
rights, title and interest therein.

Furthermore, the legal effect of a document cannot be taken away
even if the property is chosen to conceal by a device the legal relation. [See
Commissioner of Income Tax, Hyderabad Vs. Nawab Mir Barkat Ali Khan
Bahadur, AIR 1975 SC 838 at 845].

In Hem Chandra Roy Chaudhury Vs. Suradhani Debya Chaudhurani
and Others [AIR 1940 PC 134], it is held:

“No doctrine of the law of India has been
indicated to their Lordships which prevents a
beneficiary under a trust from dealing with his
interest by way of mortgage, though it is true
enough that in India such an interest is not
technically regarded as an equitable estate.”

Furthermore, the doctrine of resulting trust was applicable in India
even before the Indian Trusts Act came into force. [See Mussumat
Ameeronnissa Khanum and Mussumat Parbutty (supra)]. We, therefore, are
of the opinion that the Respondent No.2 had a transferable interest in the
CANCIGOS.

ALLOTMENT OF CANCIGO  IS IT A TRANSFER?

The allotment of CANCIGOS is not a transfer as thereby Canbank
Mutual Fund had allowed the shares not as owner thereof. The Benami
Transactions Act applies when there is a transaction in which the property is
transferred. If allotment of CANCIGOS is not a transfer of property, the Act
would not apply. [See Sri Raj Sachdeva Vs. Board of Revenue [AIR 1959
All 595] and The Swadeshi Cotton Mills, Co., Ltd. , In re. [1932 Comp. Cas
411].

In Madura Mills Co. Ltd., In re. [1937 Comp. Cas 71], Varadachariar,
J. stated the law thus:

“As we have already observed, it is no doubt true
that in the hands of a shareholder, a share is
property and when a shareholder exchanges his
shares with another it may be possible to regard
the transaction as amounting to a transfer whether
by way of exchange or conveyance: Cf. Coats v.
Inland Revenue Commissioners (1897) 2 Q.B.
423. But when the company is for the first time
issuing shares, it seems to us that there is no
question of property already possessed by the
company being thereby transferred to the allottee.”
Even assuming that the Benami Transactions Act as also the bar on
transfer imposed by Canbank Mutual Fund (CBMF) would apply, the
properties would remain vested in Respondent Nos. 3 and 4 and Respondent
No. 2 would have no interest therein which would attract the provisions of
Sub-section (3) of Section 3 of ‘the Act’.

BENAMI TRANSACTIONS ACT – APPLICABILITY:

Benami transactions in India were generally recognized by the Courts.
But the same had not been given effect to when the transaction

(a) violates the provisions of any law; or
(b) defeats the rights of innocent transferees for value from the
banamidar without notice; or when
(c) the object of the benami transaction was to defraud the creditors of
the real owner and that object has been accomplished; or when
(d) it is against public policy.

Benami Transactions, however, used to be effected for various
purposes  to avoid taxes, to avoid ceiling laws etc. Blank transfers of
shares had also posed serious problems as dividends are paid to the
registered shareholders and not to the real shareholders as in the case of
benami holdings of shares, but despite the same the transactions have not
been declared to be invalid in law by any statute including the Benami
Transactions Act.

‘Benami Transaction’ has been defined in Section 2(a) of the Benami
Transactions Act to mean any transaction in which property is transferred to
one person for a consideration paid or provided by another person.
‘Transfer’ of property, therefore, is sine qua non for attracting the said
definition.
In a transfer involving benami transaction, three parties are involved.
The benamidar may be a party therein. In this case, the parties to the
transactions are public sector undertakings being scheduled banks and their
subsidiaries. A presumption would, thus, arise that they would not
encourage any benami transaction nor would involve themselves therein. In
a situation of this nature and, in particular, having regard to the fact that a
disclosure was made by the Respondent Nos. 3 and 4 in their applications
for allotment of CANCIGO; that the same were filed on behalf of the
Respondent No. 2 herein, the intention of the parties was not to enter into a
benami transaction.

The Benami Transaction Act is not a piece of declaratory or curative
legislation. It creates substantive rights in favour of benamidars and
destroys substantive rights of real owners who are parties to such
transactions and for whom new liabilities are created by the Act. A statute
which takes away the rights of a party must be strictly construed. [See R.
Rajagopal Reddy (dead) by L.Rs. and ors. Vs. Padmini Chandrasekharan
(dead) by L.Rs. AIR 1996 SC 238].

