Holding

Bonus shares, dividend and interest are accretions to the pledged shares and form part of the pledged property; the letter of 11 May 1992 created a valid pledge, allowing the bank to retain and sell the pledged securities and retain the accretions, while the Cantriple units must be returned to the Custodian.

Summary

The Supreme Court examined a dispute arising under the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992 where Standard Chartered Bank claimed that shares and securities pledged by broker Hiten Dalal were its security against a loss of Rs. 280.80 crore. The Court held that the bank had proved loss of that amount and was entitled to retain the pledged shares, including the original, rights, bonus shares and the dividend/interest accrued, as these accretions form part of the pledged property. The letter dated 11 May 1992 was deemed to create a valid pledge. The Court ordered that the Cantriple units be returned to the Custodian and affirmed the award of Rs. 30 lakh costs against Dalal. The appeal of the bank was partly allowed, while Dalal's appeal was dismissed.

Issues considered

Whether the bank suffered the loss it claimed and the quantum of loss proved.
Whether the shares delivered by Dalal were given as security and, if so, whether the security was a pledge or a mortgage.
Whether bonus shares, dividend and interest accrued on pledged shares constitute accretions forming part of the pledged security.
Whether the bank is entitled to retain and sell the pledged shares, rights shares, bonus shares and retain accretions.
Whether the Cantriple units must be handed over to the Custodian.
Whether the award of costs against Dalal is proper.
Interpretation and applicability of Section 163 of the Contract Act and related provisions of the Transfer of Property Act.
Whether the Special Court’s findings on loss and on the nature of the security were correct.

Legislation cited

Companies Act, 1956s. 94
Indian Contract Act, 1872s. 148, s. 160, s. 163, s. 172, s. 174, s. 176
Indian Evidence Act, 1872s. 106, s. 163
Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992s. 11, s. 11(2), s. 3(2), s. 3(3), s. 5, s. 9-A
Transfer of Property Acts. 63, s. 64

Subjects

securitiespledgebonus sharesaccretionSpecial Court Actattachmentloss quantificationevidencecontract lawcosts award

Judgment

....._ ~ STANDARD CHARTERED BANK AND ANR. ETC.
v.
A

CUSTODIAN AND ANOTHER ETC.

APRIL 18, 2000

[B.N. KIRPALAND R.P. SETHI, JJ.] B
..,. Special Court (Trial of Offences Relating to Transactions in Securities)
Act, 1992 Sections 3(2) read with Sections 3(3), 5, 9-A and 11-Custodian
constituted under the Act notifying name of R-2, a share broker, under Section
3(2)-Custodian calling upon the appellant either to hand over shares c
belonging to R-2 or to obtain appropriate order from the Special Court
constituted under the Act-Appellant claimed to have made investments in
securities through R-2 but the same was not backed by securities and banker's
). receipt-Appellant claiming title and interest in certain shares and securities
worth Rs. 145 crores received from R-2, filed a suit for a declaration that R-
2 had no right, title or interest in the said shares on the date of the D
notification-Appellant also claiming that the said shares were validly
pledged in favour of the appellant bank and the said shares could be adjusted
against the admitted liability of R-2 through a letter dated 11.5.1992-Held,
Special Court had to be satisfied by independent evidence and not merely on
the basis of the admission of R-2 that appellant had suffered loss-On facts, E
held, appellant had suffered loss which could enable it to retain and dispose

- off the shares and debentures which had been pledged to it by R-2 and
therefore, Custodian cannot ask the appellant to hand over the same-Also,
R-2 had created a pledge in favour of the appellant not only of the shares and
securities but also of the bonus shares, dividend and interest accrued on the
pledged shares-Bonus shares, interest and dividend were accretions to the F
pledged shares and securities which could not be ordered to be handed over
to R-2 unless redemption took place-Further, appellant was entitled to sell
all the original shares and stock handed over by R-2 and also to retain the
... dividend and interest accrued on such original shares and securities-Also
held, in view of the loss suffered by appellant, award of costs of Rs. 30 lacs G
in favour of appellant against R-2 was justified.

'"" Companies Act, 1956-Bonus Shares-Nature of and when to be issued.

Contract Act, 1872-Sections 148, 160, 163, 172, 174 & 176-Bailment
ofproperty for securing payment of debt-Held, bailor has a duty to return the H
81
82 SUPREME COURT REPORTS [2000) 3 S.C.R.
A pledged goods on repayment ofdebts-In case ofincrease in the value ofgoods
pledged, pledgee is entitled to the increase as integral part of his secwity-
Thus in case of shares and debentures pledged with the bank as security,

B
dividend and interest accrued on such pledged shares and debentures fanned
part of the pledged secwity-Such accretions is to be returned by pledgee-
However, in case of default in payment of debt, a pawnee also has the right to
sell the accretion along with the original goods pledged after due notice.
-
Worm and Phrases-Worm "bonus shares"-Meaning of

With a view to deal with large scale mal-practices in transactions in
Government and other securities indulged in by some brokers in collusion
c with employees of banks and financial institutions and in particular to
ensure speedy recovery of the huge amounts from the individual account of
certain brokers, the Special Court (Trial of Offences Relating to Transac-
tions in Securities) Ordinance, 1992, followed by an Act was passed. Section
3 of the Act enabled the Central Government to appoint one or more
D Custodian having an authority to notify the name of any person involved in
any offence relating to transactions in security, to notify in the official
gazette. Under Section 3(3), movable and immovable properties of such
notified persons stood attached simultaneously with the issue of the notifi-
cation and was to be dealt with by the Custodian in such manner as the
Special Court established under Section 5 of the Act, presided over by the
E
sitting Judge of the High Court, so directed.

F
Name of R-2 was notified by R-1 who came to know that some shares
and securities belonging to R-2 were in appellant bank and that the appel-
lant had got some of the shares transferred to its name. R-1 directed R-2
either to hand over possession of shares and securities to R-1 or to obtain
-
appropriate direction from the Court in case the appellant claimed any title
to the said shares. Thereafter, Appellant filed a suit for such direction
before the High Court. The case of the appellant in the suit was that it had

G
made investments in securities through R-2 (stock broker) but same were
not backed by delivery of securities and banker's receipt. There was a
short-fall of Rs. 1300 crores; that R-2 admitted his liability through a letter
dated 11.5.1992 and it was an admitted fact that this letter was signed by R-
-
2 on 18.5.1992; that appellant was entitled to exercise the ownership right
in respect of the said shares and to the accretions thereon which may have
been received by the appellant; that R-2 had no right, title or interest in the
H shares on the date of the notification; that the said shares were validly
STANDARD CHARTERED BANK. v. CUSTODIAN AND ANR. 83
-~ pledged in favour of the appellant bank and the said shares could be A
adjusted against the admitted liability of R-2; that the letter dated 11.5.1992
created a valid and existing pledge of the shares and that the rights, bonus
and the dividend received by the appellants formed part of the pledge and
constituted security for the appellants and therefore appellants were enti-
tied to retain possession of the shares and accretions until R-2 satisfied his
B
liability towards the appellants.
"..)r
The Special Court, inter alia, held that appellant were able to prove
loss totaling to Rs. 280 crores while other claims were disapproved, that
letter dated 11.5.1992 of R-2 created a pledge in favour of shares; that the
appellants were entitled to claim original and right shares pledged to them c
in reduction of R-2's liability; that the bonus shares and dividend and
interest accrued on the original shares were not themselves the subject
matter of the pledge and must be handed back by the appellant to R-1 and
a cost of Rs. 30 lacs were awarded against R-2 and in favour of the
appellants. Hence these cross appeals.
D
Partly allowing the appeal filed by the Banks and Financial lnstitu-
tions and dismissing the appeal filed by the Share Brokers, the Court

~
.. HELD : 1.1. The Special Courts Act, 1992 contemplates attachment
of all movable and immovable properties from the day when the party is
notified. The attached property is thereupon to be dealt with by the Custo- E
dian in such manner as the Court may direct. The attached property is to be
disposed of by the Custodian under order of the Court and Section 11(2)
specifies the liabilities of the notified party which are required to be paid or
discharge out of the proceeds of the properties of the notified party. It was,
therefore, but right that the Court had to be satisfied by positive evidence, F
and not merely on.the basis of the admission of Respondent 2 that the
appellant Bank had suffered loss inasmuch as purchases were not sup-
ported by deliveries with the result that securities and shares (worth Rs.
145 crores) had been pledged with the appellant. However, it was enough
for the bank to prove that it had paid money in excess of Rs. 145 crores and
had not received shares or bankers' receipt in respect thereof. This would G
give the Bank right to retain the said shares as having been pledged to it.
The Special Court had required the appellant Bank to prove by independ-
ent evidence as to what was the extent of loss suffered by it. One of the
issues between the appellant Bank and the Custodian was as to what was
the extent of loss suffered by the Bank. The Special Court answered the H
84 SUPREME COURT REPORTS [2000] 3 S.C.R.
A issue by holding that the appellant Bank had been able to prove that it had ~
suffered a loss to the extent of Rs. 280.80 crores only. This decision of the
Special Court is affirmed. [96-H; 97-A-B; 101-E-F]

