9911796707
TMI Blog1994 (8) TMI 313X X X X Extracts X X X X X X X X Extracts X X X X ..... ations, 1991, was filed, on the plea that these amendments were 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 purch ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... able half-yearly on 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 e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 which he sold to SCB through their broker for which the necessary consideratio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h 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 per cent NPC bonds in spite of repeated reminders and since he delivered the IRFC bonds together with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 cost memo by Andhra Bank to establish that there was nopurchase of 17 per cent NPC bonds from that bank. (e) Though NKA sent a letter along with the impugned le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 pointed out from the correspondence on record between PHB and the petitioner that Amro Bank was aware of the defect in title and that is why it wrote to the Deputy Governor, Reserve Bank of India (letter d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icient 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 the decision in S. Rama Rao v. Dasarathy Rao, AIR 1955 Mys 43, to show that where, in a sale of shares through a broker, the delivery of the share certificates with the transfers executed in blank passes not the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 1994. It was argued before us, in yet another similar case relating to securities that by virtue of this Ordinance, the jurisdiction of the Company Law Board in relation to any matter arising out of the transactions in securities entered into after ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 747 (CLB) to the Special Court after considering the provisions of the Ordinance. Accordingly, the same ratio should be applied in this case as well, he stressed. 29. Arguments were submitted by Shri K.S. Cooper, senior advocate, on beha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ercise 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 be transferred to the Special Court. Sub-section (4D) of Section 10E of the Companies Act, 1956, further makes the position very conclusive by the use of the words with regard to the Company Law Board "every Bench shall be deemed to be a civil court". Sub-section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 anywhere. 34. However, the pronouncement of a distinctive judgment is considered an essential sine qua non to a court and unless and until a binding and authoritative judgment can be pronounced by a person or body of persons it cannot be concluded that he or they constitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions 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, namely, expeditious disposal in respect of civil matters wherever notified persons were involved. We also find that as at present the Company Law Board has parallel jurisdiction with the civil courts in respect of matters relating to companies by which an option is available to the lit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 say so in the petition, though they say so in their written submissions much later. 39. The contention of Amro Bank that the contract note was pre-dated to March 9, 1992, is plausible. NKA did not have on hand the IRFC bonds on March 9 as KVB sent the letter of allotment of IRFC bonds only on March 10, 1992. NKA forwarded the LOA on March 12 to Hiten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resh 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 said security was given to us as an alternate security for the original security, namely, 17 per cent bonds, sought to be purchased through the said brokers, we were pressing the said brokers who had promised to replace the said security by 17 per cent NPC bonds. Till date we have not received the said original security." 42. The nature of delivery was also expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ker. 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 stock exchange which governs respondent No. 3. Therefore, the argument of NKA that there is no valid pledge is acceptable. 46. The petitioners advocate has also simultaneously adopted the line of argument that the case falls under Section 27 of the Sale of Goods Act. Section 27 deals with the sale by a mercantile agent in the ordinary course of business. A mercantile agent, though he is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on 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. Clark [1884] 26 Ch D 257 to the effect that though normally a non-owner cannot pass on a good title, the situation would be different if there is a mercantile agent involved. However, this does not mean that a mercantile agent in the ordinary course of business can appropriate the goods belonging to another person and convey a good title by such appropriation. All the more so, when the person who is takin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curities 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 the IRFC bonds does not convey a good title to the petitioner-bank, and they cannot appropriate the same to themselves. 53. In fairness to both the parties, viz., Amro Bank and NKA, we should also deal with one relevant question raised by them, viz., if it is a separate contract as asserted by NKA why did he not follow up the payment till June 15, when only a letter was received by the petitioner for the price ? NKA has also ra ..... X X X X Extracts X X X X X X X X Extracts X X X X
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