Canbank Financial Services
Ltd. Vs. The Custodian & Others  Insc 512 (3 September 2004)
N. Santosh Hegde,S.B.
Sinha & A.K. Mathur With C.A. No. 165 Of 1994 S.B. Sinha, J:
Andhra Bank (Respondent No. 3) is a nationalized bank. Andhra Bank Financial
Services Limited (Respondent No. 4) is a company wholly owned by Andhra Bank.
Canbank Mutual Fund (CBMF) is a subsidiary company of Canara Bank, another
nationalized bank. The Appellant herein is also a subsidiary of Canara Bank. In
or about 1989, Canbank Mutual Fund floated an open ended investment scheme
known as CANCIGO on an assured return of 12.5% p.a. payable half yearly; the
lock in period wherefor was one year. A stipulation was also made to the effect
that transfers are not permitted. Hiten P. Dalal (Respondent No. 2) was a
registered stock broker.
Respondent No. 3 at his request applied for CANCIGO units of face value of
Rs. 11 crores. Similarly, Respondent No. 4 also at the request of Respondent
No. 2 applied for CANCIGO units of face value of Rs. 22 crores. Indisputably,
the payment of application money for purchase of said CANCIGO units was to be
made, out of the monies lying in the bank account of Respondent No. 2. The
Respondent Nos. 3 and 4 complied with said request of Respondent No.2. The
CANCIGO certificates received by the Respondent Nos. 3 and 4 were handed over
to the Respondent No. 2.
The interest accruing from the CANCIGO received by the Respondent Nos.
3 and 4 was also credited to the account of Respondent No. 2. The said
Respondents did not claim any right, title or interest therein. There had been
diverse dealings by and between the Appellant herein and the said Respondent
No. 2 in respect of the purchase and sale of shares and securities of various
companies. A sum of Rs. 25,01,67,129/- was due and payable by the Respondent
No. 2 to the Appellant herein in respect of the said transactions as on 6th
February, 1992. Respondent No. 2 offered the aforementioned CANCIGOs to the
Appellant herein as a beneficiary thereof.
The said offer of the Respondent No. 2 was accepted in discharge of his
aforementioned liabilities to the Appellant. The Appellant on 6th February,
1992 paid the balance amount of consideration of the said CANCIGOs, viz., a sum
of Rs. 7,98,32,871/- by a cheque dated 11th February, 1992 drawn in favour of
the Respondent no.3 but the same was to be credited in the account of
Respondent No. 2.
In or about May, 1992 serious irregularities in security transactions were
discovered whereupon the Reserve Bank of India constituted a Committee known as
'Jankiraman Committee' to look into the real nature of the transactions and to
ascertain the true facts. Investment in CANCIGO by Respondent No. 3 found place
in the report of the said Committee wherein it was contended that it had made
an application dated 28th August, 1991 for investment in CANCIGOs on behalf of
Respondent No. 2 for 11 crores.
Pending investigation, the Appellant was advised not to part with the two
sets of CANCIGO certificates without the consent of the Reserve Bank of India.
The President of India promulgated an ordinance known as "The Special
Courts (Trial of Offences Relating to Transactions in Securities) Ordinance,
1992". It was repealed and replaced by 'The Special Courts (Trial of
Offences Relating to Transactions in Securities) Act, 1992 ("the
Act"), the Statement of Objects and Reasons wherefor are as under:-
"(1) In the course of the investigations by the Reserve Bank of India,
large scale irregularities and malpractices were noticed in transactions in
both the Government and other securities, indulged in by some brokers in
collusion with the employees of various banks and financial institutions. The
said irregularities and malpractices led to the diversion of funds from banks
and financial institutions to the individual accounts of certain brokers.
(2) To deal with the situation and in particular to ensure speedy recovery
of the huge amount involved, to punish the guilty and restore confidence in and
maintain the basic integrity and credibility of the banks and financial
institutions the Special Court (Trial of Offences Relating to Transactions in
Securities) Ordinance, 1992, was promulgated on the 6th June, 1992. The
Ordinance provides for the establishment of a Special Court with a sitting
Judge of a High Court for speedy trial of offences relating to transactions in
securities and disposal of properties attached. It also provides for
appointment of one or more custodians for attaching the property of the
offenders with a view to prevent diversion of such properties by the
offenders." On or about 6th June, 1992 the Respondent No. 2 was declared
to be a 'notified person' under the Act.
In terms of the provisions of the Act, a Special Court was established.
The Special Court was conferred with exclusive jurisdiction in relation to
the matters specified therein as also trial of offences arising thereunder.
CLAIM OF THE PARTIES BEFORE THE SPECIAL COURT:
Both the Custodian and the Appellant filed applications before the Special
Court which were registered as Misc. Application Nos. 13 of 1993 and 55 of
In its application, the Appellant prayed for the following reliefs:
"(a) that it be declared by this Hon'ble Court that:
(i) that the property/ debt in the CANCIGO covered under the two
certificates issued by Canbank Mutual Fund are the property of the petitioners;
(ii) that the CANCIGOs covered under the said two certificates are not
within the purview of the Notification dated 6th June 1992 notifying Respondent No. 2 issued by Respondent No. 1 under sub-section (2) of Section 3 of the
(iii) In the alternative to prayer (ii) above, the Respondent No. 1 subject
to the directions of this Hon'ble Court is entitled to deal with, dispose of
and encash the CANCIGOs under the said two Certificates, pay the same to the
Petitioners and permit the Petitioners to appropriate and/ or adjust the net
realization thereof in or towards the satisfaction of Petitioners dues from the
Responent No. 1;
(b) Without prejudice to prayer (a) above and in the alternative, in the
event of this Hon'ble Court coming to the conclusion that CANCIGOs under the
said two certificates are not the property of the Petitioners and/ or the
Petitioners are not entitled to encash them, the Respondent No. 1 and/ or
Respondent No. 2 be ordered and directed to pay to the Petitioners a sum of Rs.
40,83,32,054/- as per particulars more particularly described in Exhibit
"F" hereto with further interest at the rate of 24% per annum on the
principal amount of Rs. 33 crores from the date hereof till payment and/ or
(c) that pending the hearing and final disposal of the petition, the
Respondent be directed not to deal with, dispose of and/ or encash the CANCIGOs
covered under the said two Certificates." However, the Custodian, in its
application, prayed for the following reliefs:
"(a) that Canfina or any other Respondent who may be in possession of
the said CANCIGOS worth Rs. 33 crores be ordered and directed by this Hon'ble
Court to handover to the Applicant the said CANCIGOS together with any accrued
(b) that the CMF be ordered and directed by this Hon'ble Court to handover
to the Applicant the accrued interest of Rs. 2,06,43,836/- and all future sums
of interest that may accrue on the said CANCIGOS worth Rs. 33 crores.
(c) that pending the hearing and final disposal of his application CMF be
ordered and directed by this Hon'ble Court to handover to the Applicant the
said accrued interest of Rs. 2,06,43,836/- and all further sums of interest
that may accrue on the said CANCIGOS worth Rs. 33 crores.
(d) that pending the hearing and final disposal of this application the
Respondents be directed to file an affidavit showing how the transactions
relating to the said CANCIGOS are reflected in their respective books/
accounts." The Respondent Nos. 2, 3 and 4 did not claim any interest in
the said CANCIGOS before the Special Court.
By reason of the impugned judgment, the Special Court allowed the
application filed by the Custodian and rejected that of the Appellant herein.
Hence these appeals.