1.2. Insofar as the right shares were concerned, it was accepted by
both the parties that as the appellant Bank had paid for these right shares
B the same belong to it and they were entitled to keep them irrespective of the
question whether they formed part of the pledge or not. The question of
return of right shares does not, therefore, arise in these appeals. [102-B)

1.3. However, the decision of the special Court that the bonus shares,
dividend and interest which had accrued on the pledged shares were not
c themselves the subject-matter of the pledge and must be handed over by
the appellant Bank to the Custodian cannot be sustained. Bonus shares is
an accretion. A bonus share is issued when the company capatalises its
profits by transferring an amount equal to the face value of the share from
its reserve to_the nominal capital. In other words, the undistributed profit
D of the company is retained by the company under the head of capital
against the issue of further shares to its shareholders. Bonus shares have,
therefore, been described as a distribution of capitalised undivided profit.
In the case of issue of bonus share there is an increase in the capital of the
company by transferring of an amount from its reserve to the capital ~
account and thereby resulting in additional shares being issued to the ~

E
shareholders. A bonus shar~ is a property which comes into existence with
an identity and the value of its own and capable of being bought and sold as
such. Neither in Dalmia Investment nor in Hunsur Plywood case was this
Court concerned with a question relating to the valuation of the bonus
share for tax purposes. [102-H; 103-A-D)
F- ,.....
CIT v. Dalmia Investment Co. Ltd., [1964) 7 SCR 210 and Hunsw·
Plywood Works Ltd. v. CIT, [1998) 1SCC355, distinguished.

G
1.4. The dividend and interest which was received by the plaintiffs
and which was relatable to the pledged stocks must also be regarded as
accretions thereto. [103-G]
-
~-
Motilal Hirabhai v. Bai Mani, AIR (1925) PC 86, referred to.

2.1. Itis not possible to accept the contention of the Custodian that as..
and when any accretion takes place the pawnee is liable to hand over the
H accretion to the pawnor. It is true that the words "upon redemption" as
STANDARD CHARTERED BANK. v. CUSTODIAN AND ANR. 85
used in Sections 63 and 64 of the Transfer of Property Act are not included A
in Section 163 of the Contract Act but it is to be seen that if the accretion is
to be regarded as forming part of the bailed property then such accretion
must remain with the pawnee and be dealt with by him in the same manner
as the pledged shares. In other words, the accretion form part of an
attached share as on the date of attachment and it follows that it would also B
be an integral part of the shares when they were pledged and would,
>· therefore, constitute a part of the pledged security. The appellant Bank
would, therefore, be entitled to retain the same and deal with them as
pledged stocks. [106-H; 107-A-B]

2.2. Reading Section 172 with Sections 148 and 160 of the Contract c
Act, it would appear that when goods are bailed for securing payment of
debt or the performance of a promise the bailor would get a right for the
1· return of the said goods when the purpose is accomplished, namely when
the debt is returned or the promise is performed. At the same time Section
176 provides for the pawnee's right when the pawnor makes default. This D
section not only gives the pawnee the right to retain the goods pledged as
collateral security but also entitles the pawnee to sell the pledged goods
after giving the pawnor reasonable notice of the same. H the proceeds of the

... -". sale are less than the amount due, the pawnor continues to be liable to pay
the balance. On the other hand, if the proceeds realised on the sale being
made are greater than the amount due to the pawnee, he is under an
E

obligation to pay over the surplus to the pawnor. [104-D; F-G]

2.3. What Section 163 of the Contract Act really means is that
accretions in respect of the goods bailed cannot be a property of the bailee
but must be returned when the goods themselves bailed are returned. A
F
necessary corollary to this would be that as the pledge extends to such
accretions then when the pledged goods are returned these accretions must
also be given back. But if the pledge extends to such natural increase on the
')
pledged goods it must follow that the pledgee would not only have the right
to retain the said accretions but also have the right to sell the same along G
-r· with the original shares pledged for the purposes of realising amounts due
to it and in respect of which the shares were pledged as security. [106-D-E]

Tejkumar Balakrishna Ruia v. A.K. Menon, [1997] 9 SCC 123, relied
on. H
86 SUPREME COURT REPORTS [2000] 3 S.C.R.
A Halsbury's Laws of England, Vol. 2 para 1524; Story on Law of Bail-
ment, para 292; Chitty on Contracts, 28th Edition, page 162, referred to.

3. Thus, in reduction of Respondent No. 2's liability to the appellants,
they are entitled to sell the original shares, rights shares and the bonus
shares and also to retain the dividend and interest accrued on the original
B shares. [111-F]

4. The appellant Bank's claim of loss of about Rs. 280 crores having
been upheld, the decision of the Special Court awarding cost of Rs. 30 lakhs
against respondent No. 2 is affirmed. [111-B]
c
CIVIL APPELLAIB JURISDICTION : Civil Appeal No. 762 of 1999.
Etc.

From the the Judgment and Order dated 24.12.98 of the Special Court
Constituted under the Special Court (Trial of offences relating to Transactions
D in Securities) Act, 1992 at Mumbai in Suit No. 17 of 1994.

K.K. Venugopal, K.S. Cooper, V.A. Bobde, Tushad Cooper, Mahesh

E
Agrawal, Guru Krishna Kumar, Manish Jha, Prasant Pakhade, S. Prasad, S.
Ganesh, Manish Parekh, P.S. Sudheer, P. Venugopal, K.J. John, Shiraz
Rustomjee, A. Subba Rao, Gaurav Joshi, Mahesh Agrawal, H.S. Chandok and
P.S. Sudheer for the appearing parties.
..
The Judgment of the Court was delivered by

KIRPAL, J. The Reserve Bank of India noticed large-scale irregulari-
F ties and mat-practices in transactions in both the Government and other
securities indulged in by some brokers in collusion with the employees of
various banks and financial institutions. The said irregularities and mal-
practices had led to the diversion of fund from banks and financial institutions
to the individual accounts of certain brokers.
G With a view to deal with this situation and in particular to ensure speedy
recovery of the huge amounts involved, the Special Court (frial of Offences
relating to transactions in securities) Ordinance, 1992 was promulgated on 6th
June, 1992. The said Ordinance has now been replaced by an Act known as
Special Court (Trial of Offences Relating to Transactions in Securities) Act,
H 1992 (hereinafter referred to as 'the Act'). Section 3 of the Act enables the
STANDARD CHARTERED BANK. v. CUSTODIAN AND ANR. [KIRPAL. J.] 87
Central Government to appoint one or more Custodian for the purposes of the A
Act. The Custodian has power under sub- section 2 of Section 3 to notify the
name of any person in the official gazette, who has been involved in any
offence relating to transactions in securities after the first day of April, 1991
and on/or before 6th June, 1992. The effect of a person being so notified was
that according to sub-section 3 of Section 3, notwithstanding anything
B
contained in the Code of Criminal Procedure or any other law for the time
,. being in force, any property, movable or immovable or both, belonging to any
person notified under that sub-section stands attached simultaneously with the
issue of the notification. The property so attached is to be dealt with by the
Custodian in such manner as the Special Court may direct.
c
The Special Court is established under Section 5 of the Act to be
presided over by a sitting Judge of a High Court. The Special Court is to take
cognizance of or to try such cases as are instituted before it or transferred to
it. It is this Court which, under Section 9A, has the jurisdiction to exercise such
power and authority which was exercisable before the commencement of the
Act by a Civil Court in relation to any property standing attached under sub- D
Section 3 of Section 3 or in relation to any matter or claim arising out of
transactions in securities entered into after first day of April, 1991 and on/or
before 6th day of June, 1992, in which a person notified under Section 3(2)
A is involved as a party, a broker, intermediary or in any other manner.
'.. E
On 8th June, 1995, respondent No. 1 the Custodian, who had been
appointed under the Act, notified Hiten P. Dalal (respondent no. 2 in Civil
Appeal No. 762 of 1999 and appellant in Civil Appeal No. 1878 of 1999)
under Section 3(2) of the said Act. The Custodian then got to know that some
shares and securities, which belonged to respondent no. 2, were in the
..... possession of the appellant bank. It also came to the knowledge of the F
Custodian that the appellant bank had got some of the shares transferred to its
name. Correspondence was then exchanged between the Custodian and the
appellant bank whereunder the appellant bank was called upon by the
Custodian to either hand over the shares and securities to the Custodian or the
bank should obtain an appropriate direction from the Court in case the G
appellant bank was claiming any title to the said shares

