New Bank Of India Ltd. vs Union Of India And Another
1980 Latest Caselaw 73 Del

JUDGMENT

D.R. Khanna, J.

1. These two writ petitions bearing Nos. 665 and 787 of 1978, raise certain common questions of fact and law and are, therefore, being taken together.

2. Briefly stared, the controversy pertains to whether the transfer of shares which a debtor, on obtaining a loan from a bank, effects in the latter's favor in the course of extending security results in the creation of a trust and, therefore, necessitates the registration of trust with the Public Trustee in terms of s. 153B of the Companies Act.

3. Writ Petition No. 665 of 1978 has been brought by the New Bank of India Ltd. The respondents imp leaded are the Union of India and the Public Trustee to the Government of India, Department of Company Affairs. It is averred that the petitioner-bank in the normal course of its banking business is having a large number of cash credit accounts against the security of shares, etc. One such account is being maintained by the Universal Investment Private Ltd. from December 12, 1968, at the bank's office in K-Block, Connaught Circus, New Delhi. The credit limit permissible in this account is up to Rs. 4,50,000. That concern has, apart from executing a promote in favor of the bank for Rs. 4,50,000 as collateral security, handed over to the bank 67,600 shares of Rs. 10 each held by it in the Jaipur Udyog Ltd. and given blank transfer deeds as security towards the payment of the amount. A further agreement for cash credit account was executed by this concern on August 20, 1971, and the shares were pledged in favor of the bank. In terms thereof the bank was given full authority either to sell the shares or to get them transferred in its favor. The bank accordingly got those shares transferred in its name. This was also in accordance with the general practice of the bank when the amounts of loans exceeded Rs. 50,000.

4. It has further been averred that on 3rd November, 1976, the petitioner-bank received a letter from the Public Trustee requiring it to file a declaration (as per form enclosed) under s. 153B of the Companies Act. The bank, however, did not do so and rather contested the propriety of the notice on the ground that it was not a trustee but a mere pledgee, holding the shares as security towards realization of the amount advanced which stood at over Rs. 7,90,000 on June 1, 1978. No instrument of trust in writing whatsoever was said to have been executed and this circumstance by itself, it was stated, excluded the application of s. 153B. However, in spite of this clarification given to the Public Trustee as also the clear provisions of the law, the Public Trustee is insisting that the bank should abide by the provisions of s. 153B. This writ petition has, therefore, been filed seeking relief in the nature of a writ of certiorari and mandamus to the effect that the respondents should not proceed against the bank for the alleged contravention of the provisions of s. 153B of the Companies Act.

5. From the side of the respondents, a counter has been filed by Shri M. K. Kukerja, Public Trustee. In this, it has been stated that the transfer of the shares in favor of the bank as collateral security for the cash credit account did not create any beneficial interest in those shares in favor of the bank, and instead the same continued to be retained by the Universal Investment Trust Ltd. In this way, a trust was stated to have been created and the bank was stopped from disputing its legal character. It has further been urged that it would be necessary and proper to examine the true nature of the transaction, having regard to all the terms and conditions of the various documents. It has been denied that the bank is only a pledgee. Rather the ownership of the shares, it is pointed out, has been transferred in favor of the bank while the beneficial interest is still retained by the Universal Investment Trust Ltd., and thus a trust has come into being. It has also been denied that no instrument in writing creating the trust has been executed. The agreements and documents executed between the parties, it is pleaded, constituted the instruments in writing.

6. In the other Writ Petition No. 787 of 1978, the petitioner No. 1 is the Sutlej Cotton Mills Ltd. (hereafter called "the Sutlej Cotton") and the petitioner No. 2 is the Gwalior Rayon Silk Manufacturing (Weaving) Company Ltd. (hereafter called "the Gwalior Rayon"). The respondents imp leaded are the Union of India, the Public Trustee and the Punjab National Bank, Bhawani Mandi. The facts enumerated are that the Sutlej Cotton pledged and/or deposited 1,46,000 equity shares of Rs. 10 each which it held in Gwalior Rayon with the Punjab National Bank, Bhawani Mandi, as collateral security, in consideration of the bank agreeing to stand guarantee for the machinery purchased by Sutlej Cotton's unit known as "Rajasthan Textile Mills" on deferred payment terms. Those shares were subsequently got register with the Gwalior Rayon in the name of the bank during the period from February 24, 1975, to January 21, 1977. By this pleading and/or deposit of shares, a mere charge was created over the shares in favor of the bank which held them as a bailee for the specific purpose. A resolution of the board of directors of the Sutlej Cotton was passed on June 25, 1974, giving out the circumstances in which the shares were pledge and certain letters were also exchanged with the bank. The entire transaction, it has been claimed, in reality and in substance, amounted to a pledge and/of pawning within the meaning of s. 172 and other provisions contained in the Indian Contract Act.

