9911796707
TMI Blog1994 (8) TMI 313X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary for the purpose of determining the real questions in controversy between the parties. After due consideration, the amendments were allowed and the amended petition was taken on record. 2. The respondents in this case are : (1) Indian Railway Finance Corporation Ltd. (IRFC). (2) Karur Vysya Bank Ltd. (KVB). (3) Naresh K Agarwala and Co., a firm of stockbrokers (NKA). Subsequently, an application was received from the Standard Chartered Bank to be impleaded as a party. After opportunity to the other parties on this application, the Standard Chartered Bank (SCB) was included as respondent No. 4. 3. The facts as per the petition are that in early March, 1992, Amro Bank purchased purportedly from the Andhra Bank, through NKA 17 per cent NPC bonds of ₹ 100 each at a price of ₹ 97 plus accrued interest for a value of ₹ 9.76 crores, In accordance with the instructions of NKA, Amro Bank issued an account payee cheque/pay order in favour of Andhra Bank, Fort Branch, Bombay, for the above said amount with an attached memorandum stating that it represents the cost of 17 per cent NPC bonds purchased on behalf of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... July 1 and January 1, each year. The petitioner-bank, therefore, has prayed for: (a) Rectification of the register of bondholders to include its name as thebondholder ; (b) Payment of interest due and payable along with compensation ;(c) Compensation in respect of further instalments of interest. 4 . Indian Railway Finance Corporation Ltd. in its reply raised certain preliminary objections mainly on the ground that the matter covered by the petition is sub judice in the Bombay High Court as a suit has been filed by SCB being Suit No. 3810 of 1993, with regard to the very same bonds, prior to the present petition which fact has been suppressed though the petitioner is a party there and as such the petitioner has not come with clean hands. It is also contended that the petition is barred by limitation under Section 111(3). The petitioner cannot also avail of the remedy under Section 111(4) as it has not availed of the remedy already available under Section 111(2). The Standard Chartered Bank is a necessary party in this case. Further, the jurisdiction conferred on the Company Law Board does not exclude the jurisdiction of the civil courts and this is not an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds. Karur Vysya Bank Ltd., therefore, submitted that the company may be directed to register SCB as the holder of the bonds and to declare that the petitioner is not the owner of the said bonds. 7 . Respondent No. 3, namely, NKA, in his reply raised the following preliminary objections ; (i) There is a misjoinder of himself as a party though no relief is claimedfrom him. (ii) There is non-joinder of necessary parties, namely, SCB and Andhra Bank. (iii) The petition requires to be stayed since a similar matter is pending before the Bombay High Court in a suit and the relief claimed therein are similar and the issue is substantially the same. (iv) The petitioner has tried to mislead the Company Law Board with regardto the date of the receipt of 9 per cent IRFC bonds from NKA, which turned out later to be an obvious error. 8. As regards preliminary objections (i), (ii) and (iii), the advocate did not press for the same later. 9. Apart from the above, NKA has narrated the sequence of events which transpired between him and the petitioner. According to him, KVB placed an order with him for sale of 9 per cent IRFC Ltd. bonds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fulfil its obligations. Delivery to NKA or Hiten Dalai is not delivery to SCB and such dealings were not authorised by SCB. The petitioner-bank in any case acquired no title to the bonds allegedly received as alternate security. The Standard Chartered Bank has also admitted that a suit has been filed by them in the Bombay High Court, being Suit No. 3810 of 1993, with regard to the same bonds. In the circumstances, it prayed that SCB may be declared as the true, rightful and legal owner and IRFC be directed to rectify the register and enter SCB's name as the holder of the bonds. Further, directions to IRFC to pay SCB such benefits and interest as agreed to on the bonds from January 20, 1992, were also prayed for. 11. Pending final hearing and disposal, we directed IRFC to deposit the six-monthly interest falling due, in a fixed deposit with the State Bank of India, the main bankers of the company. 12. Arguments were advanced by Shri V.N. Koura, Advocate, on behalf of the Amro Bank. He stated that there was only one order for purchase of 17 per cent NPC bonds on March 3, 1992, and there was no order for purchase of IRFC bonds. Since NKA failed to deliver the 17 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n behalf of KVB, questioned as to why payment was made by the petitioner to the Andhra Bank while the transaction was with the broker ; as such the deal for 17 per cent NPC bonds was actually with the Andhra Bank. He further stated that under Section 178 of the Indian Contract Act, pledge of goods is permissible only when somebody is in judicial possession and in the present case the pledge is not in the normal course of business and it was totally outside the knowledge of the original owner. 