# CANBANK FINANCIAL SERVICES LTD v. THE CUSTODIAN AND. ORS

- **Citation:** [2004] Supp. 4 S.C.R. 60
- **Court:** Supreme Court of India
- **Decided:** 2004-09-03
- **Case number:** Civil Appeal No. 164of1994
- **Bench:** N. Santoshhegde, S.B. Sinha, A.K. Mathur
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/canbank-financial-services-ltd-v-the-custodian-and-ors-20162
- **Pages:** 44

## Headnote

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The Special Courts (Trial of Offences Relating to . Transactions in
securities) Act, 1992.
Sections 3, 4, 9A and I 3-Units with stipulation making their transfer
impermissible-Application for investment by some entities in own nameHowever, consideration for allotment paid by a stock broker and certificates
· of units as well as interest thereon, though first received by those entities,
later handed over to stock broker-Transfer of these units by stock broker
in discharge of his liabilities towards another person who . also paid
remaining consideration for units-Validity and legality of-Held: Stipulation .
. making transfer impermissible was not absolute legal bar-Units were
valuable securities capable of being transferred in terms of established ·
business practice, Sale of Goods Act, 1930 or Transfer of Property Act,
I BB2-Stock broker had transferable beneficial interest in units as cestui qui
trust was created for his benefit-It was not a case of benami transaction and
Benami Transactions (Prohibition) Act, 19BB not applicable-There was no
statute forbidding either those entities from entering this transaction or
precluding the stock broker from transferring his interest to ano.ther person,
and both the transactions were legal-The arrangement may be unethical but
not illegal-As the transfer· took place before coming into force of the' 1992
Act, stock broker had no interest therein which could have been attached by
Custodian appointed under that Act-C,anbank Mutual Fund (CANCIGO)
Scheme, J9BB, Conditions 2(k), 2 (r) 5, JO, 19, 22 and 24-Indian Trusts
Act, JBBB, Sections 7, 58, 82 and BB-Transfer of Property Act, 18B2,
Sections 6(d) and JO-Sale of Goods Act, 1930, Sections 4, 19 and 20Benami Transactions (Prohibition) Act, I 9B8, Section 3, 4 and 5.
Role of Custodian-His rights are same as that of notified personProperties of latter neither vest in him nor is he permitted to deal with any
property which did not belong to latter on the relevant date-He is not a
receiver within the meaning of provisions of Code of Civil Procedure or an
Official Receiver or an Official Assignee under the Insolvency laws-He is
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CANBANKFINANCIAL SERVICES LTD. v. CUSTODIAN
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also not Official Liquidator under the Companies Act.
Section 3(3)-Attachment of properties of notified person-It 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 must be subject to the said
right of the third party-Under all circumstances the right of a third party
must be recognised.
Section 9A-Statutory attachment of properties of notified person-All
claims relating thereto must be adjudicated by Special Court only.
Sale of Goods Act, 1930-Right, title and interest in movable property--
It passes by delivery of possession and upon paying of consideration unless
the transaction is forbidden under Section 23 of Contract Act, 1872.
Benami Transactions (Prohibition) Act, 1988-Scope and applicability
of Discussed.
Indian Trusts Act, 1888-Section 88-Fiduciary character-Discussed.
Maxims: Cesti qui trust-It is synonym with beneficiary and covers
cases falling under Sections 82 and 88 of Indian Trusts Act, 1888.
Words and phrases-Trust--:Creation, annexed obligations, nature,
transferability and remedies-Meaning of-In context of Indian Trusts Act,
1888.
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Appellant and CBMF are subsidiary companies of same nationalised
bank. CBMF floated a scheme of investment in units, named 'CANCIGO'
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with a stipulation making their transfer impermissible. Respondent No.
4, another nationalized bank and Respondent No. 3, its wholly owned
subsidiary, on request of Respondent No. 2, a registered stock broker
applied for those units aggregating to face value of Rs. 33 crores.
