2001 (1) TMI 889 - DSC - Companies Law

Judgment Confirms Conspiracy in Off-Market Transactions Leading to Rs. 22.12 Crores Loss; Canfina Entitled to Recover Losses.

Canbank Financial Services Ltd. Versus Hiten P. Dalal

Canbank Financial Services Ltd. Versus Hiten P. Dalal - [2001] 31 SCL 325 (SPL COURT - BOM.)] 1. Issues Presented and Considered Whether the petitioner's claim based on conspiracy and fraud in securities transactions is maintainable and not misconceived. Whether respondent No. 1 acted as broker in the transactions dated 13-5-1992 and 15-5-1992. Whether the transactions of 13-5-1992 and 15-5-1992 were interconnected and formed part of a conspiracy to cause loss to the petitioner. Whether the sale of securities on 13-5-1992 at below market price and repurchase on 15-5-1992 at market price caused loss to the petitioner and unjust enrichment to respondents. Whether respondent Nos. 4 and 5 (dealers) were involved in the conspiracy and acted with consent and connivance of other respondents. Whether the transactions between petitioner and respondent Nos. 2 and 3 were independent or linked to conspiracy. Whether the transactions were entered into in violation of internal controls and authority delegation, particularly after letter dated 7-5-1992. Whether the petitioner suffered loss given that the transactions were on Portfolio Management Scheme (PMS) accounts. Whether the respondents are liable to pay damages and interest as claimed. Whether the plea of limitation and defective pleadings raised by respondents is sustainable. 2. Issue-wise Detailed Analysis Issue 1: Maintainability and Misconceived Nature of Petition Legal Framework and Precedents: The petition is based on tort of civil conspiracy and fraud, requiring proof of conspiratorial agreement plus overt acts causing damage. The burden is on petitioner to prove loss and connection of respondents to conspiracy. Court Reasoning and Findings: The petition is not misconceived. The existence of four contracts and their terms are undisputed. The claim is based on loss caused by transactions at off market rates forming a circuitous flow. The Court finds sufficient prima facie evidence of conspiracy and loss to petitioner. Conclusion: Petition is maintainable and not misconceived. Issue 2: Role of Respondent No. 1 (HPD) as Broker in Transactions Legal Framework: Identification of broker and their involvement is crucial to establish conspiracy and liability. Court Reasoning: Although HPD denied acting as broker in 13-5-1992 transaction, evidence including cost memos, deal pads, and admissions in Misc. Petition No. 46/1995 (Exhibit-JJ) confirm HPD's involvement as broker in transactions dated 13-5-1992 and 15-5-1992. HPD's assurance to Dhyan Investments and his purchase from Citibank on 15-5-1992 corroborate his role. Conclusion: HPD was involved as broker in the transactions of 13-5-1992 and 15-5-1992. Issue 3: Whether the Four Contracts Were Interconnected and Part of Conspiracy Legal Framework: For civil conspiracy, interconnectedness of acts and agreements is essential. Acts done in pursuance of agreement causing damage form integral part of tort. Court Reasoning: The four contracts form a circuitous flow: sale by petitioner to Citibank on 13-5-1992 at below market price; sale by Citibank to HPD; sale by HPD to Dhyan Investments at market price; and repurchase by petitioner from Dhyan Investments at market price on 15-5-1992. The loss to petitioner equals the aggregate profits of Citibank, HPD, and Dhyan Investments. The letter dated 15-5-1992 (Exhibit-O) evidences a tripartite arrangement involving M.K. Ashok Kumar (dealer), HPD, and Dhyan Investments, negating claims of independent transactions. Conclusion: The four contracts are interconnected and part of a conspiracy to cause loss to petitioner. Issue 4: Loss Caused to Petitioner and Unjust Enrichment of Respondents Legal Framework: Loss and unjust enrichment are essential components of civil conspiracy and fraud claims. Court Reasoning: Petitioner sold securities at Rs. 14 and Rs. 16.50 per unit (below market) and repurchased at Rs. 20 and Rs. 30 per unit (market price), incurring loss of Rs. 22.1250 crores. Respondents Citibank, HPD, and Dhyan Investments made profits of Rs. 27.5 lakhs, Rs. 21.16 crores, and Rs. 68.75 lakhs respectively. Respondents failed to rebut evidence of loss and unjust enrichment. The circuitous flow of funds confirms siphoning of petitioner's assets. Conclusion: Petitioner suffered loss and respondents unjustly enriched themselves. Issue 5: Involvement of Respondent