A.B. Palkar, J.
1. This is a group of 32 petitions filed by different parties most of which are Banks or financial institutions. However, there are also few private parties. The petitioners in all the petitions impugn order passed by the Custodian under Section 4(1) of the Special Courts (TORTS) Act, (hereinafter referred to as 'the said Act'), cancelling the contract and calling upon the petitioners to pay a particular sum of money with interest to the Custodian representing that notified party by making payment in the attached account of the notified party and in all these petitions the only one notified party included is Hiten P. Dalai.
2. All these petitions were heard as a group on certain common points of law, by consent of the learned Counsel appearing for the parties, with a view to decide common points of law first and thereafter, if necessary, to hear each of the petition separately on facts. Facts in almost all the petitions are similar although not common and give rise to similar questions of law. In order to appreciate the points of law involved and the controversies, it would be necessary to refer to facts of one or two matters at least.
3. Petition No. 28 of 2002 is filed by Standard Chartered Grindlays Bank. As the show cause notices issued in all the above proceedings are common, it would be worthwhile to refer in detail to the show-cause notice issued in the matter of Standard Chartered and Grindlays Bank. Show-cause notice dated 17.1.2002 in substance is as below:
Whereas Mr. Hiten P. Dalai (HPD) is a person notified by the Custodian on 8th June, 1992 under the provisions of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992; the following information has come to the notice of the undersigned :
(i) On 2.11.1991 ANZ Grindlays Bank (ANZ for short) had a purchase transaction of 11,5% GOI 2007 Bonds of the value of Rs. 30 crores with Bank of America (BOA for short) wherein N.K. Aggarwala & Co. acted as a broker. ANZ had paid a sum of Rs. 30.59,85,141/- to BOA on 2.11.1991 through Banker's Cheque No. 236854 and 235860 dated 2.11.1991 for Rs. 29,59,47,741/- and Rs. 1,00,37,400/-respectively for a contracted consideration of Rs. 29,59,47,741/-. The excess payment made by ANZ to BOA which is the payment of difference of Rs. 1,00,37,400/- has been received by ANZ on 2.11.1991 vide cheque drawn on Andhra Bank by debating the amount to the account of HPD.
(ii) The security deal slip of ANZ indicates the rate as Rs. 98/- and contracted consideration as Rs. 29,59,47,741/-. The deal confirmation copy of BOA forwarded by ANZ with the deal slip indicates the rate as Rs. 101.3458 and the total consideration as Rs. 30,59,85,141/-. Thus as per the confirmation of the counterparty (BOA) no excess payment was received by them and what they received is the actual value of the transaction which according to them was Rs. 30,59,85,141/-.
(iii) ANZ has failed to furnish copies of brokers deal confirmation by the counterparty or any other documentary evidence to establish that the transaction value was Rs. 29,59,47,741/- and also failed to furnish correspondence between ANZ and BOA in regard to the excess payment of Rs. 1,00,37,400/-.
(iv) The said transaction was between ANZ and BOA. ANZ has failed to explain the reason and the circumstances under which they received payment of Rs. 1,00,37,400/- through Banker's cheque drawn on Andhra Bank by debit to HPD' s account who was not in any way associated with the aforesaid transaction as broker or as a counterparty.
(v) BOA has confirmed to have sold the bonds of face value of Rs. 30,59,85,141/-wherein N.K. Aggarwala & Co. was broker.
(vi) In order to establish that the total transaction value was Rs. 30,59,85,141/- BOA has forwarded broker's contract note, delivery slip, and BOA's securities trade confirmation. These documents establish beyond doubt that 11.5% GOI 2007 Bonds of face value of Rs. 30 crores at Rs. 101.3458 had been sold to ANZ at a settlement price of Rs. 30,59,85,141/-and not at Rs. 29,59,47,741/-as claimed by ANZ.
(vii) BOA has confirmed having received a sum of Rs. 30,59,85,141/- from ANZ as full and final settlement by aforesaid bonds and delivered SGL on 2.11.1991 favouring ANZ and have stated that BOA is not aware of payment of Rs. 1,00,37,400/- made by HPD to ANZ and they have nothing to do with it.
(viii) M/s. Sharp and Tannan, Chartered Accountants who conducted the audit of securities transactions of ANZ have confirmed that the difference amount of Rs. 1,00,37,400/- was received by ANZ from HPD and is claimed to be relating to this transaction. They have further observed in respect of the above transaction leading to payment of difference that these do not appear to have taken place during the normal course of business.
(ix) HPD was asked as to why Pay Order was issued by debit to his account with Andhra Bank. No reply was received, no document was furnished.
Considering the facts and circumstances of the case, the Custodian is of the opinion that the difference payment of Rs. 1,00,37,400/- received by ANZ by debit to the account of HPD, a notified party, is illegal and fraudulent transaction and appears to have been entered into to defeat the provisions of the Act.
The alleged transaction between ANZ and HPD was therefore prima facie entered into to divert monies from HPD to ANZ defeating the provisions of the Act, and the same therefore attracts the provisions of Section 4(1) of the Act.
The Custodian therefore gave notice as per provisions of Section 4(1) of the Act to show cause as to why the said transaction should not be cancelled.
4. In reply to the show-cause notice, ANZ raised various points contending Inter alia therein that the notice is barred by law of limitation. The alleged payment of Rs. 1,00,37,400/- on 2.11.1991 was not concealed. Any action to cancel the transaction as illegal or fraudulent and should have been taken within three years. The Custodian had previously filed Misc. Application No. 9 of 2001 in respect of several such transactions which were subsequently withdrawn. The notice does not disclose any case of fraud, illegality or any attempt to defeat the provisions of the Act. The notice mechanically recites Section 4(1) and is bad-in-law and totally lacks in material particulars. The notice does not specify grounds on which the order is proposed to be made. According to ANZ records, the rate at which the bonds were purchased was Rs. 98/- and contracted consideration was Rs. 29,59,47,741/- whereas according to BOA rate was Rs. 101.3458 and total consideration was Rs. 30,59,85,141/-, BOA has received this amount. On the basis of the vague allegations as contained in the show-cause notice, Custodian has concluded that difference payment received by ANZ by debit to the account of HPD is an illegal and fraudulent transaction and appears to have been entered into to defeat the provisions of the Act.
5. It is significant to note that even according to the notice, the Custodian is not impugning the transaction of 2.11.1991 between ANZ and BOA and secondly the Custodian is not impugning the rate of Rs. 101.3458 at which BOA agreed to sell and the rate of Rs. 98/- at which ANZ agreed to purchase. The Custodian is also not impugning the entire transaction as such whereby BOA had received the entire amount of Rs. 30,59,85,000/- and what is said to be impugned is the differential payment. The conclusion is based on four documents, namely (i) Sharp and Tannan report, opinion expressed by the Chartered Accountant indicating that the transaction having contract rate and delivery rate differences having been used to bring an element of differences to enable transaction of monies to the Bank; (ii) comments contained in the report of the Jankiraman Committee wherein it is stated that above type of difference represent fixed returns against contracts where the risk was carried by the broker but the Bank used its own investment portfolio and invested its own funds; and (iii) the IDG report which corroborates report of Jankiraman Committee. The aforesaid comments or opinions or even findings rendered in the said reports suggest that the reason or object recording a difference in the contract and delivery rates of the transaction was with a view to either transfer monies or the notified party to the Bank or differential payment represented fixed returns in respect of contract undertaken by the brokers on behalf of the Banks. Rs. 1,00,37,400/- was received by ANZ from HPD and ANZ in fact paid the said amount to BOA on the same date and towards consideration payable in respect of the very same transaction. It is, therefore, not possible to accept that the alleged reason for the differential payment is either illegal or fraudulent. There is no substance in the allegation that the payment was illegal or fraudulent and there is no basis for establishing the allegation of diversion of monies from HPD to ANZ. The Custodian has not discharged the burden for establishing the allegations in order to make out a case under Section 4(1) of the Act. The Custodian occupies no higher position than the notified party. The presumption under Section 118 of the Negotiable Instruments Act is not rebutted as the payment is made by cheque by HPD to ANZ.
