S.N. Variava, J.
1. This is a petition taken out by the Custodian against the Karnataka Bank for a direction that the 1st respondents be directed to credit a sum of Rs. 2,75,66,822.99 into the attached account of respondent No. 2. Respondent No. 2 is Fairgrowth Financial Services Ltd. Respondent No. 2 was notified on 2nd July, 1992.
2. The Kasturba Road Branch, Bangalore of the 1st respondent had granted to the 2nd respondent an overdraft facility in a sum of Rs. 2.50 crores. As security, the 2nd respondent had executed in favour of the 1st respondent a Power of Attorney dated 1st December, 1990 and a Deed of Hypothecation dated 21st March, 1991.
3. In pursuance of this facility, the 1st respondents had allowed the 2nd respondents to withdraw the following amounts :
(a) Rs. 1.50 crores on 4th December, 1990;
(b) Rs. 0.50 crores on 31st March, 1991; and
(c) Rs. 0.50 crores on 15th October, 1991.
4. On the date the 2nd respondent got notified, under the said overdraft facility, a sum of Rs. 2,75,66,822.99 was due and payable by the 2nd respondent to the 1st respondent. It is an admitted position that after the date of the notification, the 1st respondent transferred all balances lying in all the accounts of the 2nd respondent in all the branches of their Bank to this branch. The 1st respondent thus transferred into this account a sum of Rs. 1,69,67,031.50. Under the circumstances indicated hereafter they also received lease rentals directly from various hire-purchasers of the 2nd respondent. They thus received an amount of Rs. 1,05,99,791.49 towards lease rentals. The 1st respondent then appropriated this amount of Rs. 2,75,66,822.99P. towards their dues.
5. The Custodian by his letter dated 8th March, 1993 called upon the General Manager of the 1st Respondent to furnish information regarding various accounts of the 2nd respondent and to convert all balances into fixed deposits. The 1st respondent by their letter dated 7th June, 1993 addressed to the Custodian set out which amounts were lying in fixed deposit and in which branches. They also, inter-alia, claimed that the appropriation made by them was in order. They however did not send information of what was appropriated. They also informed the Custodian that they had filed a writ petition in the Karnataka High Court which was pending.
6. The 1st respondents had, in the meantime, filed writ petition No. 12300 of 1993 in the High Court of Karnataka at Bangalore. This writ petition was against the Custodian, the 2nd respondent and various hire-purchasers. On 30th July, 1993 they obtained an ad-interim order by which the various hire-purchasers were directed to pay to the petitioners the lease amounts due under their Hire Purchase Agreements with the 2nd respondent. It is in pursuance of this order that they had managed to recover the sum of Rs. 1,05,99,791.49 from the various hire-purchasers.
7. On 25th November, 1993 the Karnataka High Court set aside the ad-interim order on the ground that the ad-interim order nullified the effect of the order passed by the Custodian under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 (hereinafter for sake of brevity called the Special Courts Act). The Karnataka High Court held that the proper course was to move the Custodian or this Court. I am informed that an appeal has been filed against this order. That appeal is pending. However no ad-interim or interim stay order has been obtained in that appeal.
8. On 6th December, 1993 the Custodian wrote to the 1st respondent calling upon them to furnish details of the amounts appropriated by them after the date of notification of the 2nd respondents. The 1st respondent by their letter dated 22nd November, 1993 sent particulars of all amounts received by them and/or appropriated by them. It is from these particulars that the Custodian learnt that an amount of Rs. 2,75,66,822.99 had been appropriated by the 1st respondent after the date of notification.