Before the learned Special Judge a contention was raised by the Respondent
No.1 to the effect that as the CANCIGOS were allotted in the names of the
Respondent Nos. 3 and 4, Respondent No.2 did not have any interest therein. A
further contention was, however, raised that as the Respondent No. 2 was the
real owner thereof, he in view of the said restriction on transfer could not
have transferred any interest whatsoever (whether limited or absolute) in
favour of the Appellant.
The learned Special Judge noticed that although in its application the
Appellant had made out a case to the effect that the CANCIGOs worth 33 crores
were held by them by way of security but a different stand was taken before it
that they are the absolute owners thereof. It was held that the Appellant
having claimed that possession of CANCIGOs were delivered by the Respondent No.
2 as security, they were not and could not have become owners thereof as the
Respondent No. 2 had no beneficial interest therein, having regard to the fact
that such interest was not admitted by the Custodian and in that view of the
matter the question of passing any right, title or interest, legal or
beneficial, in the CANCIGOS in favour of the Appellant by the said Respondent
would not arise. Relying on a decision of 453: (1992) 1 SCC 160], the learned
Judge opined that the said decision is an authority for the proposition that
any transfer contrary to the Articles of Association or terms of issue would not
be valid. The learned Judge held that having regard to the fact that the
transaction was illegal, the right, title and interest of CANCIGOs remained
with Respondent No. 2 and, thus, stood attached in terms of Section 3 of the
"Under Section 3 of the Special Court Act, any property, movable or
immovable, or both, belonging to any person notified stands attached.
Therefore there is a statutory attachment of "any property belonging to
the person notified". The definition "any property belonging to the
person notified" must necessarily include property in which a person
notified has a beneficial interest.
By virtue of Section 13 of the Special Courts Act, the provisions of the
Special Courts Act prevail notwithstanding anything to the contrary in any
other law or contract. Therefore, the Custodian is making a claim under a
statutory provision which allows him to do so. That statutory provision creates
no right in favour of third parties, including the 5th Respondent. Therefore,
merely because the Custodian claims on the footing of the 1st Respondent is the
beneficial owner does not ipso facto give a right to the 5th Respondent to
claim that the beneficial interest in these CANCIGO'S is transferable."
Analysing the provisions of Section 4(2) of the Benami Transactions Act and
Section 13 of the Act, the learned Judge opined:
"Therefore, so far as the Custodian is concerned, he can make a claim
to any property even though the same is held benami in some other person. The
same can't be done by the 5th Respondent. The provisions of the Benami
Transactions Act would squarely apply to the 5th Respondent. It is the 5th
Respondent who can't make a claim or bring an action to enforce any right in
respect of the CANCIGO's either against 1st or 2nd or 3rd Respondent or the
Custodian. Also, by virtue of Section 4(2) of the Benami Transactions Act the
5th Respondent can't be allowed to raise a defence in respect of the CANCIGO's
even to the extent of claiming a beneficial interest." Repelling the contentions
of the Appellant as regard applicability of Section 58 of the Trusts Act, it
was held that the expressions "any interest" are of very wide
amplitude and would, thus, include a beneficial interest.
It was further held:
"It is thus clear that Respondent No.5 could not have purchased the
CANCIGO's nor could the beneficial interest in the CANCIGO's be transferred to
them. Respondent No.5 have got thus no right, title or interest in the
CANCIGO's and cannot be allowed to hold on to them. This is particularly so as
they have now given up their claim that these were deposited with them, as and
by way of security. The claim, if any, of Respondent No.5, against the 1st
Respondent, is a mere money claim. The CANCIGO's remain the property of
Respondent No.1 and stand attached.
They must be handed over by Respondent No.5 to the Custodian. It must be
mentioned that, even if the 5th Respondent had claimed that the CANCIGO's were
deposited with them as security for repayment of debts due by the 1st
Respondent, the terms of issue would still have prevented any interest being
created in their favour.
It was directed:
"Under these circumstances, Application No.55 of 1993 is made absolute
in terms of prayers (a).
Clarified that it is the 5th Respondent who must hand over the concerned
CANCIGO'S to the Custodian. Application No.55 of 1993 is also made absolute in
terms of prayer (b). Prayer (a) of Application No. 13 of 1993 stands rejected.
So far as prayer (b) of Application No. 13 of 1993 is concerned, the claim
of 5th Respondent being a money claim, the same will have to be taken up at
time of distribution of assets. As set out in Judgment dated 22nd July, 1993 in Misc.
Application No. 96 of 1993, the distribution would have to be in the manner
laid down under Section 11 of the Special Courts Act. Therefore so far as
prayer (b) is concerned, this Petition is adjourned sine die. Office is
directed to put this Petition on board when the Court is considering
distribution of assets of Respondent No.1." SUBMISSIONS:
Mr. Rohit Kapadia, learned senior counsel appearing on behalf of the
Appellant would submit that in the facts and circumstances of this case,
Respondent No. 2 having transferred the CANCIGO units in favour of the
Appellant, he had no interest therein warranting attachment under the Act. It
was urged that the rights of the Custodian are the same as that of the notified
person. The learned counsel would contend that as Respondent Nos. 3 and 4
claimed no right, title or interest of any nature whatsoever in the CANCIGOs
despite the fact that they were registered in their names, the Respondent No. 2
must be held to have an interest therein by reason of his having made payment
therefor and obtained possession thereof. It was pointed out that even the
custodian contended before the Special Court that the Respondent No. 2 had a
beneficial interest and in that view of the matter the question of the
Custodian's application seeking to enforce attachment was not maintainable.
It was argued that having regard to the provisions contained in Section 58
of the Indian Trusts Act the beneficial interest of Respondent No.2 was
transferable. The purported bar to the effect that a CANCIGO holder cannot
create 'any interest' therein or transfer them to a third person would not
apply to transfer of a beneficial interest keeping in view the fact that
restriction on transfer was on the Respondent Nos. 3 and 4 and not on the
beneficial owner. No interest having been created in the Respondent No. 2 by
any act or deed of Respondent Nos. 3 and 4, the beneficial interest accrued in
him by way of operation of law was transferable. It was contended that in the
event it be held that the Respondent Nos. 3 and 4 could not validly transfer
any interest in favour of the Respondent No. 2, the question of enforcing
attachment would not arise as the legal title thereof would remain vested in
the Respondent Nos. 3 and 4. In any event such an absolute restriction on
transfer is void under Section 10 of the Transfer of Property Act and, thus,
cannot be acted upon.
The learned counsel would contend that findings of the Special Court to the
effect that Respondent No. 2 had an interest therein which could not have been
transferred in terms of Section 6(d) of the Transfer of Property Act is not
correct. It was urged that the question of repeal of Section 82 of the Indian
Trust Act by reason of The Benami Transactions (Prohibition) Act, 1988 (for
short 'The Benami Transactions Act') would be of no consequence as the
provisions of the Indian Trusts Act,
1882 are not exhaustive. It was argued that Section 82 embodied a principle
of equity underlying creation of a "Resulting Trust" which was held
to be applicable even prior to enactment of the Indian Trusts Act.
Reliance in this connection has been placed on Mussumat Ameeronnissa Khanum and
Mr. Subramonium Prasad, learned counsel appearing on behalf of the
Respondent No.1, on the other hand, would submit that no implied trust was
created by and between Respondent No. 2, on the one hand, and Respondent Nos. 3
and 4, on the other, and in that view of the matter, no beneficial interest
could be created in favour of the Respondent No.2.