The demand of the Custodian re.quiring the appellant bank to hand over
the said shares which it had obtained from the notified party led the appellant
bank, which is incorporated under the laws of England and Wales and has its
Head Office at 1, Aldennanbury Square, London, and the second appellant H
88 SUPREME COURT REPORTS (2000] 3 S.C.R.
A which is an existing company under the Companies Act, 1956 and is a wholly
owned subsidiary of the 1st appellant, to file a suit No. 1958 of 1993 in the
Bombay High Court. On transfer to the Special Court, the suit was numbered
as Suit No. 3 of 1994. On 29th June, 1994, the appellants withdrew suit No.
3 of 1994 with liberty to file a fresh suit. It is thereupon that the appellants
filed suit No. 17 of 1994 from where the. present appeal arises.
B
The case of the appellants in the plaint, inter alia, was that on 30th
April, 1992, one Mr. Arvind Lal, an employee of the Bank, inf01med one Mr.
R Iyer, a Director of the Local Currency Group, Investment Banking Division
in the bank, that approximately Rs. 800 crores of investments made by the
c appellant bank appellant through Hiten Dalal were not backed by securities or
banker receipts. How this shortfall happened, was not known to the higher
officials of the appellant bank till 10th May, 1992. Thereafter enquiries were
made by the appellant bank to ascertain the short-fall and efforts were made
to recover the same. According to the appellants the shortfall was ascertained
to be in the region of approximately Rs. 1300 crores. It was alleged that there
D
were meetings between the officials of the appellants and Hiten Dalal wherein
the said notified party admitted and acknowledged his liability and he had
given various proposals for re-payment and delivery of various stocks in
which there was a short-fall. According to the appellants Hiten Dalal did not
fulfil his commitments to deliver cash or stock. Hiten Dalal is alleged to have
E agreed to and deliver, between 11th May, 1992 and 13th May, 1992, various
..,
shares, securities, bonds and debentures (hereinafter referred to for the sake
of convenience as 'shares'). On 14th May, 1992 the Manager, Legal Services
of the Bank, advised that a letter should be obtained from Hiten Dalal in order
to eliminate the possibility of his subsequently claiming that the said shares
had been delivered by way of safe custody. A letter containing the understand-
F
ing between the parities was drafted by the in-house lawyer of the appellant
bank and was given to have it transcribed ·on his note paper. On 18th May,
1992 Hiten Dalal brought the draft to the office of the Bank where it was typed
and signed by Hiten Dalal. It is an admitted fact that though the letter was
signed on 18th May, 1992, the said letter, however, bears the date of 11th May,
G 1992.

Alternative claims were put forth by the appellan.ts in the said suit. In
the first instance it was claimed that the shares, the details of which were
mentioned in the annexure to the said letter dated 11.5.1992 and worth
H approximately Rs. 145 crores, were deliver,ed by Hiten Dalal in partial
STANDARD CHARTERED BANK. v. CUSTODIAN AND ANR. [KIRPAL, J.] 89

_; discharge of his liability to the appellant Bank in pursuance to the aforesaid A
agreement which was recorded in a note dated 18th May, 1992. The case of
the appellants was that the bank is entitled to exercise ownership right in
respect of the said shares and to the accretions thereon which may have been
received by the appellants. The appellants also sought a declaration that Hiten
Dalal had no right, title or interest in the said shares and the same did not
B
belong to him on the date of the notification. It may here be noted that the
counsel for the appellants did not press this claim of ownership before the
Special Judge.

The second alternative claim by the appellants was that the said shares
were validly pledged in favour of the appellant bank under the letter dated 11th c
May, 1992. In exercise of its rights as pledgees, the appellant bank claimed
that the said shares had been adjusted against the admitted liability of the
second respondent to the appellant bank. It thus claimed ownership over the
+- said shares. This plea also was not pressed by the appellants before the Special
Court inasmuch as it conceded that in law no such right existed in a pledgee.
D
The third alternative put forth in the plaint by the appellants was that
the letter dated 11th May, 1992 created a valid and existing pledge of the
shares and that the rights, bonus and the dividends received by the appellants
formed part of the pledge and constituted security for the appellants. The
appellant bank claimed that it was entitled to retain possession of the shares
.E
and accretions thereon until the second respondent satisfied his liability
towards the appellants. The appellants claimed a right to sell the pledged
shares and appropriate the sale proceeds towards partial satisfaction of the
outstanding liability of Hiten Dalal of Rs. 1253 crores. The appellants thus
claimed that as pledgees they were entitled to have the shares transferred in
-;... their names without the process of certification. By an amendment in 1996, F
another alternative claim put-forth by the appellants was that the said shares,
debentures, bank receipts, bonds and securities and the rights and bonus
received by the appellant bank stood mortgaged to it The appellants claimed
that a sum of Rs. 30040885.00 expended by the appellant bank on purchase
of right shares and for preservation of the mortgaged security formed part of G
the mortgage debt The appellants thus claimed that they were entitled to retain
,... the mortgaged shares and securities and the accretions received in respect
thereof.

The custodian in its written statement did not admit the correctness of
the facts stated in the plaint According to the custodian, Hiten Dalal was a H
90 SUPREME COURT REPORTS [2000] 3 S.C.R.
A notified party and the shares worth Rs.145 crores which were in the custody ).._
of the appellants were the property of the said notified party. By virtue of the
provisions of the Act these shares stood attached as on the day when the name
of Dalal was notified and the said shares could not be dealt with by the
appellants except by and under the directions of the court. The custodian
denied that the appellants were entitled to any of their claims.
B
In his written statement the defence which was, inter alia, taken by
Hiten Dalal was that he was acting as a broker in securities and as such was
dealing with the appellants for the last four years. He did not admit that there
was any shortfall in respect of the transactions, which had taken place through
c him. He specifically denied that the purchases approximating Rs.1253 crores
were not supported by delivery of stocks or acceptable bank receipts. On the
contrary Dalal averred that the appellants had committed several irregularities
and were attempting to transfer the burden on him. He denied having accepted
any liability to pay any amount to the appellant bank or having admitted to
the appellants having suffered any loss as alleged or at all. With regard to the
D.
stocks and shares worth Rs.145 crores which were lying with the appellants,
the case of Dalal was that two employees of the appellants, namely, Ravi Iyer
and Siva Kumar had forcibly taken away those stocks which had been lying
in his office and which belonged not only to him but also to his wife and some
of his customers. Dalal claimed that these officers threatened him that if he
E did not cooperate they would prosecute and ruin him. Dalal further alleged that
his signatures were taken on blank documents and the appellants had wrong-
fully used those documents with blank signatures in order to foist a false claim
against him. He further alleged that on 18th May, 1992 under threat of physical
torture, criminal prosecution and threat to that his life and that he would be
F ruined the appellants made him sign a letter dated 11th May, 1992. In short
he denied that he had voluntarily admitted any liability towards the appellants.

On the basis of the pleadings the Special Court framed sixteen issues
as between the appellants an!l respondent no. I and another seventeen issues
between the appellants and respondent no. 2. It is not necessary, for deciding
G these appeals, to refer to the said issues inasmuch as the Special Court itself
observed that though a number of issues had been raised there were only four --,.-
questions which arose for consideration and they were; [i] whether the
appellants herein had suffered a loss as claimed or at all; [ii] whether
respondent no.2 had given the said shares as securities and/or the same were
H taken from him forcibly; [iii] if the said shares were given as securities then
STANDARD CHARTERED BANK. v. CUSTODIAN AND ANR. (KIRPAL, J.] 91
the question would also be as to whether it was by way of pledge or mortgage; A
and [iv] whether rights and bonus shares, dividend and interest on the said
shares formed part of secured assets.

It may here be noted that before the Special Court counsel for the
appellants stated that he was not pressing the plea of pledge with right of
appropriation. He contended that the appellants were only pressing that in B
respect of the shares in question which they had in their possession there was
either a mortgage or pledge in respect thereof.

When the Special Court was framing issues relating to the question as
to how the appellants had been able to prove the loss caused to them by Dalal
and if so to what extent, the counsel for the appellants had contended that
Dalal had admitted his liability in the said letter of 11th May, 1992 and other
c
documents and, therefore, it was not necessary for him to prove the loss. The
Special Court over-ruled this submission but no speaking order was passed
inasmuch as the counsel for the appellants informed that if the court so desired
the appellants would prove the loss. The court then proceeded with the trial
of the case on the basis that the loss stated to have been suffered by the D
appellants was not to be attempted to be proved only on the basis of the
admissions of Dalal. The appellants proceeded with the trial claiming that loss
had been caused to them by their having paid moneys in purchase transactions
and their not having received deliveries of stocks/bankers receipts.

The appellants led evidence in support of their case. On behalf of Dalal
the court was given to understand that he will enter the witness box in order
E
to substantiate his plea of physical torture, threat of criminal prosecution,
coercion etc. Ultimately Dalal chose not to give evidence before the court. On
24th December, 1998, the Special Court delivered its judgment and, inter alia,
held that;

(1) the appellants had been able to prove loss totalling Rs. 280.80 F
crores and that other losses alleged by the appellants were
disproved;

(2) no coercion had been exercised by the appellants on Dalal;

(3) the letter dated llth May, 1992 addressed by Dalal to the G
appellants created a pledge in favour of shares and sa.id deben-
tures. particulars of which were given in annexure to the said
letter. The claim of mortgage of the said shares was not
accepted;

(4) the appellants were entitled to sell the original and right shares H
92 SUPREME COURT REPORTS [2000] 3 S.C.R.
A pledged to them in reduction of Dalal' s liability to the appel-
lants;

(5) bonus shares and dividend and interest accrued on the original
shares pledged were not themselves the subject matter of the
pledge and must be handed back by the appellants to the
B Custodian;

(6) Cantriple Units, referred to in the letter dated 11th May, 1992,
received by the appellants from Dalal must be handed back by
the appellants to the custodian as the appellants had not
succeeded in showing that they had any right, title or interest
c in respect thereto and nor had it been proved that the said units
had been pledged with the appellants.