16. Shri K.S. Cooper, senior advocate, appearing on behalf of SCB stated that : (a) The cost memo dated January 20, 1992, of KVB clearly reflects the transaction between SCB and KVB, supported by a contract note dated January 13, 1992, of NKA. (b) The BR of KVB is still lying with SCB which shows that the bond/LOA hasnot been delivered. (c) The petitioners have not submitted any contract note regarding the purchase of 17 per cent NPC bonds whereas NKA claims that he had a contract note for NPC bonds, thus raising rival contentions. The presence of the contract note confirms that NKA has acted only as a broker and not as a principal. (d) There is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that such person is entitled to deal with the shares, so that any honest purchaser from that person obtains a good title to the shares. In my opinion, until the decisions in France v. Clark [1884] 26 Ch D 257 and Fox v. Martin [1895] 64 L) Ch. 473 are directly overruled, the answer to that question must be in the negative. 18. According to Shri Cooper, the above case law clearly brings out that NKA cannot pass on any title to the IRFC bonds, particularly when Amro Bank is aware that it is dealing with a broker. 19. On the facts Shri Cooper submitted that the letter of NKA/KVB dated May 28, 1992, only shows that the letter of allotment was delivered to Hiten P. Dalai and not to SCB. Thus, no delivery was given to SCB. Though KVB is representing as if SCB has received documents and lost the same, he demonstrated from the correspondence between the Andhra Bank and the Amro Bank and that between NKA and KVB that the petitioner-bank had been dealing with Hiten P. Dalai and has not been able to recover the amount remitted to the Andhra Bank and has been wrongfully holding on to a security which belongs to SCB. 20. Shri G. Sarangan, representing KVB, further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statement in the decision in France v. Clark [1884] 26 Ch D 257 cited by Shri K.S. Cooper to indicate that the decision would have been different if there had been a mercantile usage which if approved would be sufficient to make a blank transfer negotiable in law . In the present case, the intermediary is a broker and hence the ruling in France v. Clark [1884] 26 Ch D 257 or of the decision of the Division Bench of the Bombay High Court in Abdul Vahed Abdul Karim v. Hasanali Alibhai Ghasia, AIR 1926 Bom 338, would not apply. Shri Koura further attacked the precedents cited by Shri Cooper by submitting subsequent judgments of the Supreme Court in V.P. Shelat v. P.J. Thakar, AIR 1974 SC 1728 ; [1975] 45 Comp Cas 43 (SC), to state that the right to ownership is conferred on the execution of the documents. Even in the case of a gift, the right to obtain the transfer of the shares is complete on the handing over of the share certificates and signing blank transfer forms. Such a view has also been upheld in Life Insurance Corporation of India v. Escorts Ltd. [1986] 59 Comp Cas 548 ; AIR 1986 SC 1370. Further, reinforcing his arguments with regard to the Sale of Goods Act he reiterated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioner is not maintainable on that basis. He further charged the petitioner with suppression of correspondence with the Andhra Bank asking for refund of the money. The petitioner should not have accepted a substitute security from a broker with definite knowledge that the broker cannot pass on the title and, therefore, he does not get a title. 26. Shri P.A.S. Rao, advocate, appearing on behalf of the company, justified the delay in transferring the bonds and stated that no claim for compensation can arise and also stated that there was no such claim in the original petition or in the oral pleas of the petitioner. The advocate for the Punjab Housing Board was also given opportunity and he raised the demand for the balance interest due from the petitioner-bank in case the bonds are ordered to be registered in Amro Bank's name. 27. After the completion of the hearing in this case, it was brought to our notice that an Ordinance has been promulgated on January 25, 1994, namely, the Special Court (Trial of Offences Relating to Transactions in Securities) Amendment Ordinance, 1994, which has now become an Act on receipt of the assent of the President on April 28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er submitted that in Chandrapal Singh v. Maharaj Singh, AIR 1982 SC 1238, even the Rent Control Officer has been deemed to be a court. He also referred to Noreen R. Srikantaiah (Mrs.) v. L. Dasarath Ramaiah, AIR 1985 Kar 208, to state that a court can be constituted with a limited jurisdiction. He also stated that even the exception with regard to the appeal as provided in the Ordinance is applicable to appeal under Section 111(2) of the Companies Act because such petitions are in the nature of appeals and hence exempted. He also drew our attention to letter No. 335/ CUS/ANL/CLB/Pt 3 126, dated January 20, 1994, of the Custodian appointed under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992. In this letter addressed to the Company Law Board, in reply to a reference made to him in the other case, the Custodian has expressed a view that since a notified person is involved the matter falls within the jurisdiction of the Special Court. He further added that the Company Law Board has already taken a decision to transfer its proceedings in a similar matter in A.N.Z. Grindlays Bank v. National Hydro Electric Power Corporation Ltd. [1995] 82 Comp Cas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the Company Law Board, Western Region Bench in Carbon Corporation Ltd. v. Abhudaya