Companies Act Case Law Standard Chartered Bank And Anr. Etc.Vs Custodian And Anothe Etc.

CASE NO.:
Appeal (civil) 762 of 1999

PETITIONER:
STANDARD CHARTERED BANK AND ANR. ETC.

RESPONDENT:
CUSTODIAN AND ANOTHE ETC.

DATE OF JUDGMENT: 18/04/2000

BENCH:
B.N. KIRPAL & R.P. SETHI

JUDGMENT:
JUDGMENT

2000 (3) SCR 81

The Judgment of the Court was delivered by

KIRPAL, J. The Reserve Bank of India noticed large-scale irregulari-ties
and mal-practices 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 mal-
practices had led to the diversion of fund from banks and financial
institutions to the individual accounts of certain brokers.

With a view to deal with this situation and in particular to ensure speedy
recovery of the huge amounts involved, the Special Court (Trial of Offences
relating to transactions in securities) Ordinance, 1992 was promulgated on
6th June, 1992. The said Ordinance has now been replaced by an Act known as
Special Court (Trial of Offences Relating to Transactions in Securities)
Act, 1992 (hereinafter referred to as ‘the Act’). Section 3 of the Act
enables the Central Government to appoint one or more Custodian for the
purposes of the Act. The Custodian has power under sub- section 2 of
Section 3 to notify the name of any person in the official gazette, who has
been involved in any offence relating to transactions in securities after
the first day of April, 1991 and on/or before 6th June, 1992. The effect of
a person being so notified was that according to sub-section 3 of Section
3, notwithstanding anything contained in the Code of Criminal Procedure or
any other law for the time being in force, any property, movable or
immovable or both, belonging to any person notified under that sub-section
stands attached simultaneously with the issue of the notification. The
property so attached is to be dealt with by the Custodian in such manner as
the Special Court may direct.

The Special Court is established under Section 5 of the Act to be presided
over by a sitting Judge of a High Court. The Special Court is to take
cognizance of or to try such cases as are instituted before it or
transferred to it It is this Court which, under Section 9A, has the
jurisdiction to exercise such power and authority which was exercisable
before the commencement of the Act by a Civil Court in relation to any
property standing attached under sub-Section 3 of Section 3 or in relation
to any matter or claim arising out of transactions in securities entered
into after first day of April, 1991 and on/or before 6th day of June, 1992,
in which a person notified under Section 3(2) is involved as a party, a
broker, intermediary or in any other manner.

On 8th June, 1995, respondent No. l the Custodian, who had been appointed
under the Act, notified Hiten P. Dalai (respondent no. 2 in Civil Appeal
No. 762 of 1999 and appellant in Civil Appeal No. 1878 of 1999) under
Section 3(2) of the said Act. The Custodian then got to know that some
shares and securities, which belonged to respondent no. 2, were in the
possession of the appellant bank. It also came to the knowledge of the
Custodian that the appellant bank had got some of the shares transferred to
its name. Correspondence was then exchanged between the Custodian and the
appellant bank whereunder the appellant bank was called upon by the
Custodian to either hand over the shares and securities to the Custodian or
the bank should obtain an appropriate direction from the Court in case the
appellant bank was claiming any title to the said shares

The demand of the Custodian requiring the appellant bank to hand over the
said shares which it had obtained from the notified party led the appellant
bank, which is incorporated under the laws of England and Wales and has its
Head Office at l, Aldermanbury Square, London, and the second appellant
which is an existing company under the Companies Act, 1956 and is a wholly
owned subsidiary of the Ist appellant, to file a suit No. 1958 of 1993 in
the Bombay High Court. On transfer to the Special Court, the suit was
numbered as Suit No. 3 of 1994. On 29th June, 1994, the appellants withdrew
suit No. 3 of 1994 with liberty to file a fresh suit. It is thereupon that
the appellants filed suit No. 17 of 1994 from where the present appeal
arises.

The case of the appellants in the plaint, inter alia, was that on 30th
April, 1992, one Mr. Arvind Lal, an employee of the Bank, informed one Mr.
R. Iyer, a Director of the Local Currency Group, Investment Banking
Division in the bank, that approximately Rs. 800 crores of investments made
by the appellant bank appellant through Hiten Dalai were not backed by
securities or banker receipts. How this short fall happened, was not known
to the higher officials of the appellant bank till lOth May, 1992.
Thereafter enquiries were made by the appellant bank to ascertain the
short-fall and efforts were made to recover the same. According to the
appellants the shortfall was ascertained to be in the region of
approximately Rs. 1300 crores. It was alleged that there were meetings
between the officials of the appellants and Hiten Dalai wherein the said
notified party admitted and acknowledged his liability and he had given
various proposals for re-payment and delivery of various stocks in which
there was a short-fall. According to the appellants Hiten Dalai did not
fulfil his commitments to deliver cash or stock. Hiten Dalal is alleged to
have agreed to and deliver, between llth May, 1992 and 13th May, 1992,
various shares, securities, bonds and debentures (hereinafter referred to
for the sake of convenience as ‘shares’). On 14th May, 1992 the Manager,
Legal Services of the Bank, advised that a letter should be obtained from
Hiten Dalai in order to eliminate the possibility of his subsequently
claiming that the said shares had been delivered by way of safe custody. A
letter containing the understanding between the parities was drafted by the
in-house lawyer of the appellant bank and was given to have it transcribed
on his note paper. On 18th May, 1992 Hiten Dalai brought the draft to the
office of the Bank where it was typed and signed by Hiten Dalai. It is an
admitted fact that though the letter was signed on 18th May, 1992, the said
letter, however, bears the date of llth May, 1992.

Alternative claims were put forth by the appellants in the said suit. In
the first instance it was claimed that the shares, the details of which
were mentioned in the annexure to the said letter dated 11.5.1992 and worth
approximately Rs. 145 crores, were delivered by Hiten Dalal in partial
discharge of his liability to the appellant Bank in pursuance to the
aforesaid agreement which was recorded in a note dated 18th May, 1992. The
case of the appellants was that the bank is entitled to exercise ownership
right in respect of the said shares and to the accretions thereon which may
have been received by the appellants. The appellants also sought a
declaration that Hiten Dalai had no right, title or interest in the said
shares and the same did not belong to him on the date of the notification.
It may here be noted that the counsel for the appellants did not press this
claim of ownership before the Special Judge.

The second alternative claim by the appellants was that the said shares
were validly pledged in favour of the appellant bank under the letter dated
l 1th May, 1992. In exercise of its rights as pledgees, the appellant bank
claimed that the said shares had been adjusted against the admitted
liability of the second respondent to the appellant bank. It thus claimed
ownership over the said shares. This plea also was not pressed by the
appellants before the Special Court inasmuch as it conceded that in law no
such right existed in a pledgee.