6. After hearing the parties and perusal of documents, the Custodian passed the impugned order. The Custodian has heavily relied on the comments of Sharp and Tannan and Amit Ray & Co. that they are unable to accept the payment received by broker of amount as difference being bonafide and related to the scrutiny transactions and the payment does not appear to have been made in the normal course of business. Findings corroborate the view that differences were compensatory arrangements between Banks and brokers. The Custodian has also referred extensively to the provisions of Section 4 of the Act and has stated that as per Section 4(1) of the Act, the Custodian has to satisfy himself after undertaking such enquiry as he may think fit to take action as provided under the Act. The Act empowers the Custodian to draw a presumption based on facts ascertained by conduct of an inquiry and such presumption is a statutory presumption. Thus after consideration of the arguments advanced before him, the Custodian has come to the conclusion that the transaction in question between notified party and the third party is fraudulent and as such liable to be cancelled and is also made to defeat the provisions of the Act and he has therefore not only cancelled the contract but has passed an order directing ANZ to pay Rs. 1,00,37,400/- by depositing the same in the attached account of HPD with the Custodian and also to pay interest at the rate of 24% per annum on the said amount with effect from 2.11.1991. Similar orders of payment have been passed in all the cases and the basis of cancellation is the same. All the show-cause notices have been issued for the transactions of 1991.
7. In the case of Oswal Agro, the material facts were that the company had directed the Citi Bank to purchase 11.5% GOI 2010 on 13.12.1991 which the Bank did through the broker HPD. There was rise in price of the said security and the company therefore instead of taking delivery asked the Bank to dispose of the same on the same day resulting into difference of Rs. 2 crores which was credited to the account of the company maintained with the Citibank. Similarly the company directed Citibank to purchase one crore units of UTI 64 on 16.12.1991 which was purchased by the Bank through HPD. Since there was also rise in the price of the said units, the company instead of taking delivery of the units directed to dispose of the same on the same day resulting into a difference of Rs. 50 lakhs which was credited to the account of the company maintained with the Citibank. Thus the total difference of Rs. 2.50 crores was paid by HPD to the petitioner Oswal Agro. Citibank denied to have received any such instructions and the Custodian therefore concluded that the company engaged itself in fictitious transactions with notified party HPD in the absence of contract notes and supporting bills and that it was a fraudulent transaction entered into in order to defeat the provisions of the Act. There was violation of the provisions of the Securities Contract Regulation Act, 1956 and as such the transaction was illegal, invalid and also fictitious.
8. As pointed out earlier in all the cases it is payment of difference by HPD to the petitioners which the Custodian has alleged to be fraudulent. Exercising powers vested in him under Section 4(1) of the Act, the Custodian has directed the petitioners to make payment with interest at different rates.
9. After considering the allegations made in the various petitions and the detailed reply filed by the Custodian and the various orders passed by the Custodian as well as the documents produced certain issues of law were framed and with the consent of parties as indicated earlier, arguments were heard on these issues of law. The issues with my findings thereon recorded against them are as below and reasons for the findings are stated in the paragraphs that follow:
ISSUESFINDINGS
1.Whether the show-cause notice issued by the custodian is without authority of law and /or is colourable exercise of the powers conferred under Section 4 of the Special Courts Act?
Yes.2.Whether the show-cause notice without jurisdiction?
Yes.3.Whether the action taken under Section 4 by the Custodian is barred by law of limitation?
No.4.Whether Limitation Act applies to the action of Custodian under Section 4 of the Special Courts Act?
No.5.Whether the provisions of the Special Courts Act override the Limitation Act?
No.6.Whether under Section 4 of the Special Courts Act, action can be initiated in the year 2001 in respect of a transaction which was concluded in teh year 1991-1992 and was a completely executed contract?
No.7.Whether Custodian has jurisdiction to pass order directing payment in pursuance of the act of cancellation of contract as envisaged by Section4?
No.8.Whether the Custodian has powers to pass an order granting interest? If yes, from what data and at what rate?
No.9.Whether the impugned order is against principle of natural justice?
No.10.Whether the order is liable to be set aside on that ground that it would amount to unjust enrichment of the notified party?Not necessary to be decided.11.What is scope of inquiry bt the Custodian under Section 4 of the Special Courts Act?
Not necessary to be decided.12.Whether the transaction was fraudulent and was entered into in order to defeat the provision of the Special Courts Act?
No.13.What is the meaning of the expression with an intent to defeat the provisions of the said Act as appearing in Section 4?
As per discussion14.Whether the show-cause notice issued by the custodian lacks in material particulars of the alleged fraud. If yes, what is its effect on the present application.
Yes.15.Whether the burden of establishing the ingredients of section 4(1) is on Custodian?
Yes.16.Whether the Custodian's satisfaction is required to be objectively established, on the basis of material whose authenticity and correctness is either admitted/undisputed or established?
Yes.17.Whether the Custodian can rely on any material reports whose correctness is not admitted, only if he establishes the correctness thereof and affords an opportunity to cross-examine are not to be party treated as affected?
Yes. The reports are not piece of evidence/If at all it is to be used the authors will have to be offered for cross-examination and as it is not possible they the person/statements of proved facts. They are opinions expressed.
18.Whether the Custodian has only cancelled the payment and not the contract an if so whether he has jurisdiction to cancel only a payment by cheque, or can only cancel a contract or agreement?
Yes and he has no jurisdiction to cancel only part of contract.
19.If so whether the burden of establishing want of consideration is on the custodian having regard to Section 18 of Negotiable Instrument Act or under the provisions of the Indian Evidence Act.
Yes.20.Whether Section 4(1) of the Act empowers the Custodian to raise any statutory presumption.
No.21.What order?Petitions succeed on the law point and it is not necessary to go into facts of each case.
REASONS
Issue Nos. 3, 4, 5 & 6:
10. These issues can be jointly considered. The provisions of the Limitation Act do not apply to the action to be taken by the Custodian under Section 4(1) of the Act. No provision of the Limitation Act was brought to my notice which would apply to the action of the Custodian. It was conceded that the Limitation Act applies only to appeal or application to be filed in a Court and not to an action to be taken by an administrative authority much less the Custodian appointed under the Act. The Special Court Act does not lay down any limitation and, therefore, the action of the Custodian cannot be impugned on the ground that it is barred by law of limitation. At the same time it needs to be pointed out that the Custodian as any other Government Officer is expected to act with due diligence and the action taken in respect of transactions entered into in 1991 in the year 2001 suffers from laches as there is no reasonable explanation given to such a long and abnormal delay in taking action specially as the Jankiraman Committee report and the Joint Parliamentary Committee report and even reports of the Chartered Accountants were available to the Custodian long before and for number of years the Custodian did not take any action. There is nothing in the Special Courts Act to show that it overrides the Limitation Act. The issues are answered accordingly.