(7) Costs of Rs. 30 lacs were awarded against respondent no. 2 and
in favour of the appellants.

D Aggrieved by the findings of the Special Court in relation to the
quantum of loss suffered, the rights of the appellants in regard to bonus shares
and dividend and interest which had accrued on the original shares, which had
been pledged, as well as the direction to hand over Cantriple Units to the
custodian and lastly the strictures passed against certain employees of the
appellants, appeal No. 762 of 1999 has been filed.
E
Hiten P. Dalal has filed appeal No. 1878 of 1999 challenging the
judgment of the Special Court which had accepted the appellants claim
regarding loss amounting to Rs. 280.80 crores. He also challenged the
directions regarding handing over of the Cantriple Units by Standard Char-
tered Bank to the custodian and lastly the challenge is to the costs of Rs. 30
F lacs that had been awarded against him.

The four questions, which were considered by the Special Court, are
what arise for consideration in these appeals before us. We will first deal with
the issue relating to the loss claimed to be suffered by the appellant bank and
its right to retain the securities, which were delivered to it
G
In the suit, which was filed, it was inter alia stated in the plaint that the
appellant bank had suffered a loss of about Rs. 1253 crores on its dealing with
Dalal. It is on this basis that it sought to retain and appropriate securities worth
Rs. 145 crores which, admittedly, had been delivered by Dalal to the appellant
bank between 11th and 15th May, 1992. The claim of the appellant bank was
H based on the letter dated 11th May, 1992 (Ex. G) in the suit It has come in
STANDARD CHAR1ERED BANK. v. CUSTODIAN AND ANR. [KIRPAL, J.] 93
the evidence and it is not disputed that this letter was prepared by the officials A
of the appellant bank and was signed by Dalal on 18th May, 1992. This letter,
however, was ante dated to 11th May, 1992. This letter addressed to the
Standard Chartered Bank, Bombay reads as follows:

"Dear Sirs,
B
Re: Transactions in Government and other securities

I. In the past 4 years I have been acting as your broker for
transactions in Government and other securities.

2. I am aware that you are in the process of reconciling your c
purchases/sales through me of Government and other securities
and whilst the reconciliation is yet to be completed, you have
ascertained as of date that the following purchases aggregating
Rs. 1258 crores are not supported by deliveries of stocks and/
or bank receipts of banks acceptable to us.
D
Type of Security Transaction Value

15 Crores units Rs. 200 crores (Karad B.R.)
9% IRFC (111) Rs. 385 Crores (Metro B.R.)
9% IRFC (1/4)
Missing B. Rs. Rs. 45 crores (various B.Rs) E
12.5% 001 2007 Rs. 80 crores (Karad SGL)
6% 0011994 Rs. 50 crores (Metro SGL)
11 % IDBI 2002 Rs. 20 crores (Metro B .R.)
11.5% IDBI 2011 Rs. 47 crores (Karad B.R.)
8.75% IDBI 2000 Rs. 23 crores (Karad B.R.)
F
6 crore units Rs. 90 crores (Metro B.R.)
12% ICICI 2011 Rs. 50 crores (Metro B.R.)
Cantriple Rs. 205 crores (Physical)
Cantriple (Expected) Rs. 58 crores

Rs. 1253 crores G
---------------------------------------------------------------------,,
Y' The letter further goes on to say that Dalal had delivered to the bank stocks,
shares, deposits etc., as listed in the annexure to the said letter by way of
securities towards the short-fall and/or any further short-falls which may be
ascertained. The stocks and shares which were listed in the annexure to this
H
;(

94 SUPREME COURT REPORTS [2000] 3 S.C.R.
A letter were the one which were handed over by Dalal to the appellant bank
>--. ...
between 11th and 15th May, 1992 and were stated to be worth Rs. 145 crores,
in respect of which, the present suit was filed. By this letter Dalal further
agreed to keep the appellant bank indemnified against any loss which it might
have incurred and/or suffered upon the appellant bank completion of final re-
conciliation of its account with Dalal and he undertook to make good any such
B
losses either by payment in cash or by physical delivery of such other assets
as the bank might require. The letter also postulated that if on the completion
~
of the re-conciliation, aggregate of the cash paid and the value of the assets
delivered exceeded the amount of loss identified, then the Bank was to refund
such excess to Dalal. He further confirmed and agreed that the appellant bank ..,...._
c was authorised to sell the stocks, shares, debentures etc., which wer~ handed
over to the bank and to appropriate the proceeds thereof to partly liquidate his
liabilities to the bank. If there \\\as any short fall after such appropriation, Dalal
held himself to be personally responsible to pay to the bank such balance as
was outstanding. -+
D At this stage, we may notice that Dalal did not deny the execution of
this letter. His case in the written statement was that this letter and other
documents were got signed by the bank officials under threat or coercion. He
had contended that the shares, securities etc., which were listed in Exhibit 'G'
had been forcibly taken away by the appellant bank officials. j..._
E
The Special Court, after taking all the evidence into consideration, came
to the conclusion that the said shares etc., had not been forcibly taken away
from DaiaI but he had, on the contrary, handed over these shares as security.
In arriving at this conclusion, the special court held that it was unbelievable
-·
that the shares would be forcibly taken away from DaiaI between 11th and
F 13th May, 1992 and for a period of three days at least he would make no
~
complaint or try to stop the appellants from taking away the said shares
forcibly. Admittedly, there had been a meeting between Daial and the
Advocate of the appellants and the Special Court found it inconceivable that ~
force had been used at the time of taking away all the shares forcibly.
G We have gone through the evidence and we agree with the aforesaid
conclusion of the Special Court to the effect that the contention of Dalal that --..,...-
the said shares were taken away from him forcibly is not correct. In the issues
which were framed the onus of proof that the letter dated 11th May, 1992 had
been executed under threat of physical tenor and criminal prosecution was on
H Dalal. Hiten Dalal however chose not to enter the witness box in support of
STANDARD CHARTERED BANK. v. CUS1DDIAN AND ANR. [KIRPAL, J.] 95
,....,.. .A this plea. Not only did he not lead any evidence in order to prove coercion, A
the appellant bank on the other hand examined witnesses who clearly proved
that Dalal had not only signed the letter dated 11th May, 1992 but he also
signed other documents to which we will presently refer. As Dalal had failed
to step into the witness box or lead any evidence on his behalf, the Special
Court rightly drew an adverse inference against him.
B
We inust, therefore, proceed on the basis that Ex. 'G' even though
prepared by the employees of the appellant bank had been voluntarily and
willingly signed by Hiten Dalal. We also proceed on the basis that the shares,
securities etc., had been delivered by Dalal to the appellant bank valued at Rs.
145 crores between 11th and 15th May, 1992. It is in this background that we c
must examine the claim of the appellant bank with regard to the loss stated
to have been suffered by it.

+ On the basis of the evidence which was led before it, the Special Court
observed that out of items of securities mentioned in Ex. 'G', items 2,3,4,6, 11, 12
and 13 were dis-proved. It held that "it is proved that in respect of these items, D
there is no loss. The claim for Rs. 795 crores thus stands disproved".

Having held that the claim for loss of Rs. 1253 crores was an exagger-
ated claim, the Special Court further came to the conclusion that items 5,7,8
"" & 9 were also dis-proved or in any event, they could not be relied upon an~
used for the purpose of calculating loss. It upheld the case of the appellants E
with regard to items 1 and 10. Lastly, the Special Court, came to the
conclusion that on the basis of the evidence produced before it, the appellants
had made a payment of Rs. 201 crores for the purchase of units of U.T.I. of
the face value of Rs. 15 crores but had not received the said securities. It also

• accepted the claim of loss of Rs. 79 .80 crores which was evident by statement
Ex. 19 which was produced in the court by the counsel for the appellants. The
F
Special Court held that this statement Ex. 19 was tendered under Section 163
of the Evidence Act and the facts stated therein must be regarded as having

- been proved or binding on Dalal.·

It was submitted by Mr. K.K. Venugopal and Mr. K.S. Cooper, learned G
1f" counsel for the appellants that for this case it was not necessary for the
__,. appellants to have established loss of more than Rs. 145 crores. Mr. K.K.
Venugopal submitted that the appellants were not contending in these appeals
that the shares worth Rs. 145 crores had been given to the appellants by way
~ of mortgage. It was submitted that the said shares were pledged to the bank.
H
96 SUPREME COURT REPORTS [2000) 3 S.C.R.
A He however, submitted that the evidence on record would show that the
appellants had been able to prove that the liability of Hiten Dalal towards the
appellants was Rs. 1253 crores. In any event, the Special Court had accepted
the claim of loss of the appellants to the extent of Rs. 280.80 crores which was
,l._
-
much more than the value of the pledged shares. It was submitted that with
regard to the balance claim the Special Court ought not to have given a
B
positive finding that the same stood dis-proved.
....,.
Hiten Dalal, in the appeal filed by him, has challenged the acceptance
by the Special Court of the loss of Rs. 280.80 crores stated to have been
suffered by the appellant bank in its dealing with him. So far as the Custodian
c is concerned, Mr. Shiraz Rustamjee, learned counsel for the Custodian,
submitted that it accepted the loss of Rs. 201 crores which was more than
sufficient to cover the value of the pledged shares of Rs. 145 crores but he
submitted that the decision of the Special Court in invoking the provisions of
Section 106 of the Evidence Act and in holding that the loss of Rs. 79.80
......
crores has been proved was not correct. In this respect he supported the
D submissions of Shri S. Ganesh, learned counsel on behalf of Dalal.