The third alternative put fbrth in the plaint by the appellants was that
the letter dated l1th May, 1992 created a valid and existing pledge of the
shares and that the rights, bonus aud the dividends received by the
appellants formed part of the pledge and constituted security for the
appellants. The appellant bank claimed that it was entitled to retain
possession of the shares and accretions thereon until the second respondent
satisfied his liability towards the appellants. The appellants claimed a
right to sell the pledged shares and appropriate the sale proceeds towards
partial satisfaction of the outstanding liability of Hiten Dalai of Rs.
1253 crores. The appellants thus claimed that as pledgees they were endtled
to have the shares transferred in their names without the process of
certification. By an amendment in 1996, another alternative claim put-forth
by the appellants was that the said shares, debentures, bank receipts,
bonds and securities and the rights and bonus received by the appellant
bank stood mortgaged to it. The appellants claimed that a sum of Rs.
30040885.00 expended by the appellant bank on purchase of right shares and
for preservation of the mortgaged security formed part of the mortgage debt
The appellants thus claimed that they were endtled to retain the mortgaged
shares and securities and the accretions received in respect thereof.

The custodian in its written statement did not admit the correctness of the
facts stated in the plaint. According to the custodian, Hiten Dalai was a
notified party and the shares worth Rs.145 crores which were in the custody
of the appellants were the property of the said notified party. By virtue
of the provisions of the Act these shares stood attached as on the day when
the name of Dalal was notified and the said shares could not be dealt with
by the appellants except by and under the directions of the court. The
custodian denied that the appellants were entitled to any of their claims.

In his written statement the defence which was, inter alia, taken by Hiten
Dalal was that he was acting as a broker in securities and as such was
dealing with the appellants for the last four years. He did not admit that
there was any short fall in respect of the transactions, which had taken
place through him. He specifically denied that the purchases approximating
Rs.1253 crores were not supported by delivery of stocks or acceptable bank
receipts. On the contrary Dalai averred that the appellants had committed
several irregularities and were attempting to transfer the burden on him.
He denied having accepted any liability to pay any amount to the appellant
bank or having admitted to the appellants having suffered any loss as
alleged or at all. With regard to the stocks and shares worth Rs.145 crores
which were lying with the appellants, the case of Dalai was that two
employees of the appellants, namely, Ravi Iyer and Siva Kumar had forcibly
taken away those stocks which had been lying in his office and which
belonged not only to him but also to his wife and some of his customers.
Dalai claimed that these officers threatened him that if hc did not
cooperate they would prosecute and ruin him. Dalai further alleged that his
signatures were taken on blank documents and the appellants had wrong-fully
used those documents with blank signatures in order to foist a false claim
against him. He further alleged that on 18th May, 1992 under threat of
physical torture, criminal prosecution and threat to that his life and that
he would be ruined the appellants made him sign a letter dated llth May,
1992. In short he denied that he had voluntarily admitted any liability
towards the appellants.

On the basis of the pleadings the Special Court framed sixteen issues as
between the appellants and respondent no. l and another seventeen issues
between the appellants and respondent no. 2. U is not necessary, for
deciding these appeals, to refer to the said issues inasmuch as the Special
Court itself observed that though a number of issues had been raised there
were only four questions which arose for consideration and they were; [i]
whether the appellants herein had suffered a loss as claimed or at all;
[ii] whether respondent no.2 had given the said shares as securities and/or
the same were taken from him forcibly; [iii] if the said shares were given
as securities then the question would also be as to whether it was by way
of pledge or mortgage; and [iv] whether rights and bonus shares, dividend
and interest on the said shares formed part of secured assets.

It rnay here be noted that before the Special Court counsel for the
appellants stated that he was not pressing the plea of pledge with right of
appropriation. He contended that the appellants were only pressing that in
respect of the shares in question which they had in their possession there
was either a mortgage or pledge in respect thereof.

When the Special Court was framing issues relating to the question as to
how the appellants had been able to prove the loss caused to them by Dalaa
and if so to what extent, the counsel for the appellants had contended that
Dalai had admitted his liability in the said letter of llth May, 1992 and
other documents and, therefore, it was not necessary for him to prove the
loss. The Special Court over-ruled this submission but no speaking order
was passed inasmuch as the counsel for the appellants informed that if the
court so desired the appellants would prove the loss. The court then
proceeded with the trial of the case on the basis that the loss stated to
have been suffered by the appellants was not to be attempted to be proved
only on the basis of the admissions of Dalai. The appellants proceeded with
the trial claiming that loss had been caused to them by their having paid
moneys in purchase transactions and their not having received deliveries of
stocks/bankers receipts.

The appellants led evidence in support of their case. On behalf of Dalai
the court was given to understand that he will enter the witness box in
order to substantial his plea of physical torture, threat of criminal
prosecution, coercion etc. Ultimately Dalai chose not to give evidence
before the court. On 24th December, 1998, the Special Court delivered its
judgment and, inter alia, held that;

(1) the appellants had been able to prove loss totalling Rs. 280.80
crores and that other losses alleged by the appellants were disproved;

(2) no coercion had been exercised by the appellants on Dalal;

(3) the letter dated llth May, 1992 addressed by Dalal to the
appellants created a pledge in favour of shares and said deben-tures,
particulars of which were given in annexure to the said letter. The claim
of mortgage of the said shares was not accepted;

(4) the appellants were entitled to sell the original and right shares
pledged to them in reduction ot” Dalal’s liability to the appel-lants;

(5) bonus shares and dividend and interest accrued on the original
shares pledged were not themselves the subject matter of the pledge and
must be handed back by the appellants to the Custodian;

(6) Cantriple Units, referred to in the letter dated llth May, 1992,
received by the appellants from Dalai must be handed back by the appellants
to the custodian as the appellants had not succeeded in showing that they
had any right, title or interest in respect thereto and nor had it been
proved that the said units had been pledged with the appellants.

(7) Costs of Rs. 30 lacs were awarded against respondent no. 2 and in
favour of the appellants.

Aggrieved by the findings of the Special Court in relation to the quantum
of loss suffered, the rights of the appellants in regard to bonus shares
and dividend and interest which had accrued on the original shares, which
had been pledged, as well as the direction to hand over Cantriple Units to
the custodian and lastly the strictures passed against certain employees of
the appellants, appeal No. 762 of 1999 has been filed.

Hiten P. Dalai has filed appeal No. 1878 of 1999 challenging the judgment
of the Special Court which had accepted the appellants claim regarding loss
amounting to Rs. 280.80 crores. He also challenged the directions regarding
handing over of the Cantriple Units by Standard Char-tered Bank to the
custodian and lastly the challenge is to the costs of Rs. 30 lacs that had
been awarded against him.

The four questions, which were considered by the Special Court, are what
anse for consideration in these appeals before us. We will first deal with
the issue relating to the loss claimed to be suffered by the appellant bank
and its right to retain the securities, which were delivered to it.

