# ~ STANDARD CHARTERED BANK AND ANR. ETC v. CUSTODIAN AND ANOTHER ETC

- **Citation:** [2000] 3 S.C.R. 81
- **Court:** Supreme Court of India
- **Decided:** 2000-04-18
- **Bench:** B.N. Kirpaland R.P. Sethi
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/standard-chartered-bank-and-anr-etc-v-custodian-and-another-etc-17423
- **Pages:** 32

## Headnote

B
..,.
Special Court (Trial of Offences Relating to Transactions in Securities)
Act, 1992 Sections 3(2) read with Sections 3(3), 5, 9-A and 11-Custodian
constituted under the Act notifying name of R-2, a share broker, under Section
3(2)-Custodian calling upon the appellant either to hand over shares
c
belonging to R-2 or to obtain appropriate order from the Special Court
constituted under the Act-Appellant claimed to have made investments in
).
securities through R-2 but the same was not backed by securities and banker's
receipt-Appellant claiming title and interest in certain shares and securities
worth Rs. 145 crores received from R-2, filed a suit for a declaration that RD
2 had no right, title or interest in the said shares on the date of the
notification-Appellant also claiming that the said shares were
validly
pledged in favour of the appellant bank and the said shares could be adjusted
against the admitted liability of R-2 through a letter dated 11.5.1992-Held,
Special Court had to be satisfied by independent evidence and not merely on
the basis of the admission of R-2 that appellant had suffered loss-On facts,
E
held, appellant had suffered loss which could enable it to retain and dispose
off the shares and debentures which had been pledged to it by R-2 and
-
therefore, Custodian cannot ask the appellant to hand over the same-Also,
R-2 had created a pledge in favour of the appellant not only of the shares and
securities but also of the bonus shares, dividend and interest accrued on the
F
pledged shares-Bonus shares, interest and dividend were accretions to the
pledged shares and securities which could not be ordered to be handed over
to R-2 unless redemption took place-Further, appellant was entitled to sell
all the original shares and stock handed over by R-2 and also to retain the
...
dividend and interest accrued on such original shares and securities-Also
held, in view of the loss suffered by appellant, award of costs of Rs. 30 lacs
G
'""
in favour of appellant against R-2 was justified.
Companies Act, 1956-Bonus Shares-Nature of and when to be issued.
Contract Act, 1872-Sections 148, 160, 163, 172, 174 & 176-Bailment
of property for securing payment of debt-Held, bailor has a duty to return the
H
81
A
B
c
D
E
F
G
H
82
SUPREME COURT REPORTS
[2000) 3 S.C.R.
pledged goods on repayment of debts-In case of increase in the value of goods
pledged, pledgee is entitled to the increase as integral part of his secwityThus in case of shares and debentures pledged with the bank as security,
dividend and interest accrued on such pledged shares and debentures fanned
part of the pledged secwity-Such accretions is to be returned by pledgeeHowever, in case of default in payment of debt, a pawnee also has the right to
sell the accretion along with the original goods pledged after due notice.
Worm and Phrases-Worm "bonus shares"-Meaning of
With a view to deal with large scale mal-practices in transactions in
Government and other securities indulged in by some brokers in collusion
with employees of banks and financial institutions and in particular to
ensure speedy recovery of the huge amounts from the individual account of
certain brokers, the Special Court (Trial of Offences Relating to Transactions in Securities) Ordinance, 1992, followed by an Act was passed. Section
3 of the Act enabled the Central Government to appoint one or more
Custodian having an authority to notify the name of any person involved in
any offence relating to transactions in security, to notify in the official
gazette. Under Section 3(3), movable and immovable properties of such
notified persons stood attached simultaneously with the issue of the notification and was to be dealt with by the Custodian in such manner as the
Special Court established under Section 5 of the Act, presided over by the
sitting Judge of the High Court, so directed.
Name of R-2 was notified by R-1 who came to know that some shares
and securities belonging to R-2 were in appellant bank

## Text

_Characters 0–39,992 of 82,194. This is a partial read: ask again with offset=39992 for what follows._

~
STANDARD CHARTERED BANK AND ANR. ETC.
A
....._
v.
CUSTODIAN AND ANOTHER ETC.
APRIL 18, 2000
[B.N. KIRPALAND R.P. SETHI, JJ.]
B
..,.
