JUDGMENT
S. Balasubramanian, Chairman
1. Canara Bank, in its capacity as the trustee of Can Bank Mutual Fund (the Fund) has filed this petition under Section 111(4) of the Companies Act, 1956 (the Act) seeking for rectification of the register of members of M/s Power Grid Corporation Limited (the company) by inserting the name of Canara Bank Trustee-Can Bank Mutual Fund A/c Centriple Plus, in place of Can Bank Financial Services Limited in respect of 17% bonds issued by the company of the value of Rs. 48 crores.
2. The facts of the case are: In the year 1992, the company had received the approval of Government of India for issue of taxable/tax free bonds by way of private placement. By a letter dated 6th March, 1992, Can Fina offered to subscribe to 17% taxable bonds of the face value of Rs. 80 crores on certain terms and conditions- that the company was to pay 4% all inclusive fee to Can Fina and that the company was to invest Rs. 16.8 Crs at 11% with Can Fina to be repaid after 3 months of the date of allotment and that the company was to invest further Rs. 60 crores for one year under Portfolio Management Scheme of Can Fina at 12% interest. By a letter dated 9.3.1992, the company conveyed that it was agreeable to make firm allotment of taxable bonds of the value of Rs. 80 crores of the face value of each bond being Rs. 1000/- carrying a coupon rate of 17% repayable at par after the expiry of 7 years from the date of allotment. The letter also contained certain terms and conditions inter alia including that 20% of the bonds should be offered to public for sale over the counter and that the bonds would be allotted on credit of Rs. 80 crores by Can Fina in a separate bank account to be opened by the company. The letter had also advised Can Fina to return a copy of the letter duly signed and marked “ACCEPTED” and that the company would advise Can Fina to deposit the application money in company’s Application Money Current Account to be opened by the company with Canara Bank, Janpath Branch, New Delhi. Can Fina credited a sum of Rs. 120 crores (including Rs. 80 crores for the above bonds) in the said account on 10.3.1992.On the same day, by debit in the same account, Rs. 120 crores were transferred to Can Fina. The company allotted 8 lakh bonds of Rs. 1,000 each and letters of allotment dated 10.3.1992 were issued in the name of Can Fina. On 20.3.1992, the Fund purchased bonds worth Rs. 48 crores from Can Fina for its Centriple Scheme. On 7-12-1992, the custodian for Centriple Scheme – City Bank – lodged the letters of allotment with the company for registration of transfer in the name of Canara Bank Trustee-Can Mutual Fund A/c Centriple Plus. In the meanwhile certain correspondences were being exchanged between the company and Canara Bank/Can Fina regarding repayment of the deposit of Rs. 60 crores on due date but the bonds were not registered for transfer as sought for. The petitioner filed the instant petition under Section 111(4) on 25.11.1993. The company, claiming itself as an unpaid seller, for the reasons elaborated later, forfeited the bonds on 11.2.1994. When this petition was taken up for hearing, the company raised certain preliminary objections on the maintainability of the petition. One of the objections was that in line with the decision of the Supreme Court in ONGC v. Collector of Central Excise wherein the court has held that dispute between public sector undertakings should be referred to the High Power Expert Committee of Secretaries, the matter should not be decided by this Board but should be referred to that committee. By an order dated 4th June, 1996, this Bench rejected the said contention of the company and directed that the matter be heard on merits. This order was taken on appeal before Delhi High Court which set aside the order of this Board. Canara Bank filed an SLP before the Supreme Court. On a similar issue before the Supreme Court in Canara Bank v. National Thermal Power Corporation (JT 2000 SCC 491) , the Supreme Court held that ONGC Judgment was not applicable to a dispute between a Mutual Fund and a public sector company as Mutual Fund was not a public sector undertaking. When the present matter went before the Supreme Court, the Supreme Court passed an order on 9.1.2001 in the following terms: “Leave granted. Counsel on both sides agreed that in view the decision of this Court in Canara Bank and Ors. v. National Thermal Power Corporation and Anr., the appropriate course to be followed is to direct the Company Law Board to dispose of the matter afresh. To facilitate the said course, we set aside the impugned order. Now we direct the Company Law Board to take up the matter and pass appropriate orders”. Accordingly, this matter was taken up for hearing. In the hearing held on 23.2.2002, the company raised an issue relating to limitation. After hearing the arguments, this Bench passed an order that he issue relating to limitation would be considered along with merits of the case. This order was taken on an appeal before the Delhi High Court and the matter is pending. However, the High Court did not stay the further proceedings before this Bench. Accordingly, the matter was finally heard and conclude don 12.6.2003.