Issue Nos. 7 & 8 :
11. Under the Special Courts Act the Custodian has no power to pass any order in the nature of a decree directing payment by any party to the notified party. If the notified party is entitled to recover something from any other party then the Custodian has to approach the Special Court with a petition or suit. Mr. A.M. Setalvad, learned Counsel appearing for the Custodian, clearly conceded that the Custodian has no such powers of passing an order in the nature of a decree of Civil Court and, therefore, during the course of argument it was suggested to the learned Counsel that these orders of the Custodian can at the most be treated as demand notices claiming various amounts from the parties with interest as a result of cancellation of contract and on failure of the parties to comply with the same, even if notices are justified, the only remedy available to the Custodian is to approach the Special Court by filing petition or suit for recovery of the said amount. The above issues are therefore answered accordingly.
Issue Nos. 1, 2, 9 to 21 :
12. All the remaining issues are inter-connected and can be conveniently considered together. In order to appreciate as to what are the requirements of a show-cause notice issued under Section 4 of the Act by the Custodian and whether the show cause notice on the basis of which the impugned orders have been passed are in conformity with the requirements of law and principles of natural justice, it would be appropriate to refer to the legal position of show-cause notices issued under different statutes by the administrative authorities. In order to decide whether the impugned orders are within the four corners of law, as required by Section 4 of the Act, it is necessary to consider the scope of Section 4, the principles thereof, and the requirements to be satisfied for passing an order of cancellation of contract on the ground of fraud, on the ground that it would defeat the provisions of the Act. The Custodian has made reference to Jankiraman Committee Report, and the reports of the Chartered Accountants. In my view it would be proper to refer to the reports of various Committees only to consider the background in which the Ordinance and the Act were passed. However, in any proceedings either before the Custodian or the Court, these reports or any part thereof cannot be treated as a substantive piece of evidence to decide upon the nature of transactions involved in the matter, reason being that if any part of the report of Jankiraman Committee, Joint Parliamentary Committee or the reports of the Chartered Accountants or IDG report are used as a piece of evidence to decide upon the nature of transaction, then the person affected has no opportunity to test either the veracity or the correctness of the statement of facts contained therein by way of cross-examination. I am referring to the reports only to point out the background. In the Third Report, Jankiraman Committee has observed on page 57 as under:
I. Introductory.
The Committee has submitted two Reports dated 31st May, 1992 and 5th July, 1992 to the Governor, Reserve Bank of India, based on its examination of the securities transactions of certain Banks and findings which could be derived therefrom. This Report is based on the scrutiny made to date by the officials of the Reserve Bank of India in respect of the undermentioned Banks and deals with a few other general matters.
1. Citibank.
2. Bank of America.
3. Andhra Bank.
4. Bank of Karad Ltd. (In liquidation).
5. Metropolitan Cooperative Bank Ltd. (In Liquidation).
6. Syndicate Bank.
7. Bombay Mercantile Cooperative Bank Ltd.
8. Nedungadi Bank Ltd.
II. Findings.
In its second Report, the Committee had reported that over 20 per cent in number and 30 per cent in value of the securities transactions reported by Banks/ institutions cannot be matched. On a further scrutiny, the possible reasons for the mismatch have been ascertained and are detailed in Chapter II of this Report.
It needs to be clarified that since the transactions as reported tally in totality, there does not appear to be any case where the transactions reported by one Bank/institution are not responded by some other Bank/institution, though as explained in Chapter III, the actual counterparty Bank/institution responding to a transaction may be different from the Bank/counterparty as reported.
2. As mentioned in the second Report, there are a number of transactions where purchases and sales have been booked by Banks/institutions at what appear to be artificial rates and differences running into crores of rupees have accrued to the accounts of brokers. No satisfactory examination has been given as to why these huge losses have been borne by the brokers or such huge gains to brokers have been allowed to accrue. It is possible that these losses and gains are compensatory adjustments for other transactions or that the Banks/institutions had informal arrangements with brokers whereby the brokers guaranteed to the Banks/institutions a specified rate of return on funds deployed through them. A pattern also seems to be emerging in respect of several of the Banks referred to in this Report whereby these large differences have occurred in transactions when certain brokers particularly broker Hiten P. Dalai are involved and where the ultimate payment for the difference has come out of broker Abhay D. Narottam's account with the Bank of Karad Ltd. This account appears to have been funded by BRs issued by Bank of Karad Ltd. and Metropolitan Cooperative Bank Ltd. not supported by the existence of securities. These transactions and the links between these brokers need further examination.
It is further observed at page 273 in the 6th final report as under:
12. There is evidence to show that in many cases Banks have carried brokers positions that is, they have entered into informal contracts where the risk is carried by the broker but the Bank has used its own investment portfolio and invested its own funds and for which service it has been given a fixed rate of return. The most blatant case is the arrangement between Stan chart and broker Hiten P. Dalai whereby Stan chart made available its funds and securities to earn a guaranteed return of 15 per cent on the funds invested.
13. The rates at which transactions in the same securities on the same date have been recorded by different Banks have significantly varied and even in respect of the same Bank, transactions in the same securities on the same date have been at different rates. It is obvious that in many cases, artificial rates have been used to record transactions for the following reasons.
(a) There are no official quotations for Units or for PSU bonds.
(b) Where a ready forward transaction is made, the difference between the purchase rate and sale rate reflects the agreed return on the use of funds and necessarily therefore, either the purchase or the sale must be at a rate different from the real value of the security.
(c) .............
In the second interim report at page 32, it is observed in paras 10 and 11 as under:
10. There are a number of transactions where the rates at which sales of investments have been booked by Banks/institutions are at rates which are considerably in excess of the rates at which counterparty Banks have booked the purchases. The payments received by the Banks/institutions have been at the rates at which purchases have been booked by the counterparty Banks/institutions and the difference often running into crores of rupees has been received from the brokers. It is obvious that sales have been booked at artificial rates to book a profit or avoid a loss. It is also obvious that the broker would not have paid the difference unless he had been compensated in some fashion. The matter is under further investigation.
11. There are a number of instances where with the full knowledge of the management, Banks/financial institutions have issued SGL forms against SGL forms brought by brokers. In some cases, these are reflected as purchases/sales of the Banks/ financial institutions but in other cases there is no such entry made. For these services rendered to the brokers, the Banks/financial institutions have charged a fee, normally 0.01 per cent of the face value of the securities involved.
At page 268 in the 6th and final report, it is stated in paras 5 and 6 as under:
5. Thus the stage was set for an era of irregular dealings in money disguised as securities transactions. There was a triple coincidence of wants first, the PSUs who, after the withdrawal of the Government budgetary support had to raise funds massively in the market and had short term liquidity on their hands, wanted an avenue of investment yielding more than the coupon rate on the bonds they had issued. Secondly, the stock market was booming and the 'bulls' desperately needed funds to finance their overbought positions, never mind the high Badla rates. Thirdly, Bankers who had accepted high cost funds from PSUs saw that the only avenue which yielded the anticipated high returns was financing the stock brokers in a booming market. What was needed was to devise some 'innovative' techniques to circumvent the regulations.
6. To circumvent the regulations, Banks needed the assistance of brokers and therefore a close nexus had developed between certain brokers and certain Banks. This was aggravated by the fact that operating managers were under pressure to greatly increase the profitability of Banks. While in the case of foreign Banks this arose out of the growth of intense competition, in the case of nationalised Banks, there was a growing awareness that their overall performance compared very unfavourably with the performance of foreign Banks and steps were needed to improve the 'bottom line' of their published results.