Special Court (Trial of Offences Relating to Transactions in Securities)
Act, 1992 Sections 3(2) read with Sections 3(3), 5, 9-A and 11-Custodian
constituted under the Act notifying name of R-2, a share broker, under Section
3(2)-Custodian calling upon the appellant either to hand over shares
c
belonging to R-2 or to obtain appropriate order from the Special Court
constituted under the Act-Appellant claimed to have made investments in
).
securities through R-2 but the same was not backed by securities and banker's
receipt-Appellant claiming title and interest in certain shares and securities
worth Rs. 145 crores received from R-2, filed a suit for a declaration that RD
2 had no right, title or interest in the said shares on the date of the
notification-Appellant also claiming that the said shares were
validly
pledged in favour of the appellant bank and the said shares could be adjusted
against the admitted liability of R-2 through a letter dated 11.5.1992-Held,
Special Court had to be satisfied by independent evidence and not merely on
the basis of the admission of R-2 that appellant had suffered loss-On facts,
E
held, appellant had suffered loss which could enable it to retain and dispose
off the shares and debentures which had been pledged to it by R-2 and
-
therefore, Custodian cannot ask the appellant to hand over the same-Also,
R-2 had created a pledge in favour of the appellant not only of the shares and
securities but also of the bonus shares, dividend and interest accrued on the
F
pledged shares-Bonus shares, interest and dividend were accretions to the
pledged shares and securities which could not be ordered to be handed over
to R-2 unless redemption took place-Further, appellant was entitled to sell
all the original shares and stock handed over by R-2 and also to retain the
...
dividend and interest accrued on such original shares and securities-Also
held, in view of the loss suffered by appellant, award of costs of Rs. 30 lacs
G
'""
in favour of appellant against R-2 was justified.
Companies Act, 1956-Bonus Shares-Nature of and when to be issued.
Contract Act, 1872-Sections 148, 160, 163, 172, 174 & 176-Bailment
of property for securing payment of debt-Held, bailor has a duty to return the
H
81
A
B
c
D
E
F
G
H
82
SUPREME COURT REPORTS
[2000) 3 S.C.R.
pledged goods on repayment of debts-In case of increase in the value of goods
pledged, pledgee is entitled to the increase as integral part of his secwityThus in case of shares and debentures pledged with the bank as security,
dividend and interest accrued on such pledged shares and debentures fanned
part of the pledged secwity-Such accretions is to be returned by pledgeeHowever, in case of default in payment of debt, a pawnee also has the right to
sell the accretion along with the original goods pledged after due notice.
Worm and Phrases-Worm "bonus shares"-Meaning of
With a view to deal with large scale mal-practices in transactions in
Government and other securities indulged in by some brokers in collusion
with employees of banks and financial institutions and in particular to
ensure speedy recovery of the huge amounts from the individual account of
certain brokers, the Special Court (Trial of Offences Relating to Transactions in Securities) Ordinance, 1992, followed by an Act was passed. Section
3 of the Act enabled the Central Government to appoint one or more
Custodian having an authority to notify the name of any person involved in
any offence relating to transactions in security, to notify in the official
gazette. Under Section 3(3), movable and immovable properties of such
notified persons stood attached simultaneously with the issue of the notification and was to be dealt with by the Custodian in such manner as the
Special Court established under Section 5 of the Act, presided over by the
sitting Judge of the High Court, so directed.
Name of R-2 was notified by R-1 who came to know that some shares
and securities belonging to R-2 were in appellant bank and that the appellant had got some of the shares transferred to its name. R-1 directed R-2
either to hand over possession of shares and securities to R-1 or to obtain
appropriate direction from the Court in case the appellant claimed any title
to the said shares. Thereafter, Appellant filed a suit for such direction
before the High Court. The case of the appellant in the suit was that it had
made investments in securities through R-2 (stock broker) but same were
not backed by delivery of securities and banker's receipt. There was a
short-fall of Rs. 1300 crores; that R-2 admitted his liability through a letter
dated 11.5.1992 and it was an admitted fact that this letter was signed by R2 on 18.5.1992; that appellant was entitled to exercise the ownership right
in respect of the said shares and to the accretions thereon which may have
been received by the appellant; that R-2 had no right, title or interest in the
shares on the date of the notification; that the said shares were validly
-
-
-
STANDARD CHARTERED BANK. v. CUSTODIAN AND ANR.
83
-~
pledged in favour of the appellant bank and the said shares could be
A
adjusted against the admitted liability of R-2; that the letter dated 11.5.1992
created a valid and existing pledge of the shares and that the rights, bonus
and the dividend received by the appellants formed part of the pledge and
constituted security for the appellants and therefore appellants were entitied to retain possession of the shares and accretions until R-2 satisfied his
B
liability towards the appellants.
"..)r
The Special Court, inter alia, held that appellant were able to prove
loss totaling to Rs. 280 crores while other claims were disapproved, that
letter dated 11.5.1992 of R-2 created a pledge in favour of shares; that the
appellants were entitled to claim original and right shares pledged to them c
in reduction of R-2's liability; that the bonus shares and dividend and
interest accrued on the original shares were not themselves the subject
matter of the pledge and must be handed back by the appellant to R-1 and
a cost of Rs. 30 lacs were awarded against R-2 and in favour of the
appellants. Hence these cross appeals.
D
Partly allowing the appeal filed by the Banks and Financial lnstitutions and dismissing the appeal filed by the Share Brokers, the Court
..