7. It has further been stated in the petition that the Public Trustee has required the Punjab National Bank of file a declaration as trustee of those shares in terms of s. 153B of the Companies Act. Similarly, the Gwalior Rayon has been required to send all papers, notices, etc., concerning those shares to the Public Trustee. The Sutlej Cotton then refuted that any such trust had been created and instead pleaded that the bank's status was that of a pledgee. The notice were, therefore, required to be withdrawn. The Public Trustee, however, insisted in his designs and claimed to possess certain legal opinion from the Ministry of Law. That legal opinion, however, was not made available to the petitioners.

8. It has, therefore, been contended that the transaction between the Sutlej Cotton and the Punjab National Bank was a contract of bailment simpliciter, where under shares had been merely pledge and/or pawned as security, and no trust whatsoever had been in any manner created. Sections 153B and 187B of the Companies Act are, therefore, pleaded to be not applicable as they can be invoked only where a trust within the meaning of s. 3 of the Indian Trusts Act, 1882, had been created. A bailee, it is urged, cannot be termed as a trustee. The present writ has, therefore, been moved alleging that in case the petitioners did not comply with the demands of the Public Trustee, they were in all likelihood to suffer irreparable harm in the form of penalties, etc. Relief in the nature of mandamus, prohibition and certiorari has been sought.

9. From the side of the Public Trustee, a counter has been filed in which similar assertions have been made as already mentioned in the narration of facts of the other writ. The locus stands of Sutlej Cotton to move this writ has also been challenged. Rather, the notices and letters of the Public trustee were stated to be all addressed to Gwalior Rayon by the Punjab National Bank. It is reiterated that the bank has become a trustee of the shares within the meaning of the expression under s. 153B of the Companies Act, particularly when the shares stand transferred in its favor. Trusts, it is pleaded, are of various kinds and included constructive trusts also. The expressions "trust" and "trustee" appearing in s. 153B, it has been urged, are used in a general sense and not in the technical sense given to them by s. 3 of the Indian Trusts Act. The beneficial interest in those shares, it is pointed out, still vests in the Sutlej Cotton.

10. Various documents have been filed from the side of the petitioners. One of them dated April 3, 1974, is addressed by the Punjab National Bank to the Rajasthan Textile Mills Unit of the Sutlej Cotton in which it was intimated that the bank had extended deferred payment guarantees for an amount of Rs. 36.50 lakhs. The securities required from the Rajasthan Textile Mills were the counter-indemnity and the pledge of shares of Gwalior Rayon to the extent of 125% of the guarantee amount. The charge was to be got registered with the Registered of Joint Stock Companies and the shares also transferred in the name of the bank as per rules.

11. Another document shows that the Punjab National Bank in compliance with the notice of the Public Trustee submitted the required declaration under s. 153B of the Companies Act with the Public Trustee in which it was mentioned that shares of the face value of 14.60 lakhs of the Gwalior Rayon were lying transferred to it as collateral security against D.P.G. and term loan. The beneficiary was stated to be the Sutlej Cotton. In a note written under this declaration it was, however, mentioned that the shares were held as a pawnee and not as a trustee. Copies of documents under which the shares were held were enclosed.

12. The copy of the resolution dated June 25, 1974, of the board of directors of the Sutlej Cotton, about which reference has been made above, stated that capital expenditure of Rs. 58,00,000 inter alia, for modernization of the company's textile mills at Bhawani was to be incurred. Some of the machineries were also to be purchased on deferred payment terms and for this purpose the company had approached the Punjab National Bank for sanction of a deferred payment guarantee limit of Rs. 30.50 lakhs. The bank had agreed to the same. The pleading of all the shares held by the company in the Gwalior Rayon with the bank was, therefore, authorised to the extent of 125% of the guarantee amount as security.

13. Another document filed is a circular issued by the Punjab National Bank, head office, to all its branches in which reference has been made to a directive issued by the Reserve Bank of the India dated August 28, 1970, regarding advances against shares. It is enjoined therein that where credit facilities of over Rs. 50,000 on the security of shares are extended, the shares must be transferred in the name of the bank, and the bank shall have exclusive voting rights in respect thereof. It continues specific prohibition against the advance of credits. Where such voting rights are not so transferred to the bank, those voting rights, it is further provided, have to be exercised with the prior approval of the Reserve Bank of India and accordance with such direction as may be given by the Reserve Bank of India.