3. Shri Sundram, Sr. Advocate for the petitioner submitted: This petition has been filed under Section 111(4) of the Act seeking for rectification of the register of members. There is no time limit fixed for filing a petition under this Section and therefore the question of application of limitation does not arise. It is wrong to contend that in the absence of any communication from the company after lodgment, this petition should have been filed within 4 months from the date of lodgment of the bonds in terms of Section 111(3) of the Act. It has been held in Finolex India Ltd. v. A.R. Chabbaria (2003 CLA 310 Bom), Sashi Prakash Khemka v. NEPC Micon Ltd (1999 1 CLJ 502 (CLB); Remanika Silks P Ltd v. J.C. Augustine (1991 1 CLJ 337 CLB) that provisions of Limitation Act are not applicable to a proceeding under Section 111(4) of the Act. Further in Khurshid Alam v. P. Pagnon Company P Ltd (2002 1 CLJ 175) the CLB has held that the right of filing a petition in terms of Section 111 could be either under Sub-section (2) or under Sub-section (4) of Section 111 of the Act. In City Bank v. Power Grid Ltd (1995 2 CLJ 255) the CLB has extensively dealt with the applicability of Section 111(4) in the matters of transfers and came to the conclusion that it is applicable. Even otherwise, by a letter dated 21.9.1993, the company had informed Can Fina that the company was an “unpaid seller” and as such would exercise the right of lien and would not issue bond certificates against the allotment and in case allotment money was not received, the company would be entitled to forfeit the letters of allotment. Even though this letter was not addressed to the petitioner, the tenor of the letter was to refuse the registration of transfer. Since this petition was originally filed on 23.9.1993, it is within the limitation period of two months from the date of refusal. Therefore, the petition is maintainable both under Section 111(4) and under Section 111(2) of the Act.
4. On merits, the learned counsel submitted: The petitioner is the trustee of the Fund. The Fund purchased the impugned bonds for valuable consideration on 20.3.1992. Along with the letters of allotment, certain instructions have been set out as an integral part of the allotment letters. These instructions being part of the allotment letters, are binding on the purchaser of the allotment letters and also the company. The terms of various instructions make it abundantly clear that the allotment letters were freely transferable and that surrender of the allotment letters to the company duly signed by the holders shall be conclusive evidence in favour of the company that the parties surrendering it have clear title to the bonds and a right to receive bond certificates from the company. There is no indication in the allotment letters that the consideration for the same had not been paid or that the company had a lien. The Fund, as a part of its business, purchased the impugned bonds in good faith and without any knowledge of the disputes between Can Fina and the company. Further, at the time when the Fund purchased the bonds, even the Articles of the company did not provide for any lien on the bonds nor vested the Board with the power of forfeiture and the Articles were amended only after the petition was filed i.e. on 9.11.1993. These Articles cannot have retrospective effect to apply to a transfer which had taken place earlier. Even otherwise, after the Fund had acquired the title to the bonds, the lien cannot be enforced as an unpaid sellers right of lien can be enforced only when possession is in the hands of the seller and cannot be extended against a third party. Once the Supreme Court has held in NTPC case (supra) that a transferee cannot be denied the payment of the value of the bonds on the ground of the liability of the transferor, there is no scope for the company in this case to take a stand that the Fund is not entitled to have the bonds registered in its name on the ground that Can Fina owes some money to the company. When the present matter came up before the Supreme Court, the counsel had agreed to go by the judgment in NTPC’s case. Even the claim of the company that it is an unpaid seller is not sustainable as the company itself had, by a letter dated 10.3.1992 (Exhibit 1 of Rejoinder), admitted that the application money in full had been credited by Can Fina in Canara Bank. Having admitted the receipt of money, the company cannot now claim itself to be an unpaid seller. Therefore, the action of the company forfeiting the letters of allotments, that too after amending the Articles and giving retrospective effect is, wrong, illegal and unsustainable. It is more so in view of the fact the letter of allotment does not contain any provision regarding exercise of lien or forfeiture. In the absence of any such provision in the letters of allotment, a bona fide purchaser cannot be denied the right to seek registration of transfer. In Standard Chartered Bank v. Housing and Urban Development Corporation Ltd (1996 4 CLJ 225) and Citi Bank v. Power Grid Corporation (1995 2 CLJ 255) , CLB has held that allotment letters are as good as bonds for the purposes of transfer. Therefore, the forfeiture of the allotment letters should be declared as null and void and since the bonds have already matured for payment, the company should be directed to pay the face value along with interest upto the date of redemption as decided by this Bench in Canara Bank v. NTPC (CP No. 11 & 12/111/1995 decided on 28th November, 2001) .