However, application money for purchase of those units was paid by
Respondent No. 2 himself, and certificates of those units as well as interest
thereon, though first received by Respondent Nos. 3 and 4, were also
la

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A
CANBANK FINANCIAL SERVICES LTD.
v.
THE CUSTODIAN AND. ORS.
SEPTEMBER 3, 2004
B
[N. SANTOSHHEGDE, S.B. SINHA AND A.K. MATHUR, JJ.]
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The Special Courts (Trial of Offences Relating to . Transactions in
securities) Act, 1992.
Sections 3, 4, 9A and I 3-Units with stipulation making their transfer
impermissible-Application for investment by some entities in own nameHowever, consideration for allotment paid by a stock broker and certificates
· of units as well as interest thereon, though first received by those entities,
later handed over to stock broker-Transfer of these units by stock broker
in discharge of his liabilities towards another person who . also paid
remaining consideration for units-Validity and legality of-Held: Stipulation .
. making transfer impermissible was not absolute legal bar-Units were
valuable securities capable of being transferred in terms of established ·
business practice, Sale of Goods Act, 1930 or Transfer of Property Act,
I BB2-Stock broker had transferable beneficial interest in units as cestui qui
trust was created for his benefit-It was not a case of benami transaction and
Benami Transactions (Prohibition) Act, 19BB not applicable-There was no
statute forbidding either those entities from entering this transaction or
precluding the stock broker from transferring his interest to ano.ther person,
and both the transactions were legal-The arrangement may be unethical but
not illegal-As the transfer· took place before coming into force of the' 1992
Act, stock broker had no interest therein which could have been attached by
Custodian appointed under that Act-C,anbank Mutual Fund (CANCIGO)
Scheme, J9BB, Conditions 2(k), 2 (r) 5, JO, 19, 22 and 24-Indian Trusts
Act, JBBB, Sections 7, 58, 82 and BB-Transfer of Property Act, 18B2,
Sections 6(d) and JO-Sale of Goods Act, 1930, Sections 4, 19 and 20Benami Transactions (Prohibition) Act, I 9B8, Section 3, 4 and 5.
Role of Custodian-His rights are same as that of notified personProperties of latter neither vest in him nor is he permitted to deal with any
property which did not belong to latter on the relevant date-He is not a
receiver within the meaning of provisions of Code of Civil Procedure or an
Official Receiver or an Official Assignee under the Insolvency laws-He is
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."
CANBANKFINANCIAL SERVICES LTD. v. CUSTODIAN
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also not Official Liquidator under the Companies Act.
Section 3(3)-Attachment of properties of notified person-It 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 must be subject to the said
right of the third party-Under all circumstances the right of a third party
must be recognised.
Section 9A-Statutory attachment of properties of notified person-All
claims relating thereto must be adjudicated by Special Court only.
Sale of Goods Act, 1930-Right, title and interest in movable property--
It passes by delivery of possession and upon paying of consideration unless
the transaction is forbidden under Section 23 of Contract Act, 1872.
Benami Transactions (Prohibition) Act, 1988-Scope and applicability
of Discussed.
Indian Trusts Act, 1888-Section 88-Fiduciary character-Discussed.
Maxims: Cesti qui trust-It is synonym with beneficiary and covers
cases falling under Sections 82 and 88 of Indian Trusts Act, 1888.
Words and phrases-Trust--:Creation, annexed obligations, nature,
transferability and remedies-Meaning of-In context of Indian Trusts Act,
1888.
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Appellant and CBMF are subsidiary companies of same nationalised
bank. CBMF floated a scheme of investment in units, named 'CANCIGO'
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with a stipulation making their transfer impermissible. Respondent No.
4, another nationalized bank and Respondent No. 3, its wholly owned
subsidiary, on request of Respondent No. 2, a registered stock broker
applied for those units aggregating to face value of Rs. 33 crores.