In the suit, which was filed, it was inter alia stated in the plaint that
the appellant bank had suffered a loss of about Rs. 1253 crores on its
dealing with Dalal. It is on this basis that it sought to retain and
appropriate securities worth Rs. 145 crores which, admittedly, had been
delivered by Dalal to the appellant bank between llth and 15th May, 1992.
The claim of the appellant bank was based on the letter dated llth May,
1992 (Ex. G) in the suit. It has come in the evidence and it is not
disputed that this letter was prepared by the officials of the appellant
bank and was signed by Dalal on 18th May, 1992. This letter, however, was
ante dated to llth May, 1992. This letter addressed to the Standard
Chartered Bank, Bombay reads as follows:

“Dear Sirs,

Re: Transactions in Govemment and other securities

1. In the past 4 years I have been acting as your broker for
transactions in Government and other securities.

2. I am aware that you are in the process of reconciling your
purchases/sales through me of Government and other securities and whilst
the reconciliation is yet to be completed, you have ascertained as of date
that the following purchases aggregating Rs. 1258 crores are not supported
by deliveries of stocks and/ or bank receipts of banks acceptable to us.

Type of Security Transaction Value

15 Crores units Rs. 200 crores (Karad B. R.)

9% IRFC (1/1) Rs. 385 Crores (Metro B. R.)

9% IRFC (1/4)

Missing B. Rs. Rs. 45 crores (various B.Rs)

12.5% GOI 2007 Rs. 80 crores (Karad SGL)

6% GOI 1994 Rs. 50 crores (Metro SGL)

11% IDBI 2002 Rs. 20 crores (Metro B. R.)

11.5% IDBI 2011 Rs. 47 crores (Karad B. R.)

8.75% IDBI 2000 Rs. 23 crores (Karad B.R.)

6 crore units Rs. 90 crores (Metro B.R.)

12% ICICI 2011 Rs. 50 crores (Metro B.R.)

Cantriple Rs. 205 crores (Physical)

Cantriple (Expected) Rs. 58 crores

Rs. 1253 crores

The letter further goes on to say that Dalai had delivered to the bank
stocks, shares, deposits etc., as listed in the annexure to the said letter
by way of securides towards the short-fall and/or any further short-falls
which may be ascertained. The stocks and shares which were listed in the
annexure to this letter were the one which were handed over by Dalai to the
appellant bank between llth and 15th May, 1992 and were stated to be worth
Rs. 145 crores, in respect of which, the present suit was filed. By this
letter Dalai further agreed to keep the appellant bank indemnified against
any loss which it might have incurred and/or suffered upon the appellant
bank corapletion of final re-conciliation of its account with Dalal and he
undertook to make good any such losses either by payment in cash or by
physical delivery of such other assets as the bank might require. The
letter also postulated that if on the completion of the re-conciliation,
aggregate of the cash paid and the value of the assets delivered exceeded
the amount of loss identified, then the Bank was to refund such excess to
Dalai. He further confirmed and agreed that the appellant bank was
authorised to sell the stocks, shares, debentures etc., which were handed
over to the bank and to appropriate the proceeds thereof to partly
liquidate his liabilities to the bank. If there was any short fall after
such appropriation, Dalal held himself to be personally responsible to pay
to the bank such balance as was outstanding.

At this stage, we may notice that Dalal did not deny the execution of this
letter. His case in the written statement was that this letter and other
documents were got signed by the bank officials under threat or coercion.
He had contended that the shares, securities etc., which were listed in
Exhibit ‘G’ had been forcibly taken away by the appellant bank officials.

The Special Court, after taking all the evidence into consideration, came
to the conclusion that the said shares etc., had not been forcibly taken
away from Dalal but he had, on the contrary, handed over these shares as
security. In arriving at this conclusion, the special court held that it
was unbelievable that the shares would be forcibly taken away from Dalal
between 11th and 13th May, 1992 and for a period of three days at least he
would make no complaint or try to stop the appellants from taking away the
said shares forcibly. Admittedly, there had been a meeting between Dalal
and the Advocate of the appellants and the Special Court found it
inconceivable that force had been used at the time of taking away all the
shares forcibly.

We have gone through the evidence and we agree with the aforesaid
conclusion of the Special Court to the effect that the contention of Dalal
that the said shares were taken away from him forcibly is not correct. In
the issues which were framed the onus of proof that the letter dated llth
May, 1992 had been executed under threat of physical terror and criminal
prosecution was on Dalal. Hiten Dalal however chose not to enter the
witness box in support of this plea. Not only did he not lead any evidence
in order to prove coercion, the appellant bank on the other hand examined
witnesses who clearly proved that Dalal had not only signed the letter
dated llth May, 1992 but he also signed other documents to which we will
presently refer. As Dalal had failed to step into the witness box or lead
any evidence on his behalf, the Special Court rightly drew an adverse
inference against him.

We must, therefore, proceed on the basis that Ex. ‘G’ even though prepared
by the employees of the appellant bank had been voluntarily and willingly
signed by Hiten Dalal. We also proceedure the basis that the shares,
securities etc., had been delivered by Dalal to the appellant bank valued
at Rs. 145 crores between llth and 15th May, 1992. It is in this background
that we must examine the claim of the appellant bank with regard to the
loss stated to have been suffered by it.

On the basis of the evidence which was led before it, the Special Court
observed that out of items of securities mentioned in Ex. ‘G’,
items2,3,4,6,ll,12 and 13 were dis-proved. It held that “it is proved that
in respect of these items, there is no loss. The claim for Rs. 795 crores
thus stands disproved”.

Having held that the claim for loss of Rs. 1253 crores was an exagger-ated
claim, the Special Court further came to the conclusion that items 5,7,8 &
9 were also dis-proved or in any event, they could not be relied upon and
used for the purpose of calculating loss. It upheld the case of the
appellants with regard to items l and 10. Lastly, the Special Court, came
to the conclusion that on the basis of the evidence produced before it, the
appellants had made a payment of Rs. 201 crores for the purchase of units
of U.T.I. of the face value of Rs. 15 crores but had not received the said
securities. It also accepted the claim of loss of Rs. 79.80 crores which
was evident by statement Ex. 19 which was produced in the court by the
counsel for the appellants. The Special Court held that this statement Ex.
19 was tendered under Section 163 of the Evidence Act and the facts stated
therein must be regarded as having been proved or binding on Dalal.

It was submitted by Mr. K.K. Venugopal and Mr. K.S. Cooper, learned counsel
for the appellants that for this case it was not necessary for the
appellants to have established loss of more than Rs. 145 crores. Mr. K.K.
Venugopal submitted that the appellants were not contending in these
appeals that the shares worth Rs. 145 crores had been given to the
appellants by way of mortgage. It was submitted that the said shares were
pledged to the bank. He however, submitted that the evidence on record
would show that the appellants had been able to prove that the liability of
Hiten Dalal towards the appellants was Rs. 1253 crores. in any event, the
Special Court had accepted the claim of loss of the appellants to the
extent of Rs. 280.80 crores which was much more than the value of the
pledged shares. It was submitted that with regard to the balance claim the
Special Court ought not to have given a positive finding that the same
stood dis-proved.

