CASE ANALYSIS OF STANDARD CHARTERED BANK & ANR. v.

CUSTODIAN & ANR.

BY PRANSHU VATS & RAHUL RANJAN

SCHOOL OF LAW, CHRIST UNIVERSITY

ABSTRACT

In 1992, the Reserve Bank of India found large securities transaction fraud and anomalies. Due
to brokers' systematic unethical misbehavior and collusion with personnel of these institutions,
money from banks and financial institutions was redirected to their accounts.
A Special Court Ordinance, later replaced by the Special Court Act, 1992, was published on June
6th, 1992 in order to expedite the collection of the enormous amounts involved. According to
Section 3 of the Act, the Central Government may designate a Custodian with the authority to
publish the name of anyone who has been charged with a crime involving securities transactions
between April 1, 1991, and June 6, 1992. 1 At the time the notification was sent, any personal
property—movable, immovable, or both—that belonged to the people who received it was still
attached. The linked property must be managed by the Custodian in line with Special Court
regulations. A High Court Judge who was currently on the bench oversaw the Special Court. 2 It
may try cases that are initiated against it or transferred to it, or it may take cognizance of them.
This Court was qualified to use the powers and privileges that a Civil Court could have used
prior to the start of the Act.3

1 The Special Court Act, 1992, § 3, No.27, Acts of Parliament, 1992(India).

2 The Special Court Act, 1992, § 5, No.27, Acts of Parliament, 1992(India).
3 The Special Court Act, 1992, § 9A, No.27, Acts of Parliament, 1992(India).
FACTS OF THE CASE

On April 30, 1992, Arvind Lal, a member of the Reserve Bank of India's staff, informed R. Iyer,
a Director of the Local Currency Group, said that Hiten Dalal's investments, which totaled Rs.
800 crores, were not backed by banking receipts or assets. The projected cost of the setback was
1300 crores of rupees. The appellants asserted that Hiten Dalal had admitted his guilt and
proposed a price in exchange for shares, debentures, securities, and bonds, as well as a method of
transferring those securities. But despite his vows to transmit, he was silent between May 11 and
May 13, 1992.
The Bank's Manager of Legal Services suggested on May 14 that a letter should be sought from
Dalal in order to prevent him from claiming delivery of shares through safe custody. The letter
was written by the bank's in-house legal counsel and delivered to Dalal for writing on his
notepaper. Although the letter's postmark reads "May 11, 1992," it was delivered to the bank
office on May 18 and signed by Dalal.4
The respondent denied admitting to the appellants that they had experienced any loss at all or
that they had accepted any responsibility to pay the Bank the amount that was demanded. The
stocks and blank signatures, in Dalal's opinion, had been taken by force and coercion,
respectively. Also allegedly signed under duress was the letter stated earlier.5

ISSUES

1. Was the loss the appellants claimed to have incurred real?6

2. Whether Hiten Dalal had given the shares as securities or if they had been extorted from
him?7
3. Whether a mortgage or pledge were used to transfer the shares as securities?8
4. What percentage of the rights, bonus shares, dividends, and interest on the shares
(accretions) were considered to be secured assets?9
5. Whether the Special Court should have imposed restrictions on the Bank.
6. Is it wrong for the Special Court to have ordered Dalal to pay costs of Rs. 30 lakhs?

LAW

Section 3,5 and 9A of The Special Court Act, 1992.

Section 163 of The Indian Contract Act,1872.
Section 63 of The Transfer of Property Act,1882.

4 Standard Chartered Bank & Anr. v. Custodian & Anr., AIR 2000 SC 1488
5 Id. at 11.
6 Id. at 12.
7 Id. at 12.
8 Id. at 12.
9 Id. at 12.
ARGUMENTS OF THE APPELLANTS

It was asserted that the letter indicated that the shares in question were pledged in favour of the
bank. The appellant bank asserted that the aforementioned shares had been changed in order to
satisfy Dalal's admitted debt to the appellant bank in the exercise of its pledgee rights.10

According to the Bank, until the liability was met, it was permitted for it to keep ownership of
the shares and accretions. The appellants argued that they had the legal right to sell the shares
and divert the revenues of the sale to pay off any unpaid debts owed by Dalal.11

ARGUMENTS OF THE RESPONDENTS

The custodian denied the allegations made by the appellants on the facts. The shares, valued at
Rs. 145 crores, were Dalal's property and were in the appellants' custody since, in the custodian's
opinion, Dalal was a person who had been notified. 12 The argument made against dealing with
the shares was that the court's discretion was required. The appellant's assertions lacked support.

Dalal, a securities broker, had built a relationship with the appellants during the course of his
four years of business. He refuted claims that he had been shortchanged in any of his transactions
and that the Rs. 1253 crores he had bought were not secured by stocks or bank receipts. Dalal
claimed that the appellants had made him the victim of their wrongdoings by using him as a
scapegoat.

SUMMARY OF THE JUDGMENT

Between May 11 and May 15, the aforementioned shares, which are worth a total of 145 crores
of rupees, were transferred to the Bank. In addition, Dalal had promised to hold the Bank
harmless from any harm it might have sustained after the conclusion of the final reconciliation of
its account with Dalal through cash or any other physical assets. After reconciliation, it was
assumed that any extra money would be returned. Furthermore, it was established that the bank
had the right to usurp the revenues from the sale of the stocks, shares, debentures, and other
securities that had been given to the bank in order to partially settle his debts. After such
appropriation, Dalal had to personally pay any remaining balance. Dalal, however, asserted that
the shares were violently removed and that the aforementioned document was signed under
duress.

