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CASE NO.: Appeal (civil)  166 of 1994

PETITIONER: Canbank Financial Services

RESPONDENT: Custodian & Anr.

DATE OF JUDGMENT: 12/04/2004

BENCH: S. RAJENDRA BABU, DR. AR. LAKSHMANAN & G.P. MATHUR.

JUDGMENT: J U D G M E N T

RAJENDRA BABU, J. :

Facts leading to this Appeal are as follows:  

Appellant engaged Respondent No. 2 as a  broker to sell 10,00,000 shares of Reliance Petro  Chemicals Ltd. at the rate of Rs. 29/- per share. It  is said that those shares were sold and the  Respondent No.2 is liable to collect the sale  proceeds and pay the same to Appellant.  The  payment was, however, not made.  In the  meanwhile, Custodian appointed under section 3  of Special Court (Trial of Offences Relating to  Transactions in Securities) Act, 1992 (the Act)  notified Respondent No.2, whereby all properties  belonging to him stood attached. Appellant filed a  Petition before the Special Court for a declaration  that the sum of Rs. 2.90 crores received by  Respondent No 2 on behalf of Appellant was not  property ’belonging to’ him and hence the  attachment of that amount is void. There was also  a plea to release the said sum in favour of the  Appellant.  

Special Court dismissed these prayers vide  its Order dated 14 September 1993. Dismissal was  on the reasoning that the Appellants failed to  show that the money was credited into or lying in  any particular account. The Special Court further  held that all that the Appellant entitled is only to a  charge on the estate of the Respondent No.2 for  recovery of their money. But refused to release  the money to Appellant. This Order is impugned  herein. It is also the case of Respondent No.2 that  the Appellant is liable to pay about Rs. 3 crores to  his brother and that he is entitled to set off the  sum of Rs. 2.90 crores against the amount due to  his brother \026 Harshad Metha.  

Case put forwarded by the Appellant is; that  the Respondent No.2 merely acted as agent /  broker on behalf of the Appellant; that the  amounts he received from the sale of their shares  should have been handed over to them; that as  long as the amounts are not handed over, the  Respondent No.2 holds the same in trust for and  on behalf of the Appellant; that the same is not

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his property; that the Respondent No.1 /  Custodian ought not to have attached the property  since it is not property ’belonging to’ Respondent  No.2.  

Respondent No.2 has not denied the  transaction.  

In this context the position of law that needs  to be ascertained is whether the amount  Respondent No.2 is holding belongs to him or not.  Under section 11(1) of the Act, the Special Court  is empowered to direct Custodian for the disposal  of property under attachment. In Harshad S.  Metha v. Custodian and Others (1998) 5 SCC 1  this Court clarified that if any person other than  the notified person has any interest, share, title or  right in the attached property it cannot be  extinguished. It was clarified that the Special  Court cannot dispose of property, which does not  belong to notified person.  

In this case, it is the admitted position that  the Respondent No.2 was asked to sell shares for  and on behalf of Appellant. Thus the proceeds of  such sale cannot be treated as property belonging  to him. It belongs to Appellant and Respondent  No.2 was only holding the same in trust. The  relationship between a share broker and customer  is one of trust. In this view of the matter, the  attachment under Section 3 of the Act cannot  extend to Appellant’s money (Rs. 2.90 crores)  and, therefore, appellant is entitled to get back his  money.       

In order to locate the money that belongs to  Appellant, this Court found it essential that more  facts in relation to the sale proceeds and the  alleged claims of setoff needs to be ascertained.  An Order was passed on 6 February, 2001 by this  Court wherein Respondent No.2 was directed to  file an affidavit disclosing the following facts: - a.      The dates on which and the parties to  whom the said 10-lakh shares were  allegedly sold;  b.      The manner in and the date on which the  price of the said shares was realized; c.      The manner in which he dealt with the  proceeds stated to have been realized  from the sale of those shares; d.      The account particulars (in so far as it is  relevant) of the bank in which the  proceeds, if any, of the sale of the said  shares were deposited; and e.      In case any payment had been received by  way of settlement or adjustment of any  other transaction, then the full particulars  of the parties with whom those  transactions were held and the particulars  of those transaction.  

His brother was also directed to file an  affidavit clarifying his position on the claim of set  off. In order to ascertain the particulars,  Respondent No. 2 and his brother were given

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liberty to verify the documents and records in the  custody of CBI or income tax authorities  concerning the said transaction.  

Pursuant to this Order Respondent No.2 filed  an affidavit; along with he attached a contract  note dated 3 March, 1992 indicating that 10 lakh  shares of Reliance Petro was sold to Harshad  Metha at the rate of Rs. 29/- per share. By this he  answers first point.  

Though sufficient time and liberty to verify  relevant records was given, he failed to answer  queries (b) to (e) on one ground or another not  tenable in law and hence adverse inference has to  be drawn against him. On August 6, 2001 brother  of Respondent No.2 Harshad Metha filed an  affidavit stating that he is not claiming any set off  against Appellant regarding his claims.  

Even in Reply to the application filed by the  Appellant before the Special Court Respondent  No.2 submitted as follows: "\005I say that it is correct that some time in  March 1992, my firm had been approached  by the Petitioner herein for sale of 10 lacs  shares of Reliance Petrochemicals Ltd. I  recollect that the transaction of sale had  taken place on behalf of the Petitioner  some time in March/April 1992. I  understand that the sale proceeds in  respect of these transaction have also  been received by my firm. I cannot say  precisely when the moneys have been  received. It is also correct that moneys  have yet not been paid over by my firm to  the Petitioners herein. I say that there was  a balance in the firm’s account in excess of  Rs. 2.90 crores when the account was  frozen by CBI\005"

Considering the categorical admission by the  Respondent No.2 that he received money on  behalf of Appellant, the Appellant is entitled to get  back his money, because the Respondent No.2 is  holding the money in Trust.   Even if the  Respondent No.2 blended the property / money  with that of his own money under section 66 of  the Indian Trusts Act, 1882 (the Trusts Act) the  Appellant is entitled to a charge on the whole fund  for the amount due. Therefore we cannot agree  with the finding of the Special Court that burdened  the Appellant to locate the particular account in  which the money is credited so as to claim it back.  Section 66 of the Trusts Act arms the Court to  impose a charge on the whole property of the  trustee to the extent of amount due.  

In result, we cannot sustain the view adopted  by the Special Court on the application of  Appellant for releasing its money. The Appellant is  entitled to the amount to the extent of Rs. 2.90  crores out of the assets of Respondent No.2.

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Hence, we allow this appeal, set aside the  order of Special Court with direction to work out  appropriate modalities for refund of the amount  due to appellants at an appropriate stage.