At page 277 in paras 21 and 22(a) and (b), it is stated as under:
21.(a) A key element in the perpetration of the irregularities was the BR. As mentioned earlier, the guidelines for the issue of BRs laid down by the IB A were observed more in their breach. In fact, the RBI circular of 26th July, 1991 referred to earlier specifically prohibits Banks from issuing BRs on behalf of their constituents including brokers. It also enjoins on Banks to be circumspect while acting as agents of their broker clients while carrying out transactions in securities on behalf of brokers.
(b) Moreover, arising out of the close nexus between the brokers and the Banks, BRs were used to generate transactions which had no security backing. Thus, the guise of security transactions was given to what were in fact pure financing transactions without even the backing of an underlying security. In many cases (e.g. in the case of SBI), by omission or perhaps by design no record was maintained of BRs issued. In other cases there is clear evidence to show that BRs supported by BRs were issued at the request of brokers. The third Report of the Committee lists a number of cases where BRs were so issued by BOK and MCB at the behest- of broker ADN and for the benefit of brokers HPD and other brokers. Similarly, BRs appear to have been issued by SBI for the benefit of broker HSM.
(c) As has already been pointed out BRs were almost used as negotiable instruments and transferred from Bank to Bank and 'third party' BRs were accepted by Banks.
(d) These lax practices gave considerable scope to Banks and brokers to indulge in a number of irregularities in the guise of securities transactions. The indiscriminate use of BRs without security backing created a kind of paper money which circulated from Bank to Bank like a stage army of soldiers and provided an opportunity to brokers to avail of funds of increasingly larger amounts.
22.(a) A second key element in the perpetration of the irregularities was the complete breakdown of internal control in a number of Banks.
(b) It is an essential element of internal control in securities transactions that there should be a clear segregation between the front office and the back office. The front office consists of the dealers who actually negotiate the deals. The back office has the responsibility to complete the paper work, receive and effect delivery of the securities, and receive the proceeds and authorise payment. Thirdly, there is the accounting Section which records the transactions and reconciles the investment accounts.
There is also reference of informal arrangement of 15% return between HPD and Stan chart at page 107, of the 4th interim report at paras 8.1 and 8.2. After referring to number of transactions, it is observed at page 109 as under:
All the above transactions are transactions which originate with a purchase on an earlier date and are reversed by a sale on 8th February, 1992. The first figure in the bracket shows the rate at which the sale is actually made whereas the second figure is the derived rate at which sale should have taken place in order to yield to Stan chart a return of 15%. The derived rates are computed on computer spread sheets which are available and which show how the rates are computed. When the actual sale rate exceeds the derived rate the difference is payable to broker HPD and is shown as a positive item. When the actual sale rate is lower than the derived rate the difference is recoverable from HPD and is shown as a negative item.
8.9 Some of the entries shown in the diary and reproduced in paragraph 8.5 above are detailed below:
(a) On 29th January, 1992, Stan chart sold to Citibank 7.5% IFCI bonds 1997 face value Rs. 14.88 crores, 7.5% IDBI bonds 1997 face value Rs. 6.45 crores, and 7.5% IDBI bonds 1997 face value Rs. 43.68 crores, aggregating to Rs. 65.01 crores at Rs. 91 as per the contract rate. However, Citi Bank made payment only at Rs. 87. The difference of Rs. 2.60 crores was received from HPD and adjusted against the accumulated difference due from him. Thus the amount of Rs. 2.60 crores recovered from HPD was accounted for by booking an artificial profit on the sale to Citibank.
(c) On 26th February, 1992, Stan chart booked 22 sales transactions with Citibank in respect of securities purchased on 26th February, 1992, mostly from State Bank of India. The net difference between the sale rate and the purchase rate aggregated to Rs. 15.4933 crores which was shown in the diary as due to HPD.
13. The Joint Parliamentary Committee while trying to find out the end use of monies, observed in para 18.36 at page 257 as under:
18.36. The Committee were seized of the aspect of the end use of monies from the very beginning. It appreciated that should the movement of monies, whether from Banks or PSUs, through brokers, be traced to the end user than the entire inter connected ramifications of the Scam would be revealed. In pursuance of this the Committee examined in detail voluminous Bank transactions of various brokers and some of the Banks. The Committee also sought cooperation and assistance of the CBI and the RBI in this regard. It advised the CBDT also to undertake a similar exercise. The Committee regret that it has not been possible to complete this task to their own satisfaction.
The Inter Disciplinary Group pointed out difficulties in tracing at para 4.7.1, page C5- 21, as under:
4.7.1. The identification of end use of funds was a laborious process involving examination and correlation of every investment transaction of the brokers and Banks. The following were among the more important constraints:
-- Entries in the books of one counterparty Bank did not correspond with that of the other counterparty.
-- There was mismatch between seller and payee or buyer and payer.
-- The investment records did not depict the true character of the deals. Actual recipient and issuer of cheque were not known.
-- Often, and more particularly in the case of HMG, entries in broker's current account at SBI, Bombay only revealed the net effect of all Bankers cheques received and issued on his behalf on a particular day. On days when the value of cheques issued equaled the value of cheques received there was no entry in his current account.
-- Transactions with Bank/financial institutions whose investment account was maintained by the same routing Bank was difficult to analysis as the payments and receipts were netted and only the net effect reflected in the Bank accounts. One to one correspondence between security transactions and payments was difficult to establish as entries did not reflect true details of the transactions.
-- Accounts of the brokers had not been prepared.
In paras 6.7.1, 6.7.2, 6.7.3 and 6.7.4 it is stated as under :
6.7.1. Based on the above, the net receipts from the Banking system to HPD amounts to about Rs. 253.12 crores, which was largely diverted to brokers, viz. N.K. Aggarwala (Rs. 147 crores), B.C. Devidas (Rs. 77 crores), Chandrakala & Co. (Rs.28 crores), Excel & Co. (Rs. 23 crores), V.K. Jain (Rs. 17 crores).
6.7.2. From the above analysis, it would appear that payments (net) to extent of Rs. 666.15 crores have been made to Banks and FIs as differences between the contract and delivery rates (Annexure VII and graph below) including differences paid on same day sale and purchase of securities. It is, therefore, obvious that no corresponding tangible assets can be traced relating to these funds.................
6.7.3. It will be seen from the above that Stan chart received as much as Rs. 274 crores as differences. Other major recipients were Bank of America (Rs. 101 crores), Canbank Mutual Fund (Rs. 94 crores), Citibank (Rs. 67 crores), ANZ Grindlays Bank (Rs. 38 crores) and Canbank Financial Services (Rs. 57 crores). The legality of these funding arrangements have to be examined. There may, however, also be cases of moneys flow to Banks on account of same day sale and purchase due to rollover of earlier Ready Forward Transactions/forward positions. Banks were asked to furnish documentary evidence to establish the rationale behind such receipts and on the basis of their replies auditors have been appointed by RBI to determine the bona fides of such receipts by the Banks/FIs concerned from the brokers. The Audit is in progress. Stan chart also appropriated Rs. 77.85 crores from HPD in 'kind'. The details have been indicated at para 8.1.1, Chapter II of JRC Report No. 4. As explained therein an aggregate amount of Rs. 107.31 crores was credited by Stan chart to P.O. Received account and dummy entries passes to recover from HPD Rs. 63 crores in respect of SLR securities and Rs. 14.85 crores in respect of non-SLR securities.
