2008 (6) TMI 351 - SC - Companies Law

Fraudulent transfer of shares - Held that - Appeal dismissed. Learned Judge of the Special Court has rightly concluded that 200 duplicate shares were obtained by the appellant by misrepresentation. The said 200 shares plus 50 Bonus shares were attached by the CBI in proceedings initiated against deceased Harshad S. Mehta therefore the attached shares of the fourth respondent-company could not be transferred to any party. The record of second respondent-Custodian would reveal that 250 shares were purchased by the appellant in the month of June 1994 and payment of Rs. 2, 92, 400 was made by cheque dated 6-7-1994. In these circumstances the learned Special Judge directed the appellant to pay to the first respondent an amount of Rs. 2, 92, 400 with interest at the rate of 18 per cent per annum from 6-7-1994 till the date of realization. Thus the orders of the learned Special Judge impugned in these appeals do not suffer from any infirmity or illegality warranting interference in exercise of appellate power.

Issues involved:

1. Validity of the duplicate share certificates issued to the appellant.
2. Legality of the transactions involving the shares originally held by the appellant.
3. The appellant's liability for misrepresentation and fraud.
4. The attachment of shares under the Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992.
5. The entitlement of the first respondent to recover the value of the shares.

Issue-wise detailed analysis:

1. Validity of the duplicate share certificates issued to the appellant:

The appellant had originally held 200 shares of Hero Honda Company and lost these shares in September 2003. He reported the loss to the police and requested the fourth respondent-company to issue duplicate certificates. The company issued these duplicate certificates after following the due process, including publishing a public notice and not receiving any objections. However, the Special Court found that the appellant had made a misrepresentation to obtain these duplicate shares, knowing that the original shares were already sold to late Harshad Mehta. The court concluded that the duplicate shares were obtained fraudulently.

2. Legality of the transactions involving the shares originally held by the appellant:

The appellant sold the 200 shares to the first respondent, who later received 50 bonus shares from the fourth respondent-company. The first respondent sold these shares, but the transfer was not registered due to the CBI's intervention, which was investigating the Share Transfer Scam. The Special Court noted that the appellant had already sold the shares to Harshad Mehta before applying for duplicate shares, thus making the transaction illegal and fraudulent.

3. The appellant's liability for misrepresentation and fraud:

The Special Court found that the appellant committed fraud by selling the original shares and then obtaining duplicate shares through misrepresentation. The court noted that the appellant was aware that the shares were already sold to Harshad Mehta, a notified person under the Act, and yet he falsely claimed that the shares were lost. As a result, the court held the appellant liable for misrepresentation and directed him to pay the first respondent the value of the shares with interest.

4. The attachment of shares under the Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992:

The shares in question were part of the properties attached under section 3(2) of the Act, as they belonged to Harshad Mehta, a notified person. The court emphasized that all properties belonging to a notified person are automatically attached upon notification, and no special order is required for such attachment. The court cited precedents to support this interpretation, including L.S. Synthetics Ltd. v. Fairgrowth Financial Services Ltd. and Ashwin S. Mehta v. Custodian.

5. The entitlement of the first respondent to recover the value of the shares:

The Special Court directed the appellant to pay the first respondent Rs. 2,92,400 with 18% interest per annum from 6-7-1994 until realization. This amount represented the value of the 250 shares (200 original shares plus 50 bonus shares) that the first respondent had purchased. The court found that the first respondent was entitled to recover this amount due to the fraudulent actions of the appellant, which led to the issuance of duplicate shares and subsequent transactions.

Conclusion:

The Supreme Court upheld the findings and orders of the Special Court, concluding that the appellant's actions constituted fraud and misrepresentation. The court affirmed the attachment of shares under the Act and the appellant's liability to compensate the first respondent. The appeals were dismissed, and the orders of the Special Court were deemed to be without any infirmity or illegality.

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