Properties P. Ltd. 11992] 73 Comp Cas 572 (CLB) which has recorded the reasons as to why the Company Law Board is not a court. The Company Law Board is even now entitled to exercise and discharge such functions and powers as are entrusted by the Central Government under the Companies Act. Section 10E(4C) recognises the Company Law Board as a civil court for certain limited purposes only. He explained the purpose of the Ordinance in the background of the Special Court Act, 1992, and stated that the Spegial Court is already vested with the powers of a criminal court, but it did not have the powers of a civil court. However, in order to expedite the disposal of cases relating to notified persons, it was considered necessary to clothe the Special Court with the powers of a civil court and as such the Ordinance took away the jurisdiction of civil courts in respect of those transactions which are spelt out in Section 9A(1). The purpose of this Ordinance is only to transfer cases relating to security transactions of notified persons, but other matters pending before any other court will not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... drawn with regard to the matter relating to these transactions as respondent No. 4, Fair Growth Financial Services Limited, is a notified person. Hence, the present proceedings before the Company Law Board including the main petition has to be transferred to the Special Court . Counsel on the other side in that case, Shri L.R. Gupta, submitted only with regard to an exception for the transfer as provided in Section 9A(2) in respect of appeals. He did not challenge the basic applicability of the Amendment Ordinance to the Company Law Board. In the above circumstances, there was no opportunity available to us to get the point relating to whether the Company Law Board was a civil court or not, argued as there was unanimity of views on both the sides. 33. We have now gone into the question of applicability of the relevant provisions of the Special Court (Trial of Offences Relating to Transactions in Securities) Amendment Act, 1994 (Act 24 of 1994), as assented to on March 28, 1994. The words court or civil court have not been generally defined in the judicial dictionary or in any enactment. The characteristic features of a court are also not clearly spelt out specifically ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a civil court it is necessary for us to examine whether we constitute a court under the Civil Procedure Code, 1908, rather than under the Companies Act, 1956. A civil court is to be distinguished basically from a criminal court. However, all civil courts are bound by the provisions of the Civil Procedure Code, 1908. In the case of the Company Law Board, however, Section 10E(6) makes it abundantly clear that it shall have power to regulate its own procedure which, in other words, means the Company Law Board is not required to adhere to the provisions of the Civil Procedure Code, 1908. Moreover, Section 10E(4C) clothes every Bench of the Company Law Board with the powers of a court under the Civil Procedure Code, 1908, in respect of certain limited matters which, in other words, means that otherwise the Company Law Board does not have the powers of a civil court in all matters excepting those spelt out under that section. In View of these, we are unable to agree to the proposition that the Company Law Board is a civil court. 35. We also observe that the objective of the Amendment Ordinance appears to be in consonance with the objective of the Special Court Act of 1992, name ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rically states that there is only one order dated March 3, 1992, for purchase of 17 per cent NPC bonds, respondent No. 3 cites evidence in the form of (submitted by the petitioner-bank itself as part of the petition) another contract on March 9, 1992, for the purchase of 9 per cent IRFC bonds. What is the correct position ? Before we decide this we have to get two sub-issues out of the way, viz., (a) whether the contract note of March 9 was pre-dated, and (b) whether NKA was being considered as a principal. The contract note dated March 9, 1992, issued by respondent No. 3 must have been actually prepared only after March 9, 1992, because on that date there was evidently no seller of 9 per cent IRFC bonds, nor did he have its possession. NKA could not prove that on or before March 9, 1992, there was an order for sale of IRFC bonds and as such in its absence he could not have made a sale. No broker makes a contract note without a seller and buyer or at least another broker in view as otherwise it would amount to a fictitious transaction. In fact, it is doubtful whether the contract note was delivered on March 18, as even the covering letter does not say so and Amro Bank also does not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated June 19, 1992, addressed by the petitioner to NKA clearly indicates that IRFC bonds are supposed to be held by the petitioner-bank for a short while until the delivery of the 17 per cent NPC bonds. The following extract from that letter is relevant : While receiving the said 9 per cent IRFC bonds as security, we had specifically informed Mr. Naresh Agarwala that our customers PHDB were interested in investment in 17 per cent bonds and not in 9 per cent IRFC bonds. It was thereupon agreed that we should hold the said letter of allotment along with transfer forms duly signed for a short while and that you would make arrangements for exchange of 17 per cent NPC bonds for the said 9 per cent IRFC bonds (emphasis added). On the basis of such assurance from Mr. Agarwala, we had not forwarded the said letter of allotment for endorsement in our favour or in favour of our customers and we are holding the said bonds along with the transfer forms. 