Hiten Dalai, in the appeal filed by him, has challenged the acceptance by
the Special Court of the loss of Rs. 280.80 crores stated to have been
suffered by the appellant bank in its dealing with him. So far as the
Custodian is concerned, Mr. Shiraz Rustamjee, leamed counsel for the
Custodian, submitted that it accepted the loss of Rs. 201 crores which was
more than sufficient to cover the value of the pledged shares of Rs. 145
crores but he submitted that the decision of the Special Court in invoking
the provisions of Section 106 of the Evidence Act and in holding that the
loss of Rs. 79.80 crores has been proved was not correct. In this respect
he supported the submissions of Shri S. Ganesh, learned counsel on behalf
of Dalai.

Before dealing with the correctness of the findings of the Special Court it
will be appropriate to analyze the said letter dated llth May, 1992 Ex.
‘G’. As has already been observed, this letter was admittedly prepared by
the officials of the appellant bank on the basis of inspection which had
been carried out. Para 2 of the said letter states in no uncertain terms
that “as on that date the bank had ascertained that the following purchases
aggregating Rs. 1258 crores are not supported by deliveries of stocks
and/or bank receipts of banks acceptable to us”. The purchases which are
referred to are the thirteen types of securities, total value of which
aggregated Rs. 1253 crores. This means that there was an outgoing of Rs.
1253 crores from the appellant bank, in cash or in kind and thirteen types
of securities listed in para 2 of the said letter, in respect of which the
outgoing had taken place, had not been delivered or bank receipts in
respect thereof given. It is to secure the delivery of these stocks and
shares that securities and shares worth Rs. 145 crores listed in annexure
to this letter were pledged to the appellant Bank.

The Special Court Act, 1992 contemplates attachment of aill movable and
immovable properties from the day when the party is notified. The attached
property is thereupon to be dealt with by the Custodian in such a manner as
the Court may direct. The attached property is to be disposed off by the
Custodian under order of the Court and Section 11(2) specifies the
liabilities of the notified party which are required to be paid or
discharged out of the proceeds of the properties of the notified party. It
was, therefore, but right that the Court had to be satisfied by positive
evidence, and not merely on the basis of the admission of Dalal that the
appellant Bank had suffered loss inasmuch as “purchases aggregating Rs.
1258 crores are not supported by deliveries….” with the result that the
securities and shares worth Rs. 145 crores had been pledged in favour of
the appellant bank.

The loss of Rs. 201 crores qua item No. l in regard to the non-delivery of
Rs. 15 crores units of U.T.I. of the face value of Rs. 150 crores was
proved through the evidence of Mr. Sanjay Pandit, PW 4. The documents which
were produced in evidence for proving that the appellant bank had made
payment of Rs. 201 crores for the purchase of the said U.T.I. units, which
securities were not received by the appellant bank, was firstly a deal slip
No. 7941 which showed purchase of these units from the Bank of Karad. In
respect of this transaction, cost memo had been received by the appellants
from the Bank of Karad on 8. l. 1992. A transaction slip dated 8. l. 1992
showing the purchase of Rs. 15 crores U.T.I. units at the rate of Rs. 13.40
(Ex. ‘B’- Vol. IV) per unit amounting to Rs. 201 crores was proved by PW 4.
Also placed on record was the banker’s receipt dated 8th January, 1992 for
a sum of Rs. 201 crores. Against this, on 8th January, 1992, there was a
sale of 9 per cent I.R.F.C. bonds of the face value of Rs. 210 crores. By
pay order dated 8th January, 1992 bearing No. 231967, a sum of Rs. 199.79
crores was paid to the Bank of Karad. Another document Ex. M is the receipt
dated 8th January, 1992 issued by the Bank of Karad acknowledging the
receipt of Rs. 201 crores in respect of said U.T.I. units. In face of the
said evidence, Shri Ganesh was unable to persuade this Court that the
decision of the Special Court in accepting the loss of Rs. 201 crores was
incorrect. This finding regarding the loss of Rs. 201 crores is affirmed.

Now we come to the next item of loss which was accepted by the Special
Court, namely, that of Rs. 79.80 crores mentioned as item no. 10 in Ex.
‘G’.

During the cross-examination of the appellant bank witness PW 6, the
counsel for the Hiten Dalal put him the following question:

“Mr. Rao calls upon the plaintiffs to show any single transaction wherein
the plaintiffs’ funds have been diverted by Mr. Hiten Dalai through bank of
Karad”. This question was put to the witness on 6th November, 1998.
Thereafter on llth November, 1998, the said PW 6 tendered in evidence Ex.
19 (colly) which was a statement containing details of two transactions
which indicated that money had ultimately gone to the account of Dalal. One
of the transactions which was listed was item no. 10 of Ex. G. When this
statement was tendered in evidence, the Special Court noted that the
counsel for the appellants had kept in Court all the Deal Slips, Cost
Memos, Pay Orders and Banker Receipts. These were not marked as exhibits
because the counsel for Dalal stated that he had not called for these
documents and the said counsel had not taken inspection of the said
documents. The Special Court observed that this statement Ex. 19 had to be
regarded as having been tendered under Section 163 of the Evidence Act and,
therefore stood proved and was binding on Dalai. The Special Court then
examined the said Ex. 19 which showed that the appellants had purchased six
crores units of the U.T.I. of the face value of Rs. 60 crores for Rs. 79.80
crores from the Bank of Karad and had made payment of the same by Pay Order
No. 231919 for Rs. 37.63 crores. This payment was made after netting of
sale of security to Bank of Karad. Ex. 19 further shows that in respect of
said transaction, the appellants had received a banker receipt No. 18 of
the Metropolitan Co-operative Bank. Ex. 19 further showed that the money
which the appellants paid to the Bank of Karad was credited into the
account of one Abhay Narottam in the Bank of Karad and thereafter, from
that account, an amount of Rs. 36 crores was transferred/ credited to the
account of Dalal with Andhra Bank. The Special Court observed that even
though the said statement established that Rs. 36 crores had been
transferred into the account of Dalal, no evidence had been led by him to
show why he had received Rs. 36 crores and/or that it was under some
transaction with the Bank of Karad. In the absence of such evidence, the
Special Court came to the conclusion that this money of the appellant bank
had been siphoned out by Dalai. The Special Court further noted from Ex. 19
that on 27th November, 1991 the appellant bank purchased 13 per cent
M.T.N.L. Bonds of the face value of Rs. 20 crores from the Bank of Karad
and by pay order No. 231079, a sum of Rs. 18.71 crores was paid by the
appellant bank to the Bank of Karad. A sum of Rs. 29.99 crores, which
included the aforesaid sum of Rs. 18.71 crores plus another sum of Rs.
11.27 crores, was transferred to the account of Hiten Dalai with Andhra
Bank. The Special Court noted that in this case also it was shown that from
the Bank of Karad an amount of Rs. 18.71 crores of the appellant’s bank had
gone to the account of Hiten Dalai. The Special Court further noticed that
in respect of this transaction relating to Rs. 18.71 crores regarding the
purchase of 13 per cent M.T.N.L. bonds, the appellant bank had not claimed
that they had suffered a loss as the said transaction was not listed in Ex.
G. While not accepting the sum of Rs. 18.71 crores as being loss/suffered
by the appellant’s bank, the Special Court accepted the loss of Rs. 79.80
crores being the face value of six crores Units of the U.T.I. in respect of
which Rs. 37.63 crores had been paid but the said units were not received.