However, application money for purchase of those units was paid by
Respondent No. 2 himself, and certificates of those units as well as interest
thereon, though first received by Respondent Nos. 3 and 4, were also
later handed over to him-the latter two not claiming any right, title or
interest therein. In respect of purchase/sale of shares and securities of
several companies, there were diverse dealings between the appellant
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and Respondent No. 2, and Rs 25,01,67,129 was due and payable by
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SUPREME COURT REPORTS [2004) SUPP. 4 S.C.R.
latter to former. In discharge of these liabilities, Respondent No. 2 offered
aforementioned units as beneficiary thereof to appellant who accepted
the same. Balance consideration of those units viz. Rs. 7,98,32,971, was
. paid by appellant by a cheque drawn in favour of Respondent No. 3, but
the same was credited to account of Respondent No. 2.
The Special Courts (Trial of Offences Relating to Transactions in
Securities) Act, 1992 was enacted to deal with serious irregularities in
security transactions. In terms of this law, Respondent No. 1 was
appointed as Custodian and it declared Respondent No. 2 a 'notified
person'. Also, a Special Court was esfablished with a sitting Judge of
High Court having exclusive jurisdiction in relation to matters specified
in the Act as also trial of offences arising thereunder. On considering
the claims of appellant and Respondent No. 1 regarding aforementioned
units, this Special Court held inter alia that as the transaction was illegal,
the right, title and interest in units remained in Respondent
No. 2 and· stood attached in terms of Section 3 of the Act.
Aggrieved by the above judgment of Special Court, appellant filed
present appeals before this Court contending inter alia, that Respondent
No. 2 had beneficial interest in the units having made payment therefor
and obtained possession thereof; that purported bar that a unit holder
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cannot create 'any interest' therein or transfer them to a third person
would not apply to transfer of a beneficial interest; that an absolute
restriction on transfer is void under Section 10 of the Transfer of Property
Act; that the beneficial interest of Respondent No. 2 was transferable in
view of Section 58 of the Indian Trusts Act and Section 6(d) of the
Transfer of Property Act; that Rt;Spondent No. 2 having transferred the
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units in favour of the appellant, he had ·no interest therein warranting
attachment under the Act; and that repeal of Section 82 oflndian Trusts
Act by Benami Transactions Act, 1988 was of no consequence as
provisions of the Indian Trusts Act, 1882 were not exhaustive •.
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Respondent No. 1 contended that no implied trust was created by
and between Respondent No. 2 on one hand and Respondents no. 3 and
4 on the other, and in that view of the matter no beneficial interest could
be created in favour of Respondent No. 2; that in the absence of any
trust Section 58 of Indian Trusts Act would not apply particularly having
regard to provisions contained in Section 7 of the Benami Transactions
Act where under Section 82 of the Trusts Act has been repealed; and
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN
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that having regard to Benami Transactions Act, the right, title and
interest in the units remained in Respondent Nos. 3 and 4 and
furthermore having regard to terms of issue of the units being nontransferable, no title passed on to the appellant.
Allowing the appeals, the Court
HELD : 1. The Can bank Mutual Fund having regard to the materials
on records must be presumed to have issued the CANCIGOs in the names
of Respondent Nos. 3 and 4 with full knowledge that they would enure to
the benefit of Respondent No. 2. The effect of grant of CANCIGOs by the
Canbarik Mutual Fund despite such knowledge does not strictly fall for
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. 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 recognise 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. 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 the 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 to them. No statutory
provision has been brought to notice forbidding such transfer. Respondent
Nos. 3 and 4, therefore, were not statutorily prevented from entering into
such a transaction. In other words, the concerned parties, namely Can bank
Mutual Fund, Respondent Nos. 3 and 4 as well as Respondent No. 2
became parties to an arrangement which may be unethical but not illegal.
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.
(93-H; 94-A-B; 95-A-B, H; 96-A-B; 98-H; 99-AJ
B.O.l Finance Ltd. v. Custodian and Others, (1997] 10 SCC 488,
applied.