Before dealing with the correctness of the findings of the Special Court
it will be appropriate to analyse the said letter dated 11th May, 1992 Ex. 'G'.
As has already been observed, this letter was admittedly prepared by the ..._
officials of the appellant bank on the basis of inspection which had been
E
carried out. Para 2 of the said letter states in no uncertain terms that "as on
that date the bank had ascertained that the following purchases aggregating Rs.
1258 crores are not supported by deliveries of stocks and/or bank receipts of
banks acceptable to us". The purchases which are referred to are the thirteen
types of securities, total value of which aggregated Rs. 1253 crores. This
F means that there was an outgoing of Rs. 1253 crores from the appellant bank, .Jr
in cash or in kind and thirteen types of securities listed in para 2 of the said
letter, in respect of which the outgoing had taken place, had not been delivered
or bank receipts .~ respect thereof given. It is to secure the delivery of these
stocks and shares that securities and shares worth Rs. 145 crores listed in
G annexure to this letter were pledged to the appellant Bank.

The Special Court Act, 1992 contemplates attachment of all movable ---r
and immovable properties from the day when the party is notified. The ~
attached property is thereupon to be dealt with by the Custodian in such a
manner as the Court may direct. The attached property is to be disposed off ,..
H by the Custodian under order of the Court and Secti9n 11(2) specifies the
STANDARD CHAR'IERED BANK. v. CUSTODIAN AND ANR. [KIRPAL, J.] 97
_.;, liabilities of the notified party which are required to be paid or discharged out A
~
of the proceeds of the properties of the notified party. It was, therefore, but
right that the Court had to be satisfied by positive evidence, and not merely
on the basis of the adn.ission of Dalal that the appellant Bank had suffered loss
inasmuch as "purchases aggregating Rs. 1258 crores are not supported by
deliveries ...." with the result that the securities and shares worth Rs. 145 crores
B
had been pledged in favour of the appellant bank.
_;
The loss of Rs. 201 crores qua item No. 1 in regard to the non-delivery
of Rs. 15 crores units of U.T.I. of the face value of Rs. 150 crores was proved
through the evidence of Mr. Sanjay Pandit, PW 4. The documents which were
produced in evidence for proving that the appellant bank had made payment c
of Rs. 201 crores for the purchase of the said U.T.I. units, which securities
were not received by the appellant bank, was firstly a: deal slip No. 7941 which
showed purchase of these units from the Bank of Karad. In respect of this
transaction, cost memo had been received by the appellants from the Bank of
Karad on 8.1.1992. A transaction slip dated 8.1.1992 showing the purchase of
Rs. 15 crores U.T.I. units at the rate of Rs. 13.40 (Ex. 'B'- Vol. IV) per unit D
amounting to Rs. 201 crores was proved by PW 4. Also placed on record was
the banker's receipt dated 8th January, 1992 for a sum of Rs. 201 crores.
Against this, on 8th January, 1992, there was a sale of9 per cent l.R.F.C. bonds
of the face value of Rs. 210 crores. By pay order dated 8th January, 1992
bearing No. 231967, a sum of Rs. 199.79 crores was paid to the Bank of E
Karad. Another document Ex. M is the receipt dated 8th January, 1992 issued
by the Bank of Karad acknowledging the receipt of Rs. 201 crores in respect
of said U.T.I. units. In face of the said evidence, Shri Ganesh was unable to
persuade this Court that the decision of the Special Court in accepting the loss
of Rs. 201 crores was incorrect. This finding regarding the loss of Rs. 201
crores is affirmed.
F

Now we come to the next item of loss which was accepted by the
Special Court, namely, that of Rs. 79.80 crores mentioned as item no. 10 in
Ex. 'G'.

During the cross-examination of the appellant bank witness PW 6, the
G
...,. counsel for the Hiten Dalal put him the following question:

"Mr. Rao calls upon the plaintiffs to show any single transaction wherein the
plaintiffs' funds have been diverted by Mr. Hiten Dalal through bank of
Karad". This question was put to the witness on 6th November, 1998. H
~
-
98 SUPREME COURT REPORTS [2000] 3 S.C.R.
A Thereafter on 11th November, 1998, the said PW 6 tendered in evidence Ex. .· ,.~
I

19 (colly) which was a statement containing details of two transactions which .......
indicated that money had ultimately gone to the account of Dalal. One of the
transactions which was listed was item no. 10 of Ex. G. When this statement
was tendered in evidence, the Special Court noted that the counsel for the
appellants had kept in Court all the Deal Slips, Cost Memos, Pay Orders and
B Banker Receipts. These were not marked as exhibits because the counsel for
Dalal stated that he had not called for these documents and the said counsel ~,

had not taken inspection of the said documents. The Special Court observed
that this statement Ex. 19 had to be regarded as having been tendered under
Section 163 of the Evidence Act and, therefore stood proved and was binding
c on Dalal. The Special Court then examined the said Ex. 19 which showed that
the appellants had purchased six crores units of the U.T.I. of the face value
of Rs. 60 crores for Rs. 79.80 crores from the Bank of Karad and had made
payment of the same by Pay Order No. 231919 for Rs. 37.63 crores. This
payment was made after netting of sale of security to Bank of Karad. Ex. 19
D further shows that in respect of said transaction, the appellants had received
a banker receipt No. 18 of the Metropolitan Co-operative Bank. Ex. 19 further
showed that the money which the appellants _paid to the Bank of Karad was
credited into the account of one Abbay Narottam in the Bank of Karad and
thereafter, from that account, an amount of Rs. 36 crores was transferred/
)I...
credited to the account of Dalal with Andhra Bank. The Special Court
E observed that even though the said statement established that Rs. 36 crores bad
been transferred into the account of Dalal, no evidence had been led by him
to show why he had received Rs. 36 crores and/or that it was under some
transaction with the Bank of Karad. In the absence of such evidence, the
Special Court came to the conclusion that this money of the appellant bank
F had been siphoned out by Dalal. The Special Court further noted from Ex. 19
that on 27th November, 1991 the appellant bank purchased 13 per cent
k
M.T.N.L. Bonds of the face value of Rs. 20 crores from the Bank of Karad
and by pay order No. 231079, a sum of Rs. 18.71 crores was paid by the
appellant bank to the Bank of Karad. A sum of Rs. 29.99 crores, which
included the aforesaid sum of Rs. 18.71 crores pllls another sum of Rs. 11.27
G crores, was transferred to the account of Hiten Dalal with Andhra Bank. The
Special Court noted that in this case also it was shown that from the Bank of ---,-.
Karad an amount of Rs. 18.71 crores of the appellant's bank had gone to the
account of Hiten Dalal. The Special Court further noticed that in respect of
this transaction relating to Rs. 18.71 crores regarding the purchase of 13 per
H cent M.T.N.L. bonds, the appellant bank had not claimed that they had
STANDARD CHARlERED BANK. v. CUSTODIAN AND ANR. [KIRPAL, J.] 99
suffered a loss as the said transaction was not listed in Ex. G. While not A
accepting the sum of Rs. 18.71 crores as being loss/suffered by the appellant's
bank, the Special Court accepted the loss of Rs. 79.80 crores being the face
value of six crores Units of the U.T.I. in respect of which Rs. 37.63 crores had
been paid but the said units were not received.

It is contended by Mr. S. Ganesh, learned counsel for the respondent no. B

-·
2 that the Special Court mis-understood and mis- conceived the provisions of
Section 163 of the Evidence Act. He submitted that Section 163 applied only
in the following three conditions:

(i) The specified documents must have been identified by the C
parties concerned;

(ii) That the parties must give notice to the other party to produce
the documents;

(iii) The said documents must have been produced and inspection D
thereof taken by the party who gave notice for the same.

