TMI Blog2000 (4) TMI 759X X X X Extracts X X X X X X X X Extracts X X X X ..... ars of which were given in the said letter, but also on the bonus shares, dividend and interest accrued on the said pledged shares and debentures. In reduction of Dalal s liability to the appellants, they are entitled to sell the original shares, rights shares and the bonus shares and also to retain the dividend and interest accrued on the original shares. Cantriple Units referred to in the letter dated 11-5-1992 representing transaction value of ₹ 205 crores shall be returned to the custodian and his retention would be subject to the outcome of the other proceedings including Miscellaneous Application No. 36 of 1993 and the appellants and other parties would be entitled to try and establish their rival claims to the said units. The observations made by the Special Court with regard to the conduct of the appellants and their employees do not call for any interference.The award of costs by the Special Court for ₹ 30 lakhs against Hiten P. Dalal is affirmed. - CIVIL APPEAL NO. 762 AND 1878 OF 1999 - - - Dated:- 18-4-2000 - B.N. KIRPAL AND R.P. SETHI, JJ. JUDGMENT Kirpal, J. - The Reserve Bank of India noticed large-scale irregularities and malpracti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... under the Act, notified Hiten P. Dalal (respondent No. 2 in Civil Appeal No. 762 of 1999 and appellant in Civil Appeal No. 1878 of 1999) under section 3(2) of the said Act. The Custodian then got to know that some shares and securities, which belonged to respondent No. 2, were in the possession of the appellant bank. It also came to the knowledge of the Custodian that the appellant bank had got some of the shares transferred to its name. Correspondence was then exchanged between the Custodian and the appellant bank whereunder the appellant bank was called upon by the Custodian to either hand over the shares and securities to the Custodian or the bank should obtain an appropriate direction from the Court in case the appellant bank was claiming any title to the said shares. 5. The demand of the Custodian requiring the appellant bank to hand over the said shares which it had obtained from the notified party led the appellant bank, which is incorporated under the laws of England and Wales and has its Head Office at 1, Aldermanbury Square, London, and the second appellant which is an existing company under the Companies Act, 1956 and is a wholly owned subsidiary of the 1st Appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shares the details of which were mentioned in the annexure to the said letter dated 11-5-1992 and worth approximately Rs. 145 crores, were delivered by Hiten Dalal in partial discharge of his liability to the appellant bank in pursuance to the aforesaid agreement which was recorded in a note dated 18-5-1992. The case of the appellants was that the bank is entitled to exercise ownership right in respect of the said shares and to the accretions thereon which may have been received by the appellants. The appellants also sought a declaration that Hiten Dalal had no right title or interest in the said shares and the same did not belong to him on the date of the notification. It may here be noted that the counsel for the appellants did not press this claim of ownership before the Special Judge. 8. The second alternative claim by the appellants was that the said shares were validly pledged in favour of the appellant bank under the letter dated 11-5-1992. In exercise of its rights as pledgees the appellant bank claimed that the said shares had been adjusted against the admitted liability of the second respondent to the appellant bank. It thus claimed ownership over the said shares. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of the transactions, which had taken place through him. He specifically denied that the purchases approximating Rs. 1253 crores were not supported by delivery of stocks or acceptable bank receipts. On the contrary Dalal averred that the appellants had committed several irregularities and were attempting to transfer the burden on him. He denied having accepted any liability to pay any amount to the appellant bank or having admitted to the appellants having suffered any loss as alleged or at all. With regard to the stocks and shares worth Rs. 145 crores which were lying with the appellants, the case of Dalal was that two employees of the appellants, namely, Ravi Iyer and Siva Kumar had forcibly taken away those stocks which had been lying in his office and which belonged not only to him but also to his wife and some of his customers. Dalal claimed that these officers threatened him that if he did not cooperate they would prosecute and ruin him. Dalal further alleged that his signatures were taken on blank documents and the appellants had wrongfully used those documents with blank signatures in order to foist a false claim against him. He further alleged that on 18-5-1992 unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chase transactions and their not having received deliveries of stocks/bankers receipts. 15. The appellants led evidence in support of their case. On behalf of Dalal the court was given to understand that he will enter the witness box in order to substantiate his plea of physical torture threat of criminal prosecution, coercion etc. Ultimately Dalal chose not to give evidence before the court. On 24-12-1998, the Special Court delivered its judgment and inter alia, held that : (1)the appellants had been able to prove loss totalling Rs. 280.80 crores and that other losses alleged by the appellants were disproved; (2)no coercion had been exercised by the appellants on Dalal; (3) the letter dated 11-5-1992 addressed by Dalal to the appellants created a pledge in favour of shares and said debentures, particulars of which were given in annexure to the said letter. The claim of mortgage of the said shares was not accepted; (4)the appellants were entitled to sell the original and right shares pledged to them in reduction of Dalal s liability to the appellants; (5)bonus shares and dividend and interest accrued on the original shares pledged were not themselves the subject-mat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as follows : "Dear Sirs, Re : Transactions in Government and other securities 1. In the past 4 years I have been acting as your broker for transactions in Government and other securities. 