In absence of any trust, Mr. Prasad would argue, Section 58 of the Indian Trusts Act
would not apply particularly having regard to the provisions contained in
Section 7 of the Benami Transactions Act whereby and whereunder Section 82 of
the Trusts Act has been repealed and, thus, the question of there being an
implied trust between Respondent No. 2, on the one hand, and Respondent Nos. 3
and 4 on the other, would not arise.
Having regard to the objects and reasons of the Benami Transactions Act, Mr.
Prasad would submit, the right, title and interest in the CANCIGO remained in
the Respondent Nos. 3 and 4 and furthermore having regard to the term of issue
CANCIGOs s being non-transferable, no title passed on to the Appellant herein
in relation thereto. Respondent Nos. 3 and 4, it was contended, were bound by
the conditions restricting transfer and in that view of the matter the
purported transfer in favour of the Appellant was void.
Section 4 of the Benami Transactions Act prohibits an action by the
beneficiary for recovery of the property and, in that view of the matter, the
Appellant herein could not have filed an application for the Custodian claiming
an interest therein. But the said provision would not apply in the case of the
Custodian having regard to the fact that he had a duty to attach the property
belonging to a notified person and further in view of the fact that in terms of
Section 13 of the said Act, the provisions thereof had an overriding effect
over any other law for the time being in force as a result whereof the
provisions of the Act would prevail over the Benami Transactions Act. Reliance
in support of the said contention has been placed (2) SCALE 1].
The primal issue which arises for consideration is as to whether the
Respondent No. 2 had any transferable interest in respect of the securities in
RESTRICTIONS ON TRANSFER :
The relevant provisions of the CANCIGO Scheme are as under:
"12(a) Only the holder or any person specifically authorized in this
behalf by him and recognized as such by the Trustee, shall be entitled to deal
with the Cancigos held by the holder thereof.
12(b) *** *** *** 12(c) A Cancigo-holder may dispose of or encash Cancigos only
by means of encashment slips in the form prescribed by the Trustee.
12(d) A Cancigo holder desirous of encashing ten or more Cancigos held by
him shall apply to the Authorised Office for the purpose in the prescribed
form. Upon such a request being found in order, the number of Cancigos desired
to be encashed shall be paid to the holder thereof on signing a duly stamped
receipt for the amount.
13. The contract for allotment of Cancigo with an Applicant by the Trustees
shall be deemed to have been concluded on the Acceptance Date. On such
conclusion of the contract for allotment, the Trustees may deliver or send to
the Applicant an acknowledgement therefor. The Trustees shall thereafter issue
to the Applicant one Cancigo credit sheet representing the Cancigo allotted to
the Applicant, or, if the Applicant so desires and the Trustees agree, such
number of certificates in such denominations as the Applicant may specify.
Provided that in that event the Trustees may charge such fee for issuing
more than one certificate as the Trustees may consider appropriate.
19. Except in the cases hereafter mentioned, no Cancigo shall be
transferable, nor shall any holder thereof be entitled to create any interest
therein, whether by way of charge or otherwise, or assign or transfer any part
thereof, and the Trustee shall not be bound to take any notice of any purported
transfer, assignment, charge, encumbrance, trust, or any other interest sought
to be created by the holder. Accordingly the Trustee shall recognize only the
holder thereof as having any right title or interest in the Cancigo held by
22. The Trustee shall not be required to maintain any register of Cancigo
25. The Trustee shall not be bound by any notice or take notice of execution
of any trust in respect of any Cancigos and they shall recognize only the
Cancigo holders in whose name the same shall have been entered as the holder or
holders of the Cancigos." In the Brochure for offer of CANCIGOS, the
restriction on transfer of CANCIGOS was stated in the following terms:
"Transfer of CANCIGO: Transfer of CANCIGO holding from one person to
another person is not permitted. However, in deserving cases Trustees may
permit addition of name/s to the existing CANCIGO holding after duly considering
the same. However, deletion of name of a CANCIGO holder is permitted,
generally, in the event of his death and not otherwise." It is not in
dispute that the CANCIGOS stood in the names of Respondent No. 3 and Respondent
Note 4 appended to CANCIGO Credit sheet states:
"Cancigo holders cannot create any interest in Cancigos or transfer
them to a third person." PROVISIONS OF THE RELEVANT STATUTES:
Sections 58, 82 (as it then stood), and 88 of the Indian Trusts Act, 1882 read
"58. Right to transfer beneficial interest.--The beneficiary, if
competent to contract, may transfer his interest, but subject to the law for
the time being in force as to the circumstances and extent in and to which he
may dispose of such interest:
82. Transfer to one for consideration paid by another. Where property is
transferred to one person for a consideration paid or provided by another
person, and it appears that such other person did not intend to pay or provide
such consideration for the benefit of the transferee, the transferee must hold
the property for the benefit of the person paying or providing the
Nothing in this section shall be deemed to affect the Code of Civil
Procedure, section 317, or Act NO.XI of 1859 (to improve the law relating to
sales of land for arrears of revenue in the Lower Provinces under the Bengal
Presidency), section 36.
88. Advantage gained by fiduciary Where a trustee, executor, partner,
agent, director of a company, legal advisor, or other person bound in a
fiduciary character to protect the interests of another person, by availing
himself of his character, gains for himself any pecuniary advantage, or where
any person so bound enters into any dealings under circumstances in which his
own interests are, or may be, adverse to those of such other person and thereby
gains for himself a pecuniary advantage, he must hold for the benefit of such
other person the advantage so gained." Transfer of Property Act:
Sections 6(d) and 10 of Transfer of Property Act read as under:
"6.What may be transferred. Property of any kind may be transferred,
except as otherwise provided by this Act or by any other law for the time being
in force, (a) *** (b) *** (c) *** (d) An interest in property restricted in
its enjoyment to the owner personally cannot be transferred by him.
10. Condition restraining alienation. Where property is transferred subject
to a condition or limitation absolutely restraining the transferee or any
person claiming under him from parting with or disposing of his interest in the
property, the condition or limitation is void, except in the case of a lease
where the condition is for the benefit of the lessor or those claiming under
him: provided that property may be transferred to or for the benefit of a women
(not being a Hindu, Muhammadan or Buddhist), so that she shall not have power
during her marriage to transfer or charge the same or her beneficial interest
therein." Sale of Goods Act:
Sections 4, 19 and 20 of Sale of Goods Act read as under:
"4. Sale and agreement to sell.(1) A contract of sale of goods is a
contract whereby the seller transfers or agrees to transfer the property in
goods to the buyer for a price. There may be a contract of sale between one
part-owner and another.
(2) A contract of sale may be absolute or conditional.
(3) Where under a contract of sale the property in the goods is transferred
from the seller to the buyer, the contract is called a sale, but where the
transfer of the property in the goods is to take place at a future time or
subject to some condition thereafter to be fulfilled, the contract is called an
agreement to sell.
19. Property passes when intended to pass(1) Where there is a contract for
the sale of specific or ascertained goods the property in them is transferred
to the buyer at such time as the parties to the contract intend it to be
(2) For the purpose of ascertaining the intention of the parties regard
shall be had to the terms of the contract, the conduct of the parties and the
circumstances of the case.
(3) Unless a different intention appears, the rules contained in Sections 20
to 24 are rules for ascertaining the intention of the parties as to the time at
which the property in the goods is to pass to the buyer.
