SUPREME COURT HOLDS THAT A CUSTODIAN MUST PROVE THAT APPELLANTS ARE LIABLE TO PAY ALLEGED DUES

In a recent case of Suman L. Shah vs The Custodian & Ors. Civil Appeal No (s). 4577 and 4583 of 2011, a two Judge Bench of the Supreme Court comprising of Justice Pamidighantam Sri Narasimha and Justice Sandeep Mehta passed a Judgment dated 05-03-2024 and observed that the primary onus of proving the allegations that the Appellants were the debtors of the Benami Companies and the garnishees of the owner of such Benami Companies, who has been notified under Section 3 (2) of the Special Court (Trial of Offences relating to transactions in Securities) Act, 1992 (‘Special Court Act’) (Appointment and functions of Custodian), would be on the Custodian by virtue of Section 101 of Evidence Act 1872 (Burden of proof). The Custodian, (on behalf of the notified person) can seek recovery of dues from the Appellants only upon proving that dues are payable by the Appellants.

Facts

i) That in the present case, one, Fairgrowth Financial Services Limited (FFSL) was notified under Section 3 (2) of the Special Court Act for being involved in offence(s) relating to transactions in securities during the period starting from 01-04-1991 to 06-06-1992. Accordingly, its properties were also attached under Section 3 (3) of the Special Court Act.

ii) The Custodian appointed by the Government under Section 3 (1) of the Special Court filed Miscellaneous Application (MA) No. 193 of 1993 in the Ld. Special Court for the recovery of various sums of money belonging to FFSL from the Respondent No. 2-Pallav Sheth, who had borrowed money from FFSL.

iii) The Ld. Special Court, vide Consent Decree dated 24-02-1994, directed the Respondent No. 2 to pay a sum of Rs. 51,49,07,417.92/- (Rupees Fifty-One Crores Forty-Nine Lakhs Seven Thousand Four Hundred and Seventeen and Ninety-Two Paise only) to the Custodian on behalf of FFSL.

iv) However, the Respondent No. 2 failed to pay the said amount and hence, the Custodian initiated attachment of the Respondent No. 2’s assets to recover the decretal amount.

v) The Custodian further submitted before Ld. Special Court that the Respondent No. 2 had illegally parked the money borrowed from FFSL in various benami companies inter alia Respondent No. 6- Klar Chemicals (P) Ltd., Respondent No. 7- Malika Foods (P) Ltd. and Respondent No. 8- Jainam Securities(P) Ltd. (Benami Companies). Further, upon inquiry with the Respondent No. 3- Income Tax Department, the Custodian was informed, vide Letter dated 05-05-1998, that the Respondent No. 2 was the benami owner of the Benami Companies.

vi) That during the years 1996-1997, these Benami Companies lent huge sums of money to the Appellants- Suman L. Shah and Laxmichand Shah.

vii) Hence, the Custodian filed Miscellaneous Applications bearing MA Nos. 162 and 184 of 2008 in MA No. 193 of 1993 before the Ld. Special Court against the Appellants- Suman L. Shah and Laxmichand Shah, for recovery of various amounts borrowed by the Appellants from the Benami Companies. As per the Custodian, the Appellants were garnishees of Respondent No. 2-Pallav Sheth, i.e. the owner of Benami Companies.

viii) That the Custodian had further notified the Respondent No. 2-Pallav Sheth under Section 3 (2) of the Special Court on 06-10-2001.

ix) Later, the Respondent No. 2-Pallav Sheth was declared insolvent on 05-11-2003. As a result, his assets and properties got vested with the Official Assignee, i.e. Respondent No. 9.

x) The Ld. Special Court, vide Order dated 11-03-2011, passed in MA Nos. 162 and 184 of 2008 in MA No. 193 of 1993, directed the Appellants to pay the amount borrowed from the Benami Companies to the Custodian along with interest. Upon recovery, the amounts were directed to be paid to Respondent No. 9- Official Assignee, whereafter the Appellants would stand discharged of their liabilities towards Benami Companies.

Supreme Court Observations

Aggrieved by the Special Court Order dated 11-03-2011, the Appellants filed Civil Appeal No (s). 4577 and 4583 of 2011 before the Hon’ble Supreme Cout under Section 10 of the Special Court Act (Appeal). The Apex Court, vide Order dated 05-03-2024, made the following observations:

1) That the Special Court Act was introduced for (i) speedy recovery of the huge amounts illegally diverted by people and institutions in the securities market, (ii) punishing the guilty, (iii) restoring the confidence of public at large in the security transactions and (iv) to uphold and maintain the basic integrity and credibility of banks and financial institutions.

2) That at the time the Appellants had borrowed money from the Benami Companies of the Respondent No. 2, i.e. in the years 1996-1997, the Respondent No. 2 was not notified by the Custodian under Section 3 (2) of the Special Court Act for being involved in offences relating to transactions of securities. The Custodian had, in fact, notified the Respondent No. 2 under Section 3 (2) of the Special Court on 06-10-2001.

3) Hence, the Appellants would not have known in 1996-97 about any benami transactions and offences pertaining to transactions involving securities being committed by the Respondent No. 2 or his Benami Companies.

4) Further, the Custodian had relied upon a Letter dated 05-05-1998 of the Respondent No. 3- Income Tax Department, to contend that the Appellants were debtors of the Benami Companies and hence, the garnishees of the Respondent No. 2. However, the said Letter did not mention the outstanding dues of the Benami Companies or that the Appellants were the debtors thereof and further, nobody from the IT Department was examined before the Ld. Special Court.

5) Furthermore, the Appellants’ stand was that they had already repaid the outstanding dues owed to the Benami Companies. Hence, their liabilities towards the Benami Companies stood discharged.

6) That as per Section 101 of the Evidence Act, the onus of proving the assertion that the Appellants were the debtors of the Benami Companies and thus, the garnishees of the Respondent No. 2, would be on the Custodian. Only after the Custodian discharges such burden, the onus would shift to the Appellants to rebut such assertion.

7) However, in the present case, the Custodian failed to provide any evidence to substantiate its assertions against the Appellants.

8) Furthermore, in any event, the Respondent No. 2 was notified by the Custodian under Section 3 (2) of the Special Court on 06-10-2001, hence, the properties of the Respondent No. 2, would get attached w.e.f. 06-10-2001 and not prior thereto. Thus, the Appellants cannot be made liable to pay the alleged dues to the Custodian which arose in 1996-1997, i.e. much prior to the Respondent No. 2 being notified under Section 3 (2) of the Special Court.

Conclusion

Thus, based on the aforesaid observations, the Supreme Court allowed the Appeals filed by the Appellants and set aside the Special Court Order dated 11-03-2011, on the ground that the Custodian failed to discharge its burden of proof against the Appellants and hence, the Appellants cannot be held liable to pay the alleged dues to the Custodian.

Harini Daliparthy

Senior Associate

The Indian Lawyer