6.7.4. Though the analysis of the Bank account, Bank/FIs and other entities who received and paid moneys were asked to explain the underlying transactions. On the basis of information received effort was made to compute the assets generated in the form of an Asset Ledger with the details of individual securities/ stock and balances. The closing positions are given at Annexures VIII-A, B, C, D and E. While auditors have been appointed to establish the delivers in respect of securities traded by Banks/Fls with ADN/HPD as indicated in the Asset Ledger created for the purpose prima facie it appears that certain Banks had not delivered the securities to the brokers against payments received from their accounts. These Banks appear to have delivered the securities to their parties. Some transactions are given below :
While taking an overall view of the Scam, in Chapter II, JPC has in categorical terms observed in paras 2.7 and 2.8 as under :
2.7. The scam is basically a deliberate and criminal misuse of public funds through various types of securities transactions with the aim of illegally siphoning of funds of Banks and PSUs to select brokers for speculative returns. The latest irregularities in the securities and Banking transactions, are manifestations of this chronic disorder since they involved not only the Banks but also the stock market, financial institutions, PSU, the Central Bank of the country and even the Ministry of Finance and other economic ministries in varying degrees. The most unfortunate aspect has been the emergency of a culture of non-accountability which permeated all sections of the Government and banking system over the years. The state of the country's system of governance, the persistence of non-adherence to rules, regulations and guidelines, the alarming decay over time in the Banking systems has been fully exposed. These grave and numerous irregularities persisted for so long that eventually it was not the observance of regulations but their breach that came to be regarded and defended as 'market practice'. Through all these years the ability of the concerned authorities to effectively address themselves to the problems has been tested and found wanting. The consequence of these irregularities in securities and Banking transactions are both financial and moral. During the period from July 1991 to May 1992 the most glaring proof of the nexus between the irregularities in Banks and the overheating of stock market which came to light is explained by the graphic representations of the BSE Index and the fact that there was a sharp increase in securities transactions during the corresponding period of the Banks involved in serious irregularities related with the scam. What is more apparent is the systematic and deliberate abuse of the system by certain unscrupulous elements. It is abundantly clear that the scam was the result of failure to check irregularities in the banking system and also liberalisation without adequate safeguards. There is also some evidence of collusion of big industrial houses playing an important role. It is because of these elements that the economy of the country had to suffer and while some gained thousands of crores, millions of investors lost their savings. The criminality of the perpetrators of the scam becomes all the more despicable as it was during this period that the country was passing through most trying times, economically and financially. An observation that the Committee has been constrained to make at a number of places in the succeeding chapters is that for all these not many have yet been identified and effectively punished.
This background is necessary to be considered while appreciating the factual aspects and legal issues involved in these petitions.
14. Section 4(1) of the Act with proviso reads as below:
4. Contracts entered into fraudulently may be cancelled.--
(1) If the Custodian is satisfied, after such inquiry as he may think fit, that any contract or agreement entered into at any time after the 1st day of April, 1991 and on and before the 6th June, 1992 in relation to any property of the person notified under Sub-section (2) of Section 3 has been entered into fraudulently or to defeat the provisions of this Act, he may cancel such contract or agreement and on such cancellation such property shall stand attached under this Act;
Provided that no contract or agreement shall be cancelled except after giving to the parties to the contract or agreement a reasonable opportunity of being heard.
Show-cause notice has to be issued in order to give a party an opportunity of being heard before the Custodian takes step of cancelling the contract. A proper analysis of Section 4 shows that the Custodian has to be satisfied after inquiry that (i) the contract has been entered into after 1.4.1991 and before 6.6.1992; (ii) it is in relation to a property of the person notified; and (iii) it has been entered into fraudulently or to defeat the provisions of the Act. It, therefore, follows that the show-cause notice to be issued must make out a case on facts on the basis of which the Custodian wants to allege that the contract is fraudulent or is entered into to defeat the provisions of the Act. It needs no elucidation to stress that whenever a fraud is to be alleged, it is necessary to make out a specific case on facts that the fraud as alleged has been practised. It necessarily involves details as to who has practised fraud i.e. who is the perpetrator of the fraud and who is the victim of fraud. The Indian Contract Act makes a contract entered into by practising fraud voidable at the instance of the party who is the victim of the fraud and who has consented due to the fraud practised. It is true that in construing the word 'fraud' we need not confine to the definition of 'fraud' contained in Indian Contract Act and I am in agreement with the learned Counsel for the Custodian that the word 'fraud' should be construed in a generalist sense and it would be better to refer to the dictionary meaning as referred to by the learned Counsel from Black Law Dictionary. However, whatever way we look at the definition of 'fraud' it is not possible to accept the contention that mere allegation that the contract is fraudulent in sufficient t make out a case of fraud. The particulars of fraud are necessary to be pleaded. Civil Procedure code makes it obligatory to plead particulars of fraud practised and in case particulars are not given, the other side has a right to call for particulars and better particulars. The reason being that the party who has to meet the allegation of fraud must know as to what is alleged. In the present case the show-cause notices issued by the Custodian are totally lacking in particulars fraud. A reference to any of the show-cause notice would clearly show that the custodian has not even alleged as to who has practised fraud and what are the facts constituting the fraud, who are the parties to the fraud, who hare the perpetrators of the fraud and who is the victim of the fraud. Unless the show cause notice gives these particulars, it is not possible for any party to meet the allegations of fraud. In case allegation is of defeating the provisions of the Act or defeating the purpose of the Act, a specific case will have to be made out in the show cause will have to be made out in the show-cause notice.
15. Mr. Aspey Chinoy, learned Counsel appearing for the petitioners in some of the matters, contended that Section 4(1) of the Act confers powers on the Custodian to cancel a contract or an agreement on being satisfied that it has been entered into fraudulently or to defeat the provisions of the Act, and requires the Custodian to give a reasonable opportunity of being heard. The power of the Custodian is conditional in that the Custodian has to satisfy himself on two jurisdictional facts, namely (i) the contract has been entered into fraudulently and (ii) it was to defeat the provisions of the Act. The Custodian is required to objectively demonstrate the existence of material facts and evidence on the basis of which he has formed his opinion or on the basis of which he has satisfied himself about existence of the two ingredients. It may be difficult to agree with the contention that the Custodian is required to demonstrate the evidence on the basis of which he formed his opinion. However, I have absolutely no doubt that the Custodian must disclose the existence of material facts. These materials facts have to be disclosed in the show-cause notice so that the affected party can effectively represent itself in contesting the show cause notice.
16. The learned Counsel relied on the judgment of the Supreme Court in the case of Bareilly Electricity Supply Co. Ltd. v. The Workmen and Ors., : (1971)IILLJ407SC . In para 14 of the judgment the Supreme Court has made reference to an earlier judgment reported in : (1958)IILLJ259SC . While making reference to the said judgment at page 264, the Supreme Court reproduced the observations in the said judgment as under:
'Now it is no doubt true that the evidence of the respondent and his witnesses was not taken in the mode prescribed in the Evidence Act; but that Act has no application to inquiries conducted by Tribunal even though they may be judicial in character. The law requires that such Tribunals should observe rules of natural justice in the conduct of the inquiry and if they do so their decision is not liable to be impeached on the ground that the procedure followed was not in accordance with that which obtains in a Court of Law.'
The Supreme Court further observed in para 14 as under:
'But the application of principle of natural justice does not imply that what is not evidence can be acted upon. On the other hand what it means is that no materials can be relied upon to establish a contested fact which are not spoken to by persons who are competent to speak about them and are subjected to cross-examination by the party against whom they are sought to be used. When a document is produced in a Court or a Tribunal the question that naturally arises is, is it a genuine document, what are its contents and are the statements contained therein true. When the appellants produced the balance-sheet and profit and loss account of the Company, it does not by its mere production amount to a proof of it or of the truth of the entries therein. If these entries are challenged the appellant must prove each of such entries by producing the books and speaking from the entries made therein.'
