Severability of ready-forward transactions preserves completed title despite illegality in the forward leg and limits regulatory breach consequences.

RBI circulars prohibiting buy-back arrangements bind banks as regulatory directions, but breach does not automatically invalidate contracts with third parties who were not addressed by the directions. A ready-forward transaction is severable: the ready leg, being an immediate sale and delivery against payment, remains valid, while any illegality is confined to the forward repurchase commitment. Once the ready leg is performed and title has passed, the completed transfer is not undone by illegality in the forward leg, and the securities cannot be treated as attachable property under the Special Court Act if they no longer belong to the notified persons.

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Issues: (i) Whether circulars issued by the Reserve Bank of India prohibiting buy-back arrangements invalidated contracts entered into by banks with third parties; (ii) Whether a ready-forward transaction was severable into a valid ready leg and an illegal forward leg; (iii) Whether illegality, if any, in the forward leg could affect title already transferred under the ready leg and attract attachment under the Special Court Act.

Issue (i): Whether circulars issued by the Reserve Bank of India prohibiting buy-back arrangements invalidated contracts entered into by banks with third parties.

Analysis: The regulatory directions were binding on banking companies, but the prohibition operated at the level of bank conduct. The statutory scheme contemplated consequences such as penalty for breach, not automatic invalidation of contracts with third parties who were not the recipients of those directions and might be unaware of them. A construction that voided completed third-party transactions would produce inequitable results and go beyond the statutory purpose.

Conclusion: The circulars did not invalidate the contracts entered into between the banks and third parties.

Issue (ii): Whether a ready-forward transaction was severable into a valid ready leg and an illegal forward leg.

Analysis: A ready-forward transaction involved two reciprocal stages. The ready leg consisted of an immediate sale and delivery against payment, by which title passed outright. The forward leg was a separate executory promise for later repurchase or resale at a fixed price. The illegality, if any, attached to the forward commitment alone, while the completed ready leg stood on its own consideration and object. The structure therefore admitted severance without rewriting the bargain.

Conclusion: The transaction was severable, and the ready leg remained valid while the forward leg alone was to be ignored.

Issue (iii): Whether illegality, if any, in the forward leg could affect title already transferred under the ready leg and attract attachment under the Special Court Act.

Analysis: Once the ready leg had been performed, property in the securities had already passed to the banks under the ordinary law governing transfer of movable property. The legality of the antecedent agreement could not undo a completed transfer of title. The principle that the court will not enforce an illegal executory bargain did not permit recovery of property already transferred under a completed part of the transaction. As the securities no longer belonged to the notified persons on the relevant date, they could not be treated as attached property.

Conclusion: The completed transfer was unaffected by the illegality of the forward leg, and the securities were not liable to attachment under the Special Court Act.

Final Conclusion: The appeals succeeded, the Special Court's view was set aside, and the Custodian's applications for return of the securities did not survive.

Ratio Decidendi: A completed transfer of property made under a transaction that is partly illegal remains effective if the legal and illegal parts are severable or if the transfer has already been fully executed; regulatory breach may attract statutory penalty, but it does not by itself nullify title that has already passed.

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