14. In this case also, the Sutlej Cotton executed a promote in favor of the bank for an amount of Rs. 65,00,000. Another document dated January 12, 1973, brought out the terms and conditions of the cash credit account (fresh) mentioning the overdraft facility of Rs. 65,00,000. There is a narration in it so the deferred payment guarantee and of all the counter indemnity from the company and the pledge of shares. In another letter, the name of the company in which the shares were held, namely, the Gwalior Rayon, was elaborated and an hypothecation agreement was also executed on September 3, 1973. While forwarding the shares to the bank, the Sutlej Cotton in its letters dated August 8, 1973, mentioned that they were being sent as security for issuing the deferred payment guarantee. The bank, however, informed in writing that the shares the transferred in its favor. This was done accordingly.

15. During the course of the hearing of this writ moved by the Sutlej Cotton and the Gwalior Rayon, it was found that the Punjab National Bank had not made any appearance. The other respondents, therefore, sought that the bank should be required to produce the documents which the Sutlej Cotton might have executed while obtaining credit and the transfer of shares. Directions were, therefore, issued to the bank to file those documents. Some documents were thereafter filed along with an affidavit to the effect that, apart from them, no other document existed in the possession of the bank. It thus appears that no formal document was executed between the bank and the Sutlej Cotton about the pleading of the shares.

16. Section 153B of the Companies Act, 1956, under which the Public Trustee has required the two banks to file declarations, is to the following effect :

"153B. (1) Notwithstanding anything contained in section 153, where any shares in, or debentures of, a company are held in trust by any person (hereinafter referred to as the trustee), the trustee shall, within such time and in such form as may be prescribed, make a declaration to the public trustee.

(2) A copy of the declaration made under sub-section (1) shall be sent by the trustee to the company concerned, within twenty-one days, after the declaration has been sent to the Public Trustee.

(3) (a) If a trustee fails to make a declarations required by this section, he shall be punishable with fine which may extend to five thousand rupees and in the case of a continuing failure, with a further fine which may extended to one hundred rupees for every day during which the failure continues.

(b) If a trustee makes in a declaration aforesaid any statement which is false and which he known or believes to be false or does not believe to be true, he shall be punishable with imprisonment for a term which may extent to two years and also with fine.

(4) The provisions of this section and section 187B shall not apply in relation to a trust -

(a) where the trust is not created by an instrument in writing;

(b) even if the trust is created by an instrument in writing, where the valuer of the shares in, or debentures, of a company, held in trust -

(i) does not exceed one lakh of rupees; or

(ii) exceeds one lakh or rupees but does not exceed either five lakhs of rupees or twenty-five per cent. of the paid-up share capital of the company, whichever is less.

Explanation. - The expression 'the value of the shares in, or debentures of, company' in clause (b) means, -

(i) in the case of shares or debentures acquired by way of allotment or transfer for consideration, the cost of acquisition thereof, and

(ii) in any other case, the paid-up value of the shares or debentures."

17. These provisions thus show that the shares must be held in trust and that such trust must have been created by an instrument in writing. Of course, the value of the shares must exceed rupees one lakh. The consequence of trustee not filing the declaration invites penalty of Rs. 5,000 and in the case of continuing failure, a further fine which may extend to Rs. 1000 for every day's default.

18. Section 187B further enjoins that the rights and powers (including the right to vote by proxy) exercisable at any meeting of the company, etc., cease to vest in the trustee but become exercisable by the Public Trustee. The latter is empowered to attend the meetings and exercise these rights and powers himself or require the trustee to do so under his directions. The Public Trustee, however, may abstain from exercising these rights and powers, if in his opinion the object of the trust or the interest of the beneficiaries of the trust are not likely to be adversely affect by such abstention. The trustee on his part may advise the Public Trustee but it is left to the latter's discretion to accept or reject the same. The Public Trustee is also conferred the rights and powers to receive and inspect all books and papers which a member is entitled to receive and inspect.

19. Section 187C makes provisions for the filing of declarations with the campaigns concerned by the holder of shares who do not hold the beneficial interest in such shares. Similar requirement is enjoined on the holders of beneficial interests also. On their failure to file such declarations without any reasonable excuse, they can be burdened with a fine of Rs. 1,000 per day during which the failure continues. Sub-section (6) of the same section is to the following effect :

"Any charge, promissory note or any other collateral agreement, created, executed or entered into in relation to any share, by the ostensible owner thereof, or any hypothecation by the ostensible owner of any share, in respect of which a declaration is required to be made under the foregoing provisions of this section, but not so declared, shall not be enforceable by the beneficial owner or any person claiming through him."

20. Section 153, to which reference is made in s. 153B, lays down that no notice of trust, express, implied or constructive, shall be entered on the register of members or of debenture-holders. Thus, it purports to include obligations in the nature of trust as enumerated in Chap. IX of the Indian Trusts Act, 1882.

