TMI Blog2003 (6) TMI 427X X X X Extracts X X X X X X X X Extracts X X X X ..... in the attached account of the notified party and in all these petitions the only one notified party included is Hiten P. Dalal. All these petitions were heard as a group on certain common points of law, by consent of learned counsel appearing for the parties, with a view to decide common points of law first and thereafter, if necessary, to hear each of the petition separately on the facts. The facts in almost all the petitions are similar although not common and give rise to similar questions of law. In order to appreciate the points of law involved and the controversies, it would be necessary to refer to facts of one or two matters at least. Petition No. 28 of 2002 is filed by Standard Chartered Grindlays Bank. As the show-cause notices issued in all the above proceedings are common, it would be worthwhile to refer in detail to the show cause-notice issued in the matter of Standard Chartered and Grindlays Bank. The show-cause notice dated January 17, 2002, in substance is as below : Whereas Shri Hiten P. Dalai (HPD) is a person notified by the Custodian on June 8, 1992, under the provisions of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 741 as claimed by ANZ. ( vii )BOA has confirmed having received a sum of Rs. 30,59,85,141 from ANZ as full and final settlement by the aforesaid bonds and delivered SGL on November 2,1991, favouring ANZ and have stated that BOA is not aware of payment of Rs. 1,00,37,400 made by HPD to ANZ and they have nothing to do with it. ( viii )Sharp and Tannan, chartered accountants, who conducted the audit of securities transactions of ANZ have confirmed that the difference amount of Rs. 1,00,37,400 was received by ANZ from HPD and is claimed to be relating to this transaction. They have further observed in respect of the above transaction leading to payment of difference that these do not appear to have taken place during the normal course of business. ( ix )HPD was asked as to why pay order was issued by debit to his account with Andhra Bank. No reply was received, no document was furnished. Considering the facts and circumstances of the case, the Custodian is of the opinion that the difference payment of Rs. 1,00,37,400 received by ANZ by debit to the account of HPD, a notified party, is illegal and fraudulent transaction and appears to have been entered into to defeat the provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and delivery rate differences having been used to bring an element of difference to enable transaction of monies to the bank; ( ii ) comments contained in the report of the Jankiraman Committee wherein it is stated that the above type of difference represent fixed returns against contracts where the risk was carried by the broker but the bank used its own investment portfolio and invested its own funds ; and ( iii ) the IDG report which corroborates the report of Jankiraman Committee. The aforesaid comments or opinions or even findings rendered in the said reports suggest that the reason or object of recording a difference in the contract and delivery rates of the transaction was with a view to either transfer monies of the notified party to the bank or the differential payment represented fixed returns in respect of contracts undertaken by the brokers on behalf of the banks. Rs. 1,00,37,400 was recovered by ANZ from HPD and ANZ in fact paid the said amount to BOA on the same date and towards consideration payable in respect of the very same transaction. It is therefore not possible to accept that the alleged reason for the differential payment is either illegal or fraudulent. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3, 1991, which the bank did through the broker HPD. There was a rise in the price of the said security and the company therefore instead of taking delivery asked the bank to dispose of the same on the same day resulting in a difference of Rs. 2 crores which was credited to the account of the company maintained with Citibank. Similarly the company directed Citibank to purchase one crore units of UTI 64 on December 16, 1991, which was purchased by the bank through HPD. Since there was also a rise in the price of the said units, the company instead of taking delivery of the units directed to dispose of the same on the same day resulting in a difference of Rs. 50 lakhs which was credited to the account of the company maintained with Citibank. Thus the total difference of Rs. 2.50 crores was paid by HPD to the petitioner Oswal Agro. Citibank denied to have received any such instructions and the Custodian therefore concluded that the company engaged in fictitious transactions with the notified party HPD in the absence of contract notes and supporting bills and that it was a fraudulent transaction entered into in order to defeat the provisions of the Act. There was violation of the provis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cessary to be decided 11 What is the scope of inquiry by the Custodian under section 4 of the Special Courts Act Not necessary to be decided 12 Whether the transaction was fraudulent and was entered into in order to defeat the provisions of the Special Courts Act No 13 What is the meaning of the expression with an intent to defeat the provisions of the said Act as appearing in section 4? As per discussion 14 Whether the show cause notice issued by the custodian lacks in