2. I am aware that you are in the process of reconciling your purchases/sales through me of Government and other securities and whilst the reconciliation is yet to be completed, you have ascertained as of date that the following purchases aggregating Rs. 1258 crores are not supported by deliveries of stocks and/or bank receipts of banks acceptable to us. Type of SecurityTransaction Value 15 Crores unitsRs. 200 crores(Karad B.R.) 9% IRFC (1/1)Rs. 385 crores(Metro B.R.) 9% IRFC (1/4) Missing B. Rs.Rs. 45 crores(various B. Rs.) 12.5% GOI 2007Rs. 80 crores(Karad SGL) 6% GOI 1994Rs. 50 crores(Metro SGL) 11% IDBI 2002Rs. 20 crores(Metro B.R.) 11.5% IDBI 2011Rs. 47 crores(Karad B.R.) 8.75% IDBI 2000Rs. 23 crores(Karad B.R.) 6 crore unitsRs. 90 crores(Metro B.R.) 12% ICICI 2011Rs. 50 crores(Metro B.R.) CantripleRs. 205 crores(Physical) Cantriple (Expected)Rs. 58 crores Rs. 1253 crores The letter further goes on to say that Dalal had delivered to the bank stocks, s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppellants and the Special Court found it inconceivable that force had been used at the time of taking away all the shares forcibly. 22. We have gone through the evidence and we agree with the aforesaid conclusion of the Special Court to the effect that the contention of Dalal that the said shares were taken away from him forcibly is not correct. In the issues which were framed the onus of proof that the letter dated 11-5-1992 had been executed under threat of physical terror and criminal prosecution was on Dalal. Hiten Dalal however chose not to enter the witness box in support of this plea. Not only did he not lead any evidence in order to prove coercion, the appellant bank on the other hand examined witnesses who clearly proved that Dalal had not only signed the letter dated 11-5-1992 but he also signed other documents to which we will presently refer. As Dalal had failed to step into the witness box or lead any evidence on his behalf, the Special Court rightly drew an adverse inference against him. 23. We must, therefore, proceed on the basis that Ex. G even though prepared by the employees of the appellant bank had been voluntarily and willingly signed by Hiten Dalal. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was submitted that with regard to the balance claim the Special Court ought not to have given a positive finding that the same stood dis-proved. 27. Hiten Dalal, in the appeal filed by him, has challenged the acceptance by the Special Court of the loss of Rs. 280.80 crores stated to have been suffered by the appellant bank in its dealing with him. So far as the Custodian is concerned, Mr. Shiraz Rustomjee the learned counsel for the Custodian, submitted that it accepted the loss of Rs. 201 crores which was more than sufficient to cover the value of the pledged shares of Rs. 145 crores but he submitted that the decision of the Special Court in invoking the provisions of section 106 of the Evidence Act and in holding that the loss of Rs. 79.80 crores has been proved was not correct. In this respect he supported the submissions of Shri S. Ganesh the learned counsel on behalf of Dalal. 28. Before dealing with the correctness of the findings of the Special Court it will be appropriate to analyse the said letter dated 11-5-1992 Ex. G . As has already been observed, this letter was admitted prepared by the officials of the appellant bank on the basis of inspection which had been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dated 8-1-1992 showing the purchase of Rs. 15 crores U.T.I. units at the rate of Rs. 13.40 (Ex. B -Vol. IV) per unit amounting to Rs. 201 crores was proved by PW 4. Also placed on record was the banker s receipt dated 8-1-1992 for a sum of Rs. 201 crores. Against this, on 8-1-1992, there was a sale of 9 per cent I.R.F.C. bonds of the face value of Rs. 210 crores. By pay order dated 8-1-1992 bearing No. 231967, a sum of Rs. 199.79 crores was paid to the Bank of Karad. Another document Ex. M is the receipt dated 8-1-1992 issued by the Bank of Karad acknowledging the receipt of Rs. 201 crores in respect of said U.T.I. units. In face of the said evidence, Shri Ganesh was unable to persuade this Court that the decision of the Special Court in accepting the loss of Rs. 201 crores was incorrect. This finding regarding the loss of Rs. 201 crores is affirmed. 31. Now we come to the next item of loss which was accepted by the Special Court, namely, that of Rs. 79.80 crores mentioned as item No. 10 in Ex. G . 32. During the cross-examination of the appellant bank witness PW 6, the counsel for the Hiten Dalal put him the following question : Mr. Rao calls upon the plaintiffs to s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by pay order No. 231079, a sum of Rs. 18.71 crores was paid by the appellant bank to the Bank of Karad. A sum of Rs. 29.99 crores, which included the aforesaid sum of Rs. 18.71 crores plus another sum of Rs. 11.27 crores, was transferred to the account of Hiten Dalal with Andhra Bank. The Special Court noted that in this case also it was shown that from the Bank of Karad an amount of Rs. 18.71 crores of the appellant s bank had gone to the account of Hiten Dalal. The Special Court further noticed that in respect of this transaction relating to Rs. 18.71 crores regarding the purchase of 13 per cent M.T.N.L. bonds, the appellant bank had not claimed that they had suffered a loss as the said transaction was not listed in Ex. G. While not accepting the sum of Rs. 18.71 crores as being loss/suffered by the appellant s bank, the Special Court accepted the loss of Rs. 79.80 crores being the face value of six crores Units of the U.T.I. in respect of which Rs. 37.63 crores had been paid but the said units were not received. 