5. Dr. Singhvi appearing for the company submitted: This petition is time barred. All instances relating to either refusal or inaction by a company in regard to transfer of shares are covered under Section 111(3). In terms of this sub-section, CLB should be moved within two months from the date of refusal or in case no notice of refusal is sent by the company, CLB should be moved within 4 months from the date of delivery of the instruments of transfer. In the present case, Citi Bank lodged the transfer instruments on 7.12.1992 and in view of various correspondences exchanged between the company and Can Fina/Canara Bank, the company did not send any notice of refusal. Therefore, in terms of Section 111(3), this petition should have been filed within 4 months from the date of lodgment i.e. before 6.4.1993 but the company filed this petition only on 25.11.1993. Therefore, the petition is time barred. The contention of the petitioner that this petition has been filed under Section 111(4) of the Act seeking for rectification of the Register of Members is not sustainable in as much as for rectification of the register of members, there should be a pre-existing error in the register as held in Banarsidas Saraf v. Dalmia Dadri Cement Ltd (AIR 1959 232) . Since there was no pre-existing error in the register, the question of rectification does not arise. Further, when Section 111(3) clearly specifies time limits in respect of transfers, there is no scope to invoke Section 111(4) in respect of a transfer. If Section 111(4) applies to transfers also, then, there is no need to have time limits in Section 111(3). By proper harmonious interpretation of these Sections, provisions of Section 111(4) should be implied to have some restrictions. Even assuming that Section 111(4) is applicable in the matter of transfers also, then, the same limitation relating to the time limit as prescribed under Section 111(3) should be applied. In paragraph 10 of Finolex case (supra), the Bombay High Court has pointed out the difference between Section 111(3) and 111(4) with regard to limitation. Even though the petitioner has relied on the decision of this Board in Citi Bank v. Power Grid Corporation of India Limited (Supra) that Section 111(4) of the Act is also applicable in the matters of transfer and that the period of limitation under that Section is three years, a reading of Para 30 of that order would reveal that this Board had not given such a finding. Therefore, the petition deserves to be dismissed as time barred.
6. Dealing with merits of the case, the learned counsel submitted: In deciding this case, the CLB should take into consideration the nature of the transaction between the company and Can Fina. In terms of the offer of Can Fina dated 6th March, 1992 (Annexure-XII) and the offer of the company dated 9.3.1992 (Annexure-XII), a composite agreement was reached by which whatever consideration was payable by Can Fina for the bonds, the company would in turn, deposit the same with Can Fina. As could be seen from the Bank Statement at Annexure XIII, an amount of Rs. 120 crores deposited by Can Fina in the account of the company on 10.3.1992 was on the same day withdrawn by Can Fina. It would show that there was no consideration paid by Can Fina and the entire transaction was a paper transaction and as such the company was never paid any consideration for the bonds. Therefore, the company is an unpaid seller. Can Fina is a wholly owned subsidiary of Canara Bank which is the trustee of the Fund. The inter relationship between them is such that they cannot be considered to be independent of each other. The Fund was fully aware that Can Fina had not paid the consideration for the bonds and therefore the Fund was not a bona fide purchaser without notice. It is a fit case wherein corporate veil has to be pierced. In paragraph 6.64 of the Joint Committee Report, the Committee has observed “The Committee regrets to note that CMF has violated almost all the guidelines and regulations. The sponsor and its subsidiary have derived benefit through the operations of CMF at the cost of the investors” . In para 6.70, the Committee has criticized the manner of working of the Fund. As per the report of the RBI, Canara Bank had started some rescue operations in relation to Can Fina with the undertaking that any loss or depreciation in bonds of the CPMF/Units would be borne by the Bank. This itself will indicate that all the 3 entities namely Canara Bank, Can Fina and the Fund were operating under a single umbrella. Otherwise, the Bank would not have started the rescue operation. It is not that the company took any mala fide decision as is evidence from Annexure-XIX. Even the Power Ministry was aware that the company was not paid the consideration and that is why the Ministry advised the company not to part with the bonds till the company realized the money deposited by it with Can Fina. The company being aware that Can Fina was unlikely to return the money deposited with it, sought a commitment from Canara Bank that it would honour the dues of Can Fina but Canara Bank did not do so. Therefore, the company was conscious of the fact that Can Fina would not refund the deposit meaning thereby that the allotment letters had been issued without receipt of any consideration. Therefore, to protect the interest of the company against any claim by the holders of the allotment letters, the Articles of the company were amended on 9.11.1993 providing that the company would have paramount lien on shares or debentures for which the allotment money was deferred or kept as term deposit and that the Board will have the power to forfeit such shares/debentures. In terms of the Articles, the company sent an intimation to Can Fina that the bonds registered in the name of Can Fina had been forfeited on 11.2.1994.
