Bombay High Court
Bank Of Baroda vs Fairgrowth Financial Services Ltd. And ... on 22 July, 1993
Equivalent citations: [1994]80COMPCAS789(BOM)
Author: S.N. Variava
Bench: S.N. Variava
ORDER S.N. Variava, J.
1. Before this court there are a number of petitions/ applications by various parties, mainly financial institutions, claiming that they have rights in properties which today stand attached by virtue of the provisions of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 (hereinafter for brevity's sake referred to as "the said Act"). These claims are, broadly speaking, by way of banker's lien, set off and the right to adjust accounts and/or as pledges and/or under documents giving rights of assignment of debts and/or under documents of hypothecation. All these parties claim that by virtue of the special right/ interest created in their favour either under some document or under law, the properties in question have been wrongly attached. They claim that they are entitled to appropriate those properties towards their claims.
2. In all these matters, the Custodian has contended that irrespective of any special rights, the properties only can be distributed in the manner laid down under Section 11(2) of the said Act. As this contention affected a number of parties, the court had put up a notice stating that any party interested in making any submission on this question and any petitioner or applicant affected by this question would be heard on July 21, 1933. Pursuant to this notice, all petitions/applications wherein this question was involved were listed on my board yesterday. All parties have been heard on this question. On behalf of the Custodian, Mr. A. M. Setalvad has argued. On behalf of various parties, Mr. J. I. Mehta, Mr. R. A. Kapadia, Mr. S. Doctor and Mr. Virag V. Tulzapurkar have argued. For the sake of convenience, this order is passed in the first matter. However, the ratio of this order will apply to all applications/petitions wherein such claims are made.
3. Before the submissions of the parties are considered, it might be more convenient to set out herein the applicable provisions of the Act. The preamble to the Act reads as follows :
"An Act to provide for the establishment of a Special Court for the trial of offences relating to transactions in securities and for matters connected therewith or incidental thereto."
4. Sections 2(a) and (d), 3, 4(1), 7, 8, 9(1) and (4), 11(1) and (2) and 13 read as follows :
"2. In this Act, unless the context otherwise requires,--
(a) 'Code' means the Code of Criminal Procedure, 1973 . . .
(d) 'Special Court' means the Special Court established under Sub-section (1) of Section 5."
"3.(1) The Central Government may appoint one or more Custodians as it may deem fit for the purposes of this Act.
(2) The Custodian may, on being satisfied on information received that any person has been involved in any offence relating to transactions in securities after April 1, 1991, and on or before June 6, 1992, notify the name of such person in the Official Gazette.
(3) Notwithstanding anything contained in the Code and any other law for the time being in force, on and from the date of notification under Sub-section (2), any property, movable or immovable, or both, belonging to any person notified under that sub-section shall stand attached simultaneously with the issue of the notification.
(4) The property attached under Sub-section (3) shall be dealt with by the Custodian in such manner as the Special Court may direct.
(5) The Custodian may take assistance of any person while exercising his powers or for discharging his duties under this section and Section 4."
"4.(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 April 1, 1991, and on or before June 6, 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."
"7. Notwithstanding anything contained in any other law, any prosecution in respect of any offence referred to in Sub-section (2) of Section 3 shall be instituted only in the Special Court and any prosecution in respect of such offence pending in any court shall stand transferred to the Special Court."
"8. The Special Court shall have jurisdiction to try any person concerned in the offence referred to in Sub-section (2) of Section 3 either as a principal, conspirator or abettor and all other offences and accused persons as can be jointly tried therewith at one trial in accordance with the Code."
"9. (1) The Special Court shall, in the trial of such cases, follow the procedure prescribed by the Code for the trial of warrant cases before a Magistrate . . .
(4) While dealing with any other matter brought before it, the Special Court may adopt such procedure as it may deem fit consistent with the principles of natural justice."
11.(1) Notwithstanding anything contained in the Code and any other law for the time being in force, the Special Court may make such order as it may deem fit directing the Custodian for the disposal of the property under attachment (2) The following liabilities shall be paid or discharged in full, as far as may be, in the order as under :
(a) all revenues, taxes, cesses and rates due from the persons notified by the Custodian under Sub-section (2) of Section 3 to the Central Government or any State Government or any local authority ;
(b) all amounts due from the person so notified by the Custodian to any bank or financial institution or mutual fund ;
(c) any other liability as may be specified by the Special Court from time to time."
"13. The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force dr in any instrument having effect by virtue of any law, other than this Act, or in any decree or order of any court, tribunal or other authority."
