# B.0.1. FINANCE LIMITED ETC v. THE CUSTODIAN AND ORS. ETC

- **Citation:** [1997] 3 S.C.R. 51
- **Court:** Supreme Court of India
- **Decided:** 1997-03-19
- **Case number:** Civil Appeal No. 1753 of 1994
- **Bench:** Am. Ahmadi, S.P. Bharucha, B.N. Kirpal
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/b-0-1-finance-limited-etc-v-the-custodian-and-ors-etc-15489
- **Pages:** 37

## Headnote

B
Banking Regulation Act 1949, ss. 21, 35-A, 36(1) (a) and (b) r/w
Secwities Contracts (Regulation) Act 1956, s. 16 and Special Court (Trial of
Offences relating to Transactions in Securities) Act 1992, s. ]()--Circulars issued by Reserve Bank of India under Banking Act prohibiting ready-f 01ward C
transactions-Special Court holding ready forward contracts entered into by
appellant banks in violation of circulars to be illegal (/Jld ordering retum of
securities to Custodian-Held, non-compliance of circulars did not result in
invalidation of contract by banks with third parties.
Contract Act 1872, ss.23 and 57-Ready-fonvard contracts entered into D
by appellant banks with third parties in violation of Rese1ve Bank of India
circulars-Whether ready leg of transaction severable from the forward
leg-Held, yes; the ready leg having been pe1fonned, the f 01ward leg which
alone was illegal, had to be ignored.
Trai1sfer of Property Act 1882, s.5, 6(11) r/w Sale of Goods Act 1930,
ss.4, 19 and 20-Ready-forward contracts entered into by appellant banks with
third parties in violation of Rese1ve Bank of India circular:.-Wliether illegality
of agreement preceding transfer of title in securities could invalidate the
transf e1-H eld, no; illegality off onvard leg could not affect transfers that had
already taken place.
The appellant banks had prior to June 6, 1992, entered into readyfonvard contracts with different brokers for the purchase and sale of
certain securities which were not listed on any stock exchange. These
E
F
transactions consisted of two inter-connected legs, viz., the first or the G
ready leg, consisting of purchase or sale of certain securities at a specified
price, and the second or fonvard 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.
The ready leg of the transactions were completed with the appellants H
51
52
SUPREME COURT REPORTS
[1997] 3 S.C.R.
A paying the agreed price and receiving the delivery of securities agreed to
be purchased. Before the forward leg could be completed, a Special Court
(Trial of Offences relating to Transactions in Securities) Ordinance, 1992
was issued on June 6, 1992 which was subsequently replaced by the Act
('Special Court Act'). The Custodian, under the Special Court Act filed
B applications before the Special Court to the effect that the ready forward
contracts entered into between the banks and the notified persons were in
violation of the Banking Regulation Act, 1949 ('Banking Act') and the
Securities Contracts Regulation Act, 1956 and therefore void. Consequently those securities which had been sold to the appellants in the ready leg
continued to be, in law, the properties of the notified persons and stood ·
C attached under s. 3 (3) of the Special Courts Act. The Custodian required
the Special Court to direct the appellant banks to return the said
securities.
Allowing the applications of the respondents, the Special Court held
that the circulars issued under the Banking Act were binding and the ready
D forward contracts being contrary thereto were illegal and void in respect
of the third parties. The appellants were directed to return the securities
to the Custodian.
·
In this Court the appellants contended that the violation of the
E circulars issued under the Banking Act did not invalidate the contracts
entered by them with their customers. Further, the forward· leg of the
transaction, which was alone illegal, was severable from the ready leg and
had to be ignored. Even assuming that the transaction was not severable,
the ready leg having been performed, the illegality of the agreements could
F
not invalidate the transfers that had already taken place.
Allowing the appeals, this Court
Held : 1.1. Infringements of the instructions issued by the Reserve
Bank of India under the Banking Regulation Act, 1956 prohibiting the
G banks from entering into buy-back arrangements did not invalidate such
contracts

## Text

_Characters 0–39,970 of 86,561. This is a partial read: ask again with offset=39970 for what follows._

B.0.1. FINANCE LIMITED ETC.
A
v.
THE CUSTODIAN AND ORS. ETC.
MARCH 19, 1997
[AM. AHMADI, CJ., S.P. BHARUCHA AND B.N. KIRPAL, JJ.]