HELD : 1.1. The Special Courts Act, 1992 contemplates attachment
~
of all movable and immovable properties from the day when the party is
E
notified. The attached property is thereupon to be dealt with by the Custodian in such manner as the Court may direct. The attached property is to be
disposed of by the Custodian under order of the Court and Section 11(2)
specifies the liabilities of the notified party which are required to be paid or
discharge out of the proceeds of the properties of the notified party. It was,
therefore, but right that the Court had to be satisfied by positive evidence,
F
and not merely on.the basis of the admission of Respondent 2 that the
appellant Bank had suffered loss inasmuch as purchases were not supported by deliveries with the result that securities and shares (worth Rs.
145 crores) had been pledged with the appellant. However, it was enough
for the bank to prove that it had paid money in excess of Rs. 145 crores and
G
had not received shares or bankers' receipt in respect thereof. This would
give the Bank right to retain the said shares as having been pledged to it.
The Special Court had required the appellant Bank to prove by independent evidence as to what was the extent of loss suffered by it. One of the
issues between the appellant Bank and the Custodian was as to what was
the extent of loss suffered by the Bank. The Special Court answered the
H
84
SUPREME COURT REPORTS
[2000] 3 S.C.R.
A
issue by holding that the appellant Bank had been able to prove that it had
~
suffered a loss to the extent of Rs. 280.80 crores only. This decision of the
Special Court is affirmed. [96-H; 97-A-B; 101-E-F]
1.2. Insofar as the right shares were concerned, it was accepted by
both the parties that as the appellant Bank had paid for these right shares
B
the same belong to it and they were entitled to keep them irrespective of the
question whether they formed part of the pledge or not. The question of
return of right shares does not, therefore, arise in these appeals. [102-B)
1.3. However, the decision of the special Court that the bonus shares,
c
dividend and interest which had accrued on the pledged shares were not
themselves the subject-matter of the pledge and must be handed over by
the appellant Bank to the Custodian cannot be sustained. Bonus shares is
an accretion. A bonus share is issued when the company capatalises its
profits by transferring an amount equal to the face value of the share from
its reserve to_the nominal capital. In other words, the undistributed profit
D
of the company is retained by the company under the head of capital
against the issue of further shares to its shareholders. Bonus shares have,
therefore, been described as a distribution of capitalised undivided profit.
In the case of issue of bonus share there is an increase in the capital of the
company by transferring of an amount from its reserve to the capital
~
E
account and thereby resulting in additional shares being issued to the
~
shareholders. A bonus shar~ is a property which comes into existence with
an identity and the value of its own and capable of being bought and sold as
such. Neither in Dalmia Investment nor in Hunsur Plywood case was this
Court concerned with a question relating to the valuation of the bonus
share for tax purposes. [102-H; 103-A-D)
F -
,.....
CIT v. Dalmia Investment Co. Ltd., [1964) 7 SCR 210 and Hunsw·
Plywood Works Ltd. v. CIT, [1998) 1SCC355, distinguished.
1.4. The dividend and interest which was received by the plaintiffs
and which was relatable to the pledged stocks must also be regarded as
-
G
accretions thereto. [103-G]
Motilal Hirabhai v. Bai Mani, AIR (1925) PC 86, referred to.
~-
2.1. Itis not possible to accept the contention of the Custodian that as ..
and when any accretion takes place the pawnee is liable to hand over the
H
accretion to the pawnor. It is true that the words "upon redemption" as
STANDARD CHARTERED BANK. v. CUSTODIAN AND ANR.
85
used in Sections 63 and 64 of the Transfer of Property Act are not included
A
in Section 163 of the Contract Act but it is to be seen that if the accretion is
to be regarded as forming part of the bailed property then such accretion
must remain with the pawnee and be dealt with by him in the same manner
as the pledged shares. In other words, the accretion form part of an
attached share as on the date of attachment and it follows that it would also
B
be an integral part of the shares when they were pledged and would,
>·
therefore, constitute a part of the pledged security. The appellant Bank
would, therefore, be entitled to retain the same and deal with them as
pledged stocks. [106-H; 107-A-B]
2.2. Reading Section 172 with Sections 148 and 160 of the Contract c
Act, it would appear that when goods are bailed for securing payment of
debt or the performance of a promise the bailor would get a right for the
1·
return of the said goods when the purpose is accomplished, namely when
the debt is returned or the promise is performed. At the same time Section
176 provides for the pawnee's right when the pawnor makes default. This
D
section not only gives the pawnee the right to retain the goods pledged as
collateral security but also entitles the pawnee to sell the pledged goods
after giving the pawnor reasonable notice of the same. H the proceeds of the
-".
sale are less than the amount due, the pawnor continues to be liable to pay
...
the balance. On the other hand, if the proceeds realised on the sale being
E
made are greater than the amount due to the pawnee, he is under an
obligation to pay over the surplus to the pawnor. [104-D; F-G]
2.3. What Section 163 of the Contract Act really means is that
accretions in respect of the goods bailed cannot be a property of the bailee
F
but must be returned when the goods themselves bailed are returned. A
necessary corollary to this would be that as the pledge extends to such
accretions then when the pledged goods are returned these accretions must
also be given back. But if the pledge extends to such natural increase on the
')
pledged goods it must follow that the pledgee would not only have the right
to retain the said accretions but also have the right to sell the same along
G
-r·
with the original shares pledged for the purposes of realising amounts due
to it and in respect of which the shares were pledged as security. [106-D-E]
Tejkumar Balakrishna Ruia v. A.K. Menon, [1997] 9 SCC 123, relied
on.