33. It is contended by Mr. S. Ganesh, the learned counsel for the respondent No. 2 that the Special Court mis-understood and mis-conceived the provisions of sectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue of Rs. 79.80 crores which had been purchased by the appellant bank, which is evident by his signing Ex. G , it is not open to him to contend that he does not accept the correctness of the contents of the said letter. In our view, therefore, without expressing any opinion on the correctness of the findings of the Special Court with regard to the applicability of section 163 of the Evidence Act in the present case, the conclusion of the Special Court to the effect that six crores units of the U.T.I. of the face value of Rs. 79.80 crores had not been delivered to the appellant bank, even though it had made payment in respect thereof, does not call for any interference. 37. With regard to the other items of securities referred to in Ex. G , the learned counsel for the appellant bank invited our attention to Ex. E collectively which were hand-written notes signed by Dalal on 17-5-1992 wherein he had undertaken to deliver various shares and securities of the total value of Rs. 900 crores. Keeping in view the fact that the Special Court had observed that the appellant bank will have to prove the extent of loss not on the basis of admission of Hiten Dalal but by leading evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d shares as having been pledged to it. 39. Undoubtedly the Special Court had required the appellant bank to prove by independent evidence as to what was the extent of loss suffered by it. One of the issues between the appellant bank and the custodian, being issue No. 2, was as to what was the extent of loss suffered by the Bank. The Special Court answered the issue by holding that the appellant bank had been able to prove that it had suffered a loss to the extent of Rs. 280.80 crores only. Having come to this conclusion it would have been more appropriate, in our opinion, for the Special Court to have observed that the appellant bank had failed to prove loss in excess of Rs. 280.80 crores rather than giving a finding that the loss in excess of Rs. 280.80 crores stands disproved. The loss which it had suffered was sufficient to enable it to retain and dispose of the shares to the extent of Rs. 145 crores which had been pledged with it. 40. In respect of the pledged stock, right shares were subscribed and obtained by the appellant bank, bonus shares and dividend and interest were also received by it. In respect of this the two questions which arise are whether these accretion ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res have, therefore, been described as a distribution of capitalised undivided profit. Section 94 of the Companies Act refers to the power of a limited company to alter its share capital. Under section 94(1)( a ) it has power to increase its capital share while under clause ( d ) it can sub-divide its share into shares of smaller amount. Whereas in a case of sub-division an existing share is simply divided or split and it may be argued that no new share or capital is created but there can be little doubt that in the case of issue of bonus share there is an increase in the capital of the company by transferring of an amount from its reserve to the capital account and thereby resulting in additional shares being issued to the shareholders. A bonus share is a property which comes into existence with an identity and value of its own and capable of being bought and sold as such. Neither in Dalmia industries nor in Hunsur Plywood Works Ltd. s case ( supra ) was this Court concerned with a question whether the bonus share could be regarded as an accretion or not. This Court in those cases was only concerned with a question relating to the valuation of the bonus share for tax purposes. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on expiration of time or accomplishment of purpose. Reading section 172 with sections 148 and 160 of Contract Act, it would appear that when goods are bailed for securing payment of debt or the performance of a promise the bailor would get a right for the return of the said goods when the purpose is accomplished, namely, the debt is returned or the promise is performed. At the same time section 176 provides for pawnee s right when pawnor makes default. This section reads as follows : "176. Pawnee s right where pawnor makes default - If the pawnor makes default in payment of the debt, or performance, at the stipulated time, of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged or giving the pawnor reasonable notice of the sale." This section not only gives the pawnee the right to retain the goods pledged as collateral security but also entitlies the pawnee to sell the pledged goods after giving pawnor reasonable notice of the same. If the proceeds of the sale are less than the amount due, the pawnor continues li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld also be attached property, it is only income generated by a notified person by dint of his own labour which falls outside the net of section 3(3). In respect of such income, the attachment under section 3(3) does not operate." 