7. The learned counsel further submitted that when the Board of Directors acts bona fide and in the interest of the company in forfeiting the bonds, the same cannot be challenged. As a matter of fact, if the Board had not acted in terms of the Articles, then, the same would have been against the interests of the company. A court cannot substitute its own wisdom when the Board of Directors had acted bona fide and in the interest of the company. Further, in terms of Section 153 of the Act, the company cannot take cognizance of a trust and therefore the prayer of the petitioner for rectification of the register of members in favour of the Trust is against the statutory provisions and as such cannot be granted. The decision of the Supreme Court in NTPC case (supra) are not applicable in this case. Since there has been commercial dishonesty on the part of Can Fina, which was in the knowledge of the Fund, this petition should be dismissed.
8. Shri Upadhayay, counsel appearing for the company, supplementing the arguments of Dr. Singhvi submitted: The Board of Directors had acted bona fide in the commercial interest of the company. The Supreme Court, in Shailesh Prabhudas Mehta v. Calico Dyeing & Printing Mill Ltd (1994 3 SCC 339) has held that if in the interested of the company, the Board of Directors decline to register transmission of shares, then the same cannot be challenged. The Ministry of Power itself advised the company not to release the bonds without realization of the amount deposited with Can Fina (Annexure XIX). The Board of the company considered the question of payment of interest on the bonds and registration of allotment letters and decided not to pay any interest or effect the registration of transfer till the interest of the company was protected. (Annexure XII). The claim of the Fund that it is a bona fide purchaser without notice cannot be accepted. Can Fina is a wholly owned subsidiary of Canara Bank which is the principal trustee of the Fund. In terms of the trust deed, Canara Bank is the Principal trustee and the management and administration of all Funds would vest in the Board of the Bank. This being the case, there is complete identity of relationship between Canara Bank, Can Fina and the Fund. That is the reason why the company sought for a guarantee from Canara Bank that it would refund the deposits with Can Fina on maturity.
9. He further submitted: The admitted position is that Can Fina had appropriated Rs. 60 crores out of the consideration for the bona fides as deposit to be repaid after one year. Since that amount was not repaid, the company was an unpaid seller in terms of Section 45(b) of Sale of goods Act. In terms of Section 43 of the same Act, the company could exercise a lien on the bonds. The sale by Can Fina to the Fund is not protected by Section 53 of the said Act in as much as this Section is applicable only in case of the transfer being in good faith and for consideration. Since the Fund is a part and parcel of Canara Bank/Can Fina, there was no good faith on its part in acquiring the letters of allotment and as such Section 53 of the Sale of Goods Act cannot apply in its case. Since as per RBI Report, Can Fina had practically become defunct, the company can also exercise its right of repossession of the letters of allotment in terms of Section 50 of the Sale of Goods Act. Further, the Fund cannot claim itself to be a holder in due course in terms of Section 9 of the Negotiable Instruments Act as the Fund was fully aware that Can Fina did not have a valid title to the letters of allotment since it had not paid consideration for the same. It has been held by the Apex Court in U. Ponnappa Moothan Sons v. Catholic Syrian Bank Ltd (1991 1 SCC 113) that for a holder in due course the possession must be bona fide and without negligence and that a holder is not entitled to disregard a “red flag” which has raised his suspicion. In the present case the Fund was fully aware that Can Fina had not paid for the bonds and inspite of this, it purchased the bonds and therefore cannot claim to be a bonafide purchaser without notice. Further, in the present case the provisions of Section 56 of the Contract Act also is applicable according to which an agreement to do an act impossible in itself is void. In Sushila Devi v. Hari Singh (1971 2 SCC 288) the Supreme Court has held that if the performance of a contract becomes impracticable or useless having regard to the object and purpose the parties had in view, then it must be held that the performance of the contract has become impossible. In view of the supervening events like the scam, JPC report, RBI report, letter from the Ministry of Power advising that bonds should not be issued without recovery of the deposits etc. amount to frustration of the contract.
