Case: Canbank Financial Services Vs. Custodian

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.2.2. In or about May, 1992 serious irregularities in security transactions were discovered whereupon the Reserve Bank of India constituted a Committee known as ankiraman 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.3. 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 by `The Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992 ("the Act"), the Statement of Objects and Reasons where for are asIn 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.5. 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 arisingthe 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.12. 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 & Others. [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,Section 3 of the Special 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 CANCIGOS is transferable.Analysing the provisions of Section 4(2) of the Benami Transactions Act and Section 13 of the Act, the learned Judgeso 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 cant 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 cant make a claim or bring an action to enforce any right in respect of the CANCIGOs 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 cant be allowed to raise a defence in respect of the CANCIGOs 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.15. It was furtheris thus clear that Respondent No.5 could not have purchased the CANCIGOs nor could the beneficial interest in the CANCIGOs be transferred to them. Respondent No.5 have got thus no right, title or interest in the CANCIGOs 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 CANCIGOs 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 CANCIGOs 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.der 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 CANCIGOS to the Custodian. Application No.55 of 1933 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."

Court's reasoning:
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.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 applicationNos. 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.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,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.94. 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. In 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 PropertyAppellant 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 in unsustainable inare 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.100. 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:101. 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