B
Banking Regulation Act 1949, ss. 21, 35-A, 36(1) (a) and (b) r/w
Secwities Contracts (Regulation) Act 1956, s. 16 and Special Court (Trial of
Offences relating to Transactions in Securities) Act 1992, s. ]()--Circulars issued by Reserve Bank of India under Banking Act prohibiting ready-f 01ward C
transactions-Special Court holding ready forward contracts entered into by
appellant banks in violation of circulars to be illegal (/Jld ordering retum of
securities to Custodian-Held, non-compliance of circulars did not result in
invalidation of contract by banks with third parties.
Contract Act 1872, ss.23 and 57-Ready-fonvard contracts entered into D
by appellant banks with third parties in violation of Rese1ve Bank of India
circulars-Whether ready leg of transaction severable from the forward
leg-Held, yes; the ready leg having been pe1fonned, the f 01ward leg which
alone was illegal, had to be ignored.
Trai1sfer of Property Act 1882, s.5, 6(11) r/w Sale of Goods Act 1930,
ss.4, 19 and 20-Ready-forward contracts entered into by appellant banks with
third parties in violation of Rese1ve Bank of India circular:.-Wliether illegality
of agreement preceding transfer of title in securities could invalidate the
transf e1-H eld, no; illegality off onvard leg could not affect transfers that had
already taken place.
The appellant banks had prior to June 6, 1992, entered into readyfonvard contracts with different brokers for the purchase and sale of
certain securities which were not listed on any stock exchange. These
E
F
transactions consisted of two inter-connected legs, viz., the first or the G
ready leg, consisting of purchase or sale of certain securities at a specified
price, and the second or fonvard 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.
The ready leg of the transactions were completed with the appellants H
51
52
SUPREME COURT REPORTS
[1997] 3 S.C.R.
A paying the agreed price and receiving the delivery of securities agreed to
be purchased. Before the forward leg could be completed, a Special Court
(Trial of Offences relating to Transactions in Securities) Ordinance, 1992
was issued on June 6, 1992 which was subsequently replaced by the Act
('Special Court Act'). The Custodian, under the Special Court Act filed
B applications before the Special Court to the effect that the ready forward
contracts entered into between the banks and the notified persons were in
violation of the Banking Regulation Act, 1949 ('Banking Act') and the
Securities Contracts Regulation Act, 1956 and therefore void. Consequently those securities which had been sold to the appellants in the ready leg
continued to be, in law, the properties of the notified persons and stood ·
C attached under s. 3 (3) of the Special Courts Act. The Custodian required
the Special Court to direct the appellant banks to return the said
securities.
Allowing the applications of the respondents, the Special Court held
that the circulars issued under the Banking Act were binding and the ready
D forward contracts being contrary thereto were illegal and void in respect
of the third parties. The appellants were directed to return the securities
to the Custodian.
·
In this Court the appellants contended that the violation of the
E circulars issued under the Banking Act did not invalidate the contracts
entered by them with their customers. Further, the forward· leg of the
transaction, which was alone illegal, was severable from the ready leg and
had to be ignored. Even assuming that the transaction was not severable,
the ready leg having been performed, the illegality of the agreements could
F
not invalidate the transfers that had already taken place.
Allowing the appeals, this Court
Held : 1.1. Infringements of the instructions issued by the Reserve
Bank of India under the Banking Regulation Act, 1956 prohibiting the
G banks from entering into buy-back arrangements did not invalidate such
contracts entered into between the banks and it's customers. The instructions which were issued by the circulars were meant to be complied with
by the banking companies only and did not purport to, nor could they, be
binding on third parties. [87-A-B, 70-A-B]
H
1.2. It would be unjust and inequitable if such transactions entered
~
' .
"'Y
I
B.O.I. FINANCE LTD. v. CUSTODIAN
53
into by the bank with a customer were to be regarded as void because the A
bank did not follow the directions or instructions of the Reserve Bank of
India. [ 69-G-HJ
Seth Banarsi Das v. The Cane Commissioner, [1963) SCR Supp. 760,
referred to.
Yango Pastoral Company Pvt. Limited v. First Chicago Australia
Limited, (1978) 139 C.L.R. 411, referred to.
2.1. The ready forward contract was severable into two parts, nameB
ly, the ready leg and the forward leg. The ready leg of the transaction
having been completed, the forward leg, which alone was illegal, had to C
be ignored. [87-B]
2.2. In the case of a ready-forward contract the stipulation to retransfer the securities, on a later date, could only be regarded as condition
precedent and it was only this part or condition which would fail. Thus, the
securities purchased by the appellants from the notified persons could not D
be attached. [76-C-D, 76-G]
Asaram v. Ludheshwar, AIR (1938) Nag 335 and Ram Santp v.
Mussumat Bela, XI Indian Appeals 44 and Sec. v. Drysdale Secwities, 785
F2d 38, referred to.