5. Mr. Setalvad submitted that under Section 3 of the said Act, any property movable or immovable, or both, belonging to any person notified stands attached simultaneously with the issue of the notification. He submitted that under Section 3(4), on such attachment, the property which is attached can be dealt with by the custodian in the manner as the Special Court may direct. He submitted that under Sections 11(1) and (2) notwithstanding anything contained in the Code (meaning thereby the Code of Criminal Procedure) and any other law for the time being in force, the Special Court has power to make such orders as it deems fit for disposal of property under attachment. He submitted that under Sub-section (2) of Section 11, the distribution of the property "shall" be in the manner laid down in that sub-section. He submitted that thus the court must compul-sorily distribute the assets to meet the liabilities in the order as set out in Section 11(2). He fairly pointed out that the distribution is to be of property which is attached. He submitted that by virtue of Section 3 this necessarily was property belonging to a notified party. He pointed out that the terms "property belonging to" and "attached" have not been defined in the said Act. He submitted that considering the object of the Act and the fact that the provisions have also been made for distribution of property an attachment under the Act is not a simple attachment. He submitted that this attachment cannot be equated with the attachments under the Criminal Procedure Code or under the Civil Procedure Code. He submitted that this is because under the said Act, the attachment results in a distribution of the property in the manner set out in Section 11. He submitted that, therefore, the scope of attachment is wider than under the Criminal Procedure Code or under the Civil Procedure Code. He submitted that to give effect to the objects of the said Act and to effectively enforce its provisions, the term "property belonging to" must also be construed in the widest possible sense. He submitted that the object of the said Act was not merely to punish the offenders. He submitted that the object of the said Act was also an orderly, logical and equitable distribution of the assets. He submitted that it is on the basis of the principles of bankruptcy that the court has been empowered to distribute the property. He submitted that the bankruptcy laws, i.e., the insolvency law and the company law, also make provisions for distribution of properties to all the creditors. He submitted that, in all such laws, the aim is to equitably distribute amongst all the creditors. He submitted that wherever the Legislature has intended that any class of creditor is to stand outside the distribution, then the Legislature specifically so provides. He submitted that in both the Insolvency Acts, i.e., the Provincial Towns Insolvency Act and the Presidency Towns Insolvency Act, there are specific provisions which permit the secured creditors to stand outside the insolvency. He submitted that even in the Companies Act, there are specific provisions which enable the secured creditor to stand outside. He submitted that in the said Act even though the court is to distribute the properties of the notified party to all the creditors there is no provision by which secured creditors or persons having special interest in the property can stand outside the distribution as provided in the said Act. He submitted that the real question before the court would be : "What is property belonging to a notified party ?" He submitted that once the court comes to the conclusion that a particular property is property belonging to a notified party, then the property stands rightly attached and the distribution can only be in the manner laid down under Section 11. He submitted that all persons, even persons claiming special rights or interests in that property, would now have to stand in line and receive only in the order laid down in Section 11.
6. Mr. Setalvad relied upon the authority of the Supreme Court in the case of Muktilal Agarwala v. Trustees of the Provident Fund of Tin Plate Co. of India Ltd., . In this case, the question was whether monies standing to the credit of an insolvent in a provident fund account vested in the official receiver. The Supreme Court held that the word "property" is used in the widest possible sense and would even include property which may be belonging to or vest in another but over which the insolvent has a "disposing power which he could exercise for his own benefit".
7. Mr. Setalvad also referred to the case of Official Liquidator v. Assistant Collector, Customs Disposal Unit [1990] 68 Comp Cas 184 (Raj). In this case, the official liquidator had been appointed liquidator of the company. The official liquidator sought possession of the goods which had been imported by the company and which were lying in the docks. The customs and docks authorities had claims in respect of their duties and charges. The question was whether the customs and docks authorities could exercise their rights de hors the order of the company court. It was held that it was only the company court which could pass orders in respect of any property which belonged to the company in liquidation. It was held that even the claims of the customs and docks authorities had to be decided upon only by the, company court. This is on the footing that in spite of the powers given under the Major Port Trusts Act and the Customs Act, it is only the company court who could distribute the property of the company in liquidation.
8. Mr. Setalvad also relied upon the case of Ananta Mills Ltd. v. City Deputy Collector [1972] 42 Comp Cas 476 (Guj). In this case also the company had been wound up and the official liquidator had been appointed the liquidator of the company. In this case, it was held that under Section 456, the liquidator was bound to take into his custody and control all property, effects and actionable claims to which the company was entitled. It was held that even though there may be an attachment by an unsecured creditor, that attachment did not prevent the liquidator from taking charge of all properties of the company and that the liquidator could do so in spite of the attachment.
9. Mr. Setalvad also relied on the case of Mysore Surgical Cottons (P.) Ltd. v. Karnataka State Financial Corporation [1988] 1 Comp LJ 63, wherein the question was whether the Karnataka State Financial Corporation, by virtue of the powers vested in it under the State Financial Corporations Act, could sell off the assets of the company in liquidation. The court considered the provisions of Sections 456 and 537 of the Companies Act and held that under Section 456 of the Act, all property of the company is deemed to be in the custody of the court. It was held that the State Financial Corporation would not have a right, despite Section 29 of the State Financial Corporations Act, to take away from the custody of the court property which had vested in the court. This even though Section 29 of the State Financial Corporations Act empowered the Corporation to sell.
10. Mr. Setalvad submitted that under the said Act, all that the court has to see is whether the property is belonging to the notified party. He submitted that any property which vests in a notified party or over which a notified party has a right of disposal is property belonging to a notified party and would stand rightly attached. He submitted that once the property is rightly attached it can only be distributed in the manner set out under Section 11(2). He submitted that in cases of hypothecation, pledges, liens, set off, assignments of debts or even a right of combining accounts, the property continues to vest in the notified party. He submitted that in such cases a "special interest" is created in favour of some other person or party. He submitted that irrespective of creation of "special interest", the distribution has to be in the manner provided under Section 11(2). He clarified that he is not suggesting that on attachment, the "special interest" comes to an end. He submitted that the "special interest" would continue in the attached property. He submitted that the court whilst distributing the property under Section 11(2) will keep in mind such "special interest", if any.