The evil of benami transaction was sought to be curbed by reason of
the provisions of the Urban Land (Ceiling and Regulation) Act, 1976, the
State Ceiling Laws, Income Tax Act, 1961 as amended by the Taxation
Laws (Amendment) Act, 1975 (See Sections 281 and 281A of the Income
Tax Act), Section 5 of the Gift Tax Act, 1958, Section 34 B of the Wealth
Tax Act and Section 5(1) of the Estate Duty Act (since repealed). It is only
with that view the Benami Transactions (Prohibition) Act, 1988 prohibiting
the right to recover benami transaction was enacted. Section 5(1) provided
that all properties held benami shall be subject to acquisition as different
from forfeiture provided for in the Smugglers and Foreign Exchange
Manipulators (Forfeiture of Property) Act, 1976. But even Section 5 had not
been made workable as no rules under Section 8 of the Act for acquisition of
property held benami were framed.

A nationalized bank cannot hold somebody else’s property in its
name. We do not know as to under what circumstances it applied for
allotment of CANCIGOs in its name on behalf of the Respondent No. 2.
We have also not been informed at the Bar as to whether there exists such a
practice or the same is otherwise permissible. We in these matters, however,
are not concerned with an ethical question. We are also not concerned with
the misconduct of any officer of the Bank, criminal or otherwise, in this
behalf. This Court is only concerned with the validity of the transactions.
We have noticed hereinbefore that in a case of this nature a beneficial
interest is created within the meaning of the provisions of Section 88 of the
Indian Trusts Act in view of the fact that the Respondent Nos. 3 and 4 have
applied the money of the Respondent No. 2 for allotment of CANCIGO in
their own names and applied for allotment of the certificates on behalf of the
Respondent No. 2 and not on their own behalves. It is, therefore, not a case
where the transaction was benami in nature. It does not appear also to be a
case where the parties entered into a transaction with a view to contravene
any law. It is also not a case where any amount belonging to a bank has
been utilized by a customer. The Respondent Nos. 3 and 4 have not
claimed any right, title and interest in CANCIGOS. In view of the
aforementioned circumstances, provisions of the Benami Transactions Act
would have no any application whatsoever.

ROLE OF CUSTODIAN UNDER THE ACT:

The Custodian has three main functions to perform:
(i) He has the authority to notify a person in the Official Gazette, on
being satisfied on information received that he has been involved
in any offence relating to transactions in securities during the
period 1-4-1991 to 6-6-1992.
(ii) He has the authority to cancel any contract or agreement relating to
the properties of the notified persons which, in his opinion, has
been entered into fraudulently or for the purpose of defeating the
provisions of the Act as specified in Section 4.
(iii) He is required to deal with the properties in the manner as directed
by the Special Court.

The properties of a notified person do not vest in the Custodian. He is
not a receiver within the meaning of the provisions of the Code of Civil
Procedure or an Official Receiver or an Official Assignee under the
Insolvency laws. He is also not an Official Liquidator under the Companies
Act. His right is same as that of the notified person. Only when the notified
person had a subsisting right in a property, the same being subject to
statutory attachment, the custodian can approach the special court for an
appropriate direction in relation thereto. In other words, the custodian is not
permitted to deal with any property which did not belong to the notified
person on the relevant date.

ARE THE TRANSACTIONS ILLEGAL?
The Canbank Mutual Fund having regard to the materials on records
must be presumed to have issued the CANCIGOs in the names of the
Respondent Nos. 3 and 4 with full knowledge that they would enure to the
benefit of the Respondent No. 2. The effect of grant of CANCIGOs by the
Canbank Mutual Fund despite such knowledge does not strictly fall for our
consideration but the same is relevant to determine the nature of illegality of
the transaction, if any. It is one thing to say that they could not have done
so having regard to the scheme, but it is another thing to say that the same
was illegal. The area of law concerning illegality and resulting trust has
undergone some changes in view of a recent decision of the House of Lords
in Tinsley Vs. Milligan reported in 1993 (3) All E.R.65. In the said case,
Lord Browne-Wilkinson specified the core applicable principles which are
as under:

“1. Property in chattels and land can pass under
a contract which is illegal and therefore
would have been unenforceable as a
contract.
2. A plaintiff can at law enforce property rights
so acquired provided that he does not need
to rely on the illegal contract for any
purpose other than providing the basis of his
claim to a property right.
3. It is irrelevant that the illegality of the
underlying agreement was either pleaded or
emerged in evidence: if the plaintiff has
acquired legal title under the illegal contract
that is enough.”