H
A
B
c
D
86
SUPREME COURT REPORTS
[2000] 3 S.C.R.
Halsbury's Laws of England, Vol. 2 para 1524; Story on Law of Bailment, para 292; Chitty on Contracts, 28th Edition, page 162, referred to.
3. Thus, in reduction of Respondent No. 2's liability to the appellants,
they are entitled to sell the original shares, rights shares and the bonus
shares and also to retain the dividend and interest accrued on the original
shares. [111-F]
4. The appellant Bank's claim of loss of about Rs. 280 crores having
been upheld, the decision of the Special Court awarding cost of Rs. 30 lakhs
against respondent No. 2 is affirmed. [111-B]
CIVIL APPELLAIB JURISDICTION : Civil Appeal No. 762 of 1999.
Etc.
From the the Judgment and Order dated 24.12.98 of the Special Court
Constituted under the Special Court (Trial of offences relating to Transactions
in Securities) Act, 1992 at Mumbai in Suit No. 17 of 1994.
K.K. Venugopal, K.S. Cooper, V.A. Bobde, Tushad Cooper, Mahesh
Agrawal, Guru Krishna Kumar, Manish Jha, Prasant Pakhade, S. Prasad, S.
Ganesh, Manish Parekh, P.S. Sudheer, P. Venugopal, K.J. John, Shiraz
E
Rustomjee, A. Subba Rao, Gaurav Joshi, Mahesh Agrawal, H.S. Chandok and
P.S. Sudheer for the appearing parties.
The Judgment of the Court was delivered by
KIRPAL, J. The Reserve Bank of India noticed large-scale irregulariF
ties and mat-practices 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 had led to the diversion of fund from banks and financial institutions
to the individual accounts of certain brokers.
G
H
With a view to deal with this situation and in particular to ensure speedy
recovery of the huge amounts involved, the Special Court (frial of Offences
relating to transactions in securities) Ordinance, 1992 was promulgated on 6th
June, 1992. The said Ordinance has now been replaced by an Act known as
Special Court (Trial of Offences Relating to Transactions in Securities) Act,
1992 (hereinafter referred to as 'the Act'). Section 3 of the Act enables the
..
,.
A
'..
.....
STANDARD CHARTERED BANK. v. CUSTODIAN AND ANR. [KIRPAL. J.]
87
Central Government to appoint one or more Custodian for the purposes of the
A
Act. The Custodian has power under sub- section 2 of Section 3 to notify the
name of any person in the official gazette, who has been involved in any
offence relating to transactions in securities after the first day of April, 1991
and on/or before 6th June, 1992. The effect of a person being so notified was
that according to sub-section 3 of Section 3, notwithstanding anything
B
contained in the Code of Criminal Procedure or any other law for the time
being in force, any property, movable or immovable or both, belonging to any
person notified under that sub-section stands attached simultaneously with the
issue of the notification. The property so attached is to be dealt with by the
Custodian in such manner as the Special Court may direct.
c
The Special Court is established under Section 5 of the Act to be
presided over by a sitting Judge of a High Court. The Special Court is to take
cognizance of or to try such cases as are instituted before it or transferred to
it. It is this Court which, under Section 9A, has the jurisdiction to exercise such
power and authority which was exercisable before the commencement of the
D
Act by a Civil Court in relation to any property standing attached under subSection 3 of Section 3 or in relation to any matter or claim arising out of
transactions in securities entered into after first day of April, 1991 and on/or
before 6th day of June, 1992, in which a person notified under Section 3(2)
is involved as a party, a broker, intermediary or in any other manner.
On 8th June, 1995, respondent No. 1 the Custodian, who had been
E
appointed under the Act, notified Hiten P. Dalal (respondent no. 2 in Civil
Appeal No. 762 of 1999 and appellant in Civil Appeal No. 1878 of 1999)
under Section 3(2) of the said Act. The Custodian then got to know that some
shares and securities, which belonged to respondent no. 2, were in the
possession of the appellant bank. It also came to the knowledge of the
F
Custodian that the appellant bank had got some of the shares transferred to its
name. Correspondence was then exchanged between the Custodian and the
appellant bank whereunder the appellant bank was called upon by the
Custodian to either hand over the shares and securities to the Custodian or the
bank should obtain an appropriate direction from the Court in case the
G
appellant bank was claiming any title to the said shares
The demand of the Custodian re.quiring the appellant bank to hand over
the said shares which it had obtained from the notified party led the appellant
bank, which is incorporated under the laws of England and Wales and has its
Head Office at 1, Aldennanbury Square, London, and the second appellant
H
A
B
c
D
E
F
G
88
SUPREME COURT REPORTS
(2000] 3 S.C.R.
which is an existing company under the Companies Act, 1956 and is a wholly
owned subsidiary of the 1st appellant, to file a suit No. 1958 of 1993 in the
Bombay High Court. On transfer to the Special Court, the suit was numbered
as Suit No. 3 of 1994. On 29th June, 1994, the appellants withdrew suit No.
