1993 (12) TMI 178 - DSC - Companies Law

Illegal Ready Forward Transactions Ruled Void, Securities Act Violation, Recovery of Public Monies, Restitution Options

AK Menon Versus Fairgrowth Finan. Services Ltd.

The court held that ready forward transactions are illegal and void under the Securities Contracts (Regulation) Act, 1956, and the Banking Regulation Act, ... Securities, Contracts in notified areas illegal in certain circumstances, Power to prohibit contracts in certain cases, Listing of dealers in securities in certain cases, Discharge of liabilities Issues Involved:1. Legality of Ready Forward Transactions.2. Applicability of the Securities Contracts (Regulation) Act, 1956.3. Applicability of the Banking Regulation Act, 1949.4. Interpretation of the term 'securities' under the said Act.5. Effect of statutory attachments under the Special Court Act.6. Doctrine of Pari Delicto and its applicability.7. Restitution under Section 65 of the Contract Act.Detailed Analysis:1. Legality of Ready Forward Transactions:The primary issue is whether ready forward transactions are illegal. The court examined the nature of these transactions and concluded that they are illegal and void. The court defined a ready forward transaction as one involving a sale or purchase with a firm commitment to repurchase or resell, which must be between the same parties, in respect of the same stock, and for the same value. The court held that ready forward transactions are prohibited under the Securities Contracts (Regulation) Act, 1956, and the Banking Regulation Act, 1949.2. Applicability of the Securities Contracts (Regulation) Act, 1956:The court considered whether the said Act applies only to listed securities or also to unlisted securities. It was held that the Act applies to all securities that are marketable, not just those listed on stock exchanges. The court emphasized that the definition of 'securities' under Section 2(h) of the Act is inclusive and broad, covering all marketable securities. The court rejected the argument that the Act only applies to listed securities.3. Applicability of the Banking Regulation Act, 1949:The court examined the circulars issued by the Reserve Bank of India (RBI) under the Banking Regulation Act, which prohibit buy-back arrangements in respect of corporate securities and bonds issued by public sector undertakings. The court held that these circulars are binding on banks and that any contravention of these circulars would render the transactions illegal and void.4. Interpretation of the term 'securities' under the said Act:The court held that the term 'securities' under the said Act includes all marketable securities, whether listed or unlisted. The court relied on the inclusive definition provided in Section 2(h) and the broad interpretation of marketability, which implies ease of selling and liquidity.5. Effect of statutory attachments under the Special Court Act:The court held that properties involved in illegal ready forward transactions stand attached under the Special Court Act. The purpose of the Act is to recover public monies siphoned off into private pockets and to ensure that such properties are available for distribution under Section 11(2) of the Act. The court emphasized that the statutory attachment operates even if the properties are in the hands of third parties pursuant to an illegal contract.6. Doctrine of Pari Delicto and its applicability:The court rejected the argument that the doctrine of pari delicto (equal fault) applies to the custodian under the Special Court Act. The court held that the custodian is not making a claim but is bringing to the court's attention that third parties are in possession of attached properties. The court emphasized that the purpose of the Act is to safeguard properties purchased from public monies and ensure their availability for distribution under Section 11(2).7. Restitution under Section 65 of the Contract Act:The court held that restitution under Section 65 of the Contract Act would apply if a party entered into a ready forward transaction believing it to be legal. However, restitution can only be at the stage of distribution under Section 11(2) of the Special Court Act. The court emphasized that a claim for restitution is not a claim for set-off but remains a claim for recovery of consideration paid for a contract discovered to be void.Conclusion:The court concluded that ready forward transactions are illegal and void under the Securities Contracts (Regulation) Act, 1956, and the Banking Regulation Act, 1949. The term 'securities' under the said Act includes all marketable securities, whether listed or unlisted. Properties involved in such illegal transactions stand attached under the Special Court Act and are subject to distribution under Section 11(2). The doctrine of pari delicto does not apply to the custodian, and restitution under Section 65 of the Contract Act can only be considered at the stage of distribution.