2009 (8) TMI 696 - SC - Companies Law

Discharge of liabilities - whether the auction sale should be confirmed or not? The acquisition of the properties whether prior to the window period, during the window period or thereafter can be attached for the discharge of liabilities? Held that - Appeal allowed by way of remand. A plain reading of section 3(3) would suggest that all properties of the notified persons on the date of the said notification would automatically stand attached irrespective of the fact as to whether they had been acquired before, during or even after the statutory period. A logical corollary of this would be that all income accruing or arising from the said property even after the date of attachment would also automatically stand attached. However property acquired by a notified person after the notification under the Special Act cannot be attached. That property does not come within the purview of the section 3(3). The cut off date for the attachment of the property accordingly is the date of notification. All properties of the persons on the said date automatically stand attached. The statutory window period is irrelevant for the attachment of the property. It would have no bearing on the said attachment. However, a lot of documents have been filed before us with regard to Audited Reports. In our opinion this clearly shows the non-application of mind of the Judge, Special Court. He was required to weigh the submissions and counter-submissions of both the parties in his proper perspective and then arrive at a well reasoned opinion, which doesn t seem to be the case before us. It is well settled that Justice must not only be done, but also must be seem to be done . The Audited Reports and the objections have been filed before us. We direct the parties to file the same before the learned Judge, Special Court, so as to enable him to consider the matter afresh strictly in the light of the earlier judgment passed in Ashwin S. Mehta s case (2006 (1) TMI 257 - SUPREME COURT OF INDIA) as well as the observations made herein.

Issues Involved:
1. Interpretation and application of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.
2. Historical background and purpose of the Special Act.
3. Involvement of Chartered Accountants and their findings.
4. Impugned judgment of the Special Court and directions from Ashwin S. Mehta's case.
5. Submissions by the appellants and the custodian.
6. Use of section 4(1) of the Special Act.
7. Issues regarding nomenclature of the parties.
8. Issue of denotification.
9. Nexus of the properties with illegal securities transactions.
10. Statutory window period.
11. Admissibility of reports and documents.
12. Application of the doctrine of lifting the corporate veil.
13. Non-application of mind by the Special Court.

Detailed Analysis:

1. Interpretation and Application of the Special Act:
The judgment revolves around the interpretation and application of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992. The Act was enacted to address the malpractices in securities transactions, particularly those involving Harshad Mehta and his associates.

2. Historical Background and Purpose of the Special Act:
The Special Act was enacted following an investigation by the Reserve Bank of India, which revealed that Harshad Mehta and his associates had diverted public funds for short-term investments in the securities market. An Inquiry Committee under Shri Janakiraman highlighted gross malpractices, leading to the creation of the Special Court for trial of offences and civil disputes arising between 1-4-1991 and 6-6-1992, referred to as the "window period."

3. Involvement of Chartered Accountants and Their Findings:
Chartered Accountants played a significant role in this case. M/s. Vyas & Vyas and M/s. Vinod K. Aggarwala & Co. were appointed to audit the assets and liabilities of Harshad Mehta. The reports indicated incomplete books of accounts and raised questions about the accuracy of the financial information provided.

4. Impugned Judgment of the Special Court and Directions from Ashwin S. Mehta's Case:
The Special Court's judgment followed directions from the Supreme Court in Ashwin S. Mehta's case. The Supreme Court had issued eleven directions, which the Special Court addressed in its judgment. These directions included the attachment of properties, consideration of tax liabilities, confirmation of auction sales, and the treatment of appellants as part of the Harshad Mehta Group.

5. Submissions by the Appellants and the Custodian:
The appellants contended that their properties should not be treated as benami properties of Harshad Mehta and that the Special Court misinterpreted the directions of the Supreme Court. They argued that their properties were acquired before the statutory period and had no nexus with illegal securities transactions. The custodian countered that all properties of notified persons stood attached under section 3 of the Act and could be used to discharge liabilities.

6. Use of Section 4(1) of the Special Act:
The appellants argued that section 4(1) of the Special Act, which deals with benami transactions, should apply. However, the court held that section 4(1) applies to third parties, not notified parties. Properties acquired by notified parties, whether before, during, or after the window period, could be attached for discharging liabilities.

7. Issues Regarding Nomenclature of the Parties:
The Special Court relied on the Supreme Court's judgment in Sudhir S. Mehta's case, which treated the appellants as part of the Harshad Mehta Group. The court noted that the appellants had previously identified themselves as part of the group and had not shown any prejudice caused by this treatment.

8. Issue of Denotification:
The appellants had withdrawn their denotification applications and later filed fresh ones. The court found no justification for the withdrawal and noted that the issue of denotification would need to be addressed by the Special Court.

9. Nexus of the Properties with Illegal Securities Transactions:
The appellants argued that their properties had no nexus with illegal securities transactions. The court held that under section 3(3) of the Special Act, all properties of notified persons stood attached automatically, irrespective of their connection to illegal transactions.

10. Statutory Window Period:
The appellants contended that the properties were acquired before the statutory window period. The court clarified that section 3(3) of the Act applies to all properties of notified persons on the date of notification, regardless of when they were acquired.

11. Admissibility of Reports and Documents:
The court acknowledged that reports from the Janakiraman Committee and others were admissible only for tracing the legal history of the Act, not as evidence. The Special Court was directed to consider audit reports from Vyas & Vyas and Vinod K. Aggarwala & Co. in detail.

12. Application of the Doctrine of Lifting the Corporate Veil:
The Special Court applied the doctrine of lifting the corporate veil to M/s. Aatur Holding Pvt. Ltd., finding that Harshad Mehta was the real owner despite the company's nominal paid-up capital and low salaries.

13. Non-application of Mind by the Special Court:
The Supreme Court criticized the Special Court for reproducing large portions of the custodian's report without considering the appellants' arguments. The judgment was set aside, and the matter was remanded to the Special Court for fresh consideration in light of the Supreme Court's observations.

Conclusion:
The Supreme Court set aside the impugned judgment and remanded the matter to the Special Court for fresh consideration, emphasizing the need for a thorough and balanced analysis of the submissions and evidence presented by both parties. The Special Court was directed to complete the hearings expeditiously and preferably within six months.

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