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Key takeaway

  • The urgent necessity is to control banks and financial entities. The behaviour of bank personnel and the desire for financial gain were highlighted in this case.
  • In order to reduce greed and reform the financial system to stop fraud and irregularities, the judicial apparatus is crucial in making recommendations.
  • To alter the bank structure that is primarily concerned with profits, establishing an additional layer of internal accountability is highlighted in this case.
  • When items are bailed to guarantee the repayment of a debt or the fulfilment of a commitment, the bailor is entitled to receive the commodities back once the obligation has been paid off or the promise has been fulfilled.

The Reserve Bank of India discovered significant fraud and misdeeds involving securities transactions in 1992. Funds from the banks and financial institutions were diverted to the accounts of brokers as a result of brokers engaging in systematic misconduct in collaboration with employees of these institutions.

A Special Court Ordinance, later replaced by the Special Court Act, 1992, was published on June 6, 1992 in order to expedite the recovery of the significant sums at stake. According to Section 3 of the Act, the Central Government may designate a Custodian who has the authority to publish the identity of anyone who has been convicted of a crime involving securities transactions between April 1, 1991, and June 6, 1992. Any movable or immovable property, or both, that belonged to the individuals notified stood attached at the same time the notification was issued. The Custodian was required to manage the attached property in accordance with the Special Court's rules. A High Court Judge who was currently on the bench oversaw the Special Court. If a case is instituted or transferred to it, it may take cognizance of it or try it. This Court was qualified to use the powers and authority that a Civil Court could have used prior to the start of the Act.

Factual Background

Arvind Lal, a Reserve Bank of India employee, alerted R. Iyer, a Director of the Local Currency Group, on April 30, 1992, that Hiten Dalai's investments totaling Rs. 800 crores were not supported by banker receipts or assets. It was estimated that the setback would cost around Rs. 1300 crores. The appellants claimed that Hiten Dalai had acknowledged his responsibility and made offers for reimbursement and the transfer of various shares, debentures, stocks, and bonds in exchange for the same. However, between May 11 and May 13, 1992, he failed to deliver as promised. On May 14, the Bank's Manager of Legal Services advised that a letter from the Dalai should be acquired to prohibit him from claiming safe custody delivery of the shares. The bank's internal legal counsel drafted a letter, which was provided to Dalai to have it written on his notepaper. Despite having a date of May 11, 1992, the letter was delivered to the bank office on May 18 and signed by Dalai.

The respondent denied accepting any responsibility to pay the Bank's claimed sum or acknowledging to the appellants that any alleged loss had occurred. The stocks and blank signatures were allegedly seized under compulsion, according to Dalai. It was also stated that the aforementioned letter was signed under duress.

Issues

  1. Whether the appellants had suffered actual loss as claimed?
  2. Whether Hiten Dalai had given the shares as securities or was they taken from him under coercion?
  3. Whether the shares were given as securities by way of pledge or mortgage?
  4. Whether rights and bonus shares, dividend, and interest on the shares (accretions)were construed as part of the secured assets?
  5. Whether the Special Court ought not to have passed strictures against the Bank?
  6. Whether the Special Court erred in directing Dalai to pay Rs. 30 lakhs as costs?

Arguments from the parties

Arguments of the Appellants

First, it was asserted that Hiten Dalai handed the shares listed in the annexure to the letter of May 11th, 1992, valued at roughly Rs. 145 crores, as part of the arrangement shown in the note dated May 18th, 1992, to partially discharge his debt to the Bank. These shares were legally owned by the bank. The appellants also requested a ruling that Dalai had no interest in, or entitlement to, the shares.

Second, it was asserted that the letter indicated the above-mentioned shares were pledged in favour of the bank. The appellant bank said that the above-mentioned shares had been adjusted against the confessed debt that Dalai owed to the appellant bank in the exercise of its pledgee rights.