Nos. 4 and 5 (Dealers) in Conspiracy Legal Framework: Liability of officers requires proof of their role in conspiracy and breach of authority. Court Reasoning: Evidence shows dealers M.K. Ashok Kumar and S. Mohan were in Bombay during May 1992, signed cost memos, instructed issuance of cheques, and collected payments without delivery of physicals. Letter dated 15-5-1992 (Exhibit-O) implicates M.K. Ashok Kumar in tripartite conspiracy. Dealers' claim of acting under direction of Chairman and Managing Director not supported by evidence. Authority of dealers was purportedly withdrawn by letter dated 7-5-1992, but they continued to act and were suspended only later. Dealers abandoned issue of compensating Citibank, failing to discharge burden of proof. Segregation of duties shows dealers had exclusive knowledge of deal terms. Conclusion: Respondent Nos. 4 and 5 were parties to the conspiracy and liable. Issue 6: Independence of Transactions by Respondent Nos. 2 and 3 Legal Framework: Independent transactions negate conspiracy unless interconnectedness is proved. Court Reasoning: Respondent Nos. 2 and 3 claimed transactions were independent. However, evidence including Exhibit-O and admissions show interconnectedness. Citibank's claim of contract date as 18-5-1992 rejected by adverse inference for failure to prove. Dhyan Investments' purchase from HPD was on assurance of delivery to petitioner, confirming linkage. Respondents failed to produce evidence to rebut connection. Thus, transactions were not independent. Conclusion: Transactions of respondents Nos. 2 and 3 were interconnected with conspiracy. Issue 7: Effect of Letter dated 7-5-1992 on Authority of Dealers Legal Framework: Delegation of authority and its withdrawal affect validity of transactions. Court Reasoning: Letter dated 7-5-1992 purported to withdraw dealers' authority and vest powers in Managing Director. However, evidence shows dealers continued to act in May 1992, signing cost memos and instructing payments. Board Minutes and Notes confirm continuation of dealers' designations. Previous judicial findings confirm dealers' authority to enter deals. No evidence supports dealers ceased acting before suspension. Thus, transactions entered by dealers are valid and their involvement in conspiracy stands. Conclusion: Letter dated 7-5-1992 did not negate dealers' authority to enter suit transactions. Issue 8: Maintainability of Claim by Petitioner Given PMS Account Transactions Legal Framework: PMS guidelines require transactions at market rates; losses/profits generally belong to PMS clients. Court Reasoning: Petitioner's transactions were on PMS accounts as admitted. However, transactions were required to be at market rates under RBI guidelines. Here, transactions were at off market rates causing loss. PMS scheme contemplates funds placed at client's risk for fixed period; investments made by petitioner; transactions in petitioner's name; and enforceable debt accrues after lock-in period. Loss caused by off market transactions is recoverable by petitioner. Petitioner's claim is maintainable notwithstanding PMS nature. Conclusion: Petitioner can seek recovery despite PMS nature of accounts due to off market transactions causing loss. Issue 9: Applicability of Section 10 of Indian Evidence Act Legal Framework: Section 10 applies when prima facie evidence of conspiracy exists, allowing acts/statements of one conspirator to bind others. Court Reasoning: Prima facie evidence of conspiracy is established by interconnected transactions, admissions, and documentary evidence (Exhibit-O). Acts done in pursuance of conspiracy form integral part of tort. Respondents failed to rebut evidence or prove independence. Acts and statements of HPD bind Citibank and Dhyan Investments. Events after 15-5-1992 are integral to performance of contracts and admissible. Section 10 is applicable. Conclusion: Section 10 applies; acts and statements of conspirators bind co-conspirators. Issue 10: Plea of Limitation and Defective Pleadings Legal Framework: Amendments and claims must be within limitation and properly pleaded with particulars. Court Reasoning: Amendment to include claim against Dhyan Investments was within limitation as fraud detected in 1994 and suit filed in 1995. Particulars of fraud adequately pleaded. No merit in plea of limitation or defective pleadings. Conclusion: Plea of limitation and defective pleadings rejected. Issue 11: Entitlement to Interest and Costs Legal Framework: Interest awarded on amount wrongfully withheld; costs awarded to parties incurring