9. The question whether Bankers could, in exercise of rights given to them under the various documents, appropriate monies or securities was considered by this Court as far back as 22nd July, 1993. This was in Misc. Application No. 96 of 1993, Bank of Baroda v. Fairgrowth Financial Services Ltd., 1994 Bank.J 634. This Court has by its order dated 22nd July, 1993 held that after the enactment of the Special Courts Act distribution can only be in the manner set out under section 11 of this Act. This Court held that Banks cannot, after the enactment of the Special Courts Act, exercise their rights under their various documents. This Court held that this would amount to getting a preference or a priority not permitted by this Special Courts Act. This Court held that if the numerous Banks, which are before this Court, were permitted to exercise their rights then it would result in the provisions of the Special Courts Act being defeated. This Court held that it would amount to distribution taking place in a manner different from that as set out under section 11 of the Special Courts Act. This Court held that Banks must also stand in queue along with other creditors. This Court held that Banks also had to receive their claim in the order as laid down under section 11 of the Special Courts Act. This Court has held that amongst creditors of the same class a Bank which had security over a particular asset would have priority over other Banks/Financial Institutions who did not have a security in their favour. The Court held that in the guise of being a secured creditor a Bank cannot claim priority over debts set out under section 11(2)(a)f of the Special Courts Act.
10. Mr. Tulzapurkar pointed out that the 1st respondent had an irrevocable power of attorney in their favour. He pointed out clauses 7 and 8 of the Deed of Hypothecation which read as follows:
'7. Before availing of any loan the borrower shall duly endorse the promissory note or hundies obtained from the hirer in favour of the Bank and lodge the same with the Bank as collateral security for the advance. The borrower shall also deposit with the Bank the hire purchase agreement and the other papers executed by the hirer. As and when the Bank at its sole and absolute discretion makes a demand, the borrower agrees and undertakes without raising any objection whatsoever, to assign the hire purchase agreement to the Bank for purpose of enabling the Bank to realise any monies due by the borrower under and by virtue of this agreement, or of any matters or things arising thereform or incidental thereto.
8. On endorsing the promissory note or hundies in favour of the Bank and depositing the hire purchase agreement with the Bank, the borrower shall notify to the hirer of his having charged the equipments to the Bank and direct the hirer/s to pay future installments to the Bank till the Bank in writing advises the hirer to the contrary. If after such directions any installments are received by the Borrower direct from the hirer/s the amounts of the said installments shall be held by the borrower as trustee for and on behalf of the bank and the same shall be remitted to the bank immediately thereafter for the credit of the loan account.'
11. Mr. Tulzapurkar submitted that under these Clauses the 2nd respondents were bound and liable to endorse all promissory notes and hundies obtained by them in favour of the 1st respondent. He submitted that the 1st respondent had a sole discretion to make a demand on the borrower and the borrower was bound and liable to pay directly to the 1st respondent the charges under the hire-purchase agreement. He submitted that this amounted to an absolute assignment of all amounts due under the various hire-purchase agreements in favour of the 1st respondent. He submitted that this assignment was prior to the date of notification.
12. Mr. Tulzapurkar relied upon the authority of the Supreme Court in the case of Bharat Nidhi Ltd. v. Takhatmal, reported in : [1969]1SCR595 . In this case a contractor entered into an arrangement with a Bank whereby it agreed to finance the contracts and to advance monies to the contractor against his bills for supplies under the contracts for the purpose of caring out this arrangement the contractor executed an irrevocable power of attorney in favour of the Bank authorising it to receive payments of the bills from the authorities. The contractor made out a bill on the military authorities for a sum and handed over the same to the Bank for collection with an endorsement that it should be paid to the Bank. The Bank sent the bill for payment but before it received the payment, the amount due under the bill was attached by a creditor in execution of a money decree obtained by him against the contractor. The Supreme Court held that the attachment was not valid. The Supreme Court held that the power of attorney coupled with the endorsement on the bill was a clear engagement by the contractor to pay the Bank out of the monies receivable under the bill and amounted to an equitable assignment of the fund by way of security.
13. Mr. Tulzapurkar submitted that on the principles laid down by the Supreme Court an equitable assignment created an interest in the funds. He submitted that the assignment was not revocable. He submitted that after this assignment in favour of the 1st respondent, they had an absolute interest in the lease amounts. He submitted that therefore on the date of the notification the lease amounts were not properties which stood attached. He submitted that as these did not stand attached and as there already was a prior assignment in favour of the 1st respondent, they were entitled to appropriate these amounts towards their dues. He submitted that the order dated 22nd July, 1993 in Misc. Application No. 96 of 1992 did not apply to the facts of this case. He submitted that the appropriation made by the 1st respondents should be allowed to stand.