3.1. With the ready leg having been performed the illegality of the
forward leg contained in the agreements could not affect the transfers
which had already taken place. [87 -CJ
E
3.2. The validity of the transfer of the securities had to depend on the F
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. [86-E]
SajanSingh v.SardaraAli, (1960) A.C.167 andSmt. Surasaibalii1iDebi
v. Phanindra Mohan Majmudar, [1965] 1 SCR 860, relied on.
G
Alexander v. Rayson, (1936) 1KB169 and Tinsley v. Millingan, (1993)
3 All ER 65, referred to
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 1753 of
1994 Etc. Etc.
H
54
SUPREME COURT REPORTS
[1997] 3 S.C.R.
A
From the Judgment and Order dated 14.12.93 of the Bombay High
B
Court in Misc. Application No. 11/93 and 23/93.
T.R. Andhyarujina, Solicitor General of India, Shanti Bhushan, K.
Parasaran, Soli J. Sorabjee, S.K. Cooper, I.M. Chhagla, D.A. Dave, S.K.
Dholakia, A.M. Setalwad, Arnn Jaitley, Ram Jethmalani, P.K. Mullick, V.
Tulzapurkar, (Anand Bhatt, Sandeep Mittal, R.N. Karanjawala, Ms. Ruby
Ahuja, N. Gore) for Mrs. M. Karanjawala, E.C. Agrawala, Mahesh Aggrawala, Atul Sharma, M. Himayatullah, S. Ganesh, S. Sukumaran, T K.
Cooper, U.A. Rana, S. Tripathi, T. Cooper, Neeraj Sharma, Ms. Kiran,
Neena Gupta for Vineet Kumar, D. Khambatta, J.D. Das, Ms. Anjali Seth,
C Ms. Mona Bhide, Dr. A.F. Julian, Arputham Aruna & Co., G .R. Joshi, A.
Subba Rao, P. Parmeshwaran, Sunil Dogra, Monica Sharma, S.S. Shroff,
Mahesh Jethmalani, S.B. Jaisingham, Anand Desai, Ms. Lata Krishnamurti,
Jay Salva, J.K. Das, H.S. Parihar, Subrat Birla, K.S. Parihar, S.K. Mehta,
Dhruv Mehta, Fazlin Anam, Ms. Monica Mehta, K.J. John, P.H. Parekh
D and Ms. Sunita Sharma for the appearing parties.
'
The Judgment of the Court was delivered by
KIRPAL, J. These appeals, under Section 10 of the Special Court
(Trial of Offences relating to Transactions in Securities) Act, 1992
E (hereinafter referred to as 'The Special Court Act') arises from the judgment of the Special Court at Bombay which decided common questions of
law relating to certain transactions of purchase of securities by the appellant banks from some of the brokers to whom the Special Court's Act, 1992
had been made applicable.
F
The appellant banks had prior to 6th June, 1992, entered into contracts with different brokers for the purpose and sale of certain
securities which were not listed on any stock exchange. For the purpose
of this case these contracts have been regarded as ready-forward transactions or buy-back transactions. The parties are agreed, and it is on
G this basis that the High Court also 'proceeded, that the nature of such
a transaction is that it consists of two inter-connected 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 latter date at a
price determined on the first date. Such ready-forward transactions
H have, in most cases, been entered into either by execution of a single
A
'
'
-
,.
B.0.1.FINANCELTD. v. CUSTODIAN[KIRPAL,J.]
55
document or by execution of two documents contemporaneously, one A
representing the first or ready leg and the other the forward or second leg.
On such contracts being entered into the ready leg of the transactions were
completed with the appellants paying the agreed price and receiving the
delivery of the securities which were agreed to be purchased.
Before the forward leg of the transactions could be completed, a B
Special Court (Trial of Offences relating to transactions in securities)
Ordinance 1992 was issued on 6.6.1992 which was subsequently replaced
by the Act.
Special Courts Act, 1992 :
. The necessity for issuance of the said Ordinance is contained in the
Statement of objects and reasons which reads as follow :
c
"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 D
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 the E
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 fmancial institutions the Special Court
(Trial of Offences Relating to Transactions in Securities) Ordinance, 1992 was promulgated on the 6th June 1992. The OrF
dinance 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 cine or more Custodians for
attaching the property of the offenders with a view to prevent
diversion of such properties by the offenders."
. G
We will now refer to some of the provisions of the said Act which
are relevant for the purpose of this matter.
Section 2 contains defmitions. The term "securities" is defined in
Section 2( c) and is as follows :
H
56
A
B
SUPREME COURT REPORTS
[1997] 3 S.C.R.