It was held that illegality being not the source of Milligam’s equitable
rights as her contribution to the purchase price was the source therefor. In
that case, Respondent did not have to rely on her own illegality because she
was entitled to an equitable share in the property in any event because she
had contributed to the purchase price. The principles evolved in Tinsley
(supra) apply to the fact of the present case. The said decision was followed
by this Court in B.O.I. Finance Ltd. Vs. Custodian and Others [(1997) 10
SCC 488].

The Scheme suggests that Canbank Mutual Fund intended to absolve
itself from such responsibilities.

Does by such contract the holder of a unit is debarred from
transferring a valuable security? The answer to that question must be
rendered in the negative. A transfer can be held to be invalid provided it is
forbidden in law. It is one thing to say that the founders of the Scheme
would not recognize any transfer so as to make it liable to pay dividend to a
person other than the person in whose name a unit is held but it is another
thing to say that it is not legally transferable. In this case, the Court is not
concerned with the question whether in the facts and circumstances of this
case the Appellant should have accepted the units of face value of Rs. 33
crores and adjusted a sum of Rs. 25,01,67,129/- followed by issuance of a
cheque of Rs. 7,98,32,871/-, but with the question as to whether such a
transaction was legally impermissible. The case at hand poses a peculiar
problem. Respondent Nos. 3 and 4 applied for allotment of CANCIGOs in
their name under the instructions of Respondent No. 2. Respondent Nos. 3
and 4 were not to invest their own money. The consideration paid towards
the allotment of the units was paid from the account of the Respondent No.
2. Even the dividends paid to them at the first instance were credited in the
account of the Respondent No. 2. Respondent Nos. 3 and 4 had never
claimed any right, title or interest in the said securities. Respondent No. 4 in
its affidavit dated 26th July, 1993 had categorically stated:

“I say and submit that Respondents No. 4 are
neither necessary nor proper parties to the petition
inasmuch as Respondents No. 4 have no claim
whatsoever in the subject securities.”
A similar statement had been made by Respondent No. 3. Respondent
Nos. 3 and 4 did not claim any right, title or interest as evidently the
possession of CANCIGOS were delivered in favour of the Respondent No.
2.

Even the Benami Transactions Act while prohibiting benami
transactions does not provide that by reason of such a transaction no title
whatsoever would pass or the property would vest in the State as for
acquisition of benami property recourse to Section 5 of the Act has to be
resorted to. In absence of any proceedings taken and a binding order passed
in terms of Section 5 of the Benami Transactions Act, only Section 4 of the
Act would apply.

Respondent Nos. 3 and 4 by reason of the said transaction held
themselves to be the trustees of Respondent No. 2 in relation to the securities
in question. They applied for allotment for the benefit of Respondent No. 2.
They never enforced any claim in relation to the said securities in a court of
law and, in fact, disclaimed any right, title or interest therein. Possession of
the securities which are movable properties has been handed over to them.
No statutory provision has been brought to our notice forbidding such
transfer. The Respondent Nos. 3 and 4, therefore, were not statutorily
prevented from entering into such a transaction.

In other words, the concerned parties, namely, Canbank Mutual Fund,
the Respondent Nos. 3 and 4 as well as the Respondent No. 2 became a party
to an arrangement which may be unethical but not illegal.

A contract may be unlawful or partly lawful or partly unlawful. If it is
lawful, it will be given effect to whereas in case it is wholly unlawful being
opposed to the public policy, it would not be. In case a transaction is partly
lawful and partly unlawful, if they are severable, the lawful part shall be
given effect to. [See B.O.I. Finance Ltd. (supra)].

The said decision is also an authority for the proposition that the
position of the custodian is same as that of the notified person himself. If by
any law the Respondent No. 2 was not precluded from transferring the
shares held by him, the transfer thereof in favour of the Appellants was
legal. The transaction took place on 6.2.1992, i.e., much prior to 6.6.1992
when Respondent No. 2 became a notified person. If on or after 6.2.1992,
Respondent No. 2 had no interest in the CANCIGOs, the same could not
have been the subject matter of attachment of the custody. The custodian
could attach the property only when the right, title and interest thereto
remain on the Respondent No. 2 and not otherwise.