In the case S.L. Kapoor v. Jagmohan and Ors., : [1981]1SCR746 , the Supreme Court observed in para 16 as under:
'Thus on the consideration of the entries material placed before us we do not have any doubt that the New Delhi Municipal Committee was never put on notice of any action proposed to be taken under Section 238 of the Punjab Municipal Act and no opportunity was given to the Municipal Committee to explain any fact or circumstance on the basis (of which) that action was proposed. If there was any correspondence between the New Delhi Municipal Committee and any other authority about the subject matter or any of the allegations, if information was given and gathered it was for entirely different purposes. In our view, the requirements of natural justice are met only if opportunity to represent is given in view of proposed action. The demands of natural justice are not met even if the very person proceeded against has furnished the information on which the action is based, if it is furnished in a casual way or for some Other purpose. We do not suggest that the opportunity need be a 'double opportunity' that is, one opportunity on the factual allegations and another on the proposed penalty. Both may be rolled into one. But the person proceeded against must know that he is being required to meet the allegations which might lead to a certain action being taken against him. If that is made known the requirements are met. We disagree with the findings of the High Court that the Committee had the opportunity to meet the allegations contained in the order of suppression.'
17. Mr. Janak Dwarkadas, learned Counsel for petitioners in some matters, contended that general allegations of fraud are not sufficient. He relied upon the judgment of the Supreme Court in the case of Barium Chemicals Ltd. v. Company Law Board, : [1967]1SCR898 , wherein the Supreme Court observed:
'The words, 'reason to believe' or 'in the opinion of' do not always lead to the construction that the process of entertaining 'reason to believe' or 'the opinion' is an altogether subjective process not lending itself even to a limited scrutiny by the Court that such 'a reason to believe' or 'opinion' was not formed on relevant facts or within the limits or within the restraints of the statute as an alternative safeguard to rules of natural justice where the function is administrative. (1951) AC 66 : (1964) AC 40 Rel. on.'
Number of judgments have been brought to my notice, but I am restricting reference to few of (hem as the principles are not in dispute.
18. It is also necessary to bear in mind that on the basis of these show-cause notices and the consequential orders passed, the Custodian is calling upon the petitioners, most of which are Banks or financial institutions, to refund money to HPD a notified party which was paid by the said notified party in 1991 in connection with a particular transaction. Therefore, the show-cause notice must indicate as to what was the part played by the concerned Bank or financial institution or private individual as the case may be in the fraud and that as a result of the fraud, the said party benefited or got an undue advantage or received something to which it was not entitled under the transaction. It was either by joining hands with the notified party or otherwise by fraudulently inducing the notified party to part with the money. Show-cause notices miserably fail to make out any such case. The allegations are too vague and general. In most of the notices reference is made to the report of the Chartered Accountants M/s. Sharp & Tannan or M/s. Amit Ray & Co. and it is pointed out that this payment of difference, according to the Chartered Accountants, do not appear to have taken place in the normal course of business. The Custodian thereby wants to allege that what is not in normal course of business is either fraudulent or is meant or intended to defeat the provisions of the Act. It is not possible to accept that merely because it is a payment which does not appear to the Chartered Accountants to be in normal-course, it can be said to be fraudulent or as a result of fraudulent contract between the parties. A mere perusal of Jankiraman Committee Report and the Joint Parliamentary Committee Report would show that in the period of scam most of the transactions which had taken place were such which cannot be said to be in normal course of business. The Banks were issuing SGLs and selling securities without there being balance in the SGL account, BRs were issued without verifying whether the securities are with the Bank and said BRs were taken back and the transactions were reversed. A nexus was found existing between the brokers and the Bank officials and the employees as a result of which monies were siphoned from the Banks and financial institutions. These siphoned amounts were used by the brokers for their own purpose to make money in the stock market resulting in a very high raise in the price of stocks and shares. However on this basis, it is not possible to say today that since these transactions were not in normal course of business, they were fraudulent and thereafter to cancel them, that also after a lapse of more than 10 years.
19. During the course of arguments, the learned Counsel for Custodian pointed out that when the party to whom show-cause notice is issued has received payment and is not in a position to explain as to why the payment is made, a fact which is within the exclusive knowledge of the party, then the Custodian is justified in alleging that it is fraudulent. I am afraid, I cannot accept this argument. The fact that payment is not in normal course of business, the fact that the transactions were not in normal course, does not absolve the Custodian in making out a case of fraud pointed out earlier and in the absence of such a case being made out in the show-cause notice, the show-cause notice becomes invalid in law; any action based on such vague notice cannot be legally sustained. To accept that since payment was not in normal course, it is fraudulent and would give rise to a presumption of fraud. There can be presumption of illegality and there can be no presumption of fraud. Illegality and fraud are required to be alleged with all the necessary details. Fraud is to be established and proved to the hilt and the burden is always on the party which alleges fraud. It was absolutely necessary for the Custodian to show in the show-cause notice as to how he was satisfied and the facts on the basis of which he has reached the satisfaction must be stated in categorical terms. Mere reference to the report of any Committee or the Chartered Accountants and quoting opinion of the Chartered Accountants that the payment does not appear to be in normal course does not lead even to proper allegation of fraud and is not sufficient to make out a case of fraud. What was expected of the Custodian is to have a deep probe into the matter and if possible to make out a case of fraud having been practised. It was also necessary to allege whether the petitioners have practised fraud on the notified party or whether the notified party and the petitioners joined hands in practising fraud and if so who was the target or victim of the said fraud.
20. Another aspect of the matter is what are the powers conferred by Section 4 on the Custodian and what in fact the Custodian has done in all these cases. What is envisaged by Section 4 is cancellation of contract or agreement.
21. Mr. Virang Tulzapurkar, learned Counsel appearing for some of the petitioners has contended that under Section 4 of the Act only contract or agreement can be cancel and not a concluded transfer. That is to say, the contract which has been completely executed and transfer of property has taken place as a result, then the same cannot be cancelled. The learned Counsel drew my attention to the different terminology is used in the Transfer of Property Act and Sale of Goods Act, viz. Sale and contract of sale, Sale and agreement of sale. The learned Counsel also referred to the provisions of the Indian Companies Act, Section 536, provisions of Insolvency Act regarding fraudulent transfers and contended that the Legislature has intentionally used the words 'contract' and 'agreement' in Section 4 and not the word 'transfer' and by necessary implication, a completed contract resulting in transfer of property has to be excluded from consideration. In this connection Mr. Setalvad appearing for the Custodian, contended that although such an interpretation may be reasonable, the section has to be interpreted in such a manner that the purpose would not be rendered nugatory. If an executed contract or a completed transfer is not included in the word 'contract' as incorporated in Section 4, then the provisions would be rendered nugatory I am unable to accept this contention. Although the ordinance was promulgated in order to meet an emergent situation and was later on converted into 'Act', it is not possible to hold that the word 'contract' would also include transfer. Such an interpretation would be contrary to the principles of interpretation and it would amount to adding word to the piece of legislation by the Court which the Court should avoid. The Legislature was fully conscious of the distinction between transfer and contract and if Legislature intended to include a completed transfer or a completely executed contract resulting in transfer of property, whether movable or immovable, the Legislature would have incorporated the specific terminology in the statute. Such an interpretation is also logical because if the Legislature intended to give a power to cancelled a transfer then the Legislature would have mad provision for the consequences thereof because when a transfer is complete then party to whom the property is transferred gets title to the property and in case of cancellation the party has to be provided with consequential remedy on cancellation. It is also possible that in the meantime the property has changed and it may come in the hands of a person who is a bona fide purchaser for valuable consideration without notice of any defect in the title of the vendor and such person has to be protected and the Legislature would have made necessary provision for the transferee who is not having notice and who has paid valuable consideration and, therefore, what was intended by Section 4 was to confer power of cancellation of a contract or agreement simplicitor. It is not possible to accept that by giving restricted meaning to the words 'contract' or 'agreement' and not including completed transfers or executed contracts in the said term, the section would be rendered nugatory. In my view, these powers were expected to be exercised with due diligence and within reasonable period of coming into force of the Act. The entire records of the notified party were either with the Custodian or with the CBI. Extensive reference to various transactions was made by the Jankiraman Committee, Joint Parliamentary Committee, C.B.I. and I.D.G. and if for a period of about 9 to 10 years after such contracts, no action was taken and action was taken after such a long lapse of time, then it would be unjust to say that section would be rendered meaningless if completed transfers or executed contracts are not included in the term of contract or agreement.