11. Mr. Setalvad submitted that in cases of hypothecation, unlike as in the case of a mortgage, the ownership of the property hypothecated remains with the owner. He submitted that in such cases all that is created is a special right. He admits that that would include a right to sell the property. He submits that apart from the special rights/interest, no ownership rights in the property are created in cases of hypothecation.
12. Mr. Setalvad submitted that even in case of pledges or pawns, the position is same. He referred to Section 172 of the Contract Act wherein a "pledge" is defined as a bailment of goods as security for payment of a debt or performance of a promise. He points out that under Section 148 of the Contract Act a bailment is a delivery of goods by one person to another for some purpose upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. He submitted that in cases of bailments and pledges, the pledgee's right is to file a suit for recovery of the amount and to retain the goods, He submitted that at the highest the pledgor may sell the goods after giving a reasonable notice.
13. In support of this, he relied upon the authority in the case of Dwarika v. Bagawati, AIR 1939 Rang 413, wherein it is laid down that a pledge confers a special interest in the property pledged, i.e., a right to sell the property if the loan be not repaid. It is held that if the pledgee sells, he does so by virtue and to the extent of the pledger's ownership and not with a new title of his own. It is held that the pledgee holds possession for the purpose of securing to himself the advance which he has made. It is held that the pledgee has no right of foreclosure since he never had the absolute ownership at law. It is held that unlike a case of mortgage the right to property is not transferred to the creditor. It is held that in the case of a pledge, the pledgee has no property in the goods pawned but merely a right to sell.
14. Mr. Setalvad also relied upon the authority of the Supreme Court in the case of Lallan Prasad v. Rahmat Ali, . In this case, the Supreme Court has held that the two ingredients of a pledge are: (1) that the property pledged should be actually and constructively delivered to the pawnee ; and (2) that the pawnee has only a special property in the pledge but the general property therein remains in the pawnor. The Supreme Court held that the owner has an absolute right to redeem the property pledged upon tender of the amount and that the only right which the pledgee has is to sell the property for the purpose of securing his debt. The Supreme Court held that if the pawnee sells, he must appropriate the proceeds of the sale towards the pawnor's debt, for, the sale proceeds are the pawnor's monies to be so applied and the pawnee must pay to the pawnor any surplus after satisfying the debt.
15. Mr. Setalvad also relied upon the authority of the Supreme Court in the case of Bank of Bihar v. State of Bihar . In this case also, the Supreme Court has held that in the case of a pawn, the pawnee has only a special interest in the thing pledged, while the general property therein continues in the owner. The Supreme Court held that the special property or interest exists so that the pawnee can compel payment of the debt or can sell the goods.
16. Mr. Setalvad submitted that a lien may be of various types. Referring to Halsbury's Laws of England, 4th Edition, Volume 28, para 501, he submitted that liens could be legal, non-possessory, equitable, general, particular, statutory, contractual, judicial or subrogatory. He submitted that liens only impose a right in one man to retain that which is rightfully and continuously in his possession but which belongs to another. He submits that the right to so retain continues till the claim of the person in possession is satisfied. He submits that in the case of a lien, there can be no doubt that the property would be property belonging to a notified party and that all that has vested in the person in possession is a right to retain it.
17. Mr. Setalvad submitted that under Section 130 of the Transfer of Property Act, there can be an assignment of debts. He fairly conceded that if an assignment is of an existing debt and such an assignment is before the date of the notification, then in such cases the ownership would be transferred to the assignee. He conceded that in such cases there could be no attachment. This because the property was no longer the property of the notified party. He submitted that this would not be the position where the assignment is of future debts. He submitted that if before the debt came into existence, an attachment intervenes, then after the attach-ment, there could be no assignment. He submitted that the attachment would operate to prevent any assignment in future. He submitted that in such cases even though there may be an earlier agreement to assign in future, such an agreement would not come into effect and the attachment would preclude any rights under those agreements being enforced de hors the provisions of the said Act.
18. Mr. Setalvad drew the attention of the court to the authorities of the Supreme Court in the cases of Bharat Nidhi Ltd. v. Takhatmal and Seth Loon Karan Sethiya v. Ivan E. John . In these authorities the Supreme Court was considering the equitable rights created by reason of assignments. In both the cases, the Supreme Court held that these equitable rights prevailed, in one case because of the provisions of law and in the other by reason of the express provisions of the contract entered into between the parties. Mr. Setalvad submitted that the Supreme Court held in favour of the assignment because of the express provision of the contract and/or law. He submitted that in the absence of an express provision in the contract or law, assignment of future debts would not prevail over an attachment. He submitted that in both these cases the question of statutory attachment and distribution of the property by the court under the provisions of a statute did not arise. He submitted that statutory attachments and provisions of a statute providing for distribution of property would prevail over assignments of future debts.
19. Mr. Setalvad submitted that some of the petitioners/applicants are bankers. He submitted that there can be no dispute that in law bankers had a right of lien, set off or adjustment of accounts. He submitted that these rights are well recognised legal rights. He submitted that these rights of banker's lien, set off or adjustment of accounts must be and are subject to any statutory provisions which may come into existence. He submitted that in this case, the statute has specifically provided for distribution of property in a particular manner. He submitted that in these circumstances, even though the bankers may have a general right of lien or set off or right of adjustment of accounts, this general right would now not prevail so as to enable the bankers to take away the concerned property except in the manner as laid down under Section 11(2) of the said Act.