10. As far as application of the amended Articles retrospectively is concerned, the learned counsel pointed out to Section 31(2) of the Companies Act and submitted that in terms of this Section, the alterations be as valid as if originally contained in the Articles. In Calico Dyeing case (supra), the Supreme Court has approved the retrospective application of amended Articles. In Luxmi Tea Company Ltd. v. Pradip Kumar Sarkar (1989 Supp (2) SCC 656) the Apex Court has held that to refuse registration of transfer, the company should be vested with powers to do so under the Articles and the refusal is on bonafide grounds and in the interest of the Company. In the present case, the company has been vested with the powers to forfeit the bonds and it had exercised the powers bonafide and in the interest of the company. The NTPC case cannot be applied in the present case since various issues like unpaid seller, forfeiture, bonafide purchaser etc. had not been dealt with in that case.
11. Shri Sundaram in rejoinder submitted: One pierces the corporate veil to establish the identity of a single person. In the present case, the Fund is a trust and the Canara Bank is the trustee. They are not one and the same. If the beneficial owner is Canara Bank, then, perhaps the question of piercing the corporate veil might arise. In the present case, both the beneficial and equitable ownership of the Fund are with thousands members of the public. Therefore to claim that the Fund, Canara Bank and Can Fina are fingers of the same arm is wrong. As far as bona fide purchaser without notice is concerned, the Fund as a part of its functions, traded in securities on the basis of various representations made on the face of the certificates. In the allotment letters, there is no indication that the consideration had not been paid or that the company would have a lien. On the contrary it is specifically mentioned that the letters of allotments were freely transferable. The claim of the company that it is an unpaid seller is baseless. On receipt of consideration for the bonds, the company had deposited Rs. 60 crores with Can Fina repayable after one year. Even in the Balance Sheet of the company, this amount is shown as deposit with Can Fina. If, as claimed by the company, the amount is recoverable towards consideration, such an indication would have been made in the Balance Sheet of the company. If at all the company has any claim against Can Fina, it can only be a claim and it has to institute proper proceedings and it cannot refuse to register transfer in the name of bona fide purchaser for valuable consideration. Neither Section 53 of the Sale of Goods Act nor Section 9 of Negotiable Instruments Act has any application to the present case. The claim of being an unpaid seller cannot affect the title of a third party.
12. I have considered the pleadings and arguments of the counsel. According to the company, this petition is hit by limitation in terms of Section 111(3) of the Act while according to petitioner, this petition has been filed under Section 111(4) of the Act wherein there is no time limit prescribed and the petition is maintainable. In terms of Section 111(1) of the Act, in case a company refuses to register the transfer/transmission, it has to give a notice of refusal within two months from the date of delivery of the instruments of transfer. In terms of Section 111(2), the transferor or the transferee may appeal to the company Law Board against any refusal or failure on the part of the company either to register the transfer or send the notice of refusal. Section 111(3) stipulates that an appeal under Sub-section (2) shall be made within two months from the date of receipt of such notice or where no notice has been sent by the company within 4 months from the date on which the instrument of transfer was delivered to the company. It is the contention of the company that since the company did send any notice of refusal, the petitioner should have appealed to the Company Law Board within 4 months of delivery of the instrument to the company. Since the instrument of transfer was delivered to the company on 7.12.92 this appeal should have been filed by 6.4.93. Since this appeal/petition was filed only on 25.11.93, it is time barred and has to be dismissed.
13. The petitioner has invoked the provisions of Section 111(4) of the Act which reads:
“If – (a) the name of any person
(i) is, without sufficient cause entered in the register of members of a company or
(ii) after having been entered in the register, is, without sufficient cause, is omitted there from; or
(b) default is made or unnecessary delay takes place, in entering in the register the fact of any person having become, or ceased to be, a member including a refusal under Sub-section (1),
the person aggrieved or any member of the company or the company may apply to the Company Law Board for rectification of the register” .