It is contended by Mr. S. Ganesh, learned counsel for the respondent no. 2
that the Special Court mis-understood and mis- conceived the provisions of
Section 163 of the Evidence Act. He submitted that Section 163 applied only
in the following three conditions:

(i) The specified documents must have been identified by the parties
concerned;

(ii) That the parties must give notice to the other party to produce the
documents;

(iii) The said documents must have been produced and inspection thereof
taken by the party who gave notice for the same.

It was contended that these basic conditions, which are necessary for the
application of Section 163 of the Evidence Act, had not been fulfilled and,
therefore, the Special Court was not correct in admitting the said
statement in evidence as Ex. 19.

Mr. Rustomjee, learned counsel, who appeared on behalf of Custodian, also
submitted that Section 163 of the Evidence Act had been wrongly invoked in
the present case.

We are not inclined to go into the correctness of the decision of the
Special Court regarding the applicability of Section 163 of the Evidence
Act. Mr. Rustomjee, learned counsel submitted that as far as Custodian is
con-cemed, he had chosen to accept the decision of the Special Court
wherein it had accepted the losses qua hem no. l stated to have been
suffered by the appellant bank for a sum of Rs. 201 crores. No appeal has
been filed by the Custodian challenging the correctness of the decision of
the Special Court accepting the loss of Rs. 79.80 crores. If the Custodian
had felt aggrieved an appeal should have been filed. This not having been
done it is not open to Mr. Rustomjee to submit that this part of the
judgement of the Special Court should be reversed. As far as Dalai is
concemed, once the Special Court has come to the conclusion that there was
no coercion or undue influence in his signing letter dated llth May, 1992,
Ex. ‘G’, it is then not open to him to contend and challenge the findings
of the Special Court which has accepted the claim of the appellant bank
with regard to payment having been made in respect of the U.T.I. Units of
the face value of Rs. 79.80 crores. This is more so when we find that the
Special Court has noticed that when the statement Ex. 19 was tendered in
evidence, the counsel for the appellant bank had kept in court all the deal
slips, cost memos, pay orders and banker receipts in respect of the said
transaction. Dalai having accepted the fact that there had been a non-
delivery of six crores units of the face value of Rs. 79.80 crores which
had been purchased by the appellant bank, which is evident by his signing
Ex. ‘G’, it is not open to him to contend that he does not accept the
correctness of the contents of the said letter. In our view, therefore,
without expressing any opinion on the correctness of the findings of the
Special Court with regard to the applicability of Section 163 of the
Evidence Act in the present case, the conclusion of the Special Court to
the effect that six crores units of the U.T.I. of the face value of Rs.
79.80 crores had not been delivered to the appellant bank, even though it
had made payment in respect thereof, does not call for any interference.

With regard to the other items of securities referred to in Ex. ‘G’,
learned counsel for the appellant bank invited our attention to Ex. ‘E’
collectively which were hand-written notes signed by Dalai on 17th May,
1992 wherein he had undertaken to deliver various shares and securities of
the total value of Rs. 900 crores. Keeping in view the fact that the
Special Court had observed that the appellant bank will have to prove the
extent of loss not on the basis of admission of Hiten Dalai but by leading
evidence on its own, we are of the opinion that the best evidence which
could have been led in respect of the other items stated to have been
purchased and mentioned in Ex. ‘G’ was not led. Apart from the loss of
aforesaid amount of Rs. 280.80 crores which has been accepted by the
Special Court and upheld by us, we would have expected the appellant Bank
to lead evidence to prove that it had paid sums of money and did not
receive the securities mentioned in Ex. ‘G’. The main documentary evidence
which was led on behalf of the appellants in respect of those items was Ex.
‘G’ and the notes Ex. ‘E’ which contain the schedule for the delivery by
Dalai of various shares which were to take place from 18th May, 1992, 19th
May, 1992, 20th May, 1992 and 22th May, 1992. These notes are signed by
Dalai. In addition thereto, there was to be conversion of bank receipts of
Canstars having valued at Rs. 10 crores. According to the appellant bank,
no such delivery took place. The appellant bank, however, did not lead any
evidence to prove that either in respect of the shares and securities
mentioned in Ex. ‘E’ or in respect of items mentioned in Ex. G, except for
items l and 10, any payment had in fact been made by the appellants. The
claim of loss in excess of Rs. 280.80 crores cannot be accepted.

The Special Court, on the basis of the evidence before it, came to the
conclusion that except for sum of Rs. 280.80 crores, the balance claim of
the appellants stood “dis-proved”. As we have already noticed, the suit was
filed by the appellant bank because it had in its possession shares and
securities which had been lodged by Dalai as a notified party with the
appellant bank between llth and 15th May , 1992. The appellants had been
asked by the Custodian to establish its right to retain the said shares and
securities and this is the reason why the suit was filed. Even though in
the plaint was said, and that is noted in Ex. ‘G’ itself that the appellant
bank had suffered a loss of Rs. 1253 crores for the purpose of establishing
its right to retain and sell shares and securities worth Rs. 145 crores, it
was not necessary for the appellant bank to have proved the extent of total
loss which it had suffered. It was enough for the Bank to prove that it had
paid money in excess of Rs. 145 crores and had not received shares or
Bankers receipt in respect thereof. This would give the Bank right to
retain the said shares as having been pledged to it.

Undoubtedly the Special Court had required the appellant bank to prove by
independent evidence as to what was the extent of loss suffered by it. One
of the issues between the appellant bank and the custodian, being Issue No.
2, was as to what was the extent of loss suffered by the Bank. The Special
Court answered the issue by holding that the appellant bank had been able
to prove that it had suffered a loss to the extent of Rs. 280.80 crores
only. Having come to this conclusion it would have been more appropriate,
in our opinion, for the Special Court to have observed that the appellant
bank had failed to prove loss in excess of Rs. 280.80 crores rather than
giving a finding that the loss in excess of Rs. 280.80 crores stands dis-
proved. The loss which it had suffered was sufficient to enable it to
retain and dispose off the shares to the extent of Rs. 145 crores which had
been pledged with it.

In respect of the pledged stock, right shares were subscribed and obtained
by the appellant bank, bonus shares and dividend and interest were also
received by it. in respect of this the two questions which arise are
whether these accretions form part of the pledgedproperty and; secondly if
they do not, then whether the Special Court should have directed the
appellant bank to hand them over to the Custodian.