"securities includes -
(i) shares, scrips, stocks, bonds, debentures, debenture stock, units
of the Unit Trust of Indin 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."
Section 3 of the said Act relates to appointment and functions of
C Custodian and reads as follows :
D
E
F
G
"3(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 transaction in securities after the 1st day of April, 1991 and on
and before the 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.
. (5) The Custodian, may take assistance of any person which
exercising his powers or for discharging his duties under this
section and Section 4."
The Custodian has been given power under Section 4 to order the
cancellation of any contract or agreement entered into between 1.4.1991
H
and 6.6.1992 which, in his opinion, has been entered into fraudulently or
-·l> -
JI
B.O.I.FINANCELTD. v. CUSTODIAN(KIRPAL,J.]
57
to defeat the provisions of the Act. On such cancellation being ordered, A
the property stands attached under the Act.
Special Court is established under Section 5 by the Central Government issuing the notification to that effect. Section 11 deals with the
discharge of liabilities and reads as follows :
"11(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 attachment.
B
(2) The following liabilities shall be paid or discharged in full, C
as far as may be, in the order as under :
(a) all revenues, taxes, cesses and rates due from the persons
notified by the Custodian under sub-section (2) of Section 3 to
the Central Government or any State Government or any local D
authority;
(b) all amounts due from the person so notified by the Custodian to any bank or financial institution or mutual fund;
( c) any other liability as may be specified by the Special Court E
from time to time."
Section 13 provides that the provisions of the Act will have an overriding
effect notwithstanding anything inconsistent therewith contained in any
other law for the time being in force or in any instrument having effect by
virtue of any law, other than this Act, or in any decree or order of any
F
Court, Tribunal or other authority.
As is evident from the above the intention of framing the aforesaid
Act was to protect the interest of the banks and financial institutions from
irregularities and mal-practices which had been committed by some
brokers in collusion with employees of various banks and financial institu- G
tions. The important feature of the Act was the attachment of the properties of the offenders with a view to prevent its diversion. The Special Court
is required to pass orders directing the disposal of the properties under
attachment. Sub-section (2) of Section 11 provides for the priorities in
which the liabilities of the notified person are to be discharged from out H
58
SUPREME COURT REPORTS
(1997] 3 S.C.R.
A of the attached properties. Considering that the Act has been passed
because of the diversion of funds from the banks and financial institutions
to the individual accounts of certain brokers, the implication of Section
11(2)(b) clearly is that after the discharge of the liabilities under Section
11(2)( a), the amounts which are paid to. the banks would probably be those
B funds which were diverted from the banks by reason of mal-practices in
the security transactions. In other words, the losses caused to the banks
and the financial institutions were to be made from out of the assets of the
notified persons.
At this stage, it will be relevant to see as to what is the position of
C the Custodian.
Section 4 of the Act gives the custodian the power to cancel such
contracts or agreements which have been entered into fraudulently. That
apart, he is merely a custodian of the properties of the notified persons
D which stand attached under the Act and such properties are to be dealt
with by him in such manr ':r as the Special Court may direct.
The Act shows that the Custodian has three main functions to
perform. Firstly; he has the authority to notify a person under Section 3(2)
who has been involved in any offence relating to transactions in securities
E
during the period 1.4.1991 to 6.6.1992. Secondly; he has been given the
authority by Section 4 to cancel contracts or agreements relating to the
properties of the notified persons which, in his opinion, have been entered
into fraudulently or for the purpose of defeating the provisions of the Act.
Lastly; he is required to deal with properties in the manner as directed by
F
the Special Court. To put it simply the Custodian is required to assist in
the attachment of the notified person property and to manage the same
thereafter. The properties of the notified persons, whether attached or not,
do not at any point of time, vest in him. He is merely a Custodian and his
position is not like that of a Receiver under Civil Procedure Code (Section
94 Order 44) or an official receiver under Provincial Insolvency Act or
G official assignee under the Presidency Insolvency Act. There is no vesting
of the attached properties of the notified persons in the custodian. This is
in contrast with Section 28(2) of the Provincial Insolvency Act and Section
17 of the Presidency Insolvency Act. There is the vesting in the official
receiver or official assignee. He is also not in a position of an official
H liquidator under the Companies Act in whom not only the property vests
..
;
B.0.I. FINANCE LTD. v. CUSTODIAN [KIRPAL, J.]
59
but who is also in control thereof. This being so there is considerable force A
in the contention of the counsel for the appellants that, except for power
exercisable under Section 4, the position of the Custodian is the same as
that of the notified person himself.
Pursuant to the promulgation of the Ordinance in 1992, Mr. Justice
V ariava of the Bombay High Court has been constituted as a Special Court B
at Bombay. This Court has been hearing several matters brought before it
by the Custodian as well as other parties.