14. A reading of the above would indicate that unlike Section 111(3), there is no time limit prescribed in this Section. The only issue for consideration is whether Section 111(4) is applicable in a matter of transfer of shares, since Sub-sections (1) to (3) of Section 111 deal with matters relating to transfers. In Citi Bank v. Power Grid Corporation of India Ltd (1995 2 CLJ 255) , a similar issue arose for consideration and as a matter of fact it was the main issue. Similar to the present case, in that case also a part of the 17% taxable bonds were involved. City Bank acquired letters of allotment of bonds to the value of Rs. 30 crores from Can Fina and lodged the same for registration of transfer on 6.7.1992. Since the company had not registered the transfer, City Bank filed a petition under Section 111 of the Act seeking for rectification of the register of members. In that case also, the company forfeited the bonds on the ground that Can Fina had not repaid Rs. 60 crores deposited by the company. Two preliminary issues were raised by the company that the letters of allotment were neither shares nor debentures and as such Section 111 was not attracted and that the petition was not maintainable due to limitation in terms of Section 111(3). The petitioner contended that the petition being for rectification of the register of members, the same was maintainable under Section 111(4). Most of the arguments by the company in the present case were also advanced in that case, more particularly that in case of transfers. Sub-section (4) of Section 11 was not applicable at all and the only applicable provisions were Section 111(2) and 111(3). After considering the various authorities cited by both the sides and after examining the historical back ground that the present provisions of Section 111(4) were earlier in Section 155 by which an aggrieved person had two alternative remedies which cannot be denied after assimilation of Section 155 as Section 111(4), this Board came to the conclusion that an aggrieved transferor or transferee can invoke the provisions of Section 111(4) also. In paragraph 28, this Board had observed “An analysis of the various decisions cited above strengthened the arguments of Shri Ganesh that the legal position that the remedies under Section 111(2) and (4) are alternative remedies as has been held by various courts and in the absence of any other contradiction by courts should continue to prevail even after 1988 amendment” . Dr. Singhvi is not correct in submitting that there has been no categorical finding in that order that the provisions of Section 111(2) and (4) are alternative remedies. In paragraph 30 of that order, it has been very categorically stated “However, the legal provision remaining as it is, and the intention of the legislature being patently clear in view of our analysis as above, we hold that the petition is maintainable under Section 111(4) and we order accordingly” . The company has not advanced any fresh arguments or cited any fresh authorities to persuade me to take a different view. Dr. Singhvi cited the decision in Dalmia Dadri Cement Ltd case to advance his argument that the question of rectification would arise only if there is a pre-existing error in the register of members. In this connection, it is necessary to note that Section 111(4) contemplates two situation. One is entry or omission in the register of members without sufficient cause and the other is unnecessary delay in entering or deleting the name of a person in the register of members. In the first situation, there has to be an error in the register for rectification. But in the second situation, only delay or default has to be established. In the present case, the cause of action for the petitioner arose on account of default in entering its name in the register of members after it had acquired the letters of allotment on payment of consideration. Therefore, the petitioner is entitled to maintain the petition on this ground.
15. Having held that this petition is maintainable, the issue that arises for consideration is whether the petitioner has made out a case for rectification of the register of bond holders. The admitted position is that the petitioner sought for registration of transfer on 7.12.1992 and till the petition was filed on 25.11.1993, the company had neither registered nor refused to register the transfer. To that extent, there had been undue delay on the part of the company giving rise to cause of action to the petitioner to file this appeal/petition under Section 111(4). The main justification given by the company for its inaction is that the company was trying to ensure that the repayment of the deposit of Rs. 60 crores was guaranteed by Canara Bank. Its stand is that since the deposit made with Can Fina was not repaid on due date, in exercise of its rights as an unpaid seller, the company has forfeited the shares in terms of the powers vested in it by the amended Articles. Thus, according to the company the question of registration of transfer of the bonds as sought for does not arise.