20. Mr. Setalvad fairly stated that he was not submitting that all these above mentioned rights and/or special interests could no longer be enforced. He submitted that there was a distinction between destruction or repudiation of such rights and a manner provided for distribution of property in an orderly fashion. He submitted that the court must and would keep these rights in mind at the time that it distributes the property under Section 11. He submitted that to distribute in any other manner and/or to allow all persons claiming any special rights/interest to take away the property belonging to a notified party would render nugatory both Sections 11 and 13. He submitted that if the financial institutions/ banks/individuals were to be so allowed, nothing would be available for distribution under Section 11(2). He submitted that the said Act was enacted because a very large amount of public money was siphoned off into private pockets. He submitted that all these monies had come from financial institutions and/or banks. He submitted that the Legislature was alive to the possibility that private rights/interests would have been created in these amounts or in properties/assets purchased/acquired from these monies. He submitted that at the time the said Act was enacted the Legislature was, therefore, aware that the majority of claimants would be financial institutions and banks. He submitted that the Legislature was aware that their claims would be by way of special rights/interests. He submitted that in cases of a transfer of ownership prior to the attachment, the Legislature has by Section 4 enabled the Custodian to set aside the contract or agreement. He submitted that where the notified party still had a right of disposal over the property the Legislature has now provided a rational, logical and orderly distribution of property. He submitted that it is with this in mind that the Legislature has provided Section 13. He submitted that the Legislature has provided in Section 13 that the provisions of this Act are to prevail notwithstanding anything which is inconsistent with any other law or in any instrument having effect by virtue of any other law other than the said Act or any decree or order of any court, tribunal or any authority. He submitted that the words "any instrument having effect by virtue of any law" would include any rights under hypothecations, pledges, adjustment of future debts, liens, set off, etc., by virtue of contracts. He submitted that the words "anything contained in any law for the time being in force" would include claims under bankers Hen, set off, adjustment of accounts, etc., under the general law. He submits that the exercise of such rights would amount to distribution in a manner other than that as laid down under Section 11(2). He submitted that even in the case of decree or order obtained from any court, tribunal or authority, the distribution must still be in the manner set out under Section 11(2). He submitted that Section 11(1) itself provides that notwithstanding anything contained in the Criminal Procedure Code or any other law for the time being in force, this court can give directions for disposal of the property. He submitted that Sub-clause (2) of Section 11 does not make a distinction between claims of secured creditors and unsecured creditors. He submitted that it provides .for distribution to all creditors. He submitted that if the Legislature intended to exclude secured creditors and/or creditors having claims by reason of special rights/interests in property, then the Legislature would have so provided. He submitted that the fact that the Legislature has not so provided clearly indicates that the Legislature wanted to distribute to all creditors including the secured creditors in the manner set out under Section 11(2).
21. On the other hand, Mr. Mehta, Mr. Kapadia, Mr. Doctor and Mr. Tulza-purkar have submitted that under Section 3, the property which is attached is only property belonging to the notified party. They have submitted that the term "attached" is not defined in the said Act. They submitted that the said Act does not give any special or other meaning to the term "attached" and, therefore, the term "attached" must be understood as it is commonly understood in the Criminal Procedure Code and the Civil Procedure Code. They have submitted that an attachment creates no special right in favour of any party. They submitted that an attachment does not create even a right of lien or a charge and that an attachment merely prevents further alienation of the property after the date of the attachment. In support of this submission, reliance is placed on the case of Rikhabchand Mohanlal Surana v. Sholapur Spg. and Wvg. Co, Ltd. .
22. It is also submitted that an attachment does not by itself affect rights created prior to the date of the attachment. It is submitted that any right, including special interests or rights created in the property by reason of hypothecation, pledges, or even a right of lien or set off would prevail over the attachment provided they are prior rights. In support of this, reliance is placed on the case of Vannarahkal Kallalathil Sreedharan v. Chandramaath Balakrishnan [1990] 1 JT 390. In this case, it was held that an agreement to sell created an obligation attached to the ownership of the property and since an attaching creditor is entitled to attach only the title and interest of the judgment-debtor, the attachment cannot be free from the obligation incurred under the contract of sale. It was held that if a subsequent conveyance was in pursuance of an agreement to sell which was entered into before attachment, the contractual obligation must be allowed to prevail over the rights of the attaching creditor. In the above case, the Supreme Court approved the authority of this court in the case of Rango Ramchandra Kulkarni v. Gurlingappa Chinnappa Muthal, AIR 1941 Bom 1198.