The shares and stocks were not seized forcibly, according to all the available information. First
off, it is incomprehensible that Dalal's shares were taken from him violently between May 11 and
May 13, 1992, and that over those three days, he did not object or stop the appellants from taking
10 Id. at 8.
11 Id. at 9.
12 Id. at 10.
the shares forcibly.13 Dalal and the appellants' attorney had met, it was acknowledged. However,
the Special Court discovered no evidence that any force had been used to seize all of the shares.
Second, Hiten Dalal made the decision to avoid taking the witness stand in support of his claim.
Since Dalal had willingly signed the letter, the Court decided that it was authentic. In addition,
from May 11 to 15, 1992, shares and stocks worth Rs. 145 crores were delivered.14

Whether the accretions are a fundamental component of the attached shares as of the attachment
date was the second point of contention. The respondent's claim that the pawnee must return the
accretion to the pawnor in accordance with Section 163 of the Contract Act was rejected by the
court.15 It was noted that Section 163 of the Contract Act does not contain the phrase "upon
redemption," as it does in Sections 6316 and 6417 of the Transfer of Property Act, but applying
that to this case, the accretion that is a part of the bailed property must remain with the pawnee in
the same way as the shares that have been pledged. As a result, the Bank would have the same
rights to keep and manage the accretion as it does the pledged stocks.

In contrast, it was claimed in the letter dated May 20, 1993 that the Cantriple Units were a part of
the committed stocks. Further proof came from a witness that the units weren't actually bought,
but rather taken as security. The Court took notice of a Miscellaneous Application that Can Bank
Financial Services Ltd. had submitted, in which it claimed that the Bank had taken the Cantriple
Units by force.18

The final point raised related to the price of Rs. 30 lakhs. This accounted for 15% of the
expenses incurred by the Bank. The court deemed the granting of the expenses to be acceptable
because the Bank's allegation of a loss of Rs. 280 crores had been upheld.

ANALYSIS

This Instant Appeal -- Standard Chartered Bank and Anr. Vs. Custodian and Anr. etc. Arises
from the judgment of the Special Court, where the trial of offenses relating to transactions in
securities was held. All the necessary parties like Standard Chartered Bank, the Custodian, Share
Broker Hiten Dalal, etc. appeared before the Special Court and filed their respective pleadings,
on the basis of which the Special Court framed as many as 16 issues. The parties on both sides
adduced their evidence in order to prove their own cases. On the basis of the evidence adduced

13 Standard Chartered Bank &Anr. v. Custodian &Anr., (2000) 3 SCR 81, para. 21.
14 Id. at 22.
15 The Indian Contract Act, 1872, § 163, No. 9, Imperial Acts, 1872(India).
16 The Transfer of Property Act, 1882, § 163, No. 4 of 1882(India).
17 Id. at § 64.
18 Standard Chartered Bank &Anr. v. Custodian &Anr., (2000) 3 SCR 81, para. 53.
on behalf of the parties, the Special Court partly allowed the prayer of the Bank that the Bank
has suffered a loss of Rs 280 cr. and it also imposed a cost of Rs. 30 lakhs against the Share
Broker Hiten Dalal.

The findings of the Special Court were challenged both by the Banker on the one hand and Hiten
Dalal on the other who filed 02 separate appeals before the Hon’ble Supreme Court which were
numbered as Cr. Appeal No. 762/1999 and Cr. Appeal No. 1878/1999. The Division Bench of
the Hon’ble Supreme Court entertained the two appeals and analyzed the judgment and the
evidence before the Trial Court. It is appreciable on the part of the Hon’ble Supreme Court that
instead of deciding all the 16 issues which were framed by the Trial Court, the Hon’ble Supreme
Court concised the matter and pinpointed the same by choosing only 04 issues as points for
determination before it.
By concentrating on only four points, the Hon’ble Supreme Court has made the judgment
concise and to the point. The Court not only evaluated in right perspective, the evidence of the
parties which were adduced in the Trial Court but also analyzed the findings of the Special Court
as to whether the findings of the Trial Court are in consonance with the evidence adduced by the
parties or not. Two Appeals were preferred before the Supreme Court, one by the Bank and the
other by Hiten Dalal. The Appeal filed by Hiten Dalal was dismissed but the Appeal no. 762 of
1999 was partly allowed by confirming most of the findings of the Special Court. The Apex
Court firstly found that the Bank remained successful in proving the loss of Rs. 280 Cr.

The second reason is that the bonus shares, dividend, and interest were a squeeze on the previous
stock and had to be viewed as belonging to the place property, which could not be commanded to
be handed over unless redemption occurs.

Additionally, the court ruled that the Bank had the right to sell the original shares, right shares,
and bonus shares while keeping the dividend and interest that had accumulated on the original
shares. “The Hon’ble Court rightly held that as Hiten Dalal did not adduce any evidence with
regard to coercion upon him by the Bank Employees hence no observation was made with regard
to the
employees of the Bank. The Court confirmed the award of cost for a sum of Rs. 30 lakhs against
Hiten Dalal.

In this way, the Hon'ble Supreme Court has reached a finding by giving reasons for each and
every point and very methodically gave its findings, which is very appreciable.

CONCLUSION

The Apex Court rightly accepted the claim of the bank that the broker Hiten Dalal had submitted
shares for adjusting his liabilities and the bank was correct in adjusting the shares against his
liabilities. The Supreme Court has reached to a finding by giving reasons for each and every
point and very methodically gave its findings, which is very appreciable. We also see that some
issues have been decided in favor of one party and some have been decided in favor of another
party. By doing so, the Supreme Court has done complete justice to all.