41. The letter dated June 18, 1992, addressed to IRFC by the petitioner-bank also indicates the arrangement between NKA and the petitioner-bank. The following sentence from the letter is relevant : Since the sai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y to pledge. 45. From a study of the section, it is clear that one of the prerequisites of a valid pledge is that the mercantile agent should be able to pledge the goods in the ordinary course of business. In other words, pledging of the securities either for raising money or as security for performance of a contract should be in the ordinary course of the business of a broker. In this connection, it may be noted that NKA is a member of the Delhi Stock Exchange and the contract note also specifies that the contract is subject to the bye-laws of the Delhi Stock Exchange Association Ltd. We have gone through the bye-laws of the stock exchange. We find that there is only one situation when a broker can exercise the right of lien and shall be also at liberty to pledge the securities of his clients. This is dealt with in bye-law 226(a) and (b) of the bye-laws updated up to March 1, 1994. The broker has a right of lien and, therefore, a right to pledge whenever a constituent is indebted to a member? In the present case, neither KVB nor SCB is shown to be indebted to NKA and as such the latter could not have a right of lien or a pledge in accordance with the bye-laws of the stoc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Housing Development Board that the RBI had already directed the Andhra Bank to honour the claim of the petitioner-bank though the former has represented their case to the RBI. In view of this in equity also the petitioner cannot have a double advantage of pursuing the payment with the Andhra Bank and claiming title to the IRFC bonds without paying any consideration. 48. Thus, our conclusion on the first substantive issue is that the transaction was neither in the nature of a valid pledge nor in the nature of a sale as the petitionerbank is itself challenging the second contract and there is no valid consideration. 49. As regards the question whether title is conveyed or not by the delivery, a share broker, in the ordinary course of business, while making a sale of securities along with blank transfer forms, does convey a good title. This has been confirmed in Fazal D. Allana v. Mangaldas M. Pakvasa, AIR 1922 Bom 303, as well as by the Mysore High Court in Rama Rao (S.) v. Dasarathy Rao, AIR 1955 Mys 43. In the absence of such a recognition, all stock exchange transactions will come to a standstill. This is perhaps the exception which was contemplated in France v. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he facts of this case are identical with the case decided by the Chancery Division in Fox v. Martin [1895] 64 LJ Ch. 473 cited by Shri K.S. Cooper. In that case, a broker who had a brief to sell a security pledged the same for his own debt and the court held that no valid title was passed on. Similar were the facts and decision in Colonial Bank v. Cady [1890] 15 AC 267. 52. If wrongful pledging of a third party's securities is recognised as valid for the purpose of conveying title, the investors will be in for a raw deal. The securities market being a wide network, it is essential to rely on the services of intermediaries who take upon themselves the responsibility of delivering the scrips or receiving the price. Every such transaction has to be as per the rules of the stock exchange and should be evidenced by a contract note as the brokers being members of the stock exchange are governed by the rules and regulations of the exchange. If such wrongful pledging is recognised, there will be total chaos in the securities market. As such the stock exchange regulations do not permit this in the ordinary course. Thus, we come to the inevitable conclusion that the delivery of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce in the stand between KVB, NKA and SCB as to the identity of the parties in this transaction. If Amro Bank concedes that it has purchased the IRFC bonds through the second contract from NKA, we would have accepted the petitioner-bank as the owner of the bonds. However, the petitioner-bank disowns the second contract and has gone on a theory of implied bailment/pledge or alternate security for the first contract. In the circumstances, the only transaction that subsists regarding IRFC bonds is the one between KVB and SCB. Though the petitioner-bank has attempted to challenge the transaction by pointing out certain discrepancies in figures, the overwhelming evidence submitted by all the other parties shows the genuineness of the transaction. 56. Consequently, we are of the opinion that the true owner of these IRFC bonds should be SCB. Accordingly, we direct IRFC to register SCB as the holder of the 9 per cent IRFC bonds covered in the petition and deliver the securities in its possession to SCB after due registration. IRFC shall also pay all arrears of interest due on these bonds. Consequently, the interim order with regard to the deposit of interest stands vacated and the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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