Standard Chartered Bank & Anr. v. Custodian &Anr

The article discusses that placing a check on banking and financial institutions is the need of the hour. This case dealt with various issues, highlighting the conduct of bank employees and the greed for profit
Estimated Reading Time: 11 minutes

Introduction

In 1992, The Reserve Bank of India came across massive irregularities and malfeasancerelating to transactions in securities. Brokers in collusion with the employees of banks and financial institutions had indulged in systematic misconduct leading to the diversion of fund from banks and financial institutions to the accounts of these brokers.

For speedy recovery of the huge amounts involved, a Special Court Ordinancewas promulgated on 6thJune, 1992, later replaced by the Special Court Act, 1992.[1] Section 3 of the Act states that the Central Government can appoint a Custodian who has the power to notify the name of any person in the gazette, who has been involved in any offence relating to transactions in securities after 1stApril, 1991 and on/before 6th June, 1992.[2]Any property, movable/immovable or both, belonging to such persons notifiedstood attached simultaneously with the issue of the notification. The property attached was to be dealt with by the Custodian in the manner prescribed by the Special Court.The Special Court was presided over by a sitting Judge of a High Court.[3]It could take cognizance of or try cases that are instituted or transferred to it. This Court had the jurisdiction to exercise such power and authority which was exercisable before the commencement of the Act by a Civil Court.[4]

Factual Background

On 30th April, 1992, Arvind Lal, an employee of the Reserve Bank of India informed R. Iyer, a Director of the Local Currency Group, that Rs. 800 crores of investments made by Hiten Dalai were not backed by securities or banker receipts. The setback was calculated to be approximately Rs. 1300 crores. It was alleged by the appellants that Hiten Dalai had admitted his liability and given proposals for repayment and conveyance of various shares, debentures, securities and bonds for the same. However, he did not fulfill his commitments to convey between 11th May and 13th May 1992. On 14th May, the Manager of Legal Services of the Bank stated that a letter should be obtained from Dalai to prevent him from claiming the delivery of shares by safe custody. A letter was drafted by the in-house legal counsel of the bank and was given to Dalai to have it transcribed on his notepaper. The letter was brought to the bank office on 18th May where it was signed by Dalai, although the letter bears the date of 11th May 1992.[5]

The respondent denied having accepted any liability to pay the amount claimed to the Bank or having admitted to the appellants to have suffered any loss as was alleged. According to Dalai, the stocks had been taken under coercion and blank signatures were taken under force. The aforementioned letter was claimed to be signed under threat as well.[6]

Issues

  1. Whether the appellants had suffered actual loss as claimed[7]?
  2. Whether Hiten Dalai had given the shares as securities or was they taken from him under coercion[8]?
  3. Whether the shares were given as securities by way of pledge or mortgage[9]?
  4. Whether rights and bonus shares, dividend, and interest on the shares (accretions)were construed as part of the secured assets[10]?
  5. Whether the Special Court ought not to have passed strictures against the Bank?
  6. Whether the Special Court erred in directing Dalai to pay Rs. 30 lakhs as costs?

Arguments from the parties

Arguments of the Appellants

The appellants put forth four claims in this suit:

Firstly, it was claimed that the sharesmentioned in the annexure to the letter dated 11th May, 1992 and worth around Rs. 145 crores, were delivered by Hiten Dalai to partially discharge his liability to the Bank as part of the agreement recorded in the note dated 18th May, 1992. The bank had ownership right in these shares. Additionally, the appellants sought a declaration that Dalai had no right, title or interest in the shares.[11]

Secondly, it was claimed the said shares were pledged in favour of the bank according to the letter. In exercise of its rights as pledgees, the appellant bank claimed that the said shares had been adjusted against the admitted liability of Dalai to the appellant bank.[12]

Thirdly, it was statedthat the letter created a valid pledge of the shares and that the rights, bonus and the dividends (accretions) received by the appellants were a part of the pledge and constituted as securities. The Bank stated that it was entitled to retain possession of the shares and accretions until the liability was satisfied. The appellants claimed a right to sell the shares as well as appropriate the sale proceeds towards satisfaction of the outstanding liability of Dalai.[13]

Fourthly, it was claimed that the shares and accretions received by the appellant bank stood mortgaged to it. The amount expended by the Bank for right shares and the preservation of the mortgaged security was said to be a part of the mortgage debt. Therefore, the appellants pleaded that they were entitled to retain the mortgaged shares and securities in additionto the accretions.

Arguments of the Respondents

The custodian contested the facts as stated by the appellants. According to the custodian, Dalai was a notified party and the shares worth Rs. 145 crores were his property which was in the custody of the appellants.[14] It was contended that the shares could not be dealt with without the discretion of the court. The claims made by the appellant were untenable.