INITIATION OF PROCEEDINGS AND DECISION OF THE SPECIAL
COURT
The custodian filed applications before the Special Court to the
effect that the above mentioned contracts entered into between the banks
c
and the notified persons were void. It was contended that such ready-forward transactions were illegal under the provisions of the Banking Regulation Act 1949 and the Securities Regulation Act 1956. It was therefore, D
contended that as the contracts were void those securities which had been
sold to the appellants in the ready leg continued to be, in law, the properties of the notified persons on the date they were so notified and the same
stood attached under Section 3(3) of the Act. The applications required
the Special Court to direct the appellant banks to return the said securities. E
Similar applications were also filed, subsequently, by Sh. Harshad Mehta,
one of the notified parties, with whom such transactions had been entered
into by some other appellant banks.
Resisting the applications the appellant banks had, inter alia, contended that the transactions in question were not illegal and did not F
contravene the provisions of Banking Regulation Act, 1949 and the circulars issued by the Reserve Bank of India thereunder and nor were they
contrary to the provisions of the
1 Securities Contract Regulation Act, 1956
and the notification issued under Section 16 thereof. lt was further contended that in any case the contracts in question were severable and the
illegality, if any, was attached only to the second leg and not to the first G
leg. The transfer for title had taken place in favour of the appellant banks
and the securities did not belong to the notified persons and as such they
could not be regarded as being attached under Section 3(3) of the Act. It
was also submitted that, assuming that the entire contract was illegal and
void, neither the Custodian nor the notified parties could ask for the relief H
60
SUPREME COURT REPORTS
(1997) 3 S.C.R.
A sought for as both the parties to the contract were in pari delicto. It was
also contended that in the event the court was to order the return of the
securities then the notified parties should be directed to return the consideration received by them.
B
The Special Court heard the applications only on that points of law
without going into the facts of any case. The case proceeded on the
assumption that the appellants .had entered into ready-forward transactions. It was accepted by the parties before the Special Court that the
ready-forward transaction (or as sometimes described as a buy-back transaction) had four ingredients; (i) there must be a present sale or purchase
C with the commitment to repurchase or resale in future; (ii) the contract
must be between the same parties; (iii) it must be in respect of some kind
of securities and for the same quantum of securities and; (iv) the transaction must be entered into on the same day or contemporaneously and the
price of resale and repurchase would be fixed at the stage of first leg itself.
D
The Special court by a common judgment proceeded to decide the
general questions of law which arose by regarding the transactions in
question to be ready-forward transactions. It took note of the concession
on behalf of the counsel for the Custodian that if a transfer had already
E taken place prior to the date of the notification then the concerned
property could not be properly regarded as belonging to the notified
persons and would not stand attached. It allowed the applications of the
respondents holding that the circulars issued under the Banking Act were
binding and, since the transactions were contrary thereto, the same were
p illegal and void "in respect of the third parties. It rejected the contention
that the contract was severable and that the first leg was not hit by the
illegality. It forth.er came to the conclusion that the contracts were also
illegal under the provisions of the Securities Regulation Act, 1956 and the
notification issued under Section 16 thereof. It also came to the conclusion
that the principles of in 'pari delicto' did not come into play in the present
G case as the Custodian was not making any claim in the applications but was
merely bringing to the attention to the court the fact that third parties were
in possession of properties which stood attached under the provisions of
Act of 1992. The fact that the Custodian had not exercised any power
under Section 4 of the Special Courts Act, in respect of these transactions,
H was also taken note of.
B.0.1.FINANCELTD. v. CUSTODIAN[KIRPAL,J.]
61
Having come to the conclusion that the contracts were void, the A
Court held that the claim of the banks for restitution will have to be dealt
with as an ordinary claim against the property of a notified person at the
stage of distribution under Section 11. It accordingly directed the banks to
return the securities to the Custodian. While giving this direction it further
observed that if these securities had been transferred by the banks to third B
parties then no right could be created in their favour as the banks had no
right to transfer them and, therefore, the banks should purchase the
securities of the same value from the market and deliver the same to the
custodian.
The appellant banks have challenged, in these appeals, the correct- C
ness of the aforesaid decision of the Special Court. The contentions raised
before the Special Court were reiterated by the learned counsels for the
appellant banks while Mr. Atul Setalvad, on behalf of the Custodian and
Mr. Jethmalani on behalf of Harshad Mehta supported the decision of the
Special Court. The Solicitor General, appearing on behalf of Reserve Bank
of India addressed arguments with regard to the effect of the circulars D
issued by the Reserve Bank of India on the contracts in issue.