3 of 1994 with liberty to file a fresh suit. It is thereupon that the appellants
filed suit No. 17 of 1994 from where the. present appeal arises.
The case of the appellants in the plaint, inter alia, was that on 30th
April, 1992, one Mr. Arvind Lal, an employee of the Bank, inf01med one Mr.
R Iyer, a Director of the Local Currency Group, Investment Banking Division
in the bank, that approximately Rs. 800 crores of investments made by the
appellant bank appellant through Hiten Dalal were not backed by securities or
banker receipts. How this shortfall happened, was not known to the higher
officials of the appellant bank till 10th May, 1992. Thereafter enquiries were
made by the appellant bank to ascertain the short-fall and efforts were made
to recover the same. According to the appellants the shortfall was ascertained
to be in the region of approximately Rs. 1300 crores. It was alleged that there
were meetings between the officials of the appellants and Hiten Dalal wherein
the said notified party admitted and acknowledged his liability and he had
given various proposals for re-payment and delivery of various stocks in
which there was a short-fall. According to the appellants Hiten Dalal did not
fulfil his commitments to deliver cash or stock. Hiten Dalal is alleged to have
agreed to and deliver, between 11th May, 1992 and 13th May, 1992, various
shares, securities, bonds and debentures (hereinafter referred to for the sake
of convenience as 'shares'). On 14th May, 1992 the Manager, Legal Services
of the Bank, advised that a letter should be obtained from Hiten Dalal in order
to eliminate the possibility of his subsequently claiming that the said shares
had been delivered by way of safe custody. A letter containing the understanding between the parities was drafted by the in-house lawyer of the appellant
bank and was given to have it transcribed ·on his note paper. On 18th May,
1992 Hiten Dalal brought the draft to the office of the Bank where it was typed
and signed by Hiten Dalal. It is an admitted fact that though the letter was
signed on 18th May, 1992, the said letter, however, bears the date of 11th May,
1992.
Alternative claims were put forth by the appellan.ts in the said suit. In
the first instance it was claimed that the shares, the details of which were
mentioned in the annexure to the said letter dated 11.5.1992 and worth
H
approximately Rs. 145 crores, were deliver,ed by Hiten Dalal in partial
, ..
STANDARD CHARTERED BANK. v. CUSTODIAN AND ANR. [KIRPAL, J.]
89
_;
discharge of his liability to the appellant Bank in pursuance to the aforesaid
A
agreement which was recorded in a note dated 18th May, 1992. The case of
the appellants was that the bank is entitled to exercise ownership right in
respect of the said shares and to the accretions thereon which may have been
received by the appellants. The appellants also sought a declaration that Hiten
Dalal had no right, title or interest in the said shares and the same did not
B
belong to him on the date of the notification. It may here be noted that the
counsel for the appellants did not press this claim of ownership before the
Special Judge.
The second alternative claim by the appellants was that the said shares
were validly pledged in favour of the appellant bank under the letter dated 11th c
May, 1992. In exercise of its rights as pledgees, the appellant bank claimed
that the said shares had been adjusted against the admitted liability of the
second respondent to the appellant bank. It thus claimed ownership over the
+-
said shares. This plea also was not pressed by the appellants before the Special
Court inasmuch as it conceded that in law no such right existed in a pledgee.
D
The third alternative put forth in the plaint by the appellants was that
the letter dated 11th May, 1992 created a valid and existing pledge of the
shares and that the rights, bonus and the dividends received by the appellants
formed part of the pledge and constituted security for the appellants. The
appellant bank claimed that it was entitled to retain possession of the shares
and accretions thereon until the second respondent satisfied his liability
.E
towards the appellants. The appellants claimed a right to sell the pledged
shares and appropriate the sale proceeds towards partial satisfaction of the
outstanding liability of Hiten Dalal of Rs. 1253 crores. The appellants thus
claimed that as pledgees they were entitled to have the shares transferred in
-;...
their names without the process of certification. By an amendment in 1996,
F
another alternative claim put-forth by the appellants was that the said shares,
debentures, bank receipts, bonds and securities and the rights and bonus
received by the appellant bank stood mortgaged to it The appellants claimed
that a sum of Rs. 30040885.00 expended by the appellant bank on purchase
of right shares and for preservation of the mortgaged security formed part of
G
the mortgage debt The appellants thus claimed that they were entitled to retain
,...
the mortgaged shares and securities and the accretions received in respect
thereof.