20. Specific goods in a deliverable state.Where there is an unconditional
contract for the sale of specific goods in a deliverable state, the property in
the goods passes to the buyer when the contract is made, and it is immaterial
whether the time of payment of the price or the time of delivery of the goods,
or both, is postponed."
BENAMI TRANSACTIONS ACT:
Sub-Section (1) of Section 3 of the Benami Act provides that no person shall
enter into any benami transaction. Sub-Section (3) of Section 3 thereof
provides that whoever enters into any benami transaction shall be punishable
with imprisonment for a term which may extend to three years or with fine or
with both. Section 4 provides for a prohibition to the right to recover
property held benami either by way of claim or by way of defence.
Section 5 provides that all properties held benami shall be subject to
acquisition by such authority, in such manner and after following such
procedure, as may be prescribed.
In terms of Section 7 inter alia Section 82 of the Indian Trusts Act,
Sections 2(c), 3, and 4 of Special Courts Act read as under:
"2(c) "securities" includes-- (i) shares, scrips, stocks,
bonds, debentures, debenture stock, units of the Unit Trust of India or any
other mutual fund or other marketable securities of a like nature in or of any
incorporated company or other body corporate;
(ii) Government securities; and (iii) rights or interests in securities;
3. Appointment and functions of Custodian.-- (1) The Central Government may
appoint one or more Custodians as it may deem fit for the purposes of this Act.
(2) The Custodian may, on being satisfied on information received that any
person has been involved in any offence relating to transactions in securities
after the 1st day of April, 1991 and on and before 6th June, 1992 notify the name of such person in the Official Gazette.
(3) Notwithstanding anything contained in the Code and any other law for the
time being in force, on and from the date of notification under sub- section
(2), any property, movable or immovable, or both, belonging to any person
notified under that sub-section shall stand attached simultaneously with the
issue of the notification.
(4) The property attached under sub-section (3) shall be dealt with by the
Custodian in such manner as the Special Court may direct.
4. Contracts entered into fraudulently may be cancelled.-- (1) If the
Custodian is satisfied, after such inquiry as he may think fit, that any
contract or agreement entered into at any time after the 1st day of April, 1991
and on and before the 6th June, 1992in relation to any property of the person
notified under sub-section (2) of section 3 has been entered into fraudulently
or to defeat the provisions of this Act, he may cancel such contract or
agreement and on such cancellation such property shall stand attached under
Provided that no contract or agreement shall be cancelled except after
giving to the parties to the contract or agreement a reasonable opportunity of
(2) Any person aggrieved by a notification issued under sub-section (2) of
section 3 or any cancellation made under sub-section (1) of section 4 or any
other order made by the Custodian in exercise of the powers conferred on him
under section 3 or section 4 may file a petition objecting to the same within
thirty days of the assent to the Special Court (Trial of Offences Relating to
Transactions in Securities)Bill, 1992 by the President before the Special Court
where such notification, cancellation or order has been issued before the date
of assent to the Special Court (Trial of Offences Relating to Transactions in
Securities) Bill, 1992 by the President and where such notification,
cancellation or order has been issued on or after that day, within thirty days
of the issuance of such notification, cancellation or order, as the case may
be; and the Special Court after hearing the parties, may make such order as it
The Special Court exercises all jurisdiction, powers and authority as were
exercisable, immediately before such commencement by any Civil Court in
relation to a matter or claim specified therein.
CANBANK MUTUAL FUND (CANCIGO) SCHEME, 1988:
Canbank Mutual Fund framed a scheme known as CANCIGO Scheme. The said Scheme
came into force on 22nd April, 1988. The provisions of the CANCIGO Scheme are
applicable to the issue of units called CANCIGOS by Canara Bank acting in its
capacity as Trustee of the Canbank Mutual Fund.
Condition 2(k) defines 'Cancigo Scheme' to mean the Cancigo Mutual Fund
(Cancigo) Scheme, 1988 under which Cancigos are issued by the Trustee. 'Holder'
in terms of Condition 2(r) to mean a person who has made an application to the Trustee
and to whom not less than five Cancigos have been issued or any person or
persons nominated by the Trustee in this behalf for the purpose of
participating in the Cancigo Scheme. Condition No. 5 provides as to the person
eligible to apply for the issue of Cancigos.
Condition No. 10 provides that all allotments should be at the discretion of
IS THE CLOG ON TRANSFER ABSOLUTE? The Rules and Regulations framed by the
Canbank Mutual Fund in relation to the issuance of CANCIGO certificates do not
have any statutory backing. The CANCIGOs had a lock in period of one year which
means that the holder thereof must not encash the securities within the
aforementioned period. The question as regard the non-transferability of the
units will have to be construed upon reading the scheme in its entirety and in
particular the Condition No. 22 thereof, in terms whereof the Trustees were not
required to maintain any register of CANCIGO holders. In terms of Condition No.
24, the person whose name is shown in a CANCIGO Certificate would be the
only person to be recognized by the Trustees as the holder of such Cancigo and
as having any right, title or interest in or to such securities. No Trust
created was also to be recognized.
Condition No. 19 creating a bar on transfer has to be construed in the
aforementioned context. The bar on transfer created was to have the effect that
the same would not be binding on Canbank Mutual Fund as it was not bound to
take any notice thereof and only the holder shall be recognized as having the
right, title or interest on the CANCIGO.
The expressions contained in Condition No. 19 of CANCIGO Scheme differ in
material particulars from the expressions used in the Brochure in terms whereof
transfer of CANCIGO from one person to another person is not permitted.
Permission is not a legal restriction. However, in deserving cases Trustees may
permit addition of names to the existing CANCIGO holding after duly considering
the same. Permission/Approval subsequently granted would validate the grant.
[See Graphite India Ltd. and Another vs.
Durgapur Projects Ltd. and Others (1999) 7 SCC 645]. CANCIGOs indisputably
are valuable securities. They are otherwise capable of being transferred in
terms of the established business practice, the Sale of Goods Act or Transfer
of Property Act. No legal bar has been created in transfer of the said
securities. The scheme, thus, does not and could not have created an absolute
legal bar on transfer of the CANCIGOs so as to invalidate the same.
EFFECT OF THE BAR:
The Rules and Regulations framed by Canbank Mutual Fund and the notes
appended to the CANCIGO Credit Sheet differ in material particulars.
Rules and Regulations explain as to why an embargo in transfer has been
placed, i.e., not to recognize the Respondent No. 3 for the dividends or for
other liabilities arising out of transfer. A transfer violating the rules and
regulations would only have the effect of the same being not binding the
Canbank Mutual Fund. No other legal consequence flows therefrom. We have also
noticed that the Brochure merely states that the transfer is not permitted but
provisions exist for grant of such permission. The Appellant Bank as well as
Canbank Mutual Fund are the subsidiaries of the Canara Bank. The Appellant
cannot be estopped from raising either a limited or absolute title in them
keeping in view of the fact that they had paid a sum of 33 crores of rupees by
way of consideration for transfer of interest of the Respondent No. 2 herein in
the said CANCIGOS.
EFFECT OF SECTION 10 OF TRANSFER OF PROPERTY ACT:
As would appear from the discussions made hereinafter that by reason of the
legal consequences of the relationship of the banker and the customer,
vis-`-vis, the transaction in question, a beneficial trust has been created.
The same would, thus, be transferable as otherwise it would be hit by Section
10 of the Transfer of Property Act. When there exists such a condition; in
terms of Section 10, an absolute restrain is void whereas partial restraint is
not. Section 10 would not be attracted only when the restriction as to Bandi
Bibi, AIR 1932 PC 158). A stipulation taking away the whole power of alienation
substantially is a question of substance and not of form.
