2004 (7) TMI 676 - HC - Companies Law

Court dismisses petition challenging share sale cancellation, finds transaction fraudulent under Securities Act. Property ownership confirmed.

Mysore Fruit Products Ltd. and Ors. Versus The Custodian and Ors.

Mysore Fruit Products Ltd. and Ors. Versus The Custodian and Ors. - TMI Issues Involved:1. Validity of the custodian's order canceling the sale transaction of shares.2. Legality of the forward sale of shares under the Securities Contracts (Regulation) Act, 1956.3. Attachment of property under Section 3 of the Special Court (Trial of Offences relating to Transactions in Securities) Act, 1992.4. Alleged fraudulent nature of the transaction to defeat the provisions of the Act.5. Limitation period for the custodian's application.Issue-wise Detailed Analysis:1. Validity of the Custodian's Order Canceling the Sale Transaction of Shares:The petitioners challenged the custodian's order dated 12th December 2001, which canceled the sale of 1 lakh shares of Fairgrowth Financial Services Pvt. Ltd. to the notified party under Section 4(1) of the Special Court Act. The custodian determined that the transaction was fraudulent and aimed to defeat the Act's provisions. The petitioners argued that the shares were transferable on 8th April 1992, and the transaction was legal and valid. However, the court found that the transaction was a forward sale, which was prohibited by the Securities Contracts (Regulation) Act, 1956, making the transaction illegal.2. Legality of the Forward Sale of Shares:The petitioners contended that the forward sale of shares was not prohibited because the shares were not listed on the stock exchange. They relied on various judgments to support their claim. However, the court held that the forward sale of shares, even of public limited companies not listed on the stock exchange, is prohibited by the Securities Contracts (Regulation) Act. The court emphasized that the Act applies to all marketable securities, not just those listed on stock exchanges.3. Attachment of Property under Section 3 of the Special Court Act:The court examined the scope of Sections 3 and 4 of the Special Court Act. Under Section 3(3), any property belonging to a notified person stands attached from the date of notification. The court found that the amount of Rs. 4,00,10,000/- belonged to the notified party and was given as an advance to the petitioners' companies in 1991. Since the sale of shares was to take place on 30th September 1993, and the notified party was notified on 6th June 1992, the amount continued to belong to the notified party and stood attached under Section 3(3).4. Alleged Fraudulent Nature of the Transaction:The custodian argued that the transaction was fraudulent and intended to defeat the Act's provisions. The petitioners claimed there was no fraud involved. The court noted that the huge amount of Rs. 4,00,10,000/- was given as an advance without any mention of interest payable by the companies. Additionally, the petitioners did not demand the return of 1,50,000 shares or the amount of Rs. 99,90,000/- from the notified party, raising suspicion about the transaction's genuineness. The court concluded that the custodian's order under Section 4 was not without basis.5. Limitation Period for the Custodian's Application:The petitioners argued that the custodian's application was barred by the law of limitation. However, this issue was not argued before the court, and it had already been decided in previous judgments, specifically in the case of A. K. Menon v. Modern Chemical Corporation.Conclusion:The court dismissed Misc. Petition No. 25 of 2002 and allowed Misc. Application No. 18 of 2004. The petitioners' companies were directed to deposit Rs. 4,00,10,000/- with interest at 15% p.a. from the date of receipt of the amount until the date of deposit with the custodian. The petitioners were also ordered to pay the custodian's costs for the petition and application.