Before we deal with the main contention it will be pertinent to note that
in so far as the right shares were concemed, it was accepted by all the
parties that as the appellant bank had paid for these right shares the same
belong to it and they were entitled to keep them irrespective of the
question whether they formed part of the pledge or not. The question of
return of right shares does not, therefore, arise in these appeals.

As far as bonus shares are concemed it was submitted by Mr. Cooper, learned
counsel for the appellant bank that they are not accretions and no issue
arises whether they should be handed over to the appellant bank or to
Dalai. It was submitted that as bonus share is only a piece of paper it has
no intrinsic value. Reliance was placed on the following passage from the
decision of this Court in Commissioner of lncome Tax v. Dalmia Investment
Company Ltd., [1964] 7 SCR 210 when in relation to the issue of bonus
shares it was observed as follows:

“….it takes nothing from the property of the corpus and adds nothing to
the interest of the shareholder. Its property is not diminished and their
interests are not increased. The proportional interest of each shareholder
remains the same. The only change is the evidence, which represents that
interest, the new shares and the original shares together representing the
same propor_ional interest that the original shares represented before the
issue of the new ones. The Corporation is no poorer and the stockholder is
no richer than they were before. What has happened is that the plaintiffs’
old certificates have been split up in effect and have diminished in value
to the extent of value of the new.”

This decision was followed by this Court in Hunsur Plywood Works Ltd. v.
Commissioner of lncome Tax, [1998] l SCC 335.

In our opinion the Court rightly came to the conclusion that bonus share is
an accretion. A bonus share is issued when the company capitalises its
profits by transferring an amount equal to the face value of the share from
its reserve to the nominal capital. In other words the undistributed profit
of the company is retained by the company under the head of capital against
the issue of further shares to its shareholders. Bonus shares have,
therefore, been described as a distribution of capitalised undivided
profit. Section 94 of the Companies Act refers to the power of a limited
company to alter its share capital. Under Section 94[l](a) it has power to
increase its capital share while under sub-clause (d) it can sub- divide
its share into shares of smaller amount. Whereas in a case of sub-division
an existing share is simply divided or split and it may be argued that no
new share or capital is created, but there can be Hole doubt that in the
case of issue of bonus share there is an increase in the capital of the
company by transferring of an amount from its reserve to the capital
account and thereby resulting in additional shares being issued to the
shareholders. A bonus share is a property which comes into existence with
an identity and value of its own and capable of being bought and sold as
such. Neither in Dalmia Industries nor in Hunsur Plywood’s case was this
Court concemed with a question whether the bonus share could be regarded as
an accretion or not. This Court in those cases was only concerned with a
question relating to the valuation of the bonus share for tax purposes.

On the other hand the Privy Council in Motilal Hirabhai and Ors. v. Bai
Mani, AIR (1925) PC 86 had to consider as to whether the pledgee was
required to return to the pledgor, on redemption, bonus shares which had
been issued. The plea taken by the pledgee in that case was that the
pledgee was only required to return the original shares which were pledged
and not the bonus shares which were received. Rejecting this contention it
was held that the bonus shares were received as arising out of and
appertaining to the original shares and that it was impossible to contend
that the right to these shares could be differentiated from the right to
the original shares. Referring to Section 163 of the Contract Act the Privy
Council held that “These shares (bonus shares) are clearly accessions to
the shares expressly pledged or hypothecated, and the pledgor or his
representative, the present plaintiff, is entitled to recover the same.”
Applying the same logic it must follow that the dividend and interest which
was received by the plaintiffs and which was relatable to the pledged
stocks must also be regarded as accretions thereto.

It was then contended by Mr. Cooper that the bonus shares, dividend and
interest, if they are regarded as accretions to the pledged stocks then
they must also be regarded as forming part of the pledged property which
could not be ordered to be handed over unless redemption takes place. In
other words, the submission was that the Special Court could not have
permitted the appellant bank to have retained the stocks originally pledged
but at the same time directed that the accretions thereto should be handed
over to the custodian.

Section 172 of the Contract Act provides that the bailment of goods as
security or payment of a debt or performance of a promise is called pledge.
Bailor being the pawnor and pawnee being the bailee. What is bailment is
defined by Section 148 which, inter alia, provides that bailment is the
delivery of goods by one person to another for some purpose, upon a
contract that they shall, when the purpose is accomplished, be returned or
otherwise disposed of according to the directions of the person delivering
them. The person deliv-ering the goods is called the bailor and the person
to whom the goods are delivered is called the bailee. Section 160 provides
that the goods bailed are to be returned by the bailee on expiration of
time or accomplishment of purpose. Reading Section 172 with Sections 148
and 160 of Contract Act, it would appear that when goods are bailed for
securing payment of debt or the performance of a promise the bailor would
get a right for the return of the said goods when the purpose is
accomplished, namely, the debt is returned or the promise is performed. At
the same time Section 176 provides for pawnee’s right when pawnor makes
default. This section reads as follows:

“Pawnee’s right where pawnor makes default:- If the pawnor makes default in
payment of the debt, or performance, at the stipulated time, of the
promise, in respect of which the goods were pledged, the pawnee may bring a
suit against the pawnor upon the debt or promise, and retain the goods
pledged as a collateral security; or he may sell the thing pledged, on
giving the pawnor reasonable notice of the sale.”

This section not only gives the pawnee the right to retain the goods
pledged as collateral security but also entitles the pawnee to sell the
pledged goods after giving pawnor reasonable notice of the same. If the
proceeds of the sale are less than the amount due, the pawnor continues
liable to pay the balance. On the other hand if the proceeds realised on
the sale being made are greater then the amount due the pawnee is under
obligation to pay over the surplus to the pawnor.

According to Section 163 of the Contract Act, in the absence of a contract
to the contrary, the bailee is bound to deliver to the bailor or according
to his directions any increase or profit which may have accrued from the
bailed goods. It is indicated in the section that if a calf is born to a
cow then the bailee is bound to deliver the calf as well the cow to the
bailor. The custodian claims that as and when such accretions have taken
place the pledgee has no right to retain the same.

In this connection it was contended by Mr. S. Rustomjee, leamed counsel for
the respondents, that Section 163 mainly provides that the bailee is bound
to deliver any increase in profit which may have accrued but the said
section does not provide that such delivery is to be made only on
accomplish-ment of the purpose for which the goods are bailed. Had it been
the intention that such accessions were to be delivered only at the time of
accomplishment of the purpose for which the goods are bailed, the
Legislature would have clearly provided for it. To buttress his argument he
sought to rely upon Sections 63 and 64 of the Transfer of Property Act
which provide that where the mortgaged property in possession of the
mortgagee has, during the continuance of the mortgage, received any
accession, the mortgagor, upon redemption, shall, in the absence of a
contract to the contrary, be entitled as against the mortgagor to such
accession. It was contended that the words “upon redemption” are
conspicuous by their absence in Section 163 of the Contract Act. He further
contended that Sections 163 to 173 of the Contract Act repeatedly referred
to the words “goods pledged” and indicated that the pawnee’s rights
including that of sale extended only to the goods pledged and not to other
goods.