material particulars of the alleged fraud. If yes, what is its effect on the present application? Yes 15 Whether the burden of establishing the ingredients of section 4(1) is on the Custodian? Yes 16 Whether the Custodian's satisfaction is required to be objectively established, on the basis of material whose authenticity and correctness is either admitted/undisputed or established ? Yes 17 Whether the Custodian can rely on any material/ reports whose correctness is not admitted, only if he establishes the correctness thereof and affords an opportunity to cross examine the pers ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Under the Special Courts Act the Custodian has no power to pass any order in the nature of a decree directing payment by any party to the notified party. If the notified party is entitled to recover something from any other party then the Custodian has to approach the Special Court with a petition or suit. Mr. A. M. Setalwad, learned counsel appearing for the Custodian, clearly conceded that the Custodian has no such powers of passing an order in the nature of a decree of civil court and therefore, during the course of argument it was suggested to learned counsel that these orders of the Custodian can at the most be treated as demand notices claiming various amounts from the parties with interest as a result of cancellation of contract and on failure of the parties to comply with the same, even if notices are justified, the only remedy available to the Custodian is to approach the Special Court by filing a petition or suit for recovery of the said amount. The above issues are therefore answered accordingly. Issues Nos. 1, 2, 9 to 21 : All the remaining issues are interconnected and can be conveniently 15 considered together. In order to appreciate as what are the require ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive Bank Ltd. (in liquidation) 6. Syndicate Bank. 7. Bombay Mercantile Co-operative Bank Ltd. 8. Nedungadi Bank Ltd. II. Findings In its second report, the Committee had reported that over 20 per cent in number and thirty per cent in value of the securities transactions reported by banks/institutions cannot be matched. On a further scrutiny, the possible reasons for the mismatch have been ascertained and are detailed in Chapter III of this report. It needs to be clarified that since the transactions as reported tally in totality, there does not appear to be any case where the transactions reported by one bank/institution are not responded by some other bank/institution, though as explained in Chapter III, the actual counter party bank/institution responding to a transaction may be different from the bank/counter party as reported (emphasis supplied). As mentioned in the second report, there are a number of transactions where purchases and sales have been booked by banks/institutions at what appear to be artificial rates and differences running into crores of rupees have accrued to the accounts of brokers. No satisfactory explanation has been given as to why these h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ." In the second interim report at page 32, it is observed in paras. 10 and 11 as under : "10. There are a number of transactions where the rates at which sales of investments have been booked by banks/institutions are at rates which are considerably in excess of the rates at which counter party banks have booked the purchases. The payments received by the banks/institutions have been at the rates at which purchases have been booked by the counter party banks/institutions and the difference often running into crores of rupees has been received from the brokers. It is obvious that sales have been booked at artificial rates to book a profit or avoid a loss. It is also obvious that the broker would not have paid the difference unless he had been compensated in some fashion. The matter is under further investigation (emphasis supplied). 11. There are a number of instances where with the full knowledge of the management, banks/financial institutions have issued SGL forms against SGL forms brought by brokers. In some cases, these are reflected as purchases/sales of the banks/financial institutions but in other cases there is no such entry made. For these services rendered ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions which had no security backing. Thus, the guise of security transactions was given to what were in fact pure financing transactions without even the backing of an underlying security. In many cases ( e.g. in the case of SBI), by omission or perhaps by design no record was maintained of BRs issued. In other cases there is clear evidence to show that BRs supported by BRs were issued at the request of brokers. The third report of the Committee lists a number of cases where BRs were so issued by BOK and MCB at the behest of broker ADN and for the benefit of brokers HPD and other brokers. Similarly, BRs appear to have been issued by SBI for the benefit of broker HSM. ( c )As has already been pointed out BRs were almost used as negotiable instruments and transferred from bank to bank and "third party" BRs were accepted by banks. ( d ) These lax practices gave considerable scope to banks and bro kers to indulge in a number of irregularities in the guise of securities transactions. The indiscriminate use of BRs without security backing created a kind of paper money which circulated from bank to bank