expenses. Court Reasoning: Respondents enriched themselves at petitioner's cost, using public funds. Interest at 18% per annum on Rs. 22.1250 crores granted from date of petition till payment. Respondent No. 6 (Custodian) entitled to actual costs incurred. Respondent Nos. 7 and 8 not entitled to costs. Conclusion: Interest and costs awarded as per decree. Issue 12: Whether Sale of Securities on 13-5-1992 Was Reversal of 20-12-1991 Transactions Legal Framework: Reversal implies squaring of transactions; distinction between outright and buy-back/ready forward transactions. Court Reasoning: Citibank and Dhyan Investments claimed 13-5-1992 sale was reversal of 20-12-1991 purchase. However, Citibank averred 13-5-1992 transaction was independent. Evidence shows 20-12-1991 purchase and 13-5-1992 sale were independent outright transactions involving BRs. PW-1's evidence ambiguous but ultimately supports independence. Rate differences and lack of evidence of buy-back agreement support this. Hence, 13-5-1992 sale not reversal. Conclusion: 13-5-1992 sale was independent transaction, not reversal of 20-12-1991 purchase. Issue 13: Whether Ratification of 15-5-1992 Transaction Ratifies 13-5-1992 Transaction Legal Framework: Ratification applies to acts clearly affirmed; ratification of part of transaction does not imply ratification of separate transaction. Court Reasoning: Board ratified acts of cheque signing on 15-5-1992 but not rates or terms. Ratification of 15-5-1992 transaction does not automatically ratify 13-5-1992 sale, which was a separate contract. Acceptance of delivery in July 1992 does not ratify off market rates of 13-5-1992 sale. Authorities cited do not support automatic ratification of separate transactions. Conclusion: Ratification of 15-5-1992 transaction does not ratify 13-5-1992 transaction. Issue 14: Effect of Letter dated 7-5-1992 on Dealers' Authority and Transactions Legal Framework: Withdrawal of delegated authority must be effective and known to parties; acts done under apparent authority may be valid. Court Reasoning: Letter dated 7-5-1992 withdrew authority of dealers but evidence shows dealers continued to act in May 1992. Board minutes confirm dealers' designations not withdrawn. Dealers' involvement in transactions proved. Previous judicial findings confirm dealers' authority. No evidence supports cessation of authority before suspension. Therefore, transactions entered by dealers valid and binding. Conclusion: Letter did not negate dealers' authority; transactions valid. Issue 15: Whether Petitioner Can Recover Loss Given PMS Account Nature Legal Framework: PMS guidelines require transactions at market rates; losses/profits generally belong to PMS clients; however, off market transactions causing loss may be recoverable by managing entity. Court Reasoning: Transactions were on PMS accounts but at off market rates violating RBI guidelines. PMS scheme contemplates funds placed at client's risk for fixed period; investments made by petitioner; transactions in petitioner's name; enforceable debt accrues after lock-in. Loss caused by off market transactions recoverable by petitioner. Petitioner's claim maintainable. Conclusion: Petitioner entitled to recover loss despite PMS nature. Issue 16: Applicability of Section 10 of Evidence Act and Binding Nature of Statements Legal Framework: Section 10 applies when prima facie conspiracy established; acts/statements of one conspirator bind others. Court Reasoning: Prima facie conspiracy established by interconnected transactions, admissions, documentary evidence. Acts done in pursuance of conspiracy integral to tort. Respondents failed to rebut evidence or prove independence. Section 10 applicable; statements of HPD bind Citibank and Dhyan Investments. Conclusion: Section 10 applicable; acts/statements of conspirators bind co-conspirators. Issue 17: Plea of Limitation and Defective Pleadings Legal Framework: Amendments and claims must be within limitation and properly pleaded. Court Reasoning: Amendment including claim against Dhyan Investments within limitation; particulars of fraud adequately pleaded. Plea rejected. Conclusion: Plea rejected. Issue 18: Entitlement to Interest and Costs Legal Framework: Interest awarded on amounts wrongfully withheld; costs awarded to parties incurring expenses. Court Reasoning: Respondents enriched themselves using public funds. Interest at 18% per annum on Rs. 22.1250 crores from petition date granted. Respondent No. 6 entitled to actual costs; others not entitled. Conclusion: Interest and costs awarded as per decree.