CASE NO.: Appeal (civil) 4785 of 1998 PETITIONER: STANDARD CHARTERED BANK Vs. RESPONDENT: THE CUSTODIAN & ORS. DATE OF JUDGMENT: 17/04/2001 BENCH: S.P. Bharucha, N. Santosh Hegde & Y.K. Sabharwal. JUDGMENT:
(With CA Nos.6088/98 & 425/99)
J U D G M E N T
L…I…T…….T…….T…….T…….T…….T…….T..J
SANTOSH HEGDE, J.
These appeals are filed against the judgment and order
dated 20th July, 1998 passed by the Special Court at Bombay
constituted under the Special Court (Trial of Offences
Relating to Transactions in Securities) Act, 1992 (for short
the Act). Though by the impugned order, the High Court
has decided a number of questions raised before it, the
appellants before us have confined their argument to the
following questions;
(a) whether the interest claimed by them is liable to be
disbursed under Section 11(2)(b) of the Act on a
preferential basis or the same is to be distributed under
Section 11(2)(c) of the Act;
(b) do the secured creditors have the right to stand
outside the distribution under Section 11 of the Act and
recover their dues.
Section 11 of the Act reads thus:
Discharge of liabilities(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
Sec. 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 of financial institution or mutual
fund; and
(c) any other liability as may be specified by the
Special Court from time to time.
The High Court came to the conclusion in regard to the
claim of interest by the appellants that the same cannot be
distributed on priority basis under Section 11(2)(b) of the
Act, but same can be done under Section 11(2)(c) of the Act.
In regard to this finding, the appellants contend that in
view of the wording of sub-section (2) of Section 11, they
are entitled not only to the principal amount due to them
but also to the interest that has become payable thereon,
therefore, they are entitled for the payment under Section
11(2)(b) of the Act. On behalf of the Custodian, it is
argued that the amount payable to the appellants, be it the
principal or interest, can be only such amount and interest
thereon as became due within the period stipulated in the
Act, that is, the notified period being 1.4.1991 and
6.6.1992. Therefore, it is contended that the appellants
are not entitled to the interest payable on the amount due
to them which falls outside the notified period. It is the
case of the Custodian that the interest that becomes payable
outside the notified period, can be claimed only under
Section 11(2)(c) of the Act.
Having considered the arguments of the parties, we are
of the opinion that the contention advanced on behalf of the
Custodian merits acceptance. It is to be seen that this
Court in Harshad Shantilal Mehta v. Custodian & Ors. (1998
5 SCC 1) while examining the claim of the Revenue for
payment on priority basis under Section 11(2)(b) of the Act
regarding the amounts due under the heads penalty and
interest had held thus :
Since the liabilities covered under Section 11(2)(a)
are only liabilities arising during the period 1.4.1991 to
6.6.1992, and do not cover penalty and interest, the
question whether the Special Court can absolve a notified
person from imposition of penalty or interest after the date
of the notification does not really arise. In any case,
interest or penalty for any action or default after the date
of the notification, are not covered by the Act. x x x The
Special Court is required to consider this question only
from the point of view of distributing any part of the
surplus assets in the hands of the Custodian after the
discharge of liabilities under Sections 11(2)(a) and
11(2)(b). The Special Court has full discretion under
Section 11(2)(c) to decide whether such claim for penalty or
interest should be paid out of any surplus funds in the
hands of the Custodian.
Though the said judgment was delivered with reference to
the claim made by the income-tax authorities, the said ratio
is applicable to the claim made by the appellants in these
appeals so far as their claim for interest is concerned.
It is to be noted also that when the Special Court was
considering the claim of the Revenue for payment of interest
and penalty due from the notified persons under Section
11(2)(b) of the Act, these very appellants had contended
that any interest or penalty which became due outside the
notified period could only be distributed by the Custodian
under Section 11(2)(c) of the Act. We are of the opinion
that the stand taken by the appellants in that case is the
correct one and the same should apply to their claim in
these appeals also. Therefore, so far as the appellants
claim for interest is concerned, in our opinion, if the
interest fell due within the notified period, the same shall
be distributed on the basis of the priority contemplated
under Section 11(2)(b) of the Act, and so far as their claim
for interest which fell due outside the notified period is
concerned, the same can be entertained by the Custodian only
under Section 11(2)(c) of the Act.
In regard to the next contention pertaining to secured
creditors, some of whom are the appellants in this batch of
appeals, it is to be noted that the Special Court held that
they are not entitled to stand outside the distribution
under Section 11 of the Act, hence, they will have to claim
the amounts due to them under Section 11(2) of the Act. The
argument on behalf of such secured creditors is that the
property secured in their favour is not attachable by the
Custodian; hence, the proceeds from such security cannot be
utilised for distribution under Section 11(2) of the Act.
They contend that these properties which are secured in
their favour cannot be treated as the properties belonging
to a notified person, and that their interest in the said
property cannot be sold or distributed to discharge the
liability of the notified person.
This Court in Harshad Shantilal Mehtas case (supra) has
held :
If in the property belonging to a notified person,
another person has a share or interest, that share or
interest is not extinguished. Of course, if the interest of
the notified person in the property is not a severable
interest, the entire property may be attached. But the
proceeds from which distribution will be made under Section
11(2) can only be the proceeds in relation to the right,
title and interest of the notified person in that property.
The interest of a third party in the attached property
cannot be sold or distributed to discharge the liabilities
of the notified person. This would also be the position
when the property is already mortgaged or pledged on the
date of attachment to a bank or to any third party. This,
however, is subject to the right of the Custodian under
Section 4 to set aside the transaction of mortgage or
pledge. Unless the Custodian exercises his power under
Section 4, the right acquired by a third party in the
attached property prior to attachment does not get
extinguished nor does the property vest in the Custodian
whether free from encumbrances or otherwise. The ownership
of the property remains as it was.
Therefore, we are of the opinion that so far as the
secured creditors are concerned, subject to the right of the
Custodian under Section 4 of the Act, they are entitled to
recover the amounts due to them (principal and interest)
from the property secured in their favour without taking
recourse to Section 11 of the Act. But if the security is
not large though to extinguish their debt, they can seek
payment of the shortfall only under section 11(2) of the
Act.
For the reasons stated above, these appeals are partly
allowed, to the extent indicated hereinabove. No costs.
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