Having heard very lucid arguments of the learned counsels for the
parties, we now propose to deal with these contentions which are necessary
for deciding these appeals.
E
RE : ALLEGED VIOLATION OF THE CIRCULARS ISSUED BY THE
RESERVED BANK OF INDIA
With regard to the finding of the Special Court that the transactions
in question were illegal, as they were in contravention of the circulars which p
were issued by the Reserve Bank of India under the provision of the Act,
it was contended by Mr. Cooper, learned counsel, that the circulars issued
were no more than guidelines which were required to be followed by the
Bank and they were not mandaiory in nature. Elaborating this contention,
Mr. Cooper submitted that the Banking Companies Act contains provisions
which enable the Reserve Bank of India to issue directions which were G
mandatory and also give advice to the banks. Our attention was drawn to
Sections 21 and 35A of the said Act and it was contended that the
directions which are issued by the Reserve Bank of India under these two
provisions are clearly mandatory. On the other hand, Section 36(1)(a) &
(l)(b) gives power to the Reserve Bank of India to give advice or lend H
62
SUPREME COURT REPORTS
[1997) 3 S.C.R.
A assistance and any action taken thereunder cannot be regarded as mandatory. It was submitted that the language of the circulars dated 14.4.1987
and 1.12.1987, which prohibit the banks from entering into buying back
arrangements, clearly shows that the said circulars were only in the nature
of advice and must be regarded as having been issued under Section
B 36(1)(a) and (l)(b) of the Act.
At this juncture, it will be appropriate to refer to the said circulars
dated 15.4.1987 and 1.12.1987. The Circular dated 15.4.1987 was marked
"confidential" and was issued to all scheduled commercial banks and dealt
with the question of buy-back arrangements in Government and other
C approved securities entered into by commercial banks. The relevant portion of this circular reads thus :
"Buy-back arrangements in Government and other approved
Securities entered into by commercial banks.
D
Please refer to paragraph lO(a) of Governor's letter No.
F
G
H
CPC.BC.84/279A-87 dated 31st March, 1987.
2. It has been observed that banks often enter into buy-back
arrangements in respect of Government and other approved
Securities among themselves and with their large public sector and
corporate clients. The banks are advised to follow the guidelines
given hereunder in respect of their buy-back arrangements with
banks and others.
A Prohibition against buy-back arrangements in respect of
Corporate Securities and Bond issued by Public Sector Undertakings.
Bank should not enter into buy-back arrangement in respect of
their holdings of public sector bonds or corporate shares and
debentures.
B. Buy-back arrangements in Governmen~ and other Approved
Securities with (non-bank) clients.
(i) The buy back deals should be exclusively confined to
Government and other Approved Securities and the re-purchase
date should be fixed after a minimum period of 30 days from the
I
- •
I
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B.O.I.FINANCELID. v. CUSTODIAN[KIRPAL,J.]
63
date of sale of the securities in question.
(ii) The purchase/sale prices under the arrangement should be
in alignment with the proximate market rates prevalent on the date
of the original transaction for the relevant Government and other
Approved Securities.
(iii) No sales of government and other Approved Securities
under the arrangement should be effected by banks unless the same
are actually held by them on their own investment portfolio either
in the form of actual scrips or in SGL account maintained with
Reserve Bank.
(iv) Immediately on sale, the corresponding amount should
invariably be deducted from the investment account of the bank
and its SLR assets for entire period (minimum 30 days) of holding
by the purchaser/counter-party.
A
B
c
(v) Interest on the securities at COl!pon rates would be paid by D
the banks after deduction of tax on the lines indicated in our
circular No. DBOD.BP.BC 88/C.469(81-B)-86 dated 14 August,
1986.
4. A copy of this circular may please be placed before the Board
of Directors for their information, under advice to us.
5. Please acknowledge receipt."
E
(Emphasis added) F
The letter of December 1, 1987 issued by the Reserved Bank of India
was also addressed to all scheduled commercial banks and was as follows :
"Buy-back arrangements in units of Unit Trust of India (UTI).
We have received inquiries from banks whether they can enter
into buy-back arrangements in units of UTI under 1964 Scheme.
We have examined the matter and have to advise that the units are
not approved security for buy-back arrangements in terms of the
instructions contained in our circular DBOD. No. DIR.BC.42/
G
C.347-87 dated 15th April, 1987.
H
64
SUPREME COURT REPORTS
[1997] 3 S.C.R.
A
2. Please acknowledge receipt."
(Emphasis added)
Referring to the language used in the said circulars dated 15.4.1987 and
1.12.1987, it was contended by Mr. Cooper that the banks were mainly
B advised to follow the guidelines contained in the said letters and that the
contents thereto were not binding on the banks.