Section 10 limits the application of such stipulation.
TRUST WHETHER CREATED:
Chapter IX of the Indian Trusts Act
provides for certain obligations in the nature of trusts. A Trust is an
obligation annexed to the ownership of property, and arising out of a
confidence reposed in and accepted by the owner or declared and accepted by
him, for the benefit of another, or of another and the owner. A trust in terms
of Section 4 of the Trust Act may be created for any lawful purpose.
When a real or personal property is purchased in the name of another, a
presumption of resulting trust arises in favour of the person who is proved to
have paid the purchase money as a result whereof a beneficial interest in the
property results to the true purchaser. Law relating to trust has not
recognized only a resulting trust but other kinds of trust as well. When an
express trust is created by reason of an agreement between the parties and one
of them being a beneficiary thereof, the same would be transferable.
A beneficial interest in the trust is created in different situations. (See,
In Barclays Bank (supra) a company which was substantially indebted to the bank
needed funds in order to pay a dividend on its shares. Quistclose Investments
advanced the necessary funds on the basis that they were only to be used for
this purpose and they were paid into a separate account at the bank, which was
made aware of the arrangement. The company went into liquidation before the
dividend had been paid. If Quistclose Investments were no more than a creditor
of the company, then the funds in the bank would belong to the company and the
bank would be entitled to set off the credit balance of the account against the
substantially greater indebtedness of the company. If, on the other hand, the
funds were held on trust for Quistclose Investments, its proprietary interest
therein would enjoy priority over the rights of the bank. The House of Lords
held that arrangements for the payment of a person's creditors by a third
person give rise to "a relationship of a fiduciary character or trust, in
favour as a primary trust, of the creditors, and secondarily, if the primary
trust fails, of the third person".
Once the primary purpose was fulfilled, the third person would be no more
than an unsecured creditor. However, there was "no difficulty in
recognizing the co-existence in one transaction of legal and equitable rights
and remedies". Since the purpose for which the funds had been advanced had
failed, the funds were still held on trust for Quistclose Investments, whose
beneficial interest was binding on the bank because it had been aware of the
basis on which the funds had been transferred." [See Equity & Trusts,
2nd Edition by Alastair Hudson, page 307] In that case the common intention of
both the parties was that the fund in question should be held on trust. The
principle in Barclays Bank (supra) has been applied both where part of the
funds advanced had indeed been used for the specific purpose in question,
holding that the creditor was entitled to recover whatever was left (See Re
EVTR (1987) B.C.L.C. 647) as also where the funds, although advanced for a
specific purpose, were paid not by way of loan but rather in satisfaction of a
contractual debt. [See Carreras Rothmans Ltd. V. Freeman Mathews Treasure Ltd.
207] In this case, the Respondent Nos. 3 and 4 acted in consonance of the
confidence reposed upon them.
Had Respondent Nos. 3 and 4 not disclosed that the applications for
allotment of CANCIGOs were for the benefit of the 2nd Respondent herein,
Section 88 of the Indian Trusts Act
would have been attracted..
A transaction which falls within the purview of Section 88 of the Indian Trusts Act
does not fall within the category of benami transaction in terms of the
provisions of the Benami Transactions Act. (See P.V. Sankara The list of
persons specified in Section 88 of the Indian Trusts Act
is not exhaustive. The expression 'other person bound in fiduciary character to
protect the interests of other persons' includes a large variety of
The heart and soul of the matter is that wherever as between two persons one
is bound to protect the interests of the other and the former availing of that
relationship makes a pecuniary gain for himself, the provisions of Section 88
would be attracted, irrespective of any designation which is immaterial. The
said principle would also apply for a banker holding the customer's money.
A fiduciary would not be liable for any action if there is no concealment by
him or no advantage taken by him.
A civilized society furthermore always provides for remedies for cases of
what was been called unjust enrichment or unjust benefit derived from another
which it is against conscience that he should keep. (See (1942) 2 All ER 122)]
In Carreras Rothmans Ltd. V. Freeman Mathews Treasure Ltd.
[(1985) Ch. 207 at page 222], it is stated :
".equity fastens on the conscience of the person who receives from
another property transferred for a specific purpose only and not therefore for
the recipient's own purposes, so that such person will not be permitted to
treat the property as his own or to use it for other than the stated
purpose." The parties to the transactions cannot enter into any benami
transaction so as to get any property transferred in their names for
consideration, i.e., paid by a third party. A presumption, thus, arises that
the parties never intended that the transaction would be a benami one. By
reason of the said transaction, a cestui qui trust was created, inasmuch as the
Respondent Nos. 3 and 4 applied for allotment of CANCIGOs on behalf of the
Respondent No. 2 and not on their own behalf. The trust was created for a
purpose, namely, the benefit arising therefrom would be appropriated by the
Respondent No. 2. The principle of cestui qui trust is a synonym of a
beneficiary. The said principle is not confined to the ingredients of Sections
82 of the Indian
Trusts Act. It also covers cases falling under Section 88 thereof. Thus if
it be held that the properties were acquired by the Respondents Nos. 3 and 4 in
their own names in breach of their obligations while acting as an agent of the
Respondent No. 2, the case would be covered under Section 88 of the Indian Trusts Act.
Section 88 of the Trusts Act has not been repealed by Section 7 of the Benami
Transaction Act. In such a case the Benami Transactions Act would not operate.
A beneficial interest indisputably can be transferred. For the said purpose,
the only legal requirement will be essence of a trust. The right of a
beneficiary to transfer his interest being absolute, the transferee derived
rights, title and interest therein.
Furthermore, the legal effect of a document cannot be taken away even if the
property is chosen to conceal by a device the legal relation. [See Bahadur, AIR
1975 SC 838 at 845].
and Others [AIR 1940 PC 134], it is held:
"No doctrine of the law of India has been indicated to their Lordships
which prevents a beneficiary under a trust from dealing with his interest by
way of mortgage, though it is true enough that in India such an interest is not
technically regarded as an equitable estate." Furthermore, the doctrine of
resulting trust was applicable in India even before the Indian Trusts Act
came into force. [See Mussumat Ameeronnissa Khanum and Mussumat Parbutty
(supra)]. We, therefore, are of the opinion that the Respondent No.2 had a
transferable interest in the CANCIGOS.
ALLOTMENT OF CANCIGO IS IT A TRANSFER? The allotment of CANCIGOS is not a
transfer as thereby Canbank Mutual Fund had allowed the shares not as owner
thereof. The Benami Transactions Act applies when there is a transaction in
which the property is transferred. If allotment of CANCIGOS is not a transfer
of property, the Act All 595] and The Swadeshi Cotton Mills, Co., Ltd. , In re.
[1932 Comp. Cas 411].
In Madura Mills Co. Ltd., In re. [1937 Comp. Cas 71], Varadachariar, J.
stated the law thus:
"As we have already observed, it is no doubt true that in the hands of
a shareholder, a share is property and when a shareholder exchanges his shares
with another it may be possible to regard the transaction as amounting to a
transfer whether by way of exchange or conveyance: Cf. Coats v.
Inland Revenue Commissioners (1897) 2 Q.B.
423. But when the company is for the first time issuing shares, it seems to
us that there is no question of property already possessed by the company being
thereby transferred to the allottee." Even assuming that the Benami
Transactions Act as also the bar on transfer imposed by Canbank Mutual Fund
(CBMF) would apply, the properties would remain vested in Respondent Nos. 3 and
4 and Respondent No. 2 would have no interest therein which would attract the
provisions of Sub-section (3) of Section 3 of 'the Act'.