It was contended that these basic conditions, which are necessary for the
application of Section 163 of the Evidence Act, had not been fulfilled and,
therefore, the Special Court was not correct in admitting the said statement in
evidence as Ex. 19. E

Mr. Rustomjee, learned counsel, who appeared on behalf of Custodian,
also submitted that Section 163 of the Evidence Act had been wrongly invoked
in the present case.
F
We are no~ inclined to go into the correctness of the decision of the
Special Court regarding the applicability of Section 163 of the Evidence Act.
Mr. Rustomjee, learned counsel submitted that as far as Custodian is con-
cerned, he had chosen to accept the decision of the Special Court wherein it
had accepted the losses qua item no. 1 stated to have been suffered by the
appellant bank for a sum of Rs. 201 crores. No appeal has been filed by the G
Custodian challenging the correctness of the decision of the Special Court
...,.. accepting the loss of Rs. 79.80 crores. If the Custodian had felt aggrieved an
appeal should have been filed. This not having been done it is not open to Mr.
Rustomjee to submit that this part of the judgement of the Special Court should_
be reversed. H
100 SUPREME COURT REPORTS [2000] 3 S.C.R.
A As far as Dalal is concerned, once the Special Colirt has come to the
conclusion that there was no coercion or undue influence in his signing letter
dated 11th May, 1992, Ex. 'G', it is then not open to him to contend and
challenge the findings of the Special Court which has accepted the claim of
the appellant bank with regard to payment having been made in respect of the
U.T.I. Units of the face value of Rs. 79.80 crores. This is Il}Ore so when we
B
find that the Special Court has noticed that when the stateclent Ex. 19 was
tendered in evidence, the counsel for the appellant bank had kept in court all
the deal slips, cost memos, pay orders and banker receipts in respect of the
said transaction. Dalal having accepted the fact that there had been a non-
delivery of six crores units of the face value of Rs. 79.80 crores which had
c been purchased by the appellant bank, which is evident by his signing Ex. 'G',
it is not open to him to contend that he does not accept the correctness of the
contents of the said letter. In our view, therefore, without expressing any
opinion on the correctness of the findings of the Special Court with regard to
the applicability of Section 163 of the Evidence Act in the present case, the
conclusion of the Special Court to the effect that six crores units of the U.T.I.
D
of the face value of Rs. 79.80 crores had not been delivered to the appellant
bank, even though it had made payment in respect thereof, does not call for
any interference.

With regard to the other items of securities referred to in Ex. 'G',
E learned counsel for the appellant bank invited our attention to Ex. 'E'
collectively which were hand-written notes signed by Dalal on 17th May, 1992
wherein he had undertaken to deliver various shares and securities of the total
value of Rs. 900 crores. Keeping in view the fact that the Special Court had
observed that the appellant bank will have to prove the extent of loss not on
the basis of admission of Hiten Dalal but by leading evidence on its own, we
F
are of the opinion that the best evidence which could have been led in respect
of the other items stated to have been purchased and mentioned in Ex. 'G' was
not led. Apart from the loss of aforesaid amount of Rs. 280.80 crores which
has been accepted by the Special Court and upheld by us, we would have
expected the appellant Bank to lead evidence to prove that it had paid sums
G of money and did not receive the securities mentioned in Ex. 'G'. The main
documentary evidence which was led on behalf of the appellants in respect of
those items was Ex. 'G' and the notes Ex. 'E' which contain the schedule for
the delivery by Dalal of various shares which were to take place from 18th
May, 1992, 19th May, 1992, 20th May, 1992 and 22th May, 1992. These notes
H are signed by Dalal. In addition thereto, there was to be conversion of bank
STANDARD CHARTERED BANK. v. CUSTODIAN AND ANR [KIRPAL, J.] 101
receipts of Canstars having valued at Rs. 10 crores. According to the appellant A
bank, no such delivery took place. The appellant bank, however, did not lead
any evidence to prove that either in respect of the shares and securities
mentioned in Ex. 'E' or in respect of items mentioned in Ex. G, except for
items 1 and 10, any payment had in fact been made by the appellants. The
claim of loss in excess of Rs. 280.80 crores cannot be accepted.
B
The Special Court, ·on the basis of the evidence before it, came to the
conclusion that except for sum of Rs. 280.80 crores, the balance claim of the
appellants stood "dis-proved". As we have already noticed, the suit was filed
by the appellant bank because it had in its possession shares and securities
which had been lodged by Dalal as a notified party with the appellant bank c
between 11th and 15th May , 1992. The appellants had been asked by the
Custodian to establish its right to retain the said shares and securities and this
is the reason why the suit was filed. Even though in the plaint,..!,t was said,
and that is noted in Ex. 'G' itself that the appellant bank had suffered a loss
of Rs. 1253 crores for the purpose of establishing its right to retain and sell
shares and securities worth Rs. 145 crores, it was not necessary for the D
appellant bank to have proved the extent of total loss which it had suffered.
It was enough for the Bank to prove that it had paid money in excess of Rs.
145 crores and had not received shares or Bankers receipt in respect thereof.
This would give the Bank right to retain the said shares as having been pledged
to it. E
Undoubtedly the Special Court had required the appellant bank to prove
by independent evidence as to what was the extent of loss suffered by it. One
of the issues between the appellant bank and the custodian, being Issue No.
2, was as to what was the extent of loss suffered by the Bank. The Special
Court answered the issue by holding that the appellant bank had been able to F
prove that it had suffered a loss to the extent of Rs. 280.80 crores only. Having
come to this conclusion it would have been more appropriate, in our opinion,
for the Spepial Court to have observed that the appellant bank had failed to
prove loss in excess of Rs. 280.80 crores rather than giving a finding that the
loss in excess of Rs. 280.80 crores stands dis-proved. The loss which it had G
suffered was sufficient to enable it to retain and dispose off the shares to the
extent of Rs. 145 crores which had been pledged with it.

In respect of the pledged stock, right shares were subscribed and
obtained by the appellant bank, bonus shares and dividend and interest were
also received by it. In respect of this the two questions which arise are whether H
I
~

102 SUPREME COURT REPORTS [2000] 3 S.C.R.
A .these accretions form part of the pledged property and; secondly if they do not,
then whether the Special Court should have directed the appellant bank to
hand them over to the Custodian.

Before we deal with the main contention it will be pertinent to note that
in so far as the right shares were concerned, it was accepted by all the parties
B that as the appellant bank had paid for these right shares the same belong to
it and they were entitled to keep them irrespective of the question whether they
fonlied part of the pledge or not. The question of return of right shares does
no7.therefore, arise in these appeals.
)''

As far as bonus shares are concerned it was submitted by Mr. Cooper,
c learned counsel for the appellant bank that they are not accretions and no issue
arises whether they should be handed over to the appellant bank or to Dalal.
It was submitted that as bonus share is only a piece of paper it has no intrinsic
value. Reliance was placed on the following passage from the decjsion of this
Court in Commissioner of Income Tax v. Dalmia Investment Company ud.,
D [1964] 7 SCR 210 when in relation to the issue of bonus shares it was observed
as follows:

" .... it takes nothing from the property of the c01:pus and adds nothing
to the interest of the shareholder. Its property is not diminished and
their interestS are not increased. The proportional interest of each
E
shareholder remains the same. The only change is the evidence, which
represents that interest, the new shares and the original shares together
representing the same proportional interest that the original shares
represented before the issue of the new ones. The corporation is no
poorer and the stockholder is no richer than they were before. What
F has happened is that the plaintiffs' old certificates have been split up
in effect and have diminished in value to the extent of value of the
nevi."

This decision was followed by this Court in Hunsur Plywood Worlcs ud. v.
Commissioner of Income Tax, [1998] 1 SCC 335.
G
In our opinion the Court rightly came to the conclusion that bonus share
is an accretion. A bonus share is issued when the company capitalises its
profits by transferring an amount equal to the face value of the share from its
reserve to the nominal capital. In other words the undistributed profit of the
H company is retained by the company under the head of capital against the issue
I
STANDARD CHAR'IERED BANK. v. CUS1DDIAN AND ANR. [KIRPAL, J .] 103
of further shares to its shareholders. Bonus shares have, therefore, been A
described as a distribution of capitalised undivided profit. Section 94 of the
Companies Act refers to the power of a limited company to alter its share
capital. Under Section 94[l)(a) it has power to increase its capital share while
under sub-clause (d) it can sub- divide its share into shares of smaller amount.
Whereas in a case of sub-division an existing share is simply divided or split
B
and it may be argued that no new share or capital is created, but there can be
little doubt that in the case of issue of bonus share there is an increase in the
capital of the company by transferring of an amount from its reserve to the
capital account and thereby resulting in additional shares being issued to the
shareholders. A bonus share is a property which comes into existence with an
identity and value of its own and capable of being bought and sold as such. c
Neither in Dalmia Industries nor in Hunsur Plywood's case was this Court
concerned with a question whether the bonus share could be regarded as an
accretion or not. This Court in those cases was only concerned with a question
relating to the valuation of the bonus share for tax purposes.
D
On the other hand the Privy Council in Motilal Hirabhai and Ors. v.
Bai Mani, AIR (1925) PC 86 had to consider as to whether the pledgee was
required to return to the pledgor, on redemption, bonus shares which had been
issued. The plea taken by the pledgee in that case was that the pledgee was
only required to return the original shares which were pledged and not the
bonus shares which were received. Rejecting this contention it was held that E
the bonus shares were received as arising out of and appertaining to the
original shares and that it was impossible to contend that the right to these
shares could be differentiated from the right to the original shares. Referring
to Section 163 of the Contract Act the Privy Council held that "These shares
(bonus shares) are clearly accessions to the shares expressly pledged or
F
hypothecated, and the pledgor or his representative, the present plaintiff, is
entitled to recover the same.,. Applying the same logic it must follow that the
dividend and interest which was received by the plaintiffs and which was
relatable to the pledged stocks must also be regarded as accretions thereto.