Section 21 of the Banking Companies Act, and sub-section (2) in
particular, entitled the Reserve Bank of India to give directions to the
C banking companies with regard to the matters specified in the said section.
D
E
Sub-section (3) provides that every banking company shall be bound to
comply with any directions given to it under the said Section. Section
35A(l) also contains the power of the Reserve Bank of India to give
directions and the same reads as under :
"35A(l) Where the Reserve Bank is satisfied that -
(a) in the (public interest) or [(aa) in the interest of banking
policy; or]
(b) to prevent the affairs of any banking company being conducted in a manner detrimental to the interests of the depositors
or in a manner prejudicial to the interests of the banking company;
or.
( c) to secure the proper management of any banking company
F
generally;
G
It is necessary to issue directions to banking companies generally or to any banking company in particular it may, from time to
time, issue such directions as it deems fit, and the banking companies or the banking company, as the case may be, shall be bound
to comply with such directions."
There can obviously be no doubt, as is evident from the plain reading
of the said provisions, that the directions issued under Sections 21 and 35A
are binding on the banking companies, Section 36(1)(a) and l(b), on which
H reliance is placed, reads thus :
-
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B.O.L F1NANCE LTD. v. CUSTODIAN [KIRPAL, J.)
65
"(1) The Reserve Bank may -
(a) caution or prohibit banking companies generally or any
banking company in particular against entering into any particular
transaction or class of transactions and generally give advice to any
banking company;
(b) on a request by the companies concerned and subject to
the provisions of (section 44A) assist as intermediary or otherwise
in proposals for the amalgamation of such banking companies."
(Emphasis added)
A
B
Referring to Section 36(1)(a), we find that it empowers the Reserve C
Bank to "caution or prohibit" the banking companies from entering into any
particular type of transaction or generally to give advice to the said banking
companies. This provision not only enables the Reserve Bank to assume an
advisory role but it also gives it the power to prohibit a banking company
against entering into any particular transaction/s or class of transaction. D
The use of words "caution or prohibit" in Section 36(1)(a) clearly implies
that when the Reserve Bank of India prohibits the banking companies from
entering into any particular transaction then such a direction which is
issued would be binding on the banks and has to be complied with. While
the Reserve Bank of India has the power, under Section 36(1)(a) of the E
Act, to give advice or to caution the banking companies which may not be
binding on the banking companies, but when the Reserve Bank prohibits
the banking companies against their entering into any particular transaction
or class of transactions, the said prohibition has to be regarded as being
binding. The power to prohibit, given by Section 36, will be meaningless if
it was not meant to be binding on the banking companies.
F
It is no doubt true that the circular dated 15.4.1987 states that the
banks are "advised" to follow the guidelines given thereunder, but paragraph 2A of the said Circular clearly contains the prohibition relating to
the buy-back arrangements. Similarly, under paragraph 28, which is applicable in the present case, by use of the words "should be" the circular G
clearly implies that the direction contained thereunder is meant to be
binding. The word "advised" used in paragraph 2 of the first circular
cannot be read in isolation. Reading the said circular, as a whole it can
leave no doubt in any one's mind that what was stated in the said document
was meant to be binding on the banking companies and, was not merely H
66
SUPREME COURT REPORTS
[1997) 3 S.C.R.
A an 'advice' or a 'caution' which could be ignored.
B
It was then submitted that even if it is held that the said circulars
were binding they could only bind the banks and not the third parties. The
submission was that by contravening the direction contained in the said
circulars, the contracts which were entered into between the banks and the
third parties could not be invalidated and the only result of such contravention would be the levy of penalty under Section 46 of the said Act.
It is not in dispute that the said circulars which have been issued
were not made public. The said circulars were confidential documents and
C required the banking companies to transact their businesses in a particular
manner namely they should not enter into any buy-back contracts which
were not according to the terms of the circulars. The Act itself does not
provide that, where the directions issued by the confidential circulars are
violated by the bank, the contracts entered into with the third parties would
D in any way be invalidated. The said circulars also, did not say that the
consequence of the directions contained therein not being followed by the
Banking Companies will result in such transaction being regarded as void.
Indeed, no such stipulation could be made which would adversely affect
third parties to whom no directions have been or could be issued and who
were not aware of such directions issued-to .the banks.
