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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

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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

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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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