Thirdly, it was claimed that the letter established a legal pledge of the shares and that the appellants' rights, bonuses, and dividends (accretions) were included in the pledge and qualified as securities. The Bank asserted that it had the right to hold onto the shares and accretions until the obligation was paid. The appellants asserted a right to sell the shares and to apply the sale proceeds to satisfy any unpaid debts owed by Dalai.

Fourthly, it was asserted that the shares and accretions the appellant bank had received were secured by a mortgage. It was claimed that a portion of the mortgage debt included the sum paid by the Bank for the right shares and to maintain the mortgaged security. The appellants therefore argued that they had a right to keep both the accretions and the shares and securities that had been mortgaged.

Arguments of the Respondents

The facts as presented by the appellants were disputed by the custodian. The shares worth Rs. 145 crores that were in the possession of the appellants were Dalai's property and, according to the custodian, he was a notified party. It was argued that the shares could not be handled without the court's discretion. The appellant's claims were unsupportable.

Dalai has been working with the appellants for four years as a securities broker. He disputed that any of his transactions had been short-changed and that the purchase of Rs. 1253 crores had been undertaken without the backing of stocks or bank receipts. Dalai alleged that the appellants used him as a scapegoat for the wrongdoings that they had done. It was alleged that two bank workers, Ravi Iyer and Sivakumar, used threats to forcefully withdraw shares worth Rs. 145 crores that belonged to him, his wife, and a small number of clients. His signatures allegedly were obtained on blank documents that were then used to unjustly charge him.Under the danger of physical torture, criminal prosecution, and threat to his life, the letter that serves as the foundation for the appellant's claim was signed. The defendant denied having any form of liability.

Summary of the decision and judgment

The bank's allegation was supported by a letter that claimed Dalai had provided the bank with the shares stated in the letter's annexure as security for the shortfall. The Bank received the aforementioned shares, valued at 145 crores of rupees, between May 11 and May 15. Additionally, Dalai had pledged to hold the Bank harmless from any losses it could have incurred or suffered following the completion of the final reconciliation of its account with Dalai through cash or any other physical assets. It was assumed that any extra funds would be returned following reconciliation. Additionally, it was confirmed that the bank had the right to sell the given stocks, shares, debentures, etc. and use the revenues to partially settle the debtor's obligations. Following such appropriation, Dalai himself was to settle any remaining debt. Dalai, however, asserted that the shares were seized against his will and that the aforementioned document was coerced into being written.

The shares and stocks were not taken forcibly, when all the evidence was taken into account. First of all, it was inconceivable that Dalai did not object or stop the appellants from removing the shares forcibly throughout the three days between May 11 and May 13, 1992, when they were removed from him. It was acknowledged that the Dalai Lama and the appellants' attorney had a meeting. The Special Court did not discover any proof, nevertheless, that force had been applied when all the shares were taken away. Second, Hiten Dalai declined to testify in favour of his case by staying outside the witness box. Thirdly, there was no proof of coercion, and the Bank had witnesses who could attest that Dalai had signed other documents in addition to the letter. As a result, the Court decided that Dalai freely signed the letter. Additionally, between May 11 and May 15, 1992, shares and stocks worth Rs. 145 crores were delivered.

The Court found that a claim for Rs. 1253 crores was excessive in terms of the amount demanded. The Court also rejected the claim for Rs. 795 crores and accepted the claim for two items totaling Rs. 201 crores and Rs. 79.80 crores, for a total of Rs. 280.80 crores. The claim for Rs. 201 crores, which was sufficient to compensate the bank, was accepted by the respondent. The Court, however, recognised the loss in the amount of Rs. 79.80 crores following cross-examination.

The next question concerned whether the accretions were a fundamental component of the attached shares as of the attachment date. The respondent's claim that the pawnee is required by Section 163 of the Contract Act to return the accretion to the pawnor was rejected by the court. Although it was noted that Section 163 of the Contract Act does not include the term "upon redemption" as it pertains to Sections 63 and 64 of the Transfer of Property Act, applying this to this case means that the accretion that is a part of the bailed property must remain with the pawnee in the same way as the shares that have been pledged. As a result, the Bank would be permitted to keep the accretion and manage it similarly to the pledged stocks.