In B.O.I. Finance Ltd. (supra) the question which fell for
consideration of this Court was as to whether ready-forward or buy-back
transactions are valid. In that case the nature of transaction was not in
dispute. The transaction consisted of two interconnected legs, namely, the
first or the ready leg, consisting of purchase or sale of certain securities at a
specified price and the second or forward leg, consisting of the sale or
purchase of the same or similar securities at a later date at a price determined
on the first date. It was held that the first leg of the transaction was not
illegal whereas the second leg of the transaction was contrary to the
provisions of the Securities Contracts (Regulation) Act, 1956. In the said
decision, non-compliance of the direction issued by the Reserve Bank also
came up for consideration and this Court in no uncertain terms held that
whereas non-compliance thereof may result in prosecution but would not
result in invalidation of any contract entered into by the bank with a third
party.

It was opined :
“60. In the present case the appellants are basing
their claim by relying not on the terms of the
ready-forward contract, but on the payment of
market price against delivery of the securities. The
claim to title is independent of the ready-forward
agreement.
61. There can be little doubt that the appellants,
when they paid the market price and took delivery
of the securities had become owners of the same.
According to Section 5 of the Transfer of Property
Act, 1882, “transfer of property” inter alia means
an act by which a person conveys property to
another person. Section 6 of this Act deals with
what property may be transferred. What is relevant
in Section 6(h) according to which no transfer can
be made (1) insofar as it is opposed to the nature of
the interest affected thereby, or (2) for an unlawful
object, or consideration within the meaning of
Section 23 of the Indian Contract Act, or (3) to a
person legally disqualified to be transferee.
According to Section 23 of the Contract Act the
consideration or object of an agreement will be
unlawful if it is forbidden by law; or is of such a
nature that, if permitted, it would defeat the
provisions of any law, or is fraudulent, or involves
or implies injury to the person or property of
another, or the court regards it as immoral or
opposed to public policy, In the instant case the
object of the contracts entered into between the
banks and the notified parties was for the transfer
and, subsequently, re-transfer of the securities. The
transfer took place on delivery of securities on
payment of market price as consideration. The
consideration for the transfer of the securities, in
the ready leg, was the payment of market price.
62. The validity of the transfer of the securities has
to depend on the provisions of the Transfer of
Property Act and the Sale of Goods Act relating to
transfer and not to the validity of the agreement
preceding the transfer. Like any other moveable
goods the securities could validly be purchased on
delivery against payment of price as per Sections
4, 19 and 20 of the Sale of Goods Act. The price
paid, while taking delivery, was the consideration
for the transfer of the securities. When the transfer
of title has taken place the agreement between the
parties preceding this cannot invalidate the
transfer”

This decision applies in all fours to the fact of the present case.

Right, title and interest in a movable property can pass by delivery of
possession and upon paying of the considerations in view of the provisions
of the Sale of Goods Act. Passing up of a title in favour of the transferee
would not be illegal, unless it is forbidden by law. For the said purpose, the
transaction must attract the wrath of Section 23 of the Indian Contract Act
and not otherwise. Section 3 of the Act does not contemplate extinction of
right of a third party. For getting the transaction invalidated in law, only
Section 4 of the Act can be taken recourse to.

The constitutional validity of the Act came up for consideration before
this Court in Harshad Shantilal Mehta Vs. Custodian and Others [(1998) 5
SCC 1]. The vires of the said statute was upheld, inter alia, on the ground
that by reason thereof the right, title and interest in a property belonging to
Respondent No. 3 is not affected. The interest of the Appellant, thus, was
not affected by the said Act or by the Benami Transactions Act. Extinction
in right, title and interest in a property must be caused as a result of
operation of law and not otherwise. Creation of title by an act of parties is
subject to law. Once a title vests in a person he cannot be divested
therefrom except by reason of or in accordance with a statute and not
otherwise. An admission does not create a title; the logical corollary
whereof would be that an admission of a party would not lead to
relinquishment of his right therein, if he has otherwise acquired a title in the
property.