like a stage army of soldiers and provided an opportunity to brokers to av ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Citibank. ( c )On February 26, 1992, Stanchart booked 22 sales transactions with Citibank in respect of securities purchased on February 26, 1992, mostly from State Bank of India. The net difference between the sale rate and the purchase rate aggregated to Rs. 15.4933 crores which was shown in the diary as due to HPD." The Joint Parliamentary Committee while trying to find out the end use 21 of monies, observed in para. 18.36 at page 257 as under : "18.36. The Committee were seized of the aspect of the end use of monies from the very beginning. It appreciated that should the movement of monies, whether from banks or PSUs, through brokers, be traced to the end user than the entire inter connected ramifications of the Scam would be revealed. In pursuance of this the Committee examined in detail voluminous transactions of various brokers and some of the banks. The Committee also sought co-operation and assistance of the CBI and the RBI in this regard. It advised the CBDT also to undertake a similar exercise. The Committee regret that it has not been possible to complete this task to their own satisfaction." (underlining is mine). The Inter Disciplinary Group pointed out d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (Rs.38 crores) and Canbank Financial Services (Rs. 57 crores). The legality of these finding arrangements have to be examined. There may, however, also be cases of moneys flow to banks on account of the same day sale and purchase due to roll over of earlier ready forward transactions/forward positions. Banks were asked to furnish documentary evidence to establish the rationale behind such receipts and on the basis of their replies auditors have been appointed by RBI to determine the bona fides of such receipts by the banks/FIs concerned from the brokers. The audit is in progress. Stanchart also appropriated Rs. 77.85 crores from HPD in "kind". The details have been indicated at para. 8.1.1, Chapter II of JRC report No. 4. As explained therein an aggregate amount of Rs. 107.31 crores was credited by Stanchart to P.O. Received account and dummy entries passed to recover from HPD Rs. 63 crores in respect of SLR securities and Rs. 14.85 crores in respect of non-SLR securities. 6.7.4. Though the analysis of the bank account, bank/FIs and other entities who received and paid moneys were asked to explain the underlying transactions. On the basis of information received effort was mad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ease in securities transactions during the corresponding period of the banks involved in serious irregularities related with the scam. What is more apparent is the systematic and deliberate abuse of the system by certain unscrupulous elements. It is abundantly clear that the scam was the result of failure to check irregularities in the banking system and also liberalisation without adequate safeguards. There is also some evidence of collusion of big industrial houses playing an important role. It is because of these elements that the economy of the country had to suffer and while some gained thousands of crores, millions of investors lost their savings. The criminality of the perpetrators of the scam becomes all the more despicable as it was during this period that the country was passing through most trying times, economically and financially. An observation that the Committee has been constrained to make at a number of places in the succeeding chapters is that for all these not many have yet been identified and effectively punished." This background is necessary to be considered while appreciating the factual aspects and legal issues involved in these petitions. Section 4(1) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion of "fraud" it is not possible to accept the contention that mere allegation that the contract is fraudulent is sufficient to make out a case of fraud. The particulars of fraud are necessary to be pleaded. The Civil Procedure Code makes it obligatory to plead particulars of fraud practiced and in case particulars are not given, the other side has a right to call for particulars and better particulars. The reason being that the party who has to meet the allegation of fraud must know as to what is alleged. In the present case the show-cause notices issued by the Custodian are totally lacking in particulars of fraud. A reference to any of the show-cause notice would clearly -show that the Custodian has not even alleged as to who has' practiced fraud and what are the facts constituting the fraud, who are the parties to the fraud, who are the perpetrators of the fraud and who is the victim of the fraud. Unless the show-cause notice gives these particulars, it is not possible for any party to meet the allegations of fraud. In case allegation is of defeating the provisions of the Act or defeating the purpose of the Act, a specific case will have to be made out in the show-cause notice. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s not evidence can be acted upon. On the other hand what it means is that no materials can be relied upon to establish a contested fact which are not spoken to by persons who are competent to speak about them and are subjected to cross-examination by the party against whom they are sought to be used. When a document is produced in a court or a Tribunal the question that naturally arises is, is it a genuine document, what are its contents and are the statements contained therein true. When the appellant produced the balance-sheet and profit and loss account of the company, it does not by its mere production amount to a proof of it or of the truth of the entries therein. If these entries are challenged the appellant must prove each of such entries by producing the books and speaking from the entries made therein." In the case of S.L. Kapoor v. Jagmohan, AIR 1981 SC 136, 145, the 30 Supreme Court observed in para. 16 as under : "Thus on the consideration of the entire material placed before us we do not have any doubt that the New Delhi Municipal Committee was never put on notice of any action proposed to be taken under section 238 of the Punjab Municipal Act and no opportunit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tices and the consequential orders passed, the Custodian is calling upon the petitioners, most of which are banks or financial institutions, to refund money to HPD a notified party which was paid by the said notified party in 1991 in connection with a particular transaction. Therefore, the show-cause notice must indicate as to what was the part played by the concerned bank or financial institution or private individual as the case may be in the fraud and that as a result of the fraud, the said party benefited or got an undue advantage or received something to which it was not entitled under the transaction. It was either by joining hands with the notified party or otherwise by fraudulently inducing the notified party to part with the money. Show-cause notices miserably fail to make out any such case. The allegations are too vague and general. In most of the notices reference is made to the report of the chartered accountants M/s. Sharp and Tannan or M/s. Amit Ray and Co. and it is pointed out that this payment of difference, according to the chartered accountants, do not appear to have taken place in the normal course of business. The Custodian thereby wants to allege that what is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... legality and fraud are required to be alleged with all the necessary details. Fraud is to be established and proved to the hilt and the burden is always on the party which alleges fraud. It was absolutely necessary for the Custodian to show in the show-cause notice as to how he was satisfied and the facts on the basis of which he has reached the satisfaction must be stated in categorical terms. Mere reference to the report of any Committee or the chartered accountants and quoting opinion of the chartered accountants that the payment does not appear to be in normal course does not lead even to proper allegation of fraud and is not sufficient to make out a case of fraud. What was expected of the Custodian is to have a deep probe into the matter and if possible to make out a case of fraud having been practiced. It was also necessary to allege whether the petitioners have practiced fraud on the notified party or whether the notified party and the petitioners joined hands in practicing fraud and if so who was the target or victim of the said fraud. Another aspect of the matter is what are the powers conferred by section 35 4 on the Custodian and what in fact the Custodian has done in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is complete then the party to whom the property is transferred gets title to the property and in the case of cancellation the party has to be provided with consequential remedy on cancellation. It is also possible that in the meantime the property has changed hands and it may come into the hands of a person who is a bona fide purchaser for valuable consideration without notice of any defect in the title of the vendor and such person has to be protected and the Legislature would have made necessary provision for the transferee who is not having notice and who has paid valuable consideration and therefore, what was intended by section 4 was to confer power of cancellation of a contract or agreement simplicitor. It is not possible to accept that by giving restricted meaning to the words "contract" or "agreement" and not including completed transfers or executed contracts in the said term, the section would be rendered nugatory. In my view, these powers were expected to be exercised with due diligence and within reasonable period of coming into force of the Act. The entire records of the notified party were either with the Custodian or with the CBI. Extensive reference to various tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dopted to circumvent the provisions of section 49 of the said Act. On April 14, 1923, two deeds were executed by the father of the appellants. By the first deed the proprietary right in the said land was sold for a sum of about Rs. 7,367. On that very date a second document, a deed of surrender, was executed. In consideration a sum of about Rs. 7,367 the appellants' predecessor in interest relinquished their occupancy rights in the 'sir' land. The appellants challenged the validity of the aforesaid deeds executed by their predecessors in interest and filed a suit for transfer of the land in question, inter alia, on the ground that the said transactions were contrary to the provisions of section 49 of the Tenancy Act and was, therefore, void. Taking note of the fact that the Act did not prohibit the