The Cantriple Units were another bone of contention. Payment had been made, but delivery of the units had not yet taken place, according to the letter cited above. However, the Cantriple Units were claimed to be a component of the pledged stocks in the letter dated May 20, 1993. A subsequent letter dated June 16, 1993 states that these units were purchased and turned on. Furthermore, a witness established that the units were taken as security rather than being bought. The Court took notice of Can Bank Financial Services Ltd.'s Miscellaneous Application, in which it claimed that the Bank had taken the Cantriple Units by force. The Court ruled that the Bank would be permitted to attempt to prove their claim to the units because the retention of these units would be governed by the other legal processes.

Additionally, the appellants argued that the Special Court erred in issuing judgement and giving observations. The Bank was accused of fabricating transactions such as the acquisition of Cantriple Units and 9% IRFC Bonds. The Bank had been breaking the Reserve Bank of India's laws and regulations out of its hunger for profit. The Court concluded that the Special Court's directives and observations against the Bank were accurate if the management was not aware of the deficiency of Rs. 1253 crores prior to May 11, 1992.

The final point raised concerned the price of Rs. 30 lakhs. This accounted for 15% of the Bank's expenses. The Court determined that granting the expenses was appropriate given that the Bank's claim of a loss of Rs. 280 crores had been upheld.

Analysis

In light of the Contract Act and the Transfer of Property Act, the Court set out on a pedestal to interpret the idea of a pledge. In the Tejkumar Balakrishna Rujacase, it was noted that it is important to prove that the property's income or usufruct is likewise attached property. The dividends, bonus shares, and right shares are considered accretions of the attached property, assuming that the property in this case is comprised of shares and stocks. The bench was asked if, as the shares were pledged, the promise would also cover these accretions. In order to respond, the Court looked into the literature on the subject and determined that, in the event that the value of the security increases during the term of the contract, the pawnee is entitled to keep their specific property as part of the security.

In CIT v. Dalmia Investment Co. Ltd. and Hunsur Plywood Works Ltd. v. CIT, the Bench set aside two earlier rulings and concluded that Section 163 of the Contract Act should be interpreted as follows: Accompaniments to commodities that are being bailed cannot belong to the bailee. They must be returned when the things bailed are returned and are handled the same as the commodities. The accretions are therefore covered by the commitment as well. The pledgee, however, has the right to sell the goods along with the original shares in order to pay off the outstanding debt for which the shares were given as security if the pledge covers the natural increase of the products.

Conclusion

The urgent necessity is to control the banks and financial entities. The behaviour of bank personnel and the desire for financial gain were highlighted in this case, which dealt with a number of topics. Hiten Dalai was found responsible for securities of Rs. 280 crores, however the Bank asserted an inflated claim of Rs. 1253 crores. In fact, the main factor in most banking scandals is greed. The actions of employees and illicit transactions are unchecked by timid regulators. To stop bankers from engaging in misconduct, any wrongdoing must be rectified. Profits are pursued at the expense of fundamental trustworthiness.

In order to reduce greed and reform the financial system to stop fraud and irregularities, the judicial apparatus is crucial in making recommendations. To alter the bank structure that is primarily concerned with profits, an additional layer of internal accountability must be established. However, this Court addressed the accretions and loss claims issues, which were crucial in later cases.

The right of the pawnee when the pawnee defaults has been established by the court's interpretation of pledge and bailment. In Syndicate Bank v. C. H. Muhammed, the High Court of Kerala cited the decision in this case with regard to Sections 148 and 160 of the Contract Act. When items are bailed to guarantee the repayment of a debt or the fulfilment of a commitment, the bailor is entitled to receive the commodities back once the obligation has been paid off or the promise has been fulfilled.


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