BENAMI TRANSACTIONS ACT - APPLICABILITY:
Benami transactions in India were generally recognized by the Courts.
But the same had not been given effect to when the transaction (a) violates
the provisions of any law; or (b) defeats the rights of innocent transferees
for value from the banamidar without notice; or when (c) the object of the
benami transaction was to defraud the creditors of the real owner and that object
has been accomplished; or when (d) it is against public policy.
Benami Transactions, however, used to be effected for various purposes to
avoid taxes, to avoid ceiling laws etc. Blank transfers of shares had also
posed serious problems as dividends are paid to the registered shareholders and
not to the real shareholders as in the case of benami holdings of shares, but
despite the same the transactions have not been declared to be invalid in law
by any statute including the Benami Transactions Act.
'Benami Transaction' has been defined in Section 2(a) of the Benami
Transactions Act to mean any transaction in which property is transferred to
one person for a consideration paid or provided by another person.
'Transfer' of property, therefore, is sine qua non for attracting the said
In a transfer involving benami transaction, three parties are involved.
The benamidar may be a party therein. In this case, the parties to the
transactions are public sector undertakings being scheduled banks and their
subsidiaries. A presumption would, thus, arise that they would not encourage
any benami transaction nor would involve themselves therein. In a situation of
this nature and, in particular, having regard to the fact that a disclosure was
made by the Respondent Nos. 3 and 4 in their applications for allotment of
CANCIGO; that the same were filed on behalf of the Respondent No. 2 herein, the
intention of the parties was not to enter into a benami transaction.
The Benami Transaction Act is not a piece of declaratory or curative
legislation. It creates substantive rights in favour of benamidars and destroys
substantive rights of real owners who are parties to such transactions and for
whom new liabilities are created by the Act. A statute which takes away the
rights of a party must be strictly construed. [See R.
(dead) by L.Rs. AIR 1996 SC 238].
The evil of benami transaction was sought to be curbed by reason of the
provisions of the Urban Land (Ceiling and Regulation) Act, 1976, the State
Ceiling Laws, Income Tax Act, 1961 as amended by the Taxation Laws (Amendment)
Act, 1975 (See Sections 281 and 281A of the Income Tax Act), Section 5 of the
Gift Tax Act, 1958, Section 34 B of the Wealth Tax Act and Section 5(1) of the
Estate Duty Act (since repealed). It is only with that view the Benami
Transactions (Prohibition) Act, 1988 prohibiting the right to recover benami
transaction was enacted. Section 5(1) provided that all properties held benami
shall be subject to acquisition as different from forfeiture provided for in
the Smugglers and Foreign Exchange Manipulators (Forfeiture of Property) Act,
1976. But even Section 5 had not been made workable as no rules under Section 8
of the Act for acquisition of property held benami were framed.
A nationalized bank cannot hold somebody else's property in its name. We do
not know as to under what circumstances it applied for allotment of CANCIGOs in
its name on behalf of the Respondent No. 2.
We have also not been informed at the Bar as to whether there exists such a
practice or the same is otherwise permissible. We in these matters, however,
are not concerned with an ethical question. We are also not concerned with the
misconduct of any officer of the Bank, criminal or otherwise, in this behalf.
This Court is only concerned with the validity of the transactions.
We have noticed hereinbefore that in a case of this nature a beneficial
interest is created within the meaning of the provisions of Section 88 of the Indian Trusts Act
in view of the fact that the Respondent Nos. 3 and 4 have applied the money of
the Respondent No. 2 for allotment of CANCIGO in their own names and applied
for allotment of the certificates on behalf of the Respondent No. 2 and not on
their own behalves. It is, therefore, not a case where the transaction was
benami in nature. It does not appear also to be a case where the parties
entered into a transaction with a view to contravene any law. It is also not a
case where any amount belonging to a bank has been utilized by a customer. The
Respondent Nos. 3 and 4 have not claimed any right, title and interest in
CANCIGOS. In view of the aforementioned circumstances, provisions of the Benami
Transactions Act would have no any application whatsoever.
ROLE OF CUSTODIAN UNDER THE ACT:
The Custodian has three main functions to perform:
(i) He has the authority to notify a person in the Official Gazette, on
being satisfied on information received that he has been involved in any offence
relating to transactions in securities during the period 1-4-1991 to 6-6-1992.
(ii) He has the authority to cancel any contract or agreement relating to
the properties of the notified persons which, in his opinion, has been entered
into fraudulently or for the purpose of defeating the provisions of the Act as
specified in Section 4.
(iii) He is required to deal with the properties in the manner as directed
by the Special Court.
The properties of a notified person do not vest in the Custodian. He is not
a receiver within the meaning of the provisions of the Code of Civil Procedure
or an Official Receiver or an Official Assignee under the Insolvency laws. He
is also not an Official Liquidator under the Companies Act. His right is same
as that of the notified person. Only when the notified person had a subsisting
right in a property, the same being subject to statutory attachment, the
custodian can approach the special court for an appropriate direction in
relation thereto. In other words, the custodian is not permitted to deal with
any property which did not belong to the notified person on the relevant date.
ARE THE TRANSACTIONS ILLEGAL?
The Canbank Mutual Fund having regard to the materials on records must be
presumed to have issued the CANCIGOs in the names of the Respondent Nos. 3 and
4 with full knowledge that they would enure to the benefit of the Respondent
No. 2. The effect of grant of CANCIGOs by the Canbank Mutual Fund despite such
knowledge does not strictly fall for our consideration but the same is relevant
to determine the nature of illegality of the transaction, if any. It is one
thing to say that they could not have done so having regard to the scheme, but
it is another thing to say that the same was illegal. The area of law
concerning illegality and resulting trust has undergone some changes in view of
a recent decision of the House of Lords Lord Browne-Wilkinson specified the
core applicable principles which are as under:
"1. Property in chattels and land can pass under a contract which is
illegal and therefore would have been unenforceable as a contract.
2. A plaintiff can at law enforce property rights so acquired provided that
he does not need to rely on the illegal contract for any purpose other than
providing the basis of his claim to a property right.
3. It is irrelevant that the illegality of the underlying agreement was
either pleaded or emerged in evidence: if the plaintiff has acquired legal
title under the illegal contract that is enough." It was held that
illegality being not the source of Milligam's equitable rights as her
contribution to the purchase price was the source therefor. In that case,
Respondent did not have to rely on her own illegality because she was entitled
to an equitable share in the property in any event because she had contributed
to the purchase price. The principles evolved in Tinsley (supra) apply to the
fact of the present case. The said decision was followed SCC 488].
The Scheme suggests that Canbank Mutual Fund intended to absolve itself from
Does by such contract the holder of a unit is debarred from transferring a
valuable security? The answer to that question must be rendered in the
negative. A transfer can be held to be invalid provided it is forbidden in law.
It is one thing to say that the founders of the Scheme would not recognize any
transfer so as to make it liable to pay dividend to a person other than the
person in whose name a unit is held but it is another thing to say that it is
not legally transferable. In this case, the Court is not concerned with the
question whether in the facts and circumstances of this case the Appellant
should have accepted the units of face value of Rs. 33 crores and adjusted a
sum of Rs. 25,01,67,129/- followed by issuance of a cheque of Rs.