23. It is submitted that under the said Act, existing rights have not been done away with. -It is submitted that all contracts and all rights including special interests subsist and can be legally enforced. It is submitted that this is clear from Section 4 of the said Act. It is submitted that Section 4 specifically provides that contracts would continue to subsist until set aside by the Custodian. It is submitted that prior contractual rights and interest in property would prevail over the attachment. It is submitted that the attachment would not in any way affect those rights. It is submitted that the secured creditors and persons having special interest can enforce their rights irrespective of attachment. It is submitted that the right to file suits and recover claims in the ordinary civil courts has not been barred. It is submitted that "property belonging to a notified party" can only be property in which no contractual rights or special interest or any right in favour of third party has been created prior to the attachment. It is submitted that Section 11(1) gives to the Special Court the power to give directions for disposal of property under attachment. It is submitted that Section 11(1) deals with the cases where there are prior contractual rights and/or rights by way of special interest in favour of the third parties. It is submitted that in all such cases, the court must give directions to the Custodian to release the property in favour of such third parties. It is submitted that Section 11(2) would only come into play after such properties are excluded. It is submitted that under Section 11(2) the only property which would be available for distribution is that in which there are no prior contractual rights or special rights/interest of third parties. It is submitted that it is only property which is left over after satisfying all prior contractual rights, claims of secured creditors and other special rights/interest (contractual or legal) which can be distributed under Section 11(2). It is submitted that Section 11(2) provides for distribution only amongst unsecured creditors. It is submitted that Section 13 has no effect and does not come into play at all. It is submitted that it is settled law that the Legislature cannot take away vested rights except by express provisions to that effect. It is submitted that the presumption in law must always be that a legislation does not affect vested rights. In support of this submission, reliance is placed on the case of Budhan Singh v. Babi Bux, . It is submitted that in the said Act there is no section providing that any vested rights have been abrogated or done away with. It is submitted that in the absence of any such express provision, it would have to be presumed that prior vested rights continue to subsist and can be exercised over the property of the notified party irrespective of attachment.
24. Apart from these submissions, Mr. Doctor and Mr. Tulzapurkar also argued that if the interpretation of the Custodian is to be accepted, then Section 11 would be subject to attack under Articles 14 and 19 of the Constitution of India. This on the ground that on such an interpretation, persons standing in the same class would be differentiated. It is submitted that if such an interpretation is put then a secured creditor would be deprived of the benefit of his security, particularly if the secured creditor is an individual. It is submitted that on that interpretation, the secured creditor's claim would become subject to Government dues, taxes, rates, etc., and in cases of private parties even to the claims of unsecured financial institutions. Reliance is placed on the authority of the Supreme Court in the case of C. B. Gautam v. Union of India . In this case, the Supreme Court was considering the constitutional validity of Chapter XXC of the Income-tax Act, 1961, wherein power has been given to the appropriate authority for pre-emptive purchase of property which has been agreed to be sold by the assessee for a consideration significantly lower than the fair market value. It was also provided that such a compulsory purchase would be free from all encumbrances. The Supreme Court held that this provision results in gross injustice to the encumbrance holders and the lessees. The Supreme Court held that it amounts to their being deprived of their valuable rights without their being in any way involved in the attempt at tax evasion. The Supreme Court, therefore, struck down the provisions to the extent that it allowed acquisition free from all encumbrances. This on the ground that it was arbitrary and without any rational nexus with the object of the legislation in question and, therefore, violative of Article 14.
25. Mr. Doctor also submitted that in cases of money, property passes with possession. He submitted that unlike chattel or other goods, all monies lying with banks belong to the concerned banks. He submitted that all that a customer has is a right to recover a debt. He submitted that so far as the banks are concerned, the money already belongs to them. He submitted that there cannot be any attachment over monies in the hands of bankers. He submitted that even though account holders or depositors may have a credit in their favour, it still would not be property belonging to the notified party. In support of this submission and of the banker's right of set off, Mr. Doctor relied upon the case of National Westminster Bank Ltd. v. Halesowen Presswork and Associates Ltd. [1972] 1 All ER 641. Mr. Doctor particularly relied on the observations of Buckley L.J. as extracted at page 646 of this judgment. They are to the following effect:
"When that cheque was cleared, as it was on June 14, 1968, it ceased to be a negotiable instrument and also ceased to be in the possession of the bank. Any lien of the bank on the cheque must thereupon have come to an end . . . The money or credit which the bank obtained as a result of clearing the cheque became the property of the bank, not the property of the (company). No man can have a lien on his own property and consequently no lien can have arisen affecting that money or that credit."
26. Mr. Doctor submitted that this position is accepted by the House of Lords. Mr. Doctor also relied upon the case of Jeffryes v. Agra and Masaterman's Bank [1866] 2 Equ Cas 674 in support of his submission that banks have a right of set off against monies actually due.
27. Mr. Doctor also argued that the interpretation which must be given must be one which is just, reasonable and sensible. He argued that the interpretation must be one which is not in favour of a statute taking away any private right to property without compensation. He submitted that the interpretation must be one which would not be vulnerable to any attack. In support of this submission, Mr. Doctor relied upon the cases of Nasiruddin v. State Transport Appellate Tribunal ;
Hughes v. Doncaster Metropolitan Borough Council [1991] 1 All ER 295 (HL) and Anirudha Ramakrishna Karlehar v. Jankibai R. Bedekar, .