While interpreting Section 3(3) of the Special Courts Act, 1992, this Court
in TejkumarBalakrishna Ruia v. A.K. Menon and Anr., [1997] 9 SCC 123 at
page 127, in paragraph 9, observed as follows:

“It is perhaps necessary to make clear that the income or usufruct of
attached property is also attached property. Thus, if the property be
shares, dividends and bonus and rights shares thereon would also be
attached property. It is only income generated by a notified person by dint
of his own labour which falls outside the net of Section 3(3). In respect
of such income, the attachment under Section 3(3) does not operate.”

If the accretions are regarded as property which come to existence after
the date when the party was notified then in view of T.B. Ruia’s case
income generated after the date of notification would fall outside the net
of Section 3(3). It, therefore, became necessary for this Court in T.B.
Ruia’s case to observe in paragraph 9 that if the attached property is
shares then the dividends, bonus and rights shares would also be regarded
as attached property. If this be so then would pledge not extend to these
accretions to the shares which were pledged? In this connection it is
relevant to notice that Story on Law of Bailment at para 292 has stated
thus: “By the pledge of a thing, not only the thing itself is pledged, but
also, accessory, the natural increase thereof. As if a flock of sheep are
pledged, the young, afterwards born, are also pledged.” This passage has
been relied upon by “Chitty on Contract”, 28th Edition at page 162 where it
is noted that “If during the pledge there is an increase in the value of
the thing pledged, the pledgee is entitled to the increase as part of his
security.” To the same effect is the view contained in Halsbury’s Laws of
England Vol.36 para 123 where it is stated in connection with the special
property of the pawnee “If during the contract there is any increase in the
value of the security, the pawnee is entitled to that increase as part of
his security”.

From the aforesaid it would follow that what Section 163 of the Contract
Act really means is that accretions in respect of the goods bailed cannot
be a property of the bailee but must be returned when the goods themselves
bailed are returned. A necessary corollary to this would be that as the
pledge extends to such accretions then when the pledged goods are retumed
these accretions must also be given back. But if the pledge extends to such
natural increase of the pledged goods it must follow that the pledgee would
not only have the right to retain the said accretions but also have the
right to sell the same along with original shares pledged for the purposes
of realising amounts due to it and in respect of which the shares were
pledged as a security. Not only will this be in line with the aforesaid
observations of this Court in T.B. Ruia’s case but in arriving at this
conclusion we find support from the Halsbury’s Laws of England Vol .2 para
1524, where dealing with the bailee’s duty to account it was observed that
“When the return of the bailed chattel constitutes part of the bailee’s
obligation, he must restore not only. the chattel itself, but also all
increments, profits and eamings immediately derived from it.” It would
follow from the aforesaid that the accretions to the pledged property would
continue to be retained by the pawnee and, in the case of a notified party,
like in the present case, the accretions to the pledged property would also
be regarded as attached property to be dealt with in the manner in which
the pledged shares have to be dealt with.

It is not possible to accept the contention of the custodian that as and
when any accretion takes place the pawnee is under Section 163 liable to
hand over the accretion to the pawnor. U is true that the words “upon
redemption” as used in Sections 63 and 64 of the Transfer of Property Act
are not included in Section 163 of Contract Act but it is to be seen that
if the accredon is to be regarded as forming part of the bailed property
then such accretion must remain with the pawnee and be dealt with by him in
the same manner as the pledged shares. In other words the accretions form
an integral part of the attached shares as on the date of attachment, as
held in T.B. Ruia’s case, and it follows that it would also be an integral
part of the shares when they were pledged and would, therefore, constitute
a part of the pledged security. The appellant bank would, therefore, be
entitled to retain the same and deal with them as pledged stocks. The
decision of the Special Court that the bonus shares, dividend and interest
which had accrued on the pledged shares were not themselves the subject
matter of the pledge and must, therefore, be handed over by the appellant
bank to the custodian cannot be sustained.

In the aforesaid letter dated llth May, 1992, Ex. ‘G’, item no.12 refers to
Cantnple Units having a transaction value of Rs. 205 crores and item no. 13
was shown as “Cantriple “accepted” having a transaction value of Rs. 58
crores. Insofar as Cantriple Unites of the value of Rs. 58 crores are
concerned, it appears that by an order dated lOth June, 1993, passed in
Miscellaneous Application No.29 of 1993, the Special Court directed the
appellant bank to hand over the said units to the custodian. This order has
attained finality and no contention has been urged in respect thereto.

What now remains to be considered is the order of the Special Court
directing that the Cantriple Units of the value of Rs. 205 crores should be
handed over by the appellant bank to the custodian. In arriving at this
decision the Special Court dealt with the evidence which had been led by
the appellant bank in respect of this item and observed that the appellant
bank had been taking contradictory stands in respect thereto. The Court
came to the conclu-sion that no payment had been made in respect of these
shares and the case which was then sought to be put forth that the said
units had been received as security was false.

It does appear that the appellant bank has, in respect of Cantriple Units,
adopted varying and contradictory stands. While in the letter dated llth
May, 1992, the tenor was that payment had been made but these units had not
been given, but in the letter dated 20th May, 1993, the stand taken was
that these Cantriple Units formed part of the pledged securities. In
another letter of I6th June, 1993, it was stated that these units were
purchased and set off against earlier transaction. A witness on behalf of
the appellant bank gave evidence to the effect that the units were taken by
way of security and were not purchased at all.

In the light of the said evidence the Special Court rightly came to the
conclusion that the appellant bank had no right to retain these units in
their possession. These units had to be regarded as being attached. We may,
however, note that in respect of these units Miscellaneous Application
No.36 of 1993 had been filed by Can Bank Financial Services Ltd. before the
Special Court. The claim of Can Bank Financial Services was that the
appellant bank herein had forcibly taken away the said Cantnple Units. The
Special Court has in this case directed that these units should be handed
over to the custodian but the appellant bank may establish a claim to these
units in any other proceedings. It may here be noted that the contention on
behalf of the appellant bank was that pending before the Special Court were
Suit No. 9 of 1994, Suit No. 45 of 1995 and Miscellaneous Application No.
36 of 1993 where the question of title to these Cantnple Units was directly
in issue.

The grievance of the appellant bank in these appeals is that the Special
Court erred in giving detailed findings in respect of these Cantriple Units
and also erred in directing the appellant bank to hand over the said units
to the custodian because Cantriple Units were outside the scope of the
suit. The fear of the appellant bank is that the findings of the Special
Court with regard to the appellant bank’s right to retain these Cantriple
Units may prejudice them in the other proceedings.