The custodian in its written statement did not admit the correctness of
the facts stated in the plaint According to the custodian, Hiten Dalal was a
H
90
SUPREME COURT REPORTS
[2000] 3 S.C.R.
A
notified party and the shares worth Rs.145 crores which were in the custody
).._
B
c
D.
of the appellants were the property of the said notified party. By virtue of the
provisions of the Act these shares stood attached as on the day when the name
of Dalal was notified and the said shares could not be dealt with by the
appellants except by and under the directions of the court. The custodian
denied that the appellants were entitled to any of their claims.
In his written statement the defence which was, inter alia, taken by
Hiten Dalal was that he was acting as a broker in securities and as such was
dealing with the appellants for the last four years. He did not admit that there
was any shortfall in respect of the transactions, which had taken place through
him. He specifically denied that the purchases approximating Rs.1253 crores
were not supported by delivery of stocks or acceptable bank receipts. On the
contrary Dalal averred that the appellants had committed several irregularities
and were attempting to transfer the burden on him. He denied having accepted
any liability to pay any amount to the appellant bank or having admitted to
the appellants having suffered any loss as alleged or at all. With regard to the
stocks and shares worth Rs.145 crores which were lying with the appellants,
the case of Dalal was that two employees of the appellants, namely, Ravi Iyer
and Siva Kumar had forcibly taken away those stocks which had been lying
in his office and which belonged not only to him but also to his wife and some
of his customers. Dalal claimed that these officers threatened him that if he
E
did not cooperate they would prosecute and ruin him. Dalal further alleged that
his signatures were taken on blank documents and the appellants had wrongfully used those documents with blank signatures in order to foist a false claim
against him. He further alleged that on 18th May, 1992 under threat of physical
torture, criminal prosecution and threat to that his life and that he would be
F
ruined the appellants made him sign a letter dated 11th May, 1992. In short
he denied that he had voluntarily admitted any liability towards the appellants.
G
H
On the basis of the pleadings the Special Court framed sixteen issues
as between the appellants an!l respondent no. I and another seventeen issues
between the appellants and respondent no. 2. It is not necessary, for deciding
these appeals, to refer to the said issues inasmuch as the Special Court itself
observed that though a number of issues had been raised there were only four
questions which arose for consideration and they were; [i] whether the
appellants herein had suffered a loss as claimed or at all; [ii] whether
respondent no.2 had given the said shares as securities and/or the same were
taken from him forcibly; [iii] if the said shares were given as securities then
--,.-
STANDARD CHARTERED BANK. v. CUSTODIAN AND ANR. (KIRPAL, J.]
91
the question would also be as to whether it was by way of pledge or mortgage;
A
and [iv] whether rights and bonus shares, dividend and interest on the said
shares formed part of secured assets.
It may here be noted that before the Special Court counsel for the
appellants stated that he was not pressing the plea of pledge with right of
appropriation. He contended that the appellants were only pressing that in
B
respect of the shares in question which they had in their possession there was
either a mortgage or pledge in respect thereof.
When the Special Court was framing issues relating to the question as
to how the appellants had been able to prove the loss caused to them by Dalal
and if so to what extent, the counsel for the appellants had contended that
Dalal had admitted his liability in the said letter of 11th May, 1992 and other
documents and, therefore, it was not necessary for him to prove the loss. The
Special Court over-ruled this submission but no speaking order was passed
inasmuch as the counsel for the appellants informed that if the court so desired
the appellants would prove the loss. The court then proceeded with the trial
of the case on the basis that the loss stated to have been suffered by the
appellants was not to be attempted to be proved only on the basis of the
admissions of Dalal. The appellants proceeded with the trial claiming that loss
had been caused to them by their having paid moneys in purchase transactions
and their not having received deliveries of stocks/bankers receipts.
The appellants led evidence in support of their case. On behalf of Dalal
the court was given to understand that he will enter the witness box in order
to substantiate his plea of physical torture, threat of criminal prosecution,
coercion etc. Ultimately Dalal chose not to give evidence before the court. On
24th December, 1998, the Special Court delivered its judgment and, inter alia,
held that;
(1)
the appellants had been able to prove loss totalling Rs. 280.80
crores and that other losses alleged by the appellants were
disproved;
(2)
no coercion had been exercised by the appellants on Dalal;
c
D
E
F
(3)
the letter dated llth May, 1992 addressed by Dalal to the
G
appellants created a pledge in favour of shares and sa.id debentures. particulars of which were given in annexure to the said
letter. The claim of mortgage of the said shares was not
accepted;
( 4)
the appellants were entitled to sell the original and right shares
H
92
A
B
c
SUPREME COURT REPORTS
[2000] 3 S.C.R.
pledged to them in reduction of Dalal' s liability to the appellants;
(5)
bonus shares and dividend and interest accrued on the original
shares pledged were not themselves the subject matter of the
pledge and must be handed back by the appellants to the
Custodian;
(6)
Cantriple Units, referred to in the letter dated 11th May, 1992,
received by the appellants from Dalal must be handed back by
the appellants to the custodian as the appellants had not
succeeded in showing that they had any right, title or interest
in respect thereto and nor had it been proved that the said units
had been pledged with the appellants.