28. These are the rival submissions before this court. In all honesty, it must be stated that the said Act appears to be very loosely drafted. However, this is due to the pressing circumstances and the urgency then prevailing. In my view, in spite of this, the intentions and objects sought to be achieved have been brought out. Undoubtedly, there is great force in the submission that private rights cannot be abrogated or curtailed without compensation. However, Mr. Setalvad has not even contended that private rights have been taken away. Mr. Setalvad has admitted that all private rights are preserved. Mr. Setalvad's submission has been that the said Act provides for distribution in a particular manner only. There can also be no dispute with the proposition that the interpretation of a statute must be one which must be just, reasonable and sensible. The question is whether the interpretation sought to be given by the Custodian is unreasonable, unjust and/or would in any way be violative of Article 14 or 19. It is also a well-settled principle of interpretation that the interpretation must be one which would further the object for which the Act was enacted. One has, therefore, to see the circumstances under which this Act came into existence and the objects which are sought to be achieved. The Act was necessitated by reason of the unprecedented situation wherein very large amounts of public monies had been siphoned off into private pockets. Most of these monies came from financial institutions and/or banks. Sad as it may seem, the reality was also that legal proceedings took unduly long time. Thus, the guilty would under normal circumstances have operated with impunity for years, before the law caught up with them, if at all. Further, even recovery proceedings would have been bogged down by legal delays. The possibility also existed of all the assets being secreted and/or transferred. This in order to completely defeat claims and thus make recovery impossible. Apart from that with the apparent involvement of so many financial institutions and banks, most of them nationalised bodies, the possibility also existed of these bodies being embroiled in unnecessary and protracted litigations against each other. This because monies taken out of one bank or financial institution would have been placed first into an account of the notified party with another bank or utilised to pay off debts of other banks or financial institutions. Also properties and assets purchased out of monies taken out of one bank/financial institution may have been pledged or hypothecated with another. The financial institutions or banks were most likely to have documents in their favour or make claims on the basis of banker's rights of lien, set off or adjustment. In my view, by this Act the Legislature, therefore, sought to provide : (1) for a speedy trial of offences ; (2) immediate attachment and thus freezing of all assets of parties suspected to be involved and thus preventing any further transfers or alienations ; (3) a reasonable, rational and equitable distribution of the property by this court as it would have the total picture. This last would ensure a much speedier return of monies than under the present legal system.
29. That these were the objectives is clear from the provisions of the said Act. The first object is clear on a plain reading of the Act. The second object is achieved by the provisions regarding a person being "notified" on prima facie satisfaction by the custodian and an automatic statutory attachment of all properties belonging to such notified party. That there has to be distribution is clear from Section 11. Whilst these were the objects, the Legislature has also kept in mind the fact that there may be contractual rights in favour of third parties, financial institutions and/o'r banks. Undoubtedly these rights were not to be affected. This is clear from Section 4 which gives the custodian the power to set aside contracts under certain conditions. Also as stated earlier it was clear that most of the money which was siphoned off was from banks and financial institutions. As is well-known, the bodies normally have securities in their favour. In the case of banks, in law, there would also be the right of lien, set off and/or adjustment. It cannot be presumed that the Legislature was not aware of this. By Section 11(2) of the said Act, the Legislature has provided for payment of liabilities towards tax and Government dues and of financial institutions and banks. A plain reading of Section 11(2) shows that it provides for payment to all creditors. This would include secured creditors and persons having special interests. This is in keeping with bankruptcy laws under the Insolvency Acts and the Companies Act. In these Acts also the distribution is to all creditors. When, therefore, there is a provision for distribution to all creditors, if the Legislature wishes to exclude secured creditors, the Legislature specifically so provides. In this case also if the Legislature had intended to keep secured creditors and persons having special interests out of the purview of Section 11, the Legislature would have said so. If the distribution was to be only among the unsecured creditors as suggested by Mr. Mehta. Mr. Kapadia, Mr. Doctor and Mr. Tulzapurkar, then the simplest thing would have been to add the words "of unsecured creditors" between the words "the following liabilities" and "shall be paid or discharged in full, as far as may be, in the order as under : "in Section 11(2). To accept this argument would require incorporating into Section 11(2) words which the Legislature purposely omitted to incorporate.
30. Further, an interpretation which would render a section or part thereof nugatory must always be avoided. Section 13 of the said Act provides that the provisions of this Act shall have effect notwithstanding anything inconsistent therewith in any other law or in any instrument having effect by virtue of any law or in any decree or order of any court, tribunal or authority. The provision regarding distribution would be the only provision against the absolute claims and rights under prior contracts. This only if the interpretation of the Custodian is accepted. If Mr. Mehta's, Mr. Kapadia's, Mr, Doctor's and Mr. Tulzapurkar's interpretations are to be accepted, then there is no provision in this Act which would be inconsistent with any contract. This interpretation would render ineffective and virtually nugatory the words "inconsistent therewith contained. . . or in any instrument having effect by virtue of any law". Further, secured creditors and persons having special interest may get decrees or orders of courts in their favour. Section 13 provides that provisions of this Act prevail even over any decree and order of any court, tribunal or authority. This would include even decrees and orders obtained by secured creditors or persons having a special interest in property. If secured creditors and persons having 'special interests were meant to stand outside, then sec-tion' 13 would have had to provide that decrees and orders obtained by such persons were to prevail over the provisions of this Act. No such provision has been made. Therefore, Section 13 is very indicative of the intention of the Legislature. It is incorporated for this purpose and is fully applicable.