It was then contended by Mr. Cooper that the bonus shares, dividend G
and interest, if they are regarded as accretions to the pledged stocks then they
must also be regarded as fonning part of the pledged property which could
not be ordered to be handed over unless redemption takes place. In other
words, the submismon was that the Special Court could not have pennitted the
appellant bank to have retained the stocks originally pledged but at the same H
104 SUPREME COURT REPORTS (2000) 3 S.C.R.
A time directed that the accretions thereto should be handed over to the
custodian.

Section 172 of the Contract Act provides that the bailment of goods as
security or payment of a debt or performance of a promise is called pledge.
Bailor being the pawnor and pawnee being the bailee. What is bailment is
B defined by Section 148 which, inter alia, provides that bailment is the 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. The person deliv-
ering the goods is called the bailor and the person to whom the goods are
c delivered is called the bailee. Section 160 provides that the goods bailed are
to be returned by the bailee on expiration of time or accomplishment of
purpose. Reading Section 172 with Sections 148 and 160 of Contract Act, it
would appear that when goods are bailed for securing payment of debt or the
performance of a promise the bailor would get a right for the return of the said
goods when the purpose is accomplished, namely, the debt is returned or the
D promise is performed. At the same time Section 176 provides for pawnee's
right when pawnor makes default. This section reads as follows:

"Pawnee's right where pawnor makes default:- If the pawnor makes
default in payment of the debt, or performance, at the stipulated time,
of the promise, in respect of which the goods were pledged, the
-E
pawnee may bring a suit against the pawnor upon the debt or promise,
and retain th~ goods pledged as a collateral security; or he may sell
the thing pledged, on giving the pawnor reasonable notice of the
sale."

F This section not only gives the pawnee the right to retain the goods pledged
as collateral security but also entitles the pawnee to sell the pledged goods
after giving pawnor reasonable notice of the same. If the proceeds of the sale
are less than the amount due, the pawnor continues liable to pay the balance.
On the other hand if the proceeds realised on the sale being made are greater
then the amount due the pawnee is under obligation to pay over the surplus
G to the pawnor.

According to Section 163 of the Contract Act, in the absence of a
contract to the contrary, the bailee is bound to deliver to the bailor or according
to his directions any increase or profit which may have accrued from the bailed
H goods. It is indicated in the section that if a calf is born to a cow then the bailee
STANDARD CHAR1ERED BANK. v. CUSTODIAN AND ANR. [KIRPAL, J.] 105
is bound to deliver the calf as well the cow to the bailor. The custodian claims A
that as and when such accretions have taken place the pledgee has no right
to retain the same.

In this connection it was contended by Mr. S. Rustomjee, learned
counsel for the respondents, that Section 163 mainly provides that the bailee
is bound to deliver any increase in profit which may have accrued but the said B
section does not provide that such delivery is to be made only on accomplish-
ment of the purpose for which the goods are bailed. Had it been the intention
that such accessions were to be delivered only at the time of accomplishment
of the purpose for which the goods are bailed, the Legislature would have
clearly provided for it. To buttress his argument he sought to rely upon c
Sections 63 and 64 of the Transfer of Property Act which provide that where
the mortgaged property in possession of the mortgagee has, during the
continuance of the mortgage, received any accession, the mortgagor, upon
redemption, shall, in the absence of a contract to the contrary, be entitled as
against the mortgagor to such accession. It was contended that the words
"upon redemption" are conspicuous by their absence in Section 163 of the D
Contract Act. He further contended that Sections 163 to 173 of the Contract
Act repeatedly referred to the words "goods pledged" and indicated that the
pawnee's rights including that of sale extended only to the goods pledged and
not to other goods.
E
While interpreting Section 3(3) of the Special Courts Act, 1992, this
Court in Tejkumar Balakrishna Ruia v. A.K. Menon and Am:, [1997] 9 SCC
123 at page 127, in paragraph 9, observed as follows:

"It is perhaps necessary to make clear that the income or usufmct of
attached property is also attached property. Thus, if the property be F
shares, dividends and bonus and rights shares thereon would also be
attached property. It is only income generated by a notified person by
dint of his own labour which falls outside the net of Section 3(3). In
respect of such income, the attachment under Section 3(3) does not
operate."
G
If the accretions are regarded as property which come to existence after
~ the date when the party was notified then in view of T.B. Ruia's case income
generated after the date of notification would fall outside the net of Section
3(3). It, therefore, became necessary for this Court in T.B. Ruia's case to
observe in paragraph 9 that if the attached property is shares then the H
106 SUPREME COURT REPORTS [2000] 3 S.C.R.
A dividends, bonus and rights shares would also be regarded as attached _.,
property. If this be so then would pledge not extend to these accretions to the
shares which were pledged? In this connection it is relevant to notice that
Story on Law of Bailment at para 292 has stated thus: "By the pledge of a
thing, not only the thing itself is pledged, but also, accessory, the natural
increase thereof. As if a flock of sh~ep are pledged, the young, afterwards
B
born, are also pledged." This passage has been relied upon by "Chitty on
Contract", 28th Edition at page 162 where it is noted that "If during the pledge
there is an increase in the value of the thing pledged, the pledgee is entitled
to the increase as part of his security." To the same effect is the view contained
in Halsbury' s Laws of England Vol.36 para 123 where it is stated in
c connection with the special property of the pawnee "If during the contract
there is any increase in the value of the security, the pawnee is entitled to that
increase as part of his security".

From the aforesaid it would follow that what Section 163 of the Contract
Act really means is that accretions in respect of the goods bailed cannot be
D
a property of the bailee but must be returned when the goods themselves bailed
are returned .. A necessary corollary to this would be that as the pledge extends
to such accretions then when the pledged goods are returned these accretions
must also be given back. But if the pledge extends to such natural increase of
the pledged goods it must follow that the pledgee would not only have the
E right to retain the said accretions but also have the right to sell the same along
with original shares pledged for the purposes of realising amounts due to it
and in respect of which the shares were pledged as a security. Not only will
this be in line with the aforesaid observations of this Court in T.B. Ruia 's case
but in arriving at this conclusion we find support from the Halsbury' s Laws
F of England Vol.2 para 1524, where dealing with the bailee's duty to account
it was observed that ''When the return of the bailed chattel constitutes part of
the bailee's obligation, he must restore not only. the chattel itself, but also all
increments, profits and earnings immediately derived from iL" It would follow
from the aforesaid that the accretions to the pledged property would continue
to be retained by the pawnee and, in the case of a notified party, like in the
G present case, the accretions to the pledged property would also be regarded as
attached property to be dealt with in the manner in which the pledged shares
have to be dealt with.

It is not possible to accept the contention of the custodian that as and
ff when any accretion takes place the pawnee is under Section 163 liable to hand
STANDARD CHARIBRED BANK. v. CUSTODIAN AND ANR. [KIRPAL, J.] 107

, .. ~ over the accretion to the pawnor. It is true that the words "upon redemption"
as used in Sections 63 and 64 of the Transfer of Property Act are not included
A

in Section 163 of Contract Act but it is to be seen that if the accretion is to
be regarded as forming part of the bailed property then such accretion must
remain with the pawnee and be dealt with by him in the same manner as the
pledged shares. In other words the accretions form an integral part of the
B
attached shares as on the date of attachment, as held in T.B. Ruia's case, and
it follows that it would also be an integral part of the shares when they were
pledged and would, therefore, constitute a part of the pledged security. The
appellant bank would, therefore, be entitled to retain the same and deal with
them as pledged stocks. The decision of the Special Court that the bonus
shares, dividend and interest which had accrued on the pledged shares were c
not themselves the subject matter of the pledge and must, therefore, be handed
over by the appellant bank to the custodian cannot be sustained.

In the aforesaid letter dated 11th May, 1992, Ex. 'G', item no.12 refers
to Cantripie Units having a transaction value of Rs. 205 crores and item no.13
was shown as "Cantriple "accepted" having a transaction value of Rs. 58 D
crores. Insofar as Cantriple Unites of the value of Rs. 58 crores are concerned,
it appears that by an order dated 10th June, 1993, passed in Miscellaneous
Application No.29 of 1993, the Special Court directed the appellant bank to
hand over the said units to the custodian. This order has attained finality and
no contention has been urged in respect thereto. E
· What now remains to be considered is the order of the Special Court
directing that the Cantriple Vnits of the value of Rs. 205 crores should be
handed over by the appellant bank to the custodian. In arriving at this decision
the Special Court dealt with the evidence which had been led by the appellant
bank in respect of this item and observed that the appellant bank had been F
taking contradictory stands in respect thereto. The Court came to the conclu-
sion that no payment had been made in respect of these shares and the case
which was then sought to be put forth that the said units had been received
as security was false.

It does appear that the appellant bank has, in respect of Cantriple Units,
G
....(· adopted varying and contradictory stands. While in the letter dated 11th May,
1992, the tenor was that payment had been made but these units had not been
given, but in the letter dated 20th May, 1993, the stand taken was that these
Cantriple Units formed part of the pledged securities. In another letter of 16th
June, 1993, it was stated that these units were purchased and set off against H
108 SUPREME COURT REPORTS [2000] 3 S.C.R.
A earlier transaction. A witness on behalf of the appellant bank gave evidence
to the effect that the units were taken by way of security and were not
purchased at all.