Dalai was a securities broker and had been dealing with the appellants for four years. He denied that there was any shortfall in the transactions made by him and that the purchase of Rs. 1253 crores were not supported by stocks or bank receipts. Dalai claimed that the appellants framed him for the irregularities committed by them. It was contended that shares worth Rs. 145 crores belonging to him, his wife and few customers, were forcibly taken using threat by two bank employees, Ravi Iyer and Sivakumar. Furthermore, it was alleged that his signatures were taken on blank documents which were later used to falsely accuse him. The letter on which the appellants claim is based on was signed under the threat of physical torture, criminal prosecution and threat to that his life. Any sort of liability on the part of the defendant was denied.[15]

Summary of the decision and judgment

The claim by the bank was based on a letter that indicated that Dalai had delivered to the bank the shares as listed in the annexure to the letter through securities towards the shortfall. Between 11th and 15th May, the said shares worth Rs. 145 crores were handed over to the Bank. Furthermore, Dalai had agreed to keep the Bank indemnified against any loss which it might have incurred or suffered upon the completion of final reconciliation of its account with Dalai through cash or any other physical assets. It was postulated that after reconciliation, any excess funds would be refunded. Additionally, it was confirmed that the bank was authorized to sell the stocks, shares, debentures etc. which were handed over to the bank as well as to appropriate the proceeds to partly liquidate his liabilities. Any outstanding amount was to be paid by Dalai himself after such appropriation. However, Dalai claimed that the said letter was signed under coercion and that the shares were forcibly taken.

Taking all the evidence into consideration, the shares and stocks were not taken away forcibly. Firstly, it was unbelievable that the shares were forcibly taken away from Dalai between 11th and 13th May, 1992 and for three days,he did not complain or prevent the appellants from taking away the shares forcibly.[16]It was admitted that there had been a meeting between Dalai and the advocate of the appellants. However, the Special Court did not find any evidence that force had been used at the time of taking away all the shares.Secondly, Hiten Dalai chose not to enter the witness box in support of his plea. Thirdly, there was no evidence proving coercion and the Bank had witnesses who proved that Dalai had not only signed the letter but he also signed other documents. Therefore, the Court held that the letter had been voluntarily signed by Dalai. Moreover, shares and stocks of Rs. 145 crores were delivered from 11thto 15th May, 1992.[17]

With respect to the amount claimed, the Court concluded that a claim of Rs 1253 crores was exaggerated. Additionally, the claim for Rs. 795 crores wasdisapprovedand the Court accepted the claim on two items worth Rs. 201 crores and Rs. 79.80 crores, amounting to a total of Rs. 280.80 crores. The respondent accepted the claim of Rs 201 crores which was enough to indemnify the bank. However, after cross-examination, the Court accepted the loss to the extent of Rs. 79.80 crores.[18]

The next issue was whether the accretions form an integral part of the attached shares as on the date of attachment. The Court rejected the argument put forth by the respondent that the pawnee is liable to handover the accretion to the pawnor under Section 163 of the Contract Act.[19] It was noted that the term‘upon redemption’ as contemplated in Sections 63[20] and 64[21] of the Transfer of Property Act is not included in Section 163 of Contract Act but applying the same to this case,the accretion that forms a part of the bailed property must remain with the pawneein the same manner as the shares that have been pledged.Hence, the Bank wouldbe entitled to retain and deal with the accretionin the same manner as the pledged stocks.

Another point of contention was regarding the CantripleUnits. In the aforementioned letter, it was stated that payment had been made but the units had not been delivered. However, in the letter dated 20th May, 1993, theCantriple Units were said to be a part of the pledged stocks. According toa subsequent letter dated 16th June, 1993, these units were bought and set off. Moreover, a witness proved that the units were taken as security and not purchased. The Court noted thatCan Bank Financial Services Ltd. filed a Miscellaneous Application claiming that the Bank had forcibly taken away the Cantriple Units.[22]Since the retention of these units would be subject to the other legal proceedings, the Court held that the Bank would be entitled to try and establish their claim to the units.

The appellants had further claimed that the Special Court had erred in passing strictures and making observations. It was alleged that the Bank had been creating false records such as 9% IRFC Bonds and the purchase of CantripleUnits.[23] In the greed for profit, the Bank had been flouting the rules and regulations laid down by the Reserve Bank of India. The Court, therefore, held that if before 11th May, 1992, the management was unaware of the shortfall of Rs. 1253 crores, the strictures passed and the observations made against the Bank by the Special Court were correct.