50. If the accretions are regarded as property which come to existence after the date when the party was notified then in view of Tejkumar Balakrishna Ruia s case ( supra ) income generated after the date of notification would fall outside the net of section 3(3). It, therefore, became necessary for this Court in Tejkumar Balakrishna Ruia s case ( supra ) to observe in paragraph 9 that if the attached property is shares then the dividends, bonus and rights shares would also be regarded as attached property. If this be so then would pledge not extend to these accretions to the shares which were pledged ? In this connection it is relevant to notice Story on Law of Bailment at para 292 has stated thus : By the pledge of a thing, not only the thing itself is pledged, but also, accessory, the natural increase thereof . As if a flock of sheep are pledged, the young, afterwards born, are also pledged. This passage has been relied upon by Chitty on Cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Transfer of Property Act are not included in section 163 of Contract Act but it is to be seen that if the accretion is to be regarded as forming part of the bailed property then such accretion must remain with the pawnee and be dealt with by him in the same manner as the pledged shares. In other words the accretions form an integral part of the attached shares as on the date of attachment as held in Tejkumar Balakrishna Ruia s case ( supra ) and it follows that it would also be an integral part of the shares when they were pledged and would, therefore, constitute a part of the pledged security. The appellant bank would, therefore, be entitled to retain the same and deal with them as pledged stocks. The decision of the Special Court that the bonus shares, dividend and interest which had accrued on the pledged shares were not themselves the subject-matter of the pledge and must, therefore, be handed over by the appellant bank to the custodian cannot be sustained. 53. In the aforesaid letter dated 11-5-1992, Ex. G , item No. 12 refers to Cantriple Units having a transaction value of Rs. 205 crores and item no. 13 was shown as Cantriple accepted having a transaction value o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ank was that pending before the Special Court were Suit No. 9 of 1994, Suit No. 45 of 1995 and Miscellaneous Application No. 36 of 1993 where the question of title to these Cantriple Units was directly in issue. 57. The grievance of the appellant bank in these appeal is that the Special Court erred in giving detailed findings in respect of these Cantriple Units and also erred in directing the appellant bank to hand over the said units to the custodian because Cantriple Units were outside the scope of the suit. The fear of the appellant bank is that the finding of the Special Court with regard to the appellant bank s right to retain these Cantriple Units may prejudice them in the other proceedings. 58. In paragraph 50 of the plaint it has been categorically stated that the suit was restricted to seeking relief in respect of the shares, securities, debentures and bank receipts delivered between 11 to 13-5-1992. The Cantriple Units in question had been delivered by Dalal on 9-5-1992. There is no specific issue, which was framed with regard to the question, as to whether these Cantriple Units had been purchased by the appellant bank or had been handed over to them by way of sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between their employees and Dalal on account of which it suffered loss heavily. Services of several officers alleged to be involved in the conspiracy were terminated by the appellant bank and criminal proceedings were instituted. This shows, it was contended, that when the appellant bank got to know about the acts of its employees it acted in a bona fide manner and no strictures should have been passed against it. 61. While examining the evidence the Special Court has observed that the appellant bank was creating false record, which was admitted by their own witnesses, and further that in the greed for profit the appellant bank was flouting rules and regulations of the Reserve Bank of India. This and the other observations made by the Special Court, though harsh, appear to be amply justified. In making these observations the Special Court took note of the fact that according to the appellant bank s own witnesses false records were created in the case of 9 per cent IRFC Bonds to hide a hole from the Reserve Bank of India. The false record, which was created showed purchased of Cantriple Units even when there was no transaction of purchase. This was done because inspection by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he plea of Dalal was that securities had been taken away from him by the appellant bank s officers by force and coercion. The appellant bank had, therefore, to lead evidence to disprove this case and to prove the circumstances under which the letter dated 11-5-1992 Ex. G was executed. The appellant bank s claim of loss of about Rs. 280 crores has been upheld and this being so the decision of the Special Court awarding costs of Rs. 30 lakhs cannot in any way be regarded as incorrect. 64. As a consequence of the aforesaid discussions and findings it follows that : (1) In Civil Appeal No. 762 of 1999, filed by the Standard and Chartered Bank and Another : ( a )The decision of the Special Court holding that the appellants had been able to prove loss to the extent of Rs. 280.80 crores is affirmed. ( b )Bonus shares, dividend and interest were accretions to the pledged stock and have to be regarded as forming part of the pledged property which could not be ordered to be handed over unless redemption takes place. ( c )We hold that the letter dated 11-5-1992, addressed by Hiten P. Dalal to the appellants created a pledge in their favour not only of the shares and debentures w ..... X X X X Extracts X X X X X X X X Extracts X X X X
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