E
It will be appropriate at this stage, to consider the decision of this
Court in the case of Seth Banarsi Das v. The Cane Commissioner & Another,
(1963) SCR (Supp.) 760. In that case an agreement was entered into
between the appellant and the cane marketing society for supply of sugar
p
cane. The appellant claimed that there was short supply of sugar cane and
the society moved the Cane Commissioner for arbitration. These proceedings were sought to be challenged by the appellant by contending that the
Cane Commissioner had no right to assume the office of arbitrator in this
dispute because no valid agreement had been entered into between the
parties, as contemplated by Section 18(2) of the Uttar Pradesh Sugar
G Factories Control Act, 1938 and in the form XII as prescribed under the
rules made thereunder. It was also contended that there were some blanks
which were left to be filled in the prescribed form and it also did not have
the signature of any representative of the sugar mill. On behalf of the
appellant it was contended in this Court that the provisions of Section 18(2)
H of Uttar Pradesh Sugar Factories Control Act were mandatory and had to
-{
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B.O.I.F1NANCEL1D. v. CUSTODIAN[KIRPAL,J.]
67
be followed to the letter. Inasmuch as the Act and the Rules prescribed a A
penalty for breach of the said Section, it could not but be regarded as
mandatory in all its parts. Therefore, assuming that the appellant may be
guilty and could be punished but, it was submitted, the mandatory provision
not having been followed no valid contract could come into existence and,
consequently the Cane Commissioner had no jurisdiction to proceed in the B
matter for appointment of an arbitrator. While repelling the contention,
this Court at page 780 observed as follows :
"This rule has been applied in many cases both in India and in
England. In State of U.P. v. Manbodhan Lal Srivastava, this Court
observed that no general rule can be laid down but the object of C
the statute must be looked at and even if the provision be worded
in a mandatory form, if its neglect would work serious general
inconvenience or injustice to persons who have no control over
those entrusted with the duty and at the ·same time would not
promote the main object of the Legislature, it is to be treated only D
as directory and the neglect of it though punishable would not
affect the validity of the acts done. These observations have been
followed in other cases and recently in Bhikraj v. Union of India,
it was observed that where a statute requires that a thing shall be
done in a particular manner or form but does not itself set out the
consequences of non-compliance the question whether the E
prescription of law shall be treated as mandatory or directory could
only be solved by regarding the object, purpose and scope of that
law. If the statute is found to be directory a penalty may be incurred
for non-compliance but the act or thing done is regarded as good.
It is unnecessary to multiply these cases which are based upon the
F
statement in Maxwell which is quoted over and over again."
It will also be useful to refer to the decision of the High Court of
Australia in the case of Yango Pastoral Company Pvt. Limited and Others
v. First Chicago Australia Limited and Others, (1978), 139 C.L.R. 411 where
Mason, J. made observations in this regard. That was a case where Section G
8 of the Bdnking Act, 1959 prohibited a body corporate from carrying on
the business of banking without a license. The question arose whether a
mortgage and guarantees given to an unlicensed corporation in the course
of carrying on business were void or unenforceable. The High Court
unanimously held that nothing in the statute made them void and that the H
68
SUPREME COURT REPORTS
(1997] 3 S.C.R.
A separate question of illegal performance should be determined by examining the terms of the statute to determine the impact of illegality on the
enforceability of the contract. At page 428, it was observed as follows :
B
c
D
E
F
G
H
"The weighing of considerations of public policy in this case and the
decision in favour of enforcing the contract is influenced by the form
of the particular legislation. In this case the Act, as I have mentioned,
is to a large extent directed to aiding the Government in executing
its fiscal policy rather than regulating the relationship between banker
and customer per se, a feature which lends support for the view that
the provision of a large recurrent penalty for offences against Section
8 is Parliament's determination of the consequences of breach of the
section and as the only legal consequences thereof. 17zere is much to
be said for the view that once a statutory penalty has been proi>ided
.
'
for an offence the rule of the common law in determining the legal
consequences of commission of the offence is thereby diminished-see
my judgment in Jackson v. Haniso1; (1978) 138 C.L.R. 438, at p.
452. See also the suggestions that the principle cannot apply to all
statutory offences (Beresford v. Royal 1hsurance Co. Ltd., in the
C:::ourt of Appeal (1937) 2 K.B. 197, at p. 22, per Lord Wright;
Maries v. Philip Trant & Sons Ltd., (1954) 1 Q.B. 29 at p. 37, per
Denning L.J ., and that it would be a curious thing if the off ender is
to be punished twice, civilly as well as criminally; (St. John Shipping
Corporation v. Joseph Rank Ltd., (1957) 1 Q.B. 267, at p. 292 per
Devlin J.). The main considerations from which the principle ex
turpi causa arose can be seen in the reluctance of the courts to be
instrumental in offering an .inducement to crime or removing a
restraint to crime : Beresford's Case (1938) A.C. at pp.