31. I am also unable to accept the submission that such an interpretation would have the effect of depriving secured creditors and/or persons with special interest of their rights. None of the rights under contracts or under law are abrogated or done away with. All that Section 11(2) provides for is an equitable and rational distribution of what was public money in the first instance. It also seeks to cut out legal delays and unnecessary litigations between nationalised bodies. Thus, for example, if there are rival claims between two financial institutions and/or banks over the same property, then the right of a financial institution having a security or special interest would necessarily prevail over the claim of another financial institution/bank. Thus, on this interpretation, no right is abrogated or done away with. However, it must be admitted that to the extent that the debts/liabilities must be paid in the order set out in Section 11(2) certain anomalies do arise. This only to the extent that a private individual, even one having security or a special interest, will be paid after all Government dues, financial institutions, etc., are paid. To that extent, there is a risk of a private person losing out. This, however, is the only instance. In the cases of financial institutions and/or banks the only precedence over them are dues of taxation and other revenue dues. Obviously, the Legislature contemplated, and as events have now shown, by and large the Government dues towards taxes, rates, cess, etc., would not deflate the assets. The Legislature has provided for payment of taxes, cesses, etc., on a priority because these are recurring liabilities. If these are not paid during the period that it takes to distribute the assets, then penalties may be incurred or the statutory body would get a right of recovery in a summary manner. This would create unnecessary complications. Whilst paying these dues the court could and would keep in mind the claims of parties over specific properties or assets, so that the statutory dues would, as far as possible, be paid out of unencumbered property in the first instance. So far as private persons are concerned, there appears to be a rationale as to why they are put last. As is known, almost all the monies were siphoned off into private pockets from financial institutions and/or banks. It has then been diverted into shares and stocks, various private companies, partnerships and their businesses, or given as loans, etc. Thus, the notified party has in most cases purchased the property or asset out of public money. The money was not his property. It belonged to the financial institution/bank from whose pocket it came. The object is to collect public money and return it to the financial institutions and/ or banks from where it came in the first instance. This is clear because what is to be distributed is "property belonging to a notified party". This court has under Section 4(2) the power to see whether a person is correctly notified. It is only after the court is so satisfied that the distribution would arise. Thus, even when private rights/special interests are created, it is out of public monies or assets acquired out of public monies. As stated above in most cases, the notified party would have had no right to the monies siphoned out from financial institutions/banks. Any asset bought by him out of these monies would be, strictly speaking, held by him in trust for the financial institutions/banks. Thus, private parties entering into contracts with a notified party would get only such rights as the notified party had. They cannot get a better title, except may be in cases of negotiable instruments and/or shares. If the notified party had no right, the third party will get none. It is for this reason that in Section 11(2)(c) the words used are "any other liability as may be specified by the special court from time to time." The object of putting private individuals last is obviously with the objective that public money must be used to first meet liabilities like tax and revenue, etc., and then be returned to financial institutions and banks. This distribution ensures that dues of the financial institutions and banks, from whose coffers the money came in the first instance, will be met in an orderly fashion, without these bodies litigating for years with each other. It may only be mentioned that, by now a number of claims have been received by the court claiming security or special interest. Out of the large number of such claims only two or three are by private individuals. Thus, factually also the anticipation of the Legislature has been proved correct. Also this court dealing with distribution of properties of the notified parties would have a complete picture before it. It is in a position to ascertain whether the notified party has used monies of banks and financial institutions and how and where it is so used. It is correct that the jurisdiction of normal civil courts is not done away with. But an additional forum is provided for enforcement of rights and claims, by asking for distribution. However, it is only if the entire distribution is by this court that this court can have any effective control. If by way of enforcement of special rights/interests properties are to be excluded or parties are permitted to execute decrees and orders de hors this court, then in effect nothing would be left for this court to distribute. It is for this reason that the Legislature has provided in Section 13 that the provisions of this Act prevail even over any decree or order of any court or tribunal. Thus, even a person or body having a decree or order in their favour must approach this court for distribution. The distribution can only be as laid down in Section 13. In my view, the classification is reasonable, rational, equitable and logical. They have been incorporated to meet the objective and have a clear nexus with the objective. In my view, the section provides for the distribution of the property in an orderly fashion. In my view, such an interpretation is not subject to any attack either under Article 14 or Article 19.
32. In this behalf what happened in the court must be mentioned. Mr. Tulzapurkar very vehemently submitted that such an interpretation would render the section susceptible to attack under Article 14. This because according to him it gave precedence to payment of tax, revenue dues and to financial institutions/banks, etc. The court put it to counsel that even according to him, Section 11(2) applied to unsecured creditors. The court asked Mr. Tulzapurkar whether, on a plain reading of the section, in cases of unsecured creditors, taxes, revenue dues and financial institutions/banks got precedence or not. If this could be there for unsecured creditors, why could the same not apply to all creditors. Counsel obviously had no answer. All he could say was that he was not concerned with a hypothetical case. This is the provision of the Act even on counsel's interpretation. Counsel may choose not to answer because it does not suit his purpose. The court cannot ignore what the Act provides. There is no doubt that certain priorities have been created. The question only is whether the priorities are unreasonable, unjust, irrational and/or inequitable. In my view, they are neither unreasonable nor unjust nor irrational nor inequitable. In my view, there is a reasonable classification meant for meeting the object, viz., recovery of public monies and for return of the same to the bodies from whose pockets it went out in the first instance in a speedy manner.