14. I am unable to accept the submission of Mr. Tulzapurkar. These very contentions were considered and dealt with by this Court in the order dated 22nd July, 1993. The Court had, at that stage been shown the authority of the Supreme Court in the case of Bharat Nidhi Ltd. (supra). In that order, the Court has, on the basis of this and one other authority of the Supreme Court held that a right created by an absolute assignment prior to the date of the notification would prevail. However, this Court has clarified that the same would not be the position in case of an assignment of future debts. The Court has held that an assignment of an existing debt, if it is prior to the date of the notification, will have already created an interest in the property in favour of the assignee. The Court has held that if however the assignment is of future debts, then after the date of the notification the provisions of the Special Courts Act will prevail. This because under section 11 as well as section 13 of the Special Courts Act, the provisions of the Special Courts Act prevail over any other law or contract. They also prevail over any Decree or Order of any other Court.
15. In this case, it is an admitted position that all the lease amounts, which have been recovered by the 1st respondent, are amounts which were due and payable by the various hirers after the date of the notification. They were not even due and payable prior to the date of notification. The power of attorney and the clauses relied upon by Mr. Tulzapurkar do not create an absolute assignment. They merely amount to an assignment of future debts. Under Clause 7, set out above, it is on demand by the Bank that the hire purchase agreements are to be assigned to the 1st respondent. Similarly under Clause 8 the hirer had to be notified and directed to pay future installments to the 1st respondent. In this case it is admitted that till notification the hirers were paying to the 2nd respondent. It is only after notification that, pursuant to Karnataka High Court order dated 30th July, 1993, the 1st respondent started collecting directly. To be noted that in Bharat Nidhi's (supra) case there was one bill which had already been drawn. That bill had been specifically endorsed in favour of the Bank. Therefore, in that case there was a specific assignment of that particular bill in favour of the Bank. It was on the basis of this specific assignment that the Supreme Court held that there was a prior assignment. Also in Bharat Nidhi's case there was no contrary statutory provision which prevailed over the terms of the contract. In this case, the 1st respondent merely have a right to get the future debts assigned in their favour. Nothing has been shown to the Court that, prior to the date of notification, there was an assignment of debts due and payable after the date of the notification. The documents merely create a right to get an assignment in favour of the 1st respondent. Once the Special Court Act was enacted, there could be no assignment of the future debts. After the enactment of the Special Courts Act, the distribution must take place only in the manner set out under section 11 of the Special Courts Act.
16. In my view, the order dated 22nd July, 1993 in Misc. Application No. 196 of 1992 fully applies to the facts of this case. It is a detailed order. It need not be repeated here. What the 1st respondent has done is that it has recovered its dues in a priority. It has recovered its dues in priority over the claim of taxes, revenue, cease, etc. The 1st respondent has taken priority by making an appropriation of the amounts belonging to respondent No. 2. These amounts were lying in the account of respondent No. 2 and/or were recoverable by respondent No. 2 from the various hire-purchasers. By recovering directly and then appropriating they have by-passed the provisions of the Special Courts Act. The 1st respondents' have in the words of the Karnataka High Court's order dated 25th November, 1993, nullified the effect of the order passed by the Custodian constituted under the Special Courts Act. In my view contrary, provision in the contract between 1st and 2nd respondents must now give way to the provision of the Special Courts Act.
17. Also in my view, Mr. Samdani is right when he submits that the 1st respondent could only recover the hire charges for and on behalf of the 2nd respondent. It could only recover as an agent of the 2nd respondent. Under the documents itself the 1st respondent was bound to account for what it had recovered. If there was excess recovery they were bound to give credit to the 2nd respondent. Thus, the 1st respondent was merely acting as agents of the 2nd respondent. There was no vesting of an absolute right in favour of the 1st respondent.
