CANBANK FINANCIAL SERVICES

CUSTODIAN AND ANR.

APRIL 12, 2004

[S. RAJENDRA BABU, DR. AR. LAKSHMANAN AND

G.P. MATHUR, JJ.]

Special Court (Trial of Offences Relating to Transal:tions in Securities) C Act, 1992:

S.3-Share broker notified under the Act-Money received as sale proceeds of shares belonging to a customer sold by share broker-Attachment of-Held, the money belongs to the customer and the share broker was holding the same in trust-Even if the share broker blended the money with his own D money, s. 66 of Trusts Act arms the court to impose a charge on the whole property of the trustee to the extent of amount due-Customer is entitled to the amount-Indian Trusts Act, 1882--s.66.

Respondent No. 2, a share broker, sold shares belonging to the appellant, for a certain amount. The payment was not made to the E appellant. Meanwhile respondent No. 2 was notified under s.3 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992. The appellant filed an application before the Special Court for a declaration that attachment of the amount received by respondent No. 2 on sale of its shares was void as it was not the property belonging to him, and the same be released in favour of the appellant. The Special F Court dismissed the application. Aggrieved, the appellant filed the present appeal.

It was contended for the appellant that respondent No. 2 merely acted as an agent on its behalf and as such held the amount recovered from the sale in trust for and on behalf of the appellant, and the custodian G ought not to have attached the said amount as it was not the property belonging to respondent No. 2.

Allowing the appeal, the Court

HELD: I. I. The relationship between a share broker and the

. •

C/\NBANK FINANCIAL SERVICES r. CUSTODIAN [RAJENDRA BABU, J.] 1101

) .. J customer is one of trust. Admittedly, respondent No. 2 was asked to sell A

...

shares for and on behalf of the appellant. Thus the proceeds of such sale cannot be treated as property belonging to him. It belongs to the appellant, and respondent No. 2 was only holding the same in trust. In this view of the matter, the attachment under s.3 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 cannot extend to appellant's money and, therefore, appellant is entitled to get back its money. 11102-G-H; 1103-AI

Harshad S. Mehta v. Custodian and Ors., 119981 5 SCC 1, relied on.

1.2. Even if respondent No. 2 blended the property/money with that of his own money, under s.66 of the Indian Trusts Act, 1882, the appellant is entitled to a charge on the whole fund for the amount due. Therefore, Special Court could not have burdened the appellant to locate the particular account in which the money is credited so as to claim it back.

Section 66 of the Trusts Act arms the Court to impose a charge on the whole property of the trustee to the extent of amount due. The appellant is entitled to the amount claimed by it out of the assets of respondent No.

2. Special Court would work out appropriate modalities for refund of the amount due to the appellant at an appropriate stage. (114-D-G]

CIVIL APPELLATE JURISDICTION : Civil Appeal No. 166of1994.

From the Judgment and Order dated 14.9.93 of the Special Judge in Special Court Bombay in M. Appln. No. 22 of 1993.

Rohit Kapadia, Ms. Sumita Dutt, Pradeep, Nilesh Parikh and Ms. Pooja Jha for M/s. Janendra Lal & Co., the Appellants.

Jay Savla, Ms. Reena Bagga, A. Subba Rao and P. Parmeswaran, (NP) for the Respondents.

The Judgment of the Court was delivered by

RAJENDRA BABU, J. Facts leading to this Appeal are as follows: G

Appellant engaged Respondent No. 2 as a broker to sell I 0,00,000

~ shares of Reliance Petro Chemicals Ltd. at the rate of Rs. 29 per share. It is said that those shares were sold and the Respondent No.2 is liable to collect the sale proceeds and pay the same to Appellant. The payment was, however, not made. In the meanwhile, Custodian appointed under Section 3 of Special H

A Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 ,,__ \ (the Act) notified Respondent No.2, whereby all properties bdonging to him stood attached. Appellant filed a Petition before the Special Court for a declaration that the sum of Rs. 2.90 crores received by Respondent No 2 on behalf of Appellant was not property 'belonging to' him and hence the B attachment of that amount is void. There was also a pica to release the said sum in favour of the Appellant.

Special Court dismissed these prayers vide its Order dated 14 September

1993. Dismissal was on the reasoning that the Appellants failed to show that the money was credited into or lying in any particular account. The Special c Court further held that all that the Appellant entitled is only to a charge on the estate of Respondent No.2 for recovery of their money, but refused to release the money to Appellant. This Order is impugned herein. It is also the case of Respondent No.2 that the Appellant is liable to pay about Rs. 3 crores to his brother and that he is entitled to set off the sum of Rs. 2.90 crores against the amount due to his brother Harshad Metha.