16. The learned counsel for the company relied on certain cases to contend that if a company acts bonafide and in the interest of the company, such an action cannot be challenged. While it is so, the action should be based on correct principles. In the present case, bonds held by a third party have been forfeited for alleged non payment of consideration by the original allottee. Even though the only issue that I have to examine is whether on the ground of being an unpaid seller, the company could forfeit the bonds held by a third party, yet I am examining as to whether, the company is an unpaid seller also. The claim that the company is an unpaid seller cannot stand against the Fund for various reasons. Even though the payment of consideration for the bonds by Can Fina and deposit of the like amount as deposit with Can Fina by the company formed a composite agreement, yet, they are distinct transactions as is evident from the relevant offer letters that no default clause has been provided for breach of the terms-more particularly to the effect that the bonds would be forfeited in case of default by Can Fina to repay the deposit. In terms of the letter of the company dated 9/11.3.1992, Can Fina was to credit Rs. 80 crores in the company’s account as application money and as per the bank statement, this amount was credited in the account of the company on 10.3.1992. By a letter dated 10.3.1992 (Exhibit-1 of the Rejoinder), the company informed Can Fina “In response to your application for allotment of 17% taxable 9% tax free (non cumulative) secured redeemed bonds for the aggregate value of Rs. 120 crores (Rs. 80 crores taxable and Rs. 40 crores tax free) and in view of the application money amounting to Rs. 120 crores having been deposited in our application money current account with Canara Bank, Janpath, (highlighting by me) the Board of Directors is pleased to allot the aforesaid bonds today i.e. 10th March, 1992. You are requested to deploy an amount of Rs. 120 crores in terms of our letter No. NPTC/C/COS/Bonds/50106 dated 10th March, 1992 under intimation to us. This is only an intimation under separate allotment letter dated 10.3.1992 will be issued to you on your request. Necessary details of investment may please be intimated to us”. This letter conclusively establishes that the company had acknowledged the receipt of consideration for the bonds and it is the company which asked Can Fina to deploy that amount as agreed earlier. Further, the letters of allotment distinctly bear an endorsement in printing “Issue of bonds of the value of Rs. 80 crores comprising of 8,00,000 17% taxable non cumulative secured redeemable bonds of Rs. 1000/- each fully paid up (highlighted by me) . In addition to the endorsement that the bonds were fully paid, in the list of instructions forming an integral part of the letter of allotment, it is stated that the bonds shall be transferable and that the party surrendering the letters of allotment shall have a clear (SIC) to the bonds. There is no indication either on the face of the letters of allotment nor in the list of instructions, that they were subject to lien or forfeiture. When a person acquires a security, he goes by the terms and conditions of the issue as well the representations made on the face of the security. Such a person is not affected by any other undisclosed understanding/agreement between the company and the original allottee. Under the circumstances, a purchaser for valuable consideration cannot be denied registration of transfer in his favour on the ground that the company is an unpaid seller.
17. The company has raised an issue that the Fund being a part of Canara Bank, the subsidiary of which is Can Fina, is not a bonafide purchaser as it must have been aware that the company was an unpaid seller. The learned counsel for the company also relied on the reports of RBI and JPC to contend that all the three are part of a single entity Viz Canara Bank. On a similar issue raised in NTPC case, the Supreme Court held that “The Trustees of the Trust constituted by Canara Bank as settlor for the benefit of numerous units holders cannot be termed and styled as a government company or a public sector undertaking” . In the present case also, as is evident from the Trust Deed dated 31.1.1990, Canara Bank, as a settlor for the benefit of persons participating in various schemes constituted the Fund and has appointed trustees with itself as the principal trustee. Therefore, it would not be correct to say that the Fund is apart and parcel of Canara Bank or its subsidiary – Can Fina and as such the Fund must have been aware of the fact that the company is an unpaid seller.
18. Assuming that the stand of the company that all the three entities are parts of Canara Bank is correct, it is necessary to examine whether the Fund was aware that the company was an unpaid seller when it acquired the letters of allotment. To determine this, the dates of events become important. The admitted position is that the Fund acquired the bonds on 20.2.1992, that is, within 10 days of the original allotment. The stand of the company that Can Fina was guilty of commercial dishonesty would merit consideration if the company could establish that even at the time of making the deposits, Can Fina had decided not to repay the same on due dates. There is nothing on record to substantiate this. It is to be noted that the company had made two deposits – one of Rs. 16.8 crores repayable after 3 months and the other of Rs. 60 crores repayable after one year. The amount of Rs. 16.8 crores deposited with Can Fina was repaid on time, that is, after the date of acquisition of bonds by the Fund. Such repayment indicates that Can Fina had not pre decided even at the time of taking the deposits, not to repay the same and that the Fund was aware of the same. It is beyond the scope of this proceeding to examine as to why Can Fina defaulted in repayment of the second deposit of Rs. 60 crores. Even assuming that the Fund was aware of the deposit made by the company, it could have, at no stretch of imagination, at the time of acquiring the letters of allotment on 20.3.1992, anticipated that Can Fina would default in repaying the deposit after one year and that the company would claim itself as an unpaid seller and forfeit the bonds. As a matter of fact, as is seen from the documents placed, the company itself was made aware of the likelihood of Can Fina defaulting the repayment only by a letter of Power Ministry dated 22.6.1992, that is nearly three months after the Fund acquired the letters of allotment. The Board of the company, however, decided only on 22.9.92 not to register of any letters of allotment. Under these circumstances, the claim of the company that the Fund was not a bonafide purchaser and that it had the knowledge of the company being an unpaid seller when the Fund acquired the bonds, cannot be sustained and I am of the firm view that the Fund was a bonafide purchase of the bonds without notice of any defect in the title of Can Fina. This being the case, the question of the Fund disregarding “red flag” does not arise. Being a bonafide purchaser in good faith and for valuable consideration, the Fund has the protection under Section 53 of the Sale of Goods Act also (assuming that the said Act is applicable to the present case as contended by learned counsel for the company) and the company could neither hold a lien on the bonds nor could forfeit the same on the ground that Can Fina had not repaid the deposits. In view of the finding that the company had no right to forfeit the bonds acquired by the Fund, I have not examined as to whether amendment to Articles could have retrospective effect to transactions taking place before the date of amendment and whether in exercise of the powers given by the amended Articles, the company could have forfeited the impugned bonds. The counsel for the company also argued that the terms of Section 56 of the Contract Act, this contract had been frustrated on the grounds of the same RBI/IPC reports, letter from the Power Ministry etc. I do not find any substance in this argument. A contract could be said to be frustrated only when an act becomes impossible or is unlawful. None of the grounds adduced by the company could have made the registration of the bonds as sought for as impossible or unlawful. It is on record that the only ground for default in registration/forfeiture was that Can Fina had not repaid the deposit. In other words there is a breach of contract by Can Fina for which the company has other remedies.