The last issue brought up was regarding the cost of Rs. 30 lakhs. This represented 15% of the costs incurred by the Bank. Since the Bank’s claim of loss of Rs. 280 crores had been upheld;theCourt held the awarding of the costs as justified.

Analysis

The Court embarked on a pedestal to interpret the concept of pledge against the backdrop of the Contract Act as well as the Transfer of Property Act. It was observed in the Tejkumar Balakrishna Rujacase[24]that it is necessary to establish that the income/ usufruct of the property is also attached property. Assuming the property in this case to be shares and stocks, the dividends, bonus and right shares constitute accretions of the attached property. The question posed before the bench was whether the pledge would extend to these accretions as the shares were pledged. To answer this, the Court explored the literature on the concept and held that with respect to the special property of the pawnee, if during the contract, there is an increase in the value of the security, the pawnee is entitled to it as part of the security.

The Bench distinguished two earlier judgments in CIT v. Dalmia Investment Co. Ltd.[25] and Hunsur Plywood Works Ltd. v. CIT[26] and held that Section 163[27] of the Contract Act is to be construed as follows: Accretions attached to goods bailed cannot be a property of the bailee. They are treated the same as the goods and are to be returned when the goods bailed are returned. Therefore, the pledge extends to the accretions as well. However, if the pledge extends to the natural increase of the goods, the pledgee has the right to sell the same with original shares for the purposeof setting off the outstanding liabilityfor which the shares were pledged as a security. The accretions to the property that has been pledged continue to be retained by the pawnee.

Conclusion

Placing a check on banking and financial institutions is the need of the hour. This case dealt with various issues, highlighting the conduct of bank employees and the greed for profit. While Hiten Dalai was held liable for securities worth Rs. 280 crores, the Bank had claimed an exaggerated amount of Rs. 1253 crores. Indeed, greed is the common denominator in most banking scandals. Timid regulators leave the conduct of employees and fraudulent transaction unbridled. Such malfeasance has to be reformed to prevent bankers from indulging in misconduct. The pursuit of profits come at the expense of basic standards of trust. The judicial machinery plays an important role in recommending ways to curtail greed and restructure the financial system to prevent irregularities and malpractices. Installing a layer of internal accountability is essential to change the bank structure that is primarily focused on profits. Nevertheless, this Court dealt with the issues of accretions and loss claimed, which have beeninstrumental in subsequent cases.

The Court’s analysis on pledge and bailment has established the pawnee’s right when the pawnee makes default. The High Court of Kerala in Syndicate Bank v. C. H. Muhammed[28]referred to the judgement in this case with respect toSection 172[29] with Sections 148[30] and 160[31] of Contract Act. When goods are bailed for securing payment of debt or the performance of a promise, the bailor has the right for the return of the goods when the debt is returned or the promise is performed.


[1]The Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992, No.27, Acts of Parliament, 1992. [Hereinafter, The Special Court Act]

[2]The Special Court Act, 1992, Section 3.

[3]The Special Court Act, 1992, Section 5.

[4]The Special Court Act, 1992, Section 9A.

[5]Standard Chartered Bank &Anr. v. Custodian &Anr., (2000) 3 SCR 81, para. 6.

[6]Id. at 11.

[7]Id. at 12.

[8]Id. at 12.

[9]Id. at 12.

[10]Id. at 12.

[11]Standard Chartered Bank &Anr. v. Custodian &Anr., (2000) 3 SCR 81, para. 7.

[12]Id. at 8.

[13]Id. at 9.

[14]Id. at 10.

[15]Id. at 11.

[16]Standard Chartered Bank &Anr. v. Custodian &Anr., (2000) 3 SCR 81, para. 21.

[17]Id. at 22.

[18]Id. at 25.

[19]The Indian Contract Act, 1872, No. 9, Imperial Acts, 1872, Section 163.

[20]The Transfer of Property Act, 1882, No. 4 of 1882, Section 63.

[21]Id. at Section 64.

[22]Standard Chartered Bank &Anr. v. Custodian &Anr., (2000) 3 SCR 81, para. 53.

[23]Id. at 61.

[24]Tejkumar Balakrishna Ruja v. A.K. Menon &Anr., (1997) 9 SCC 123.

[25]Commissioner of Income Tax v. Dalmia Investment Co. Ltd., [1964] 52 ITR 567 (SC).

[26]Hunsur Plywood Works Ltd. v. Commissioner of Income Tax, [1998] 229 ITR 112 (SC).

[27]The Indian Contract Act, 1872, Section 163.

[28]Syndicate Bank v. C. H. Muhammed, 2010 SCC Online Kerala 4865. 

[29]The Indian Contract Act, 1872, Section 172.

[30]Id. at Section 148.

[31]Id. at Section 160.

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