Case put forwarded by the Appellant is; that Respondent No.2 merely acted as agent I broker on behalf of the Appellant; that the amounts he received from the sale of their shares should have been handed over to them; that as long as the amounts are not handed over, Respondent No.2 holds the

E same in trust for and on behalf of the Appellant; that the same is not his property; that Respondent No. I/Custodian ought not to have attached the property since it is not property 'belonging to' Respondent No.2.

Respondent No. l has not denied the transaction.

F In this context the position of law that needs to be ascertained is whether the amount, Respondent No.2 is holding, belongs to him or not. Under section

11 (I) of the Act, the Special Court is empowered to direct Custodian for the disposal of property under attachment. In Harshad S. Metha v. Custodian and Ors., [ 1998] 5 SCC 1 this Court clarified that if any person other than the notified person has any interest, share, title or right in the attached property G it cannot be extinguished. It was clarified that the Special Court cannot dispose of property, which does not belong to notified person.

In this case, it is the admitted position that Respondent No.2 was asked to sell shares for and on behalf of Appellant. Thus the proceeds of such sale cannot be treated as property belonging to him. It belongs to Appellnt and H Respondent No.2 was only holding the same in trust. The relationship between

1 -I

CANBANK FINANCIAL SERVICES v. CUSTODIAN [RAJENDRA BABU, J.]

11 QJ

a share broker and customer is one of trust. In this view of the matter, the A attachment under Section 3 of the Act cannot extend to Appellant's money (Rs. 2.90 crores) and, therefore, appellant is entitled to get back his money.

In order to locate the money that belongs to Appellant, this Court found it essential that more facts in relation to the sale proceeds and the alleged claims of set off needs to be ascertained. An Order was passed on 6 February, B 200 I by this Court wherein Respondent No.2 was directed to file an affidavit disclosing the following facts: -

(a) The dates on which and the parties to whom the said 10-lakh

shares were allegedly sold;

(b) The manner in and the date on which the price of the said shares was realized;

(c) The manner in which he dealt with the proceeds stated to have been realized from the sale of those shares;

(d) The account particulars (in so far as it is relevant) of the bank D in which the proceeds, if any, of the sale of the said shares were deposited; and (e). In case any payment had been received by way of settlement or adjustment of any other transaction, then the full particulars of the parties with whom those transactions were held and the particulars of those transactions.

His brother was also directed to file an affidavit clarifying his position on the claim of set off. In order to ascertain the particulars, Respondent No. 2 and his brother were given liberty to verify the documents and records in the custody of CBI or income tax authorities concerning the said transaction.

Pursuant to this Order Respondent No.2 filed an affidavit; along with F he attached a contract note dated 3 March, 1992 indicating that I 0 lakh shares of Reliance Petro was sold to Harshad Metha at the rate of Rs. 29 per share. By this he answers first point.

Though sufficient time and liberty to verify relevant records was given, G he failed to answer queries (b) to (e) on one ground or another not tenable in law and hence adverse inference has to be drawn against him. On August 6, 200 I brother of Respondent No.2 Harshad Metha filed an affidavit stating that he is not claiming any set off against Appellant regarding his claims.

Even in Reply to the application filed by the Appellant before the H

A Special Court Respondent No.2 submitted as follows:

" .... .I say that it is correct that some time in March 1992, my firm had been approached by the Petitioner herein for sale of I 0 lacs shares of Reliance Petrochemicals Ltd. I recollect that the transaction of sale had taken place on behalf of the Petitioner some time in March/ April

1992. I understand that the sale proceeds in respect oftl:ese transactions have also been received by my firm. I cannot say precisely when the moneys have been received. It is also correct that moneys have yet not been paid over by my firm to the Petitioners herein. I say that there was a balance in the firm's account in excess of Rs. 2.90 crores when the account was frozen by CBI... .. "

Considering the categorical admission by Respondent No.2 that he received money on behalf of Appellant, the Appellant is entitled to get back his money, because Respondent No.2 is holding the money in Trust. Even if Respondent No.2 blended the property I money with that of his own money D under Section 66 of the Indian Trusts Act, 1882 (the Trusts Act) the Appellant is entitled to a charge on the whole fund for the amount due. Therefore we cannot agree with the finding of the Special Court that burdened the Appellant to locate the particular account in which the money is credited so as to claim it back. Section 66 of the Trusts Act arms the Court to impose a charge on the whole property of the trustee to the extent of amount due.

E In the result, we cannot sustain the view adopted by the Special Court on the application of Appellant for releasing its money. The Appellant is entitled to the amount to the extent of Rs. 2.90 crores out of the assets of Respondent No.2.

F Hence, we allow this appeal, set aside the order of Special Court with direction to work out appropriate modalities for refund of the amount due to appellants at an appropriate stage.

R.P.

Appeal allowed.

i.. \