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SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.
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Harshad Shanti/al Mehta v. Custodian and Others, [1998) 5 SCC i
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and V.B. Rangaraj v. V.B. Gopalakrishnan & Ors., AIR (1992) ~C 453,
referred to.
2.i. The Rules and Regulations framed by the Canbank Mutual
Fund in relation to the issuance of CANCIGO certificates do not have
any statutory backing. [85-D]
2.2. Permission is not a legal restriction. However, in deserving
cases, Trustees may permit addi~i9n Qf names to the existing CAN CI GO
holding after duly considering the same. Permission/Approval
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subsequently granted would validate the grant. (86-A)
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Graphite India Ltd. and Another v. Durgapur Projects Ltd. and Others,
[1999) 7 sec 645, referred to.
2.3. CANCIGOs indisputably are nluable securities. They are
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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. [86-B-C)
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2.4. The Rules and Regulations framed by Can bank Mutual Fund
and the notes appended to the CANCIGO Credit Sheet differ in material
particulars. Rules and Regulations explaiit as to why an embargo in
transfer has been placed, i~e.; not to recognise Respondent No. 3 for the
dividends or for other liabilities arising out of transfer. A transfer violating
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the rules and regulations would only have the effect of the fame befog not •
binding the Canbank Mutual Fund. No other legal consequences flow
therefrom. The brochure merely states that the transfer is no.t permitted
but provisions exist for grant of such permission. (86-D-E)
3.1. Transfer of CANCIGO in favour of the Appellant was valid
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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. (102-Gl
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3.2. Respondent No. 2 did not hold any personal interest which
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CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN
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could come within the purview of Section 6(d) of the Transfer of Property
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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 Special Judge,
therefore, committed an error in invoking Section 6(d) of the Transfer
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of Property Act. [101-B-C]
Na/lajerla Krishnayya v. Vuppala Raghavulu, AIR (1958) AP 658,
referred to.
3.3. The Appellant having paid a consideration of Rs. 33 crores in
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relation to the CANCIGOs in question had a just right to posses the
same to the exclusion of 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. (102-C]
3.4. The Appellant Bank as well as Canbank Mutual Fund.are the
subsidiaries of Canara Bank. The appellant cannot be estopped from
raising either a limited or absolute title in them keeping in view the fact
that they had paid a sum of 33 crores of rupees by way of consideration
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for transfer of interest of Respondent No. 2 in the said CANCIGOs.
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[86-E-F]
4.1. By reason of the legal consequences of the relationship of the
banker and the customer, vis-a-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
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there exists such a condition, in terms of Section 10, an absolute restraint
is void whereas partial restraint is not. [86-G)
Mohammed Raza and Others v. Mt. Abbas Bibi, AIR (1932) PC 158,
referred to.
4.2. The parties to the transaction 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
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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
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SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.
Respondent Nos. 3 and 4 applied for allotment on behalf of 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
Respondent No. 2. The principle of cesti qui trust is a synonym of a
beneficiary. The said principle is not confined to the ingredients of Section
82 of the Indian Trust Act. It also covers cases falling under Section 88
thereof. Thus, if it be held that th~ properties were acquired by
Respondents Nos. 3 and 4 in their own names in breach of their obligations
while acting as an agent of 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 Transactions Act. In
such a case, the Bena mi Transactions Act would not operate. [89-D-G]
P. V. Sankara Kurup v. Leelavathy Nambiar, AIR (1994) SC 2694 and
R Rajagopal Reddy (dead) by LRs. and Ors. v. Padmini Chandrasekharan
(dead) by L.Rs., AIR (1996) SC 238, referred to.
Barclays Bank v. 9.uitclose Investments, [1970] AC 567; Re EVTR
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(1987) B.C.I.C. 647 ana Carreras Rothmans Ltd v. Freemand Mathews
Treasure Ltd., (1985) Ch. 207, referred to.