Title in a property connotes a bundle of rights. Subject to prohibitory
or regulatory statute, such rights are capable of being transferred. Apart
from the provisions of Benami Transactions Act, no other provision
operating in the field which would negate the claim of the Appellant was
pointed out. As discussed hereinbefore, the Benami Transactions Act will
have no application in the instant case.

It is also not a case where a transfer has been made by a company
beyond its articles. Appellant has not acted ultra vires its articles.
Furthermore, it is one thing to say that a transfer is made contrary to Articles
but it would not be correct to contend that the same was prohibited by terms
of issue.

ATTACHMENT :

Attachment under sub-Section (3) of Section 3 of the Act is subject to
an encumbrance, if any. Even if a limited right is transferred by a notified
person to a third party, the order of attachment, if any, must be subject to the
said right of the third party. In other words, under all circumstances, the
right of a third party must be recognized. It is now well-settled, in view of
the decision of this Court in C.B. Gautam vs. Union of India & Others
[(1993) 1 SCC 78], that even where a statute providres for compulsory
purchase, the property will not vest in the Government free from all
encumbrances but would vest subject to the encumbrances.

In C.B. Gautam (supra), this Court held:

“36Reading down is not permissible in such a
manner as would fly in the face of the express
terms of the statutory provisions. In view of the
express provision in Section 269-UE that the
property purchased would vest in the Central
Government “free from all encumbrances”
(emphasis supplied) it is not possible to read down
the section as submitted by learned Attorney
General. In the result the expression “free from all
encumbrances” in sub-section (1) of Section 269-
UE is struck down and sub-section (1) of Section
269-UE must be read without the expression “free
from all encumbrances” with the result the
property in question would vest in the Central
Government subject to such encumbrances and
leasehold interests as are subsisting thereon except
for such of them as are agreed to be discharged by
the vendor before the sale is completed”

In V.B. Rangaraj (supra), whereupon reliance has been placed by the
learned counsel for the Respondents, transfer was contrary to the Articles of
the Company. This Court therein had no occasion to consider the effect of a
transaction which is contrary to the terms of issue. The said Act provides for
certain statutory consequences which must be kept within the four corners
thereof. The Learned Special Judge, therefore, erred in asking unto itself a
wrong question that the statutory provisions create no right in the third party
including the Appellant herein. The question which should have been posed
was : Had any right, title or interest of Respondent No. 2 existed on the
notified date in the said CANCIGOS authorizing the Custodian to act in
terms of Section 3? The answer to that question must be rendered in the
negative. It is no doubt true that Section 13 of the said Act provides for a
non-obstante clause but before the said clause is resorted to, it must be
shown that there exists a provision inconsistent with the provision in any
other Act. In any event, if Respondent Nos. 3 and 4 could transfer or
relinquish its right in favour of Respondent No. 2 who in turn could transfer
the same to the Appellant, provisions of the said Act would not entitle the
custodian to claim a property which ceased to be the property of the
Respondent No. 2. Here again, the learned Special Judge committed an
error in holding that by reason of Section 4(2) of the Benami Transactions
Act, the Appellant is forbidden from raising a defence in respect of the
CANCIGOs although such a bar would not apply in the case of the
Custodian.

The Appellant, in our opinion, had also the requisite locus to maintain
its application before the Special Court with a view to show that it having an
interest in the CANCIGOs, the same is beyond the purview of purported
automatic attachment under Section 3(3) of the Act and consequently neither
the custodian derived any right to deal therewith nor the special court could
issue any direction in relation thereto. In any event having regard to the
provision contained in Section 9A of the Act, all claims relating to the
properties which are claimed to have been statutorily attached must be
adjudicated by the Special Court only. The claim petition of the Appellant
was, thus, maintainable.

In V.B. Rangaraj (supra), this Court held that shares being movable
property, a shareholder has a free right to transfer his shares. Such right can
only be taken away by Articles of Association and not otherwise.