19. On an overall assessment of the facts of the case, it is clear that the company had acted wrongly in forfeiting the impugned bonds. (Incidentally, I note that the company has not forfeited all the letters of allotment acquired by the Fund as is evident from the distinctive numbers in the list of letters of allotment lodged with the company and the distinctive numbers in the list of letters of appellant forfeited by the company. Of the value of Rs. 48 crores, the company had forfeited bonds worth Rs. 33.2 crores only). In the normal course, I would have directed the company to annual the forfeiture and rectify the register of bond holders as sought for. But, as submitted by the learned counsel for the company there is a statutory bar in terms of Section 153 of the Act to register the transfer as sought for. Such being the situation, reference may be made to the decision of this Bench in NTPC case which has been upheld by the Supreme Court. In that case, in the order dated 13.6.1996, this Bond had observed “Having taken cognizance of the trust and having been convinced that the beneficial owner is the mutual fund, putting the name of Canara Bank as “Trustee- Canbank Mutual Fund” is a mere clerical act which, however is not permissible under Section 153 of the Act. At the same time, non entry of the name of the Mutual Fund does not defeat the title of the Fund to the bonds in question. In exercise of the powers under Section 111(7), after determining the title, keeping in view the fact that the equity is in favour of mutual fund, the consequential order as prayed for in the petition has to be granted in favour of the petitioners. Since the 13% bonds have now become due for redemption, the prayer for directing NTPC to redeem the bonds has to granted. Since the beneficiary of the bonds is the mutual fund, we hereby direct NTPC to pay the redemption amount along with arrears of interest directly to Canbank Mutual Fund. However, NTPC is at liberty to seek any letter of release from Canara Bank as presently the bonds are registered in its name.” The said observation and direction are equally applicable in the present case. When this petition was filed, the bonds had not matured for payment and therefore, there is no consequential prayer for payment on redemption. However, the learned counsel for the petitioner made an oral prayer in this regard. Now that the bonds have matured for repayment, I am of the view that the same direction that was given by this Board in NTPC case could be given that the company should pay the maturity value alongwith interest to the Fund directly. Since the company has not paid any interest right from the beginning of acquisition of letters of allotment by the Fund, the company is bound to pay the coupon rate at 17% from 20.3.1992 till the bonds matured for repayment. Since the maturity period of the bonds was for 7 years they had matured on 10.3.1999. Since the maturity amount is still kept with the company, the company is liable to pay interest from the date of maturity till the date of repayment. This is in line with the decision of this Board in Canara Bank v. NTPC (CP No. 11&12/111/1985 – Order dated 28.11.2001). Since there has been substantial reduction in the rates of interest in the recent years, I am of the view that a rate of interest at 12% (simple should be equitable to both the sides for the period beyond the date of redemption. Accordingly, I direct as follows: The name of Can Fina will be restored in respect of the bonds impugned in the petition which have been forfeited within 15 days of this order. Thereafter, redeeming the bonds, the company should pay to the Fund, the face value of the bonds along with coupon rate at 17% per annum till the date of the maturity of the bonds and 12% per annum (simple) on the face value from the date of maturity till the date of payment. The entire amounts should be paid on or before 15.8.2003.
20. With the above direction, the petition is disposed of with no order as to cost.