7,98,32,871/-, but with the question as to whether such a transaction was
legally impermissible. The case at hand poses a peculiar problem. Respondent
Nos. 3 and 4 applied for allotment of CANCIGOs in their name under the
instructions of Respondent No. 2. Respondent Nos. 3 and 4 were not to invest
their own money. The consideration paid towards the allotment of the units was
paid from the account of the Respondent No.
2. Even the dividends paid to them at the first instance were credited in
the account of the Respondent No. 2. Respondent Nos. 3 and 4 had never claimed
any right, title or interest in the said securities. Respondent No. 4 in its
affidavit dated 26th July, 1993 had categorically stated:
"I say and submit that Respondents No. 4 are neither necessary nor
proper parties to the petition inasmuch as Respondents No. 4 have no claim
whatsoever in the subject securities." A similar statement had been made
by Respondent No. 3. Respondent Nos. 3 and 4 did not claim any right, title or
interest as evidently the possession of CANCIGOS were delivered in favour of
the Respondent No.
Even the Benami Transactions Act while prohibiting benami transactions does
not provide that by reason of such a transaction no title whatsoever would pass
or the property would vest in the State as for acquisition of benami property
recourse to Section 5 of the Act has to be resorted to. In absence of any
proceedings taken and a binding order passed in terms of Section 5 of the
Benami Transactions Act, only Section 4 of the Act would apply.
Respondent Nos. 3 and 4 by reason of the said transaction held themselves to
be the trustees of Respondent No. 2 in relation to the securities in question.
They applied for allotment for the benefit of Respondent No. 2.
They never enforced any claim in relation to the said securities in a court
of law and, in fact, disclaimed any right, title or interest therein.
Possession of the securities which are movable properties has been handed over
No statutory provision has been brought to our notice forbidding such
transfer. The Respondent Nos. 3 and 4, therefore, were not statutorily
prevented from entering into such a transaction.
In other words, the concerned parties, namely, Canbank Mutual Fund, the
Respondent Nos. 3 and 4 as well as the Respondent No. 2 became a party to an
arrangement which may be unethical but not illegal.
A contract may be unlawful or partly lawful or partly unlawful. If it is
lawful, it will be given effect to whereas in case it is wholly unlawful being
opposed to the public policy, it would not be. In case a transaction is partly
lawful and partly unlawful, if they are severable, the lawful part shall be
given effect to. [See B.O.I. Finance Ltd. (supra)].
The said decision is also an authority for the proposition that the position
of the custodian is same as that of the notified person himself. If by any law
the Respondent No. 2 was not precluded from transferring the shares held by
him, the transfer thereof in favour of the Appellants was legal. The transaction
took place on 6.2.1992, i.e., much prior to 6.6.1992 when Respondent No. 2
became a notified person. If on or after 6.2.1992, Respondent No. 2 had no
interest in the CANCIGOs, the same could not have been the subject matter of
attachment of the custody. The custodian could attach the property only when
the right, title and interest thereto remain on the Respondent No. 2 and not
In B.O.I. Finance Ltd. (supra) the question which fell for consideration of
this Court was as to whether ready-forward or buy-back transactions are valid.
In that case the nature of transaction was not in dispute. The transaction
consisted of two interconnected legs, namely, the first or the ready leg,
consisting of purchase or sale of certain securities at a specified price and
the second or forward leg, consisting of the sale or purchase of the same or
similar securities at a later date at a price determined on the first date. It
was held that the first leg of the transaction was not illegal whereas the
second leg of the transaction was contrary to the provisions of the Securities
Contracts (Regulation) Act, 1956. In the said decision, non-compliance of
the direction issued by the Reserve Bank also came up for consideration and
this Court in no uncertain terms held that whereas non-compliance thereof may
result in prosecution but would not result in invalidation of any contract
entered into by the bank with a third party.
It was opined :
"60. In the present case the appellants are basing their claim by
relying not on the terms of the ready-forward contract, but on the payment of
market price against delivery of the securities. The claim to title is
independent of the ready-forward agreement.
61. There can be little doubt that the appellants, when they paid the market
price and took delivery of the securities had become owners of the same.
According to Section 5 of the Transfer of
1882, "transfer of property" inter alia means an act by which a
person conveys property to another person. Section 6 of this Act deals with
what property may be transferred. What is relevant in Section 6(h) according to
which no transfer can be made (1) insofar as it is opposed to the nature of the
interest affected thereby, or (2) for an unlawful object, or consideration
within the meaning of Section 23 of the Indian Contract Act, or (3) to a person
legally disqualified to be transferee.
According to Section 23 of the Contract Act the consideration or object of
an agreement will be unlawful if it is forbidden by law; or is of such a nature
that, if permitted, it would defeat the provisions of any law, or is
fraudulent, or involves or implies injury to the person or property of another,
or the court regards it as immoral or opposed to public policy, In the instant
case the object of the contracts entered into between the banks and the
notified parties was for the transfer and, subsequently, re-transfer of the
securities. The transfer took place on delivery of securities on payment of
market price as consideration. The consideration for the transfer of the
securities, in the ready leg, was the payment of market price.
62. The validity of the transfer of the securities has to depend on the
provisions of the Transfer of Property Act
and the Sale of Goods Act relating to transfer and not to the validity of the
agreement preceding the transfer. Like any other moveable goods the securities
could validly be purchased on delivery against payment of price as per Sections
4, 19 and 20 of the Sale of Goods Act. The price paid, while taking delivery,
was the consideration for the transfer of the securities. When the transfer of
title has taken place the agreement between the parties preceding this cannot
invalidate the transfer" This decision applies in all fours to the fact of
the present case.
Right, title and interest in a movable property can pass by delivery of
possession and upon paying of the considerations in view of the provisions of
the Sale of Goods Act. Passing up of a title in favour of the transferee would
not be illegal, unless it is forbidden by law. For the said purpose, the
transaction must attract the wrath of Section 23 of the Indian Contract Act and
not otherwise. Section 3 of the Act does not contemplate extinction of right of
a third party. For getting the transaction invalidated in law, only Section 4
of the Act can be taken recourse to.
The constitutional validity of the Act came up for consideration before SCC
1]. The vires of the said statute was upheld, inter alia, on the ground that by
reason thereof the right, title and interest in a property belonging to
Respondent No. 3 is not affected. The interest of the Appellant, thus, was not
affected by the said Act or by the Benami Transactions Act. Extinction in
right, title and interest in a property must be caused as a result of operation
of law and not otherwise. Creation of title by an act of parties is subject to
law. Once a title vests in a person he cannot be divested therefrom except by
reason of or in accordance with a statute and not otherwise. An admission does
not create a title; the logical corollary whereof would be that an admission of
a party would not lead to relinquishment of his right therein, if he has otherwise
acquired a title in the property.
Title in a property connotes a bundle of rights. Subject to prohibitory or
regulatory statute, such rights are capable of being transferred. Apart from
the provisions of Benami Transactions Act, no other provision operating in the
field which would negate the claim of the Appellant was pointed out. As
discussed hereinbefore, the Benami Transactions Act will have no application in
the instant case.
It is also not a case where a transfer has been made by a company beyond its
articles. Appellant has not acted ultra vires its articles.
Furthermore, it is one thing to say that a transfer is made contrary to
Articles but it would not be correct to contend that the same was prohibited by
terms of issue.