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Equity & Trusts, 2nd Edition by Alastair Hudson, page 307, referred
to.
4.3. A beneficial trust indisputably can be transferred. For the said
purpose, the only legal requirement will be the essence of a trust. The
right of a beneficiary to transfer his interest being absolute, the transferee
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derived rights, title and interest therein. Furthermore, the doctrine of
resulting trust was applicable in India even before the Indian Trusts Act
came into force. Thus, Respondent No. 2 had a transferable interest in
the CANCIGOs. [89-G-H; 90-D]
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Hem Chandra Roy Chaudhury v. Suradhani Debya Chaudhurani and
Others, AIR (1940) PC 134; Commissioner of Income Tax, Hyderabad v.
Nawab Mir Barkat Ali Khan Bahadur, AIR (1975) 838 at 845 and Mussamat
Ameeronnissa Khanum and Mussamat Parbutty (1871 ) 14 Moor Ind. App.
433, referred to.
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5.1. The allotment of CANCIGOs is not a transfer as thereby
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CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN
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Canbank Mutual Fund had allowed the shares not as owner thereof.
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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 would not apply. Even assuming that Benami
Transactions Act as also the bar on the transfer imposed by Canbank
Mutual Fund (CBMF) would apply, the properties would remain vested
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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. (90-E; 91-A-B]
Sri Raj Sachdeva v. Board of Revenue, AIR (1959) All. 595; The
Swadeshi Cotton Mills Co. Ltd, In re., (1932) Comp. Cas. 411 and Madura
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Mills Co. Ltd., Jn re., (1937) Comp. Cas. 71, referred to.
5.2. This Court is only concerned with the validity of the
transactions. In a case of this nature a beneficial interest is created
within the meaning of the provisions of Section 88 of the Indian Trusts
r:)
Act in view of the fact that Respondent Nos. 3 and 4 have applied the
money of Respondent No. 2 for allotment of CANCIGO in their own
names and applied for allotment of the certificates on behalf of
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
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to contravene any law. It is also not a case where any amount belonging
to a bank has been utilized by a customer. 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 application whatsoever. [92-G-H; 93-A-B]
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5.3. 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. (91-G-H]
5.4. This Court is not concerned with the :right of a party to take
recourse to a remedy but is concerned with a rig:ht of a party to possess
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the property over which it has a lawful title. In such a situation, Benami
Transactions Act will have no application in allo1cation of shares as the
same would not come within the purview of transaction relating to a
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SUPREME COURT REPORTS [2004) SUPP. 4 S.C.R.
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transfer of property. (102-F]
5.5. A transaction which falls within the purview of Section 88 of.
the Indian Trusts Act does not fall within the category of benami
transactions in terms of provisions of Benami Transactions Act. (88-F]
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6.1. The properties of a notified person do not vest in the Custodian.
He is not a receiver within the meaning of the provisions of 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
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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. (93-F-G]
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6.2. The position of custodian is the same as that of the notified
person himself. If by any law Respondent No. 2 was not precluded from
transferring the shares 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 notified person. If on
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or after 6.2.1992 Respond~nt No. 2 had no interest in the CANCIGOs,
the same could not have f:>een the subject matter of attachment of the
custody. The custodian could attach the property only when the right,
title and interest thereto remain on Respondent No. 2 and not otherwise.
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(96-D-F]
7.1. Attachment under sub-Section (3) of Section 3 of the Act is
subject to an encumbran'ce, if any. Even if a limited right is transferr~d
by a notified person to a third party, the order of attachment, if any,
must be subject to the said right of third party. The Special Judge erred
in asking unto himself a wrong question that the statutory provisions
create no right in the. third party including the Appellant. (99-B, HJ
Harshad Shanti/a/I Mehta v. Custodian and Others, [1998) 5 SCC 1,
relied on.
C.B. Gautam v. Union of India & Others, [1993) 1 SCC 78, referred·.
to.