22. Another aspect of the matter is that if a contract has resulted into transfer of property then it is not possible to set aside the contract or to cancelled the contract. In this connection it is worthwhile to refer to the Supreme Court judgment in B.O.I. Finance v. Custodian, : [1997]3SCR51 . In the case before the Supreme Court legality of ready forward contract was involved and in paras 38 and 39 the Supreme Court observed as under:
38. We will first deal with the submission that the agreements in question were severable and the illegality attached to the forward leg cannot affect the ready leg of the transaction.
39. Mr. Chagle, appearing for ANZ Grindlays Bank while assuming that the ready-forward transaction was one composite transaction, submitted that the same was severable into two parts each of which had a separate consideration and a separate object. He submitted that provisions of Section 57 of the Contract Act were applicable to the present case and the first set of promises of the ready leg would constitute a binding contract while the second leg, namely, the forward leg would be void. In support of this contention reliance was placed on a decision of the Full Bench of the Nagpur High Court in Asaram v. Ludheshwar, AIR 1938 Nag 335. In that case a joint family was indebted to the defendants. It had proprietary share in land to which the provisions of the Central Provinces Tenancy Act applied. According to Section 49 of the said Tenancy Act alienation of 'sir' land, that is home farm land in cultivation, was ineffective unless the sanction of appropriate official had first been obtained. Section 49 of the said Tenancy Act postulated that if a proprietor lost his right to occupy any portion of the sir land as a proprietor he shall, as from the date of the loss, become an occupancy tenant of such 'sir' land. In order to alienate the interest in the said land a device was adopted to circumvent the provisions of Section 49 of the said Act. On 14th April, 1923 two deeds were executed by the father of the appellants. By the first deed the proprietary right in the said land was sold for a sum of about Rs. 7367/-. On that very date a second document, a deed of surrender, was executed. In consideration a sum of about Rs. 7,367/-the appellants' predecessor in interest relinquished their occupancy rights in the 'sir' land. The appellants challenged the validity of the aforesaid deeds executed by their predecessors in interest and filed a suit for transfer of the land in question, inter alia, on the ground that the said transactions were contrary to the provisions of Section 49 of the Tenancy Act and was, therefore, void. Taking note of the fact that the Act did not prohibit the transfer of the proprietary interest, because on such transfer the propriety becomes an occupancy tenancy of the 'sir', the Full Bench considered whether, in such a case, Section 24 of the Contract Act became applicable. While dealing with the case where the contract consisted of legal and illegal parts Mr. Justice Vivian Bose at page 343 observed as under:
'Therefore if this transaction had consisted of a single consideration for the two objects contemplated, namely, the sale of the proprietary rights (as distinguished from the occupancy rights) together with the occupancy right (which we usually somewhat inaccurately call cultivating rights in these Provinces), then the whole would have fallen to the ground under this section unless the transferee had been content to accept the proprietary rights alone for the entire consideration and forgo the occupancy rights. But since the transaction consists of two separate considerations for two severable objects we are left with a contract consisting of legal and illegal parts in which the lawful is separable from the unlawful. In such a case it is always possible to give effect to the lawful and reject the unlawful; in fact that whole transaction is prohibited by statute or unless it involves serious moral turpitude or is otherwise against public policy. See Sections 57 and 58, Contract Act. This rule was applied and in my opinion rightly, to this very class of cases in 27 NLR 113 : 22 NLR 136 . As I have said the whole transaction in this case is not prohibited by statute; on the contrary the part of it relating to the transfer of the proprietary rights is expressly allowed. Therefore under this rule since the considerations are separable that portion can, in my opinion, be enforced and it is only the surrender which is of no effect.....'
In the course of the judgment the Supreme Court also observed and it suffices to refer to the headnote at page 1954, which is as under:
'Even if it be assumed that the agreements were not severable, and they were composite agreements even then the ready leg having been performed the position in law is that the illegality of the agreements cannot affect the transfers which had already taken place. The position in law is that if pursuant to an agreement to do an illegal act a transaction in part takes place which would otherwise be valid if there was no such prior agreement, then notwithstanding the illegality of the contract the said completed transaction itself cannot be regarded as invalid.'
23. In the aforesaid case the Supreme Court has referred to the judgment of the House of Lords in the case of Tinsley v. Millingan, 1993(3) All ER 65. While making specific reference to some earlier judgments in the same paragraph at page 1968, it is stated:
'It has, however, for some years been recognised that a completely executed transfer of property or of an interest in property made in pursuance of an unlawful agreement is valid and the Court will assist the transferee in the protection of his interest provided that he does not require to found on the unlawful agreement (See Ayert v. Jenkins (1873) LR 16 Eq. 275 , Alexander v. Rayson (1935) All ER 185 Bowmakers Ltd. v. (1936)1 KB 169 Barmer Instruments Ltd. (1944)2 ALL ER 579: (1945) KB 65, Sajan Singh v. Sardara Ali (1960)1 All ER 269 :(1960) AC 167 . To the extent, at least, of his third proposition it would appear that there has been some modification over the years of Lord Eldon LC's principles.'
In the course of the judgment the House of Lords has enunciated the following principles from various authorities at para 54.
'From these authorities the following proposition emerges :
(1) Property in chattels and land can pass under a contract which is illegal and therefore would have been unenforceable as a contract;
(2) A plaintiff can at law enforce property rights so acquired provided that he does not need to rely on the illegal contract for any purpose other than providing the basis of his claim to a property right.
(3) It is irrelevant that the illegality of the underlying agreement was either pleaded or emerged in evidence: if the plaintiff has acquired legal title under the illegal contract that is enough'.
24. Now in the present case, it is necessary to consider as to what has been done by the Custodian as a matter of fact. The entire contract relating to transfer of securities has not been cancelled. Transfers have taken place under the contract, securities have changed hands, and that a portion of the contract has not been touched. What has been set aside or cancelled is only the payment which is part of the consideration of the contract not by a party who is a party to the contract, but who is either a broker or not even a broker in some cases and is a third party. The payment of part of consideration by him is held to be fraudulent and is cancelled. So in effect the contract has been held to be fraudulent in part and that part consists the payment made by HPD to the petitioners and is cancelled. Such a course of action is clearly impermissible under the provisions of Section 4 of the Act, Power is conferred on the Custodian to cancel a contract. If a contract is to be cancelled it has to be cancelled in its entirety reverting the position back to the situation as if the contract was not entered into. There is no provision for cancellation of a part of contract relating to payment of part consideration of the Contract. On this ground also the orders of the Custodian are clearly unsustainable in law.