Attachment under sub-Section (3) of Section 3 of the Act is subject to an
encumbrance, if any. Even if a limited right is transferred by a notified
person to a third party, the order of attachment, if any, must be subject to
the said right of the third party. In other words, under all circumstances, the
right of a third party must be recognized. It is now well-settled, in view of
the decision of this Court in C.B. Gautam vs. Union of India & Others
[(1993) 1 SCC 78], that even where a statute providres for compulsory purchase,
the property will not vest in the Government free from all encumbrances but
would vest subject to the encumbrances.
In C.B. Gautam (supra), this Court held:
"36Reading down is not permissible in such a manner as would fly in the
face of the express terms of the statutory provisions. In view of the express
provision in Section 269-UE that the property purchased would vest in the
Central Government "free from all encumbrances" (emphasis supplied)
it is not possible to read down the section as submitted by learned Attorney
General. In the result the expression "free from all encumbrances" in
sub-section (1) of Section 269- UE is struck down and sub-section (1) of
Section 269-UE must be read without the expression "free from all
encumbrances" with the result the property in question would vest in the
Central Government subject to such encumbrances and leasehold interests as are
subsisting thereon except for such of them as are agreed to be discharged by
the vendor before the sale is completed" In V.B. Rangaraj (supra),
whereupon reliance has been placed by the learned counsel for the Respondents,
transfer was contrary to the Articles of the Company. This Court therein had no
occasion to consider the effect of a transaction which is contrary to the terms
of issue. The said Act provides for certain statutory consequences which must
be kept within the four corners thereof. The Learned Special Judge, therefore,
erred in asking unto itself a wrong question that the statutory provisions
create no right in the third party including the Appellant herein. The question
which should have been posed was : Had any right, title or interest of
Respondent No. 2 existed on the notified date in the said CANCIGOS authorizing
the Custodian to act in terms of Section 3? The answer to that question must be
rendered in the negative. It is no doubt true that Section 13 of the said Act
provides for a non-obstante clause but before the said clause is resorted to,
it must be shown that there exists a provision inconsistent with the provision
in any other Act. In any event, if Respondent Nos. 3 and 4 could transfer or
relinquish its right in favour of Respondent No. 2 who in turn could transfer
the same to the Appellant, provisions of the said Act would not entitle the
custodian to claim a property which ceased to be the property of the Respondent
No. 2. Here again, the learned Special Judge committed an error in holding that
by reason of Section 4(2) of the Benami Transactions Act, the Appellant is
forbidden from raising a defence in respect of the CANCIGOs although such a bar
would not apply in the case of the Custodian.
The Appellant, in our opinion, had also the requisite locus to maintain its
application before the Special Court with a view to show that it having an
interest in the CANCIGOs, the same is beyond the purview of purported automatic
attachment under Section 3(3) of the Act and consequently neither the custodian
derived any right to deal therewith nor the special court could issue any
direction in relation thereto. In any event having regard to the provision
contained in Section 9A of the Act, all claims relating to the properties which
are claimed to have been statutorily attached must be adjudicated by the
Special Court only. The claim petition of the Appellant was, thus,
In V.B. Rangaraj (supra), this Court held that shares being movable
property, a shareholder has a free right to transfer his shares. Such right can
only be taken away by Articles of Association and not otherwise.
The stand of the custodian, in this behalf, is inconsistent and self-
contradictory. If by reason of the embargo placed on transfer of any CANCIGO,
the right remains vested in the Respondent Nos. 3 and 4, the question of the
same being subject to attachment would not arise. However, if, according to the
custodian, right, title and interest in the CANCIGOS vested in the Respondent
No. 2, he being a third party can transfer his interest, as he was not bound by
the rules for allotment. On the one hand, it is contended that the Respondent
Nos. 3 and 4 were bound by the conditions imposed by Canbank Mutual Fund and on
the other a contention was raised that they were benamidars. Both cannot stand
together. Similarly, a contention has been raised that the condition contained
in Note No. 4 of the Credit Sheet is an absolute restraint on alienation, but
at the same time it is contended that even the third party cannot transfer his
interest (if he has any) in favour of another although a transfer can be given
effect to after the expiry of the lock-in period.
Furthermore, in a case of this nature, the Respondent No. 2 did not hold any
personal interest which would come within the purview of Section 6(d) of the
Act. An interest in the CANCIGOS was not created in the Respondent No. 2 for
enjoyment in his personal capacity. Section 6(d) of the Transfer of
Property Act would apply when a transfer is in violation of such
stipulation which would defeat the object thereof. The learned Special Judge,
therefore, committed an error in invoking Section 6(d) of the Transfer of Property Act.
it is stated:
"5If, on a construction of the relevant terms of the instrument, the
Court comes to the conclusion that rights were created against the property,
the matter is taken out of the purview of Section 6(d) of the Transfer of
Property Act." In Harshad Shantilal Mehta (supra), this Court held:
"18. The last question can be answered first. As stated above, Section
3(3) clearly provides that the properties attached are properties which belong
to the person notified. The words "belong to" have a reference only
to the right, title and interest of the notified person in that property. If in
the property "belonging to" a notified person, another person has a share
or interest, that share or interest is not extinguished. Of course, if the
interest of the notified person in the property is not a severable interest,
the entire property may be attached. But the proceeds from which distribution
will be made under Section 11(2) can only be the proceeds in relation to the
right, title and interest of the notified person in that property. The interest
of a third party in the attached property cannot be sold or distributed to
discharge the liabilities of the notified person. This would also be the
position when the property is already mortgaged or pledged on the date of
attachment to a bank or to any third party. This, however, is subject to the
right of the Custodian under Section 4 to set aside the transaction of mortgage
or pledge. Unless the Custodian exercises his power under Section 4, the right
acquired by a third party in the attached property prior to attachment does not
get extinguished nor does the property vest in the Custodian whether free from
encumbrances or otherwise. The ownership of the property remains as it was.
The Appellant having paid a consideration of Rs. 33 crores in relation to
the CANCIGOS in question had a just right to possess the same to the exclusion
of the Respondent No. 2 and in that view of the matter too the Special Court
could not have directed the Appellant to hand over the same to the Custodian.
The said direction is unsustainable in law.
SECTION 13 OF THE ACT:
In Solidaire India Ltd.(supra), the Custodian initiated proceedings before
the Special Court for recovery of an amount of loan of Rs. 1 crore due to the
Respondent No. 1 from the Appellant therein. The suit was decreed and only
during pendency of appeal, the Appellant became sick.
The question which arose for consideration was as to whether in view of the Sick Industrial
Companies (Special Provisions) Act, 1985, no proceeding could have been
initiated or continued under the said Act. Referring to Section 13 of the Act,
this Court held that the provisions of the said Act would prevail over the
provisions of the Sick Industrial
Companies (Special Provisions) Act,
We are here not concerned with the right of a party to take recourse to a
remedy but are concerned with a right of a party to possess the property over
which it has a lawful title. In such a situation, Benami Transactions Act will
have no application in allocation of shares as the same would not come within
the purview of transaction relating to a transfer of property.
Transfer of CANCIGO in favour of the Appellant was, thus, valid and legal as
by reason of the transfer of possession of the CANCIGOS by Respondent No. 2 in
favour of the Appellant, a valid right has been created therein, the same could
not have been attached in terms of Section 3(3) of the said Act.
The Custodian thought it expedient not to invoke the provisions of
Sub-section (2) of Section 4 of the said Act. He was at liberty to do so.
Even now he is free to do so, if so advised.
For the reasons aforementioned, the impugned judgment cannot be sustained
which is set aside accordingly. These appeals are allowed. In the facts and
circumstances of this case, however, there shall be no order as to costs.