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN
69
V.B. Rangaraj v. V.B. Gopalakrishnan & Ors., AIR (1992) SC 453,
A
held inapplicable.
7.2. It is no doubt true that Section 13 of the 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 their 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 Respondent No. 2. Here again, the 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 ofthe Custodian. (100-B-C)
8. 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 relationship. 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 whkh is immaterial. The said principle would also apply
for a banker holding the customer's money. (88-G-H]
Fibrosa Spolka v. Akeyjna v. Fairbaim Lawson Combe Barbour Ltd,
[1942) 2 All ER 122, referred to.
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 164of1994.
From the Judgment and Order dated 22.9.93 of the Special Court (Trial
of offences relating to transactions in Securities) at Bombay in Misc. P. No.
13 of 1993.
WITH
C.A. No. 165 of 1994.
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Ms. Sunita Dutt for Mis. Janendra Lal & Co. for the Appellant.
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SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.
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Subramonium Prasad for the Respondents.
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The Judgment of the Court was delivered by
S.B. SINHA, J. :
BACKGROUND FACTS:
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, Can bank Mutual Fund
floated an open.ended investment scheme known as CAN CI GO 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 ofapplication 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 ~ 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.
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CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.]
71
In or about May, 1992 serious irregularities in security transactions were
A
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
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for
investment in
CANCIGOs
on behaif of Respondent
No. 2 for 11 crores. Pending investigation, the Appellant was advised not
to part with the two sets ofCANCIGO certificates without the consent of the
Reserve Bank of India.
The President of India promulgated an ordinance known as "The
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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:-
"(l) 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."
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SUPREME COURT REPORTS (2004] SUPP. 4 S.C.R.
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On or about 6th June, 1992 the Respondent No. 2 was declared to be
a 'notified person' under the Act.
"
In tenns of the provisions of the Act, a Special Court was established.
The Special Court was conferred with exclusive jurisdiction in relation to the
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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
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and 55 of 1993 respectively.
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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 CAN CI GO 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 said Act.
(iii) In the alternative to prayer (ii) above, the Respondent No.
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 pennit the
Petitioners to appropriate and/ or adjust the net realization
thereof in or towards the satisfaction of Petitioners dues from ·
the Respondent No. 1;
(b)
Without prejudice to prayer (a) above and in the alternative,
in the event of this Hon'ble Court coming to the co~dusion
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
..
CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.]
73
Petitioners a sum of Rs. 40,83,32,054 as per particulars more
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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 realization;
(c)
that pending the hearing and final disposal of the petition, the
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Respondent be directed not to deal witl1, 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 interest thereon.
(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.
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(c) that pending the hearing and final disposal of his application
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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.
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SUPREME COURT REPORTS [2004] SUPP. 4 S.C.R.
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JUDGMENT:
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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 this Court
in V.B. Rangaraj v. V.B. Gopalakrishnan & Ors., AIR 1992 SC 453: [1992]
1 sec 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
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in terms of Section 3 of the Act, observing:
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"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 perwn 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
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CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.)
75
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 lst 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:
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"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
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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
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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
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B
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76
SUPREME COURT REPORTS [2004] SUPP.4 S.C.R.
l st 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. 13of1993 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.I."
SUBMISSIONS:
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Mr. Roh it Kapadia, learned senior counsel appearing on behalf of the
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Appellant would submit that in the facts and circumstances of this case,
Respondent No. 2 huving 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
·-
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CANBANK FINANCIAL SERVICES LTD. v. CUSTODIAN [SINHA, J.)
77
transferable. The purported bar to the effect that a CANCIGO holder cannot
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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
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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 IO of the Transfer of Property Act and, thus,
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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
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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
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enactment of the Indian Trusts Act. Reliance in this connection has been
placed on Mussumat Ameeronnissa Khanum and Mussumat Parbutty v.
Mussumat Ashrufoonnisa, (1871) 14 MooindApp 433.
Mr.