33. The submission of Mr. Doctor that in cases of bankers, the right of bankers would prevail because it is already money belonging to the bankers is contrary to the pleadings in this and other matters. The pleadings in the case of bankers are on the footing that the bankers have a right of lien and/or set off. Such contention not having been pleaded and being contrary to pleadings is rejected on this ground itself. Even otherwise the very concept of Hen is a right to withhold somebody else's property. The very concept of a set off means adjusting what is due to somebody else against what is payable to you. These concepts are on the footing that "property belongs to somebody else". The right of a banker's lien or a banker's set off is based upon the concept that it is being exercised against property belonging to somebody else. The distinction sought to be drawn by Mr. Doctor in cases of money, as distinguished from chattel, does not affect this position. When a banker is claiming a right of lien and/or set off even on money, such a claim can only be on the footing that the "monies" against which such a claim is made belong to somebody else. If that were not so, then in cases of money, bankers can never have a right of lien or set off. To accept Mr. Doctor's arguments would have the effect of negating the well-established principles of banker's lien and set off and/or abrogating the law of banker's lien and set off in respect of "money" in their hands. It would do more harm than good to bankers. To understand the fallacy of Mr. Doctor's argument one would have to examine the very concept of banking. Banking started because people found it difficult to keep large amounts of wealth/property with them. They, therefore, entrusted it to persons of great eminence, trust and power. Ultimately such persons also had the same difficulty. The obvious solution was to enable such persons to utilise and regenerate what was with them. This was all right so long as the credit of these persons was good. It is thus that the practice of enabling utilisation of other person's properties developed. With the advent of money, it being legal tender, the concept of the relationship of debtor and creditor between the banker and his customer developed in law. However, a banker is not just an ordinary debtor. He is a debtor with an absolute obligation to repay. When monies are put into an account or deposited with the bank, they then belong to the bank and the bank can use them or deal with them as owners. In that sense, the use of the words "lien" and/or "set off" in cases of banker's claims over "money" is misleading, inappropriate and in fact inapplicable. However, if properly analysed, this is not so. Even though in modern times banks undertake a lot of activities and functions, the very basic banking business still is to keep monies of other persons and to use that money during the period that it is in their (bankers) custody. This is clear from the definition of "banking" in the Banking Regulation Act, 1949. Section 5(b) of the Banking Regulation Act defines "banking" as follows:
"Accepting, for the purposes of lending or investment, of deposits of money from the public, repayable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise."
34. Therefore, as stated above, whilst in their hands, bankers deal with monies as if it belongs to them. But banking has another element also. When a customer puts monies into his account or he deposits monies with the bank, he does not do so with any intention of transferring ownership. Ownership may transfer because money is legal tender and, therefore, to the extent that a banker receives money that particular note or coin becomes property of the banker. However, Mr. Doctor has overlooked the second element of banking. This is an equally important element. A banker is not a simple debtor. A banker has a duty and, an obligation in law to repay and return the amount on demand. Once a demand is made an absolute obligation to repay arises except in cases where there is not sufficient credit in the account or a right of lien or set off arises. Based on this absolute obligation to repay, the customer continues to consider the monies lying to his credit in a bank to be his asset and property. Thus when a customer writes up a withdrawal slip or draws a cheque upon a bank, he is not drawing upon monies belonging to the bank, he is withdrawing his own money which has been temporarily kept with the banker. Similarly, in his tax returns the customer will show these as his asset. It is because of this absolute obligation to repay and in theory the money remaining the customer's money, that the banker's right of lien and set off even on "money" is recognised in law. So far as bankers are concerned, so long as there is a credit in the customer's account, all that they can claim is a right of lien or set off or adjustment of accounts. Of course where there are other security documents in their favour, then the rights given to them under those documents could also be enforced. Therefore, there can be and will be attachments on the amounts standing to a person's credit in the account with a bank or in deposits with the bank. The submission of Mr. Doctor that the banker is entitled to retain money because it is the banker's money is unique and cannot be accepted at all. To accept it would affect the very concept of banking. To accept it would be* to eliminate the absolute obligation to repay on demand. To accept it would be to make bankers into ordinary debtors without any absolute obligation to repay. This in present times, when it is seen that actions of bankers have become questionable, would be to set a very bad precedent. Also as stated above, this has not been pleaded in a single matter before the court.
35. In my view, therefore, it will have to be held that even though the contractual and special rights in property have not been abrogated or done away with they can only be enforced subject to the order of payments laid down under Section 11 of the said Act. All such parties, whether decree holders or otherwise, must come before this court and put their case before this court. They may make their claim directly before this court or enforce their claim in normal civil courts and then approach this court on the basis of decrees or orders obtained from any court or tribunal. Even when parties elect to make their claim in the normal civil court, in my view, it would be preferable and advisable that the parties intimate this court. This so that the court could then take note of the pending claim. This court will then consider and/or keep in mind what rights they have in respect of a particular property and at the time of ultimate distribution all such contractual rights and/or special interests will be taken into account.
36. In this view, it will be necessary in any case to consider, in each petition/application, what is the right that is being claimed and whether in fact that party has got that right. Thereafter, in the event of it being held that the party has a right as claimed, it will be kept in mind at the time of distribution under Section 11 of the said Act.