(7)
Costs of Rs. 30 lacs were awarded against respondent no. 2 and
in favour of the appellants.
D
Aggrieved by the findings of the Special Court in relation to the
E
F
G
H
quantum of loss suffered, the rights of the appellants in regard to bonus shares
and dividend and interest which had accrued on the original shares, which had
been pledged, as well as the direction to hand over Cantriple Units to the
custodian and lastly the strictures passed against certain employees of the
appellants, appeal No. 762 of 1999 has been filed.
Hiten P. Dalal has filed appeal No. 1878 of 1999 challenging the
judgment of the Special Court which had accepted the appellants claim
regarding loss amounting to Rs. 280.80 crores. He also challenged the
directions regarding handing over of the Cantriple Units by Standard Chartered Bank to the custodian and lastly the challenge is to the costs of Rs. 30
lacs that had been awarded against him.
The four questions, which were considered by the Special Court, are
what arise for consideration in these appeals before us. We will first deal with
the issue relating to the loss claimed to be suffered by the appellant bank and
its right to retain the securities, which were delivered to it
In the suit, which was filed, it was inter alia stated in the plaint that the
appellant bank had suffered a loss of about Rs. 1253 crores on its dealing with
Dalal. It is on this basis that it sought to retain and appropriate securities worth
Rs. 145 crores which, admittedly, had been delivered by Dalal to the appellant
bank between 11th and 15th May, 1992. The claim of the appellant bank was
based on the letter dated 11th May, 1992 (Ex. G) in the suit It has come in
STANDARD CHAR1ERED BANK. v. CUSTODIAN AND ANR. [KIRPAL, J.]
93
the evidence and it is not disputed that this letter was prepared by the officials
A
of the appellant bank and was signed by Dalal on 18th May, 1992. This letter,
however, was ante dated to 11th May, 1992. This letter addressed to the
Standard Chartered Bank, Bombay reads as follows:
"Dear Sirs,
Re: Transactions in Government and other securities
I.
In the past 4 years I have been acting as your broker for
transactions in Government and other securities.
2.
I am aware that you are in the process of reconciling your
purchases/sales through me of Government and other securities
and whilst the reconciliation is yet to be completed, you have
ascertained as of date that the following purchases aggregating
Rs. 1258 crores are not supported by deliveries of stocks and/
or bank receipts of banks acceptable to us.
Type of Security
Transaction Value
15 Crores units
9% IRFC (111)
9% IRFC (1/4)
Missing B. Rs.
12.5% 001 2007
6% 0011994
11 % IDBI 2002
11.5% IDBI 2011
8.75% IDBI 2000
6 crore units
12% ICICI 2011
Cantriple
Cantriple (Expected)
Rs. 200 crores
Rs. 385 Crores
Rs. 45 crores
Rs. 80 crores
Rs. 50 crores
Rs. 20 crores
Rs. 47 crores
Rs. 23 crores
Rs. 90 crores
Rs. 50 crores
Rs. 205 crores
Rs. 58 crores
Rs. 1253 crores
(Karad B.R.)
(Metro B.R.)
(various B.Rs)
(Karad SGL)
(Metro SGL)
(Metro B .R.)
(Karad B.R.)
(Karad B.R.)
(Metro B.R.)
(Metro B.R.)
(Physical)
---------------------------------------------------------------------,,
Y'
The letter further goes on to say that Dalal had delivered to the bank stocks,
shares, deposits etc., as listed in the annexure to the said letter by way of
securities towards the short-fall and/or any further short-falls which may be
ascertained. The stocks and shares which were listed in the annexure to this
B
c
D
E
F
G
H
;(
94
SUPREME COURT REPORTS
[2000] 3 S.C.R.
A
letter were the one which were handed over by Dalal to the appellant bank
>--.
between 11th and 15th May, 1992 and were stated to be worth Rs. 145 crores,
...
in respect of which, the present suit was filed. By this letter Dalal further
agreed to keep the appellant bank indemnified against any loss which it might
have incurred and/or suffered upon the appellant bank completion of final reB
conciliation of its account with Dalal and he undertook to make good any such
losses either by payment in cash or by physical delivery of such other assets
as the bank might require. The letter also postulated that if on the completion
of the re-conciliation, aggregate of the cash paid and the value of the assets
~
delivered exceeded the amount of loss identified, then the Bank was to refund
such excess to Dalal. He further confirmed and agreed that the appellant bank
..,...._
c
was authorised to sell the stocks, shares, debentures etc., which wer~ handed
over to the bank and to appropriate the proceeds thereof to partly liquidate his
liabilities to the bank. If there \\\as any short fall after such appropriation, Dalal
held himself to be personally responsible to pay to the bank such balance as
-+
was outstanding.