25. Argument was also advanced on the basis of presumption arising under the Negotiable Instruments Act as well the payments are made by HPD to various petitioners by cheque. In my view it is in fact not necessary to go into the argument regarding presumption raised by Section 118 of the Negotiable Instruments Act. Even on facts when a payment is admittedly made then the presumption is that it is made for some reason or consideration, unless it is claimed to be a gratuitous payment. The total amount that is involved in all these petitions and is paid by the single individual (HPD) to different petitioners on calculation comes to Rs. 10,37,39,04,036/-. It is probable that a shrewd broker like HPD who is notified for having siphoned huge funds from different Banks and financial institutions whose properties stand attached, would make payment of crores of rupees to different parties, Banks and financial institutions for no reason, for no consideration, for no gain. It is not possible to digest the argument that the payment has been made without consideration. I have already referred to Jankiraman Committee report and the 15% arrangement between HPD and Stan chart and it is obvious that such payments of differences were being made by him because in return he was to gain huge advantage and if he had paid Rs. 1037 and odd crores, then it is obvious that in turn he must have earned huge profits atleast 20 times. If the end use of the money that has been siphoned out from the system has to be found out what is required is to find use of the money so earned by the brokers by illegally siphoning of funds from Banks and financial institutions and not by calling upon Banks to pay him the difference amount which he paid to the Banks 10 years ago in different transactions. If one refers to the part of the report of the JPC indicated above and the statement of objects and reasons of the Special Courts Act, it will be clear that the Act was enacted for the reason as set out in the objects and reasons, which are as under:
(1) 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.
(3) The Bill seeks to replace the said Ordinance.'
Thus it has been accepted by the Legislature that large scale irregularities, illegalities and malpractices in Government and other securities indulged in by some brokers were in collusion with the employees of various Banks and financial institutions and this led to the diversion of funds from the Banks and financial institutions to individual accounts of the brokers. But what the Custodian has said in all these orders is that the Banks and financial institutions have diverted money from the account of broker and has called upon them to pay the same to the broker. The intention of the Custodian is definitely bonafide. The action is however misconceived. The statement of objects and reasons clearly indicates that money was diverted from the Banking system to the individual accounts of brokers like HPD and in order to recover atleast apart thereof these persons were notified resulting in attachment of all their assets in order to make the same available for distribution to the creditors. It is therefore not possible even to appreciate the contention of the custodian when in the order he states that the monies have been diverted by the Banks from the accounts of the brokers.
26. The learned Counsel appearing for the petitioners in various petitions severely criticised the use of the terminology 'statutory presumption' in the Custodian's orders. Mr. Atul Setalvad contended in reply that these are administrative officers and their orders should not be scrutinised as if they are passed by a judicial body. There can be no dispute about the proposition in reply. That however is not a complete reply. When the custodian claims that he is entitled to raise a statutory presumption, he obviously means to say that the burden to disprove fraud is on the other side. He can then ignore his duty of even alleging fraud which law requires of him. There being no provision for any such presumption in law the custodian has misled himself by use of such terminology in the impugned orders.
27. The Standard Chartered Bank (SCB) has claimed that there was arrangement between the Bank and HPD whereby Bank was assured 15% return of the sales and purchases through HPD. This contention was raised even in earlier litigation between Canara Bank and SCB. The Supreme Court has referred to this arrangement in the judgment in Canara Bank v. Standard Chartered Bank, : AIR2002SC132 . In para 8 Supreme Court observed--
'8. In our opinion, the decision of the Special Court calls for no interference. The plea which had been taken in the written statement essentially was that there was a squaring up of the transaction. This did not succeed as there was lack of evidence. The other plea of repayment was also failed. We see no infirmity with the decision of the Special Court on this account with regard to the contention that the transaction was opposed to public policy. The Special Court was right in observing that no such plea has been raised in the written statement and we agree with the Special Court that permitting such a plea to be raised would be contrary to the plea already taken in the written statement namely, of squaring up or of repayment. The order relating to the admissibility of the cheque wherein the Special Court had come to the conclusion that such a plea could not be raised was passed on 2nd/3rd March, 1995. The appellant herein chose not to file any application for amendment of the written statement before the Special Court. It proceeded with the case and in our opinion it is now too late to allow such an amendment in this Court. We are also not satisfied that there is any merit in the contention that the transaction in question would be void on the ground of public policy. The allegation in this connection which the appellant wanted to prove was that there was an understanding between the respondent and Hiten Dalai to the effect that Hiten Dalai will ensure a return of 15 per cent in turn and purchase and sale of securities would take place under the instructions of Hiten Dalai so as to ensure that the Bank got this return. It was sought to be contended that such a transaction was contrary to the creditors of the Reserve Bank and were opposed to public policy. We agree with the observations of the Special Court which had been referred to hereinabove in connection with this connection (sic) and furthermore, as held by this Court in B.O.I. Finance Ltd. v. Custodian, : [1997]3SCR51 . The instructions which were issued by the Reserve Bank of India were meant to be complied with only by the Banking Companies and could not be regarded as binding on the other parties. There was no evidence raised or sought to be raised in the present case which could possibly have led the Court to the conclusion that the transaction was opposed to public policy.'
28, In the result I find that the show cause notices issued by the Custodian fail miserably even to allege fraud. There was absolutely no material before the Custodian to come to the conclusion that fraud has been practised. The Custodian has not even contended that this fraud was practised by the petitioners on the notified party nor is it contended by him that the notified party (HPD) and the petitioners jointly practised fraud and if so who was the victim of this fraud. The most important question as to who was the victim of the fraud remains unanswered. The reports of various committees and the statement of objects and reasons of the Act clearly show that the fraud was practised on the entire Banking system by the brokers and the brokers siphoned off money from the Banks and financial institutions and ultimately that money was used in the stock market for speculation. To accept the contention of the Custodian that the fraud was practised by the petitioners which include various Banks and financial institutions and monies were diverted from the accounts of brokers by the Banks and financial institutions is not only contrary to the objects and reasons of the Act but on the face of it unacceptable. In any case no material is placed on record to support the contention. To hold that there was fraud practised by the petitioners merely because auditors have found that the payment of difference was not in normal course amounts to read too much in the reports of the auditors and even the auditors may not have meant by using the word 'not in normal course' that it amounts to fraud. The statement in the report of the auditors to that effect is to say the least vague and does not lead to any conclusion much less to the conclusion of 'fraud' or 'defeating the provisions or purpose of the Act'. The Custodian having wrongly held that he was entitled to raise statutory presumption has not made any attempt to find out material in support of the allegations contained in the show-cause notices issued to the petitioners. The arrangement of 15% between SCB and HPD has been held by the Supreme Court not to be against the public policy and also not violative of circulars issued by the Reserve Bank of India. The Custodian is not clear as to what contract he is cancelling and whether it is an independent contract or part of the entire contract of sale or purchase of security. In any case the entire contract has been performed and securities stand transferred. Section 4 of the Act does not confer power on the Custodian to cancel a completed transfer and is confined to cancellation of contracts or agreements. In view of the aforesaid facts and circumstances and the detailed discussion contained in the above paragraphs it is not necessary to go into the facts of each case separately as the petitions are liable to be allowed in view of the findings on the issuance of law. In view of the discussion in the above paragraphs, the concerned issues are answered accordingly and following order is passed.
29. All the petitions succeed and are allowed. All the impugned orders passed by the Custodian in the above petitions are quashed and set aside. No order as to costs.