18. Under these circumstances, it will have to be and is held that the 1st respondent could not have appropriated these amounts after the notification of the 2nd respondent.
19. Further it is to be noted that towards lease amounts 1st respondent have recovered a sum of Rs. 1,05,99,791.49. Even presuming the arguments of Mr. Tulzapurkar were correct, this is the only amount which they could have appropriated. Over and above these amounts, the 1st respondent has also transferred from the other accounts of the 2nd respondent a sum of Rs. 1,69,67,031.50. This admittedly is not recovery of lease rentals. This in any case could never been appropriated by them.
20. Realising this, Mr. Tulzapurkar pointed out that, subsequently the 1st respondent have recovered by way of hire-charges a further sum of Rs. 78,23,220.81. He submitted that this amount has been kept in a separate fixed deposit. He submitted that this had not been appropriated as all the dues of the 1st respondent had already been recovered by the earlier appropriation. He submitted that if the Court does not permit appropriation of Rs. 1,69,67,031.50, then under their rights they would be entitled to appropriate Rs. 78,23,220.81. As already held earlier, the 1st respondent is not entitled to appropriate anything. Therefore, the question of allowing the 1st respondents to appropriate Rs. 78,23,220.82 does not arise.
21. Under these circumstances, the 1st respondent should be called upon to bring in the entire amount of Rs. 2,75,66,822.99. However, the fact remains that the 2nd respondent owes to the 1st respondent a sum of Rs. 2,75,66,822.99. The fact also remains that under the various documents, interest at a high rate runs on these dues. If the amounts are brought back they will lie in fixed deposits. They will not earn interest at the rate which 2nd respondent has to pay. At this stage, the Court does not require these amounts. From the figures now available with the Court it prima facie appears that the 2nd respondent may have sufficient assets to pay off their liability. Of course the final picture will only be available after the auditors appointed by Court give their report. At this stage it prima-facie appears that these amounts may not be required for distribution for taxes, rates and cesses. Ultimately because of their documents the 1st respondents may get priority in respect of these amounts. In the past, in such cases the Court has permitted Banks to retain amounts with them on a specific undertaking that, if required for distribution, the Banks would bring in the amounts on being called upon to do so by the Court. The Banks have also undertaken that during the period that they are allowed to retain the amounts, interest will stop running on those amounts. This arrangement is to the benefit of all.
22. Mr. Tulzapurkar, on taking instructions from the 1st respondent, undertakes to Court that if the Court allows the 1st respondent to retain the sum of Rs. 2,75,66,822.99, they will do so till such time as this Court allows. He undertakes that the 1st respondent will bring these amounts into Court, without any demur and on demand, when called upon to do so by the Court. He also undertakes that from the period that these amounts were received by the 1st respondent till the date that they are brought back, if at all, the 1st respondent will not charge any interest on these amounts. Mr. Tulzapurkar clarified that these undertakings are without prejudice to the 1st respondent's right to file an appeal against this order.
23. The 1st respondent always has a right to appeal. Giving the undertakings does not deprive them of that right. The 1st respondents are permitted to retain the amounts of Rs. 2,75,66,822.99 on the above undertakings which are accepted. This includes the undertaking that no interest will be charged on these amounts from the dates that they were received by the 1st respondent till such time as they are brought back into Court, if at all.
24. One last point needs to be mentioned. It would appear that some of the hire-purchasers are still paying the hire charges to the 1st respondent. Mr. Tulzapurkar clarifies that the 1st respondent are not willing to take on responsibility of recovery of the hire-charges. The Custodian and the 2nd respondent to write to all the hirers to send the future hire charges to the Cusodian. In the event of any amount being still received by the 1st respondent, the 1st respondents to keep that amount in a fixed deposit in the name of the 2nd respondent. The 1st respondent to inform the Custodian about the receipt of such amount and from whom.
25. The petition stands disposed off accordingly.