transfer of the proprietary interest, because on such transfer the proprietor becomes an occupancy tenant of the 'sir', the Full Bench considered whether, in such a case, section 24 of the Contract Act became applicable. While dealing with the case where the contract consisted of legal and illegal parts Mr. Justice Vivan Bose at page 343 observed as under : 'Therefore if this transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the judgment of39 the House of Lords in the case of Tinsley v. Millingan [1993] 3 All ER 65. While making specific reference to some earlier judgments in the same paragraph at page 1968, it is stated (page 103): "It has, however, for some years been recognised that a completely executed transfer of property or of an interest in property made in pursuance of an unlawful agreement is valid and the court will assist the transferee in the protection of his interest provided that he does not require to found on the unlawful agreement (see Ayerst v. Jenkins [1873] LR 16 Eq 275 at 283, Alexander v. Rayson [1936] 1 KB 169 at 184-185 ; [1935] All ER Rep 185 at 191 (CA), Bowmakers Ltd. v. Bar-net Instruments Ltd. [1944] 2 All ER 579 ; [1945] KB 65 (CA) and Sajan Singh v. Sardara Ali [1960] 1 All ER 269 at 272-273 ; [1960] AC 167 at 176 (PC)). To the extent, at least, of his third proposition it would appear that there has been some modification over the years of Lord Eldon LC's principles." In the course of the judgment the House of Lords has enunciated the following principles from various authorities at para. 54 (page 104) : "From these authorities the followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l amount that is involved in all these petitions and is paid by the single individual (HPD) to different petitioners on calculation comes to Rs. 1037,39,04,036. Is it probable that a shrewd broker like HPD who is notified for having siphoned off huge funds from different banks and financial institutions, whose properties stand attached, would make payment of crores of rupees to different parties, banks and financial institutions for no reason, for no consideration, for no gain ? It is not possible to digest the argument that the payment has been made without consideration. I have already referred to the Jankiraman Committee report and the 15 per cent arrangement between HPD and Stanchart and it is obvious that such payments of differences were being made by him because in return he was to gain huge advantage and if he had paid Rs. 1,037 odd crores, then it is obvious that in turn he must have earned huge profits at least 20 times. If the end use of the money that has been siphoned out from the system has to be found out what is required is to find out the end use of the money so earned by the brokers by illegally siphoning off funds from banks and financial institutions and not by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y was diverted from the banking system to the individual accounts of brokers like HPD and in order to recover at least a part thereof these persons were notified resulting in attachment of all their assets in order to make the same available for distribution to the creditors. It is therefore not possible even to appreciate the contention of the Custodian when in the order he states that the monies have been diverted by the banks from the accounts of the brokers. Learned counsel appearing for the petitioners in various petitions severely criticised the use of the terminology "statutory presumption" in the Custodian's orders. Mr. Atul Setalvad contended in reply that these are administrative officers and their orders should not be scrutinised as if they are passed by a judicial body. There can be no dispute a bout the proposition in reply. That however is not a complete reply. When the custodian claims that he is entitled to raise a statutory presumption, he obviously means to say that the burden to disprove fraud is on the otherside. He can then ignore his duty of even alleging fraud which law requires of him. There being no provision for any such presumption in law the custodian ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o hereinabove in connection with this connection and furthermore, as held by this court in B. O. I. Finance Ltd. v. Custodian [1997] 89 Comp. Cas. 74 ; [1997] 10 SCC 488. The instructions which were issued by the Reserve Bank of India were meant to be complied with only by the banking companies and could not be regarded as binding on the other parties. There was no evidence raised or sought to be raised in the present case which could possibly have led the court to the conclusion that the transaction was opposed to public policy." In the result I find that the show-cause notices issued by the Custodian 46 fail miserably even to allege fraud. There was absolutely no material before the Custodian to come to the conclusion that fraud has been practiced. The Custodian has not even contended that this fraud was practiced by the petitioners on the notified party nor is it contended by him that the notified party (HPD) and the petitioners jointly practiced fraud and if so who was the victim of this fraud. The most important question as to who was the victim of the fraud remains unanswered. The reports of various committees and the Statement of Objects and Reasons of the Act clearly ..... X X X X Extracts X X X X X X X X Extracts X X X X
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