In the light of the said evidence the Special Court rightly came to the
conclusion that the appellant bank had no right to retain these units in their
B possession. These units had to be regarded as being attached. We may,
however, note that in respect of these units Miscellaneous Application No.36
of ~993 had been filed by Can Bank Financial Services Ltd. before the Special
Court. The claim of Can Bank Financial Services was that the appellant bank
herein had forcibly taken away the said Cantriple Units. The Special Court has
c in this case directed that these units should be handed over to the custodian
but the appellant bank may establish a claim to these units in any other
proceedings. It may here be noted that the contention _on behalf of the
appellant bank was that pending before the Special Court were Suit No. 9 of
1994, Suit No. 45 of 1995 and Miscellaneous Application No. 36 of 1993
where the question of title to these Cantriple Units was directly in issue.
D
The grievance of the appellant bank in these appeals is that the Special
Court erred in giving detailed findings in respect of these Cantriple Units and
also erred in directing the appellant bank to hand over the said units to the
custodian because Cantriple Units were outside the scope of the suit. The fear
of the appellant bank is that the fmdings of the Special Court with regard to
E
the appellant bank's right to retain these Cantriple Units may prejudice them
in the other proceedings.

In paragraph 50 of the plaint it has been categorically stated that the suit
was restricted to seeking relief in respect of the shares, securities, debentures
F and bank receipts delivered between 11th to 13th May, 1992. The Cantriple
Units in question had been delivered by Dalal on 9th May, 1992. There is no
specific issue, which was framed with regard to the question, as to whether
these Cantriple Units had been purchased by the appellant bank or had been
handed over to them by way of security. Once the Special Court has come to
the conclusion that the appellant bank has not proved that Rs. 205 crores,
G representing the transaction value of these Cantriple Units, were paid for or
were pledged, it was justified in directing handing over of the said units to the
custodian. Other proceedings specifically relating to these Cantriple Units are
still pending before the Special Court, especially Miscellaneous Application
No. 36of1993. Under the circumstances it would appear that the observations
H and findings of the Special Court relating to the Cantriple Units, in the absence
STANDARD CHAR'IERED BANK. v. CUSTODIAN AND ANR. [KIRPAL, J.] 109
of evidence being led before it by all the interested parties, can only be A
regarded as, prima facie so as to enable it to come to the conclusion that the
said Cantriple Units must be handed over to the custodian and his retention
would be subject to the outcome of the other legal proceedings including
Miscellaneous Application No. 36 of 1993 and the appellant bank and other
parties would be entitled to try and establish their rival claims to get possession
B
of the said Cantriple Units.

Learned counsel for the appellant bank also submitted that the observa-
tions of the Special Court to the effect that there appeared to be some
arrangement which subsisted between the appellant bank and Dalal were
unwarranted and uncalled for. We do not intend to make any observation in c
connection therewith because the Court has itself stated that it was merely a
presumption, and not a finding, that the appellant bank had entered into some
sort of a transaction in securities with Dalal with the understanding that they
would get a fixed return of 15 per cent on those transactions. Once the Court
itself observed that " loss is not a finding but merely a presumption", the said
observations cannot in any way adversely affect the appellant bank or reflect D
as being a positive fmding in respect of its business transactions. Perhaps the
Special Court could have avoided the said observation but, as we have already
observed, these observations should not and cannot cause any prejudice to the
appellant bank in any other matter which is pending before the Special Court.
E
It was submitted on behalf of the plaintiffs that the Special Court ought
not to have passed strictures or made harsh observations against the appellant
bank. It was contended that the appellant bank was victim of conspiracy
between their employees and Dalal on account of which it suffered Joss
heavily. Services of several officers alleged to be involved in the conspiracy
were tenninated by the appellant bank and criminal proceedings were insti- F
tuted. This shows, it was contended, that when the appellant bank got to know
about the acts of its employees it acted in a bona fide manner and no strictures
should have been passed against it.

While examining the evidence the Special Court has observed that the
appellant bank was creating false record, which was admitted by their own
G
witnesses, and further that in the greed for profit the appellant bank was
flouting rules and regulations of the Reserve Bank of India. This and the other
observations made by the Special Court, though harsh, appear to be amply
justified. In making these observations the Special Court took note of the fact
that according to the appellant bank's own witnesses false records were H
110 SUPREME COURT REPORTS [2000] 3 S.C.R.
A created in the case of 9 per cent IRFC Bonds to hide a hole from the Reserve .\· •
Bank of India. The false record, which was created, showed purchase of
. ·?·
Cantriple Units even when there was no transaction of purchase. This was
done because inspection by the Reserve .B.ank of India was expected. None of
the officers against whom observations have been made by the Special Court
have chosen to challenge the same. No orders need be passed, in our opinion,
B
with regard to the said observations of the Special Court made with reference
to the officers of the bank who suddenly one day realised in May 1992 that
the bank had made purchases of securities etc., for Rs.1253 crores but in
respect of which deliveries have not been made, the case which was set up in
the letter dated 11th May, 1992. If before 11th May, 1992 the management was
c unaware of the short fall of arrears worth Rs.1253 crores, as claimed by the
appellant bank, the strictures passed and the observations made against the
appellant bank by the Special Court were eminently justified.

Hiten Dalal in C.A. No. 1878 of 1999 has impugned the decision of the
Special Court upholding the appellant bank's claim for losses/deficiencies to
D
the. extent of Rs. 280.80 crores. The decision of the Special Court in this regard
has already been approved by us herein above and nothing more need to be
said about this. One other contention which requires consideration relates to
the awarding of the costs of Rs. 30 lacs by the Special Court against Hiten
)r
Dalal. Arguing the appeal on behalf of Hiten Dalal, Mr. Ganesh contended that
E he has serious objection to the award of the huge costs of Rs. 30 lacs to
Standard and Chartered Bank. He contended that it was the Standard and
Charted Bank which has led evidence for all along 33 days, the Special Court
has given special fmdings that except for PW-4 the: other witnesses of the bank
had lied or prevaricated and in respect thereto severe strictures had been
F passed. As many as 11 claims put up by the appellant bank had been rejected
by the Special Court and that the Special Court had also found that the
appellant bank had constantly shifted their stand. It was contended that the
award of costs of Rs. 30 lacs was grossly excessive and Hiten Dalal should
not have been directed to pay this amounL

G The Special Court observed that it did not doubt that the appellant bank
had incurred costs of over Rs. 2 crores. It then held that this was not a fit case ~
where actual costs should be awarded but it restricted the costs to Rs.30 lacs.
This represents 15 per cent of the costs actually incurred by the appellant bank.
It is to be noted that the plea of Dalal was that securities had been taken away
H from him by the appellant bank's officers by force and coercion. The appellant
STANDARD CHARTERED BANK. v. CUSTODIAN AND ANR. [KIRPAL, J.] 111
bank had, therefore, to lead evidence to disprove this case and to prove the A
-- f circumstances under which the letter dated 11th May, 1992 Ex. 'G' was
executed. The appellant bank's claim of loss of about Rs. 280 crores has been
upheld and this being so the decision of the Special Court awarding costs of
Rs. 30 lacs cannot in any way be regarded as incorrect.

As a consequence of the aforesaid discussions and findings it follows B
that:
:y·
(1) In Civil Appeal No.762 of 1999, filed by the Standard Chartered
Bank and Another:

(a) The decision of the Special Court holding that the appellants c
had been able to prove loss to the extent of Rs. 280.80 crores
is affirmed.

(b) Bonus shares, dividend and interest were accretions to the
pledged stock and have to be regarded as forming part of the
pledged property which could not be ordered to be handed over D
unless redemption takes place.

(c) We hold that the letter dated 11th May, 1992, addressed by
Hiten P. Dalal to the appellants created a pledge in their favour
not only of the shares and debentures worth Rs. 105 crores,
particulars of which were given in the said letter, but also on the E
bonus shares, dividend and interest accrued on the said pledged
shares and debentures.

(d) In reduction of Dalal' s liability to the appellants, they are
entitled to sell the original shares, rights shares and the bonus
shares and also to retain the dividend and interest accrued on
F
the original shares.

(e) Cantriple Units referred to in the letter dated 11th May, 1992

... representing transaction value of Rs. 205 crores shall be re-
turned to the custodian and his retention would be subject to the
out come of the other proceedings including Miscellaneous
G
~- Application No. 36of1993 and the appellants and other parties
would be entitled to try and establish their rival claims to the
said units.

(f) The observations made by the Special Court with regard to the H
x_
112 SUPREME COURT REPORTS [2000] 3 S.C.R.
A conduct of the appellants and their employees do not call for any
interference.

(g) The award of costs by the Special Court for Rs. 30 lacs against
Hiten P. Dalal is affirmed.

B (2) Appeal No.762 of 1999 is partly allowed to the extent indicated
above.

(3) Appeal No.1878 of 1999, filed by Hiten P. Dalal, stands dismissed. ·-..r-
Parties to bear their own costs.
c R.K.S. Appeal allowed/dismissed.