D
At this stage, we may notice that Dalal did not deny the execution of
this letter. His case in the written statement was that this letter and other
documents were got signed by the bank officials under threat or coercion. He
had contended that the shares, securities etc., which were listed in Exhibit 'G'
had been forcibly taken away by the appellant bank officials.
j..._
E
The Special Court, after taking all the evidence into consideration, came
to the conclusion that the said shares etc., had not been forcibly taken away
from DaiaI but he had, on the contrary, handed over these shares as security.
-·
In arriving at this conclusion, the special court held that it was unbelievable
that the shares would be forcibly taken away from DaiaI between 11th and
F
13th May, 1992 and for a period of three days at least he would make no
~
complaint or try to stop the appellants from taking away the said shares
forcibly. Admittedly, there had been a meeting between Daial and the
~
Advocate of the appellants and the Special Court found it inconceivable that
force had been used at the time of taking away all the shares forcibly.
G
We have gone through the evidence and we agree with the aforesaid
conclusion of the Special Court to the effect that the contention of Dalal that
--..,...-
the said shares were taken away from him forcibly is not correct. In the issues
which were framed the onus of proof that the letter dated 11th May, 1992 had
been executed under threat of physical tenor and criminal prosecution was on
H
Dalal. Hiten Dalal however chose not to enter the witness box in support of
STANDARD CHARTERED BANK. v. CUS1DDIAN AND ANR. [KIRPAL, J.]
95
.A
this plea. Not only did he not lead any evidence in order to prove coercion,
A
,....,..
the appellant bank on the other hand examined witnesses who clearly proved
that Dalal had not only signed the letter dated 11th May, 1992 but he also
signed other documents to which we will presently refer. As Dalal had failed
to step into the witness box or lead any evidence on his behalf, the Special
Court rightly drew an adverse inference against him.
B
We inust, therefore, proceed on the basis that Ex. 'G' even though
prepared by the employees of the appellant bank had been voluntarily and
willingly signed by Hiten Dalal. We also proceed on the basis that the shares,
securities etc., had been delivered by Dalal to the appellant bank valued at Rs.
145 crores between 11th and 15th May, 1992. It is in this background that we c
must examine the claim of the appellant bank with regard to the loss stated
to have been suffered by it.
+
On the basis of the evidence which was led before it, the Special Court
observed that out of items of securities mentioned in Ex. 'G', items 2,3,4,6, 11, 12
and 13 were dis-proved. It held that "it is proved that in respect of these items,
D
there is no loss. The claim for Rs. 795 crores thus stands disproved".
Having held that the claim for loss of Rs. 1253 crores was an exagger-
""
ated claim, the Special Court further came to the conclusion that items 5,7,8
& 9 were also dis-proved or in any event, they could not be relied upon an~
E
used for the purpose of calculating loss. It upheld the case of the appellants
with regard to items 1 and 10. Lastly, the Special Court, came to the
conclusion that on the basis of the evidence produced before it, the appellants
had made a payment of Rs. 201 crores for the purchase of units of U.T.I. of
the face value of Rs. 15 crores but had not received the said securities. It also
•
accepted the claim of loss of Rs. 79 .80 crores which was evident by statement
F
Ex. 19 which was produced in the court by the counsel for the appellants. The
Special Court held that this statement Ex. 19 was tendered under Section 163
of the Evidence Act and the facts stated therein must be regarded as having
been proved or binding on Dalal.·
-
It was submitted by Mr. K.K. Venugopal and Mr. K.S. Cooper, learned
G
1f"
counsel for the appellants that for this case it was not necessary for the
__,.
appellants to have established loss of more than Rs. 145 crores. Mr. K.K.
Venugopal submitted that the appellants were not contending in these appeals
~
that the shares worth Rs. 145 crores had been given to the appellants by way
of mortgage. It was submitted that the said shares were pledged to the bank.
H
96
SUPREME COURT REPORTS
[2000) 3 S.C.R.
A
He however, submitted that the evidence on record would show that the
,l._ -
appellants had been able to prove that the liability of Hiten Dalal towards the
appellants was Rs. 1253 crores. In any event, the Special Court had accepted
the claim of loss of the appellants to the extent of Rs. 280.80 crores which was
much more than the value of the pledged shares. It was submitted that with
B
regard to the balance claim the Special Court ought not to have given a
positive finding that the same stood dis-proved.
Hiten Dalal, in the appeal filed by him, has challenged the acceptance
....,.
by the Special Court of the loss of Rs. 280.80 crores stated to have been
suffered by the appellant bank in its dealing with him. So far as the Custodian
c
is concerned, Mr. Shiraz Rustamjee, learned counsel for the Custodian,
submitted that it accepted the loss of Rs. 201 crores which was more than
sufficient to cover the value of the pledged shares of Rs. 145 crores but he
submitted that the decision of the Special Court in invoking the provisions of
......
Section 106 of the Evidence Act and in holding that the loss of Rs. 79.80
D
crores has been proved was not correct. In this respect he supported the
submissions of Shri S.