In paragraph 50 of the plaint it has been categorically stated that the
suit was restricted to seeking relief in respect of the shares, securities,
debentures and bank receipts delivered between llth to 13th May, 1992. The
Cantriple Units in question had been delivered by Dalai on 9th May, 1992.
There is no specific issue, which was framed with regard to the question,
as to whether these Cantriple Units had been purchased by the appellant
bank or had been handed over to them by way of security. Once the Special
Court has come to the conclusion that the appellant bank has not proved
that Rs. 205 crores, representing the transaction value of these Cantriple
Units, were paid for or were pledged, it was justified in directing handing
over of the said units to the custodian. Other proceedings specifically
relating to these Cantriple Units are still pending before the Special
Court, especially Miscellaneous Application No. 36 of 1993. Under the
circumstances it would appear that the observations and findings of the
Special Court relating to the Cantriple Units, in the absence of evidence
being led before it by all the interested parties, can only be regarded as,
prima facie so as to enable it to come to the conclusion that the said
Cantriple Units must be handed over to the custodian and his retention
would be subject to the outcome of the other legal proceedings including
Miscellaneous Application No. 36 of 1993 and the appellant bank and other
parties would be entitled to try and establish their rival claims to get
possession of the said Cantriple Units.

Leamed counsel for the appellant bank also submitted that the observa-tions
of the Special Court to the effect that there appeared to be some
arrangement which subsisted between the appellant bank and Dalal were
unwarranted and uncalled for. We do not intend to make any observation in
connection therewith because the Court has itself stated that it was merely
a presumption, and not a finding, that the appellant bank had entered into
some sort of a transaction in securities with Dalal with the understanding
that they would get a fixed retum of 15 per cent on those transactions.
Once the Court itself observed that” loss is not a finding but merely a
presumption”, the said observations cannot in any way adversely affect the
appellant bank or reflect as being a positive finding in respect of its
business transactions. Perhaps the Special Court could have avoided the
said observation but, as we have already observed, these observations
should not and cannot cau’e any prejudice to the appellant bank in any
other matter which is pending before the Special Court.

It was submitted on behalf of the plaintiffs that the Special Court ought
not to have passed strictures or made harsh observations against the
appellant bank. It was contended that the appellant bank was victim of
conspiracy between their employees and Dalal on account of which it
suffered loss heavily. Services of several officers alleged to be involved
in the conspiracy were terminated by the appellant bank and criminal
proceedings were insti-tuted. This shows, it was contended, that when the
appellant bank got to know about the acts of its employees it acted in a
bona fide manner and no strictures should have been passed against it.

While examining the evidence the Special Court has observed that the
appellant bank was creating false record, which was admitted by their own
witnesses, and further that in the greed for profit the appellant bank was
flouting rules and regulations of the Reserve Bank of India. This and the
other observations made by the Special Court, though harsh, appear to be
amply justified. In making these observations the Special Court took note
of the fact that according to the appellant bank’s own witnesses false
records were created in the case of 9 per cent IRFC Bonds to hide a hole
from the Reserve Bank of India. The false record, which was created, showed
purchase of Cantriple Units even when there was no transaction of purchase.
This was done because inspection by the Reserve Bank of India was expected.
None of the officers against whom observations have been made by the
Special Court have chosen to challenge the same. No orders need be passed,
in our opinion, with regard to the said observations of the Special Court
made with reference to the officers of the bank who suddenly one day
realised in May 1992 that the bank had made purchases of securities etc.,
for Rs.1253 crores but in respect of which deliveries have not been made,
the case which was set up in the letter dated llth May, 1992. If before
llth May, 1992 the management was unaware of the short fall of arrears
worth Rs.1253 crores, as claimed by the appellant bank, the strictures
passed and the observations made against the appellant bank by the Special
Court were eminently justified.

Hiten Dalai in C.A. No. 1878 of 1999 bas impugned the decision of the
Special Court upholding the appellant bank’s claim for losses/deficiencies
to the extent of Rs. 280.80 crores. The decision of the Special Court in
this regard has already been approved by us herein above and nothing more
need to be said about this. One other contention which requires
consideration relates to the awarding of the costs of Rs. 30 lacs by the
Special Court against Hiten Dalai. Arguing the appeal on behalf of Hiten
Dalal, Mr. Ganesh contended that he has serious objection to the award of
the huge costs of Rs. 30 lacs to Standard and Chartered Bank. He contended
that it was the Standard and Charted Bank which has led evidence for all
along 33 day s, the Special Court has given special findings that except
for PW-4 the other witnesses of the bank had lied or prevaricated and in
respect thereto severe strictures had been passed. As many as 11 claims put
up by the appellant bank had been rejected by the Special Court and that
the Special Court had also found that the appellant bank had constantly
shifted their stand. It was contended that the award of costs of Rs. 30
lacs was grossly excessive and Hiten Dalai should not have been directed to
pay this amount.

The Special Court observed that it did not doubt that the appellant bank
had incurred costs of over Rs. 2 crores. It then held that this was not a
fit case where actual costs should be awarded but it restricted the costs
to Rs.30 lacs. This represents 15 per cent of the costs actually incurred
by the appellant bank. It is to be noted that the plea of Dalai was that
securities had been taken away from him by the appellant bank’s officers by
force and coercion. The appellant bank had, therefore, to lead evidence to
disprove this case and to prove the circumstances under which the leter
dated llth May, 1992 Ex. ‘G’ was executed. The appellant bank’s claim of
loss of about Rs. 280 crores has been upheld and this being so the decision
of the Special Court awarding costs of Rs. 30 lacs cannot in any way be
regarded as incorrect.

As a consequence of the aforesaid discussions and findings it follows that:

(1) In Civil Appeal No.762 of 1999, filed by the Standard Chartered Bank
and Another:

(a) The decision of the Special Court holding that the appellants had
been able to prove loss to the extent of Rs. 280.80 crores is affirmed.

(b) Bonus shares, dividend and interest were accretions to the pledged
stock and have to be regarded as forming part of the pledged property which
could not be ordered to be handed over unless redemption takes place.

(c) We hold that the letter dated llth May, 1992, addressed by Hiten P.
Dalai to the appellants created a pledge in their favour not only of the
shares and debentures worth Rs. 105 crores, particulars of which were given
in the said letter, but also on the bonus shares, dividend and interest
accrued on the said pledged shares and debentures.

(d) In reduction of Dalal’s liability to the appellants, they are
entitled to sell the original shares, rights shares and the bonus shares
and also to retain the dividend and interest accrued on the original
shares.

(e) Cantriple Units referred to in the letter dated llth May, 1992
representing transaction value of Rs. 205 crores shall be re-tumed to the
custodian and his retention would be subject to the out come of the other
proceedings including Miscellaneous Application No. 36 of 1993 and the
appellants and other parties would be entitled to try and establish their
rival claims to the said units.

(f) The observations made by the Special Court with regaid to the
conduct of the appellants and their employees do not call for any
intetference.

(g) The award of costs by the Special Court for Rs. 30 lacs against
Hiten P. Dalal is affirmed.

(2) Appeal No.762 of 1999 is partly allowed to the extent indicated above.

(3) Appeal No. 1878 of 1999, filed by Hiten P. Dalal, stands dismissed.
Parties to bear their own costs.

 

 

 

Leave a Comment