Chartered Bank Vs. The Custodian & Ors  Insc 220 (17 April 2001)
Bharucha, N. Santosh Hegde & Y.K. Sabharwal. Santosh Hegde, J.
CA Nos.6088/98 & 425/99)
appeals are filed against the judgment and order dated 20th July, 1998 passed by the Special Court at Bombay constituted under the Special Court (Trial of Offences Relating to Transactions in Securities)
Act, 1992 (for short the Act). Though by the impugned order, the High Court has
decided a number of questions raised before it, the appellants before us have
confined their argument to the following questions;
the interest claimed by them is liable to be disbursed under Section 11(2)(b)
of the Act on a preferential basis or the same is to be distributed under
Section 11(2)(c) of the Act;
the secured creditors have the right to stand outside the distribution under
Section 11 of the Act and recover their dues.
11 of the Act reads thus:
of liabilities(1) Notwithstanding anything contained in the Code and any other
law for the time being in force, the Special Court may make such order as it
may deem fit directing the Custodian for the disposal of the property under
following liabilities shall be paid or discharged in full, as far as may be, in
the order as under:--
all revenues, taxes, cesses and rates due from the persons notified by the
Custodian under sub-section (2) of Sec. 3 to the Central Government or any
State Government or any local authority.
amounts due from the person so notified by the Custodian to any bank of
financial institution or mutual fund; and
other liability as may be specified by the Special Court from time to time.
Court came to the conclusion in regard to the claim of interest by the
appellants that the same cannot be distributed on priority basis under Section
11(2)(b) of the Act, but same can be done under Section 11(2)(c) of the Act.
regard to this finding, the appellants contend that in view of the wording of
sub-section (2) of Section 11, they are entitled not only to the principal
amount due to them but also to the interest that has become payable thereon,
therefore, they are entitled for the payment under Section 11(2)(b) of the Act.
On behalf of the Custodian, it is argued that the amount payable to the
appellants, be it the principal or interest, can be only such amount and
interest thereon as became due within the period stipulated in the Act, that is,
the notified period being 1.4.1991 and 6.6.1992. Therefore, it is contended
that the appellants are not entitled to the interest payable on the amount due
to them which falls outside the notified period. It is the case of the
Custodian that the interest that becomes payable outside the notified period,
can be claimed only under Section 11(2)(c) of the Act.
considered the arguments of the parties, we are of the opinion that the
contention advanced on behalf of the Custodian merits acceptance. It is to be
seen that this Court in Harshad Shantilal Mehta v. Custodian & Ors. (1998 5
SCC 1) while examining the claim of the Revenue for payment on priority basis
under Section 11(2)(b) of the Act regarding the amounts due under the heads
penalty and interest had held thus :
the liabilities covered under Section 11(2)(a) are only liabilities arising
during the period 1.4.1991 to 6.6.1992, and do not cover penalty and interest,
the question whether the Special Court can absolve a notified person from imposition
of penalty or interest after the date of the notification does not really
arise. In any case, interest or penalty for any action or default after the
date of the notification, are not covered by the Act. x x x The Special Court
is required to consider this question only from the point of view of
distributing any part of the surplus assets in the hands of the Custodian after
the discharge of liabilities under Sections 11(2)(a) and 11(2)(b). The Special Court has full discretion under Section
11(2)(c) to decide whether such claim for penalty or interest should be paid
out of any surplus funds in the hands of the Custodian.
the said judgment was delivered with reference to the claim made by the
income-tax authorities, the said ratio is applicable to the claim made by the
appellants in these appeals so far as their claim for interest is concerned.
to be noted also that when the Special Court was considering the claim of the
Revenue for payment of interest and penalty due from the notified persons under
Section 11(2)(b) of the Act, these very appellants had contended that any
interest or penalty which became due outside the notified period could only be
distributed by the Custodian under Section 11(2)(c) of the Act. We are of the
opinion that the stand taken by the appellants in that case is the correct one
and the same should apply to their claim in these appeals also. Therefore, so
far as the appellants claim for interest is concerned, in our opinion, if the
interest fell due within the notified period, the same shall be distributed on
the basis of the priority contemplated under Section 11(2)(b) of the Act, and
so far as their claim for interest which fell due outside the notified period
is concerned, the same can be entertained by the Custodian only under Section
11(2)(c) of the Act.
regard to the next contention pertaining to secured creditors, some of whom are
the appellants in this batch of appeals, it is to be noted that the Special
Court held that they are not entitled to stand outside the distribution under
Section 11 of the Act, hence, they will have to claim the amounts due to them
under Section 11(2) of the Act. The argument on behalf of such secured
creditors is that the property secured in their favour is not attachable by the
Custodian; hence, the proceeds from such security cannot be utilised for
distribution under Section 11(2) of the Act.
contend that these properties which are secured in their favour cannot be
treated as the properties belonging to a notified person, and that their
interest in the said property cannot be sold or distributed to discharge the
liability of the notified person.
Court in Harshad Shantilal Mehtas case (supra) has held :
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.
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.
we are of the opinion that so far as the secured creditors are concerned,
subject to the right of the Custodian under Section 4 of the Act, they are
entitled to recover the amounts due to them (principal and interest) from the
property secured in their favour without taking recourse to Section 11 of the
Act. But if the security is not large though to extinguish their debt, they can
seek payment of the shortfall only under section 11(2) of the Act.
the reasons stated above, these appeals are partly allowed, to the extent
indicated hereinabove. No costs.