The stand of the custodian, in this behalf, is inconsistent and self-
contradictory. If by reason of the embargo placed on transfer of any
CANCIGO, the right remains vested in the Respondent Nos. 3 and 4, the
question of the same being subject to attachment would not arise. However,
if, according to the custodian, right, title and interest in the CANCIGOS
vested in the Respondent No. 2, he being a third party can transfer his
interest, as he was not bound by the rules for allotment. On the one hand, it
is contended that the Respondent Nos. 3 and 4 were bound by the conditions
imposed by Canbank Mutual Fund and on the other a contention was raised
that they were benamidars. Both cannot stand together. Similarly, a
contention has been raised that the condition contained in Note No. 4 of the
Credit Sheet is an absolute restraint on alienation, but at the same time it is
contended that even the third party cannot transfer his interest (if he has any)
in favour of another although a transfer can be given effect to after the
expiry of the lock-in period.

Furthermore, in a case of this nature, the Respondent No. 2 did not
hold any personal interest which would come within the purview of Section
6(d) of the Act. An interest in the CANCIGOS was not created in the
Respondent No. 2 for enjoyment in his personal capacity. Section 6(d) of
the Transfer of Property Act would apply when a transfer is in violation of
such stipulation which would defeat the object thereof. The learned Special
Judge, therefore, committed an error in invoking Section 6(d) of the Transfer
of Property Act.

In Nallajerla Krishnayya Vs. Vuppala Raghavulu [AIR 1958 AP 658},
it is stated:

“5If, on a construction of the relevant terms of
the instrument, the Court comes to the conclusion
that rights were created against the property, the
matter is taken out of the purview of Section 6(d)
of the Transfer of Property Act.”
In Harshad Shantilal Mehta (supra), this Court held:
“18. The last question can be answered first. As
stated above, Section 3(3) clearly provides that the
properties attached are properties which belong to
the person notified. The words “belong to” have a
reference only to the right, title and interest of the
notified person in that property. If in the property
“belonging to” a notified person, another person
has a share or interest, that share or interest is not
extinguished. Of course, if the interest of the
notified person in the property is not a severable
interest, the entire property may be attached. But
the proceeds from which distribution will be made
under Section 11(2) can only be the proceeds in
relation to the right, title and interest of the notified
person in that property. The interest of a third party
in the attached property cannot be sold or
distributed to discharge the liabilities of the
notified person. This would also be the position
when the property is already mortgaged or pledged
on the date of attachment to a bank or to any third
party. This, however, is subject to the right of the
Custodian under Section 4 to set aside the
transaction of mortgage or pledge. Unless the
Custodian exercises his power under Section 4, the
right acquired by a third party in the attached
property prior to attachment does not get
extinguished nor does the property vest in the
Custodian whether free from encumbrances or
otherwise. The ownership of the property remains
as it was.

The Appellant having paid a consideration of Rs. 33 crores in relation
to the CANCIGOS in question had a just right to possess the same to the
exclusion of the Respondent No. 2 and in that view of the matter too the
Special Court could not have directed the Appellant to hand over the same to
the Custodian. The said direction is unsustainable in law.

SECTION 13 OF THE ACT:

In Solidaire India Ltd.(supra), the Custodian initiated proceedings
before the Special Court for recovery of an amount of loan of Rs. 1 crore
due to the Respondent No. 1 from the Appellant therein. The suit was
decreed and only during pendency of appeal, the Appellant became sick.
The question which arose for consideration was as to whether in view of the
Sick Industrial Companies (Special Provisions) Act, 1985, no proceeding
could have been initiated or continued under the said Act. Referring to
Section 13 of the Act, this Court held that the provisions of the said Act
would prevail over the provisions of the Sick Industrial Companies (Special
Provisions) Act, 1985.

We are here not concerned with the right of a party to take recourse to
a remedy but are concerned with a right of a party to possess the property
over which it has a lawful title. In such a situation, Benami Transactions
Act will have no application in allocation of shares as the same would not
come within the purview of transaction relating to a transfer of property.
Transfer of CANCIGO in favour of the Appellant was, thus, valid and legal
as by reason of the transfer of possession of the CANCIGOS by Respondent
No. 2 in favour of the Appellant, a valid right has been created therein, the
same could not have been attached in terms of Section 3(3) of the said Act.

The Custodian thought it expedient not to invoke the provisions of
Sub-section (2) of Section 4 of the said Act. He was at liberty to do so.
Even now he is free to do so, if so advised.

CONCLUSION:
For the reasons aforementioned, the impugned judgment cannot be
sustained which is set aside accordingly. These appeals are allowed. In the
facts and circumstances of this case, however, there shall be no order as to
costs.

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