21. However, s. 153B when it makes mention of trusts, does not elaborate the inclusion of implied or constructive trusts, or what may be termed as obligation in the nature or trust. The circumstance that sub-s. (4) enjoins the creation of a trust by an instrument in writing before this section can come into play further tends to exclude implied or constructive trusts or obligation in the nature of a trust. One has, therefore, to look to the definition of trust as given in s. 3 of the Indian Trusts Act for understanding the import of this expression under s. 153B. The same envisages that a "trust" is an obligation annexed to the ownership of property, and arising out of confidence reposed in and accepted by the owner, or declared and accepted by him, for the benefit of another, or of another and the owner.

22. The Bombay High Court has thus in the case of Tan Bug Taim v. Collector of Bombay, AIR 1946 Bom 216, observed that the very heading of Chap. IX and the terms of s. 80 of the Indian Trusts Act show that the relationships provided for in Chap. IX are not trusts but obligations in the nature of trust and, therefore, it cannot be said that merely because those obligation were enacted within the provisions of that Act, they were included in the definition or conception of trusts which only were the subject-matter of the enactment of that Act.

23. The Patna High Court has also held in the case of Nandkishore Bajoria v. Gaya Sugar Mills Ltd., , that s. 185 of the Indian Companies Act, 1913, was confined to trusts as defined in s. 3 of the Trusts Act. Distinction was drawn between an express trust and a constructive trust. The later category was opined as not covered by the provisions of s. 185 of the Indian Companies Act, 1913.

24. From the side of the Public Trustee, it has been contended that the word "trust" as used in s. 153B has not be understood in the legal concept as envisaged by the Indian Trust Act, but has to be given the common parlance meaning of faith or confidence reposed. The same was claimed as analogous to trust or confidence or tacit belief which one may have in another.

25. In our opinion, however, when certain terms have become words of well-considered legal import, they have to be understood as such when found introduced in any statute, unless they are defined otherwise or are stated in a different context. There is, therefore, no reason to ascribe a different meaning to the word "trust" occurring in s. 153B of the Companies Act from want has come to be understood in the context of the Indian Trusts Act. The Punjab High Court has, in the case of S. Ripudaman v. Surinder Kumar, , taken note of the implication of a trust under that Act and observed that it subjected the person, by whom a property was held, to equitable duties to deal with the property for the benefit of another, and in the case of an express trust arising from the intention of a person to create a trust directly or indirectly, it was the manifestation of intention and not the actual intention which determined whether a trust had been created. A number of features, it was next held, distinguished a trust from a contract. Trust always involved an equitable ownership whereas a contract was legal obligation based on an undertaking supported by a consideration, which obligation may or may not be fiduciary in character. The beneficiary of a trust has the beneficial interest in the trust property, the beneficiary of a contract had only a personal claim against the promisor.

26. In the present cases, no formal instruments of trust stand executed as envisaged by sub-s. (4) of s. 153B of the Companies Act, 1956. However, this circumstance should not preclude the ascertainment whether the creation of trust could be deduced from a number of document executed between the concerned parties.

27. Before proceeding further, it may be relevant here to mention what was the object which induced the Legislature to introduce the provisions contained in ss. 153B, 187A and 187B. A perusal, in this respect, of the Guide to the Companies Act, by A. Ramaiya (8th Edn., 1977), at p. 329, shows that the Finance Minister, while elaborating the object and scope of these sections at various stages of the Bill, explained that while the Government had no intention to interfere with the position of trust equities, it had often happened that certain types of trusts held large amounts of equities and the people who were in management of these trusts used those equities for the purpose of having control. Such groups of persons, it had been noted, were defeating the various other provisions which tended to limit the amount of control by excessive acquisition of equity capital in their hands by holding them in the form of trust and then becoming trustees themselves. The result was that trust funds were being invested and utilised for furthering the donor's business interests that of the beneficiaries. The intention of these provisions was, therefore, not to interfere in the affairs of genuine trusts but to prevent the holding of securities by trusts to be used by a group of persons for the purposed of augmenting their own voting rights. A public trustee was, therefore, sought to be appointed to whom the exercise of voting rights was to be transferred.

28. We next advert to the facts of the present cases as to what in substance were the nature of loan accounts and whether the transfer of shares in the form of extending securities in favor of the banks did result in the creation of trusts as envisaged by s. 153B of the Companies Act. Ex facie, three factors were already discernible. Firstly, though the shares stood transferred in the names of the banks, the dividends occurred on them were credited to the respective cash credit accounts of the debtors. Thus, the benefit of those dividends was occurring to them. There was further an obligation to transfer back the shares to the debtors once the accounts were squirted up. Thirdly, according to the Public Trustee, the voting rights were also being exercised by the banks at the behest of the debtors. In this way, the mains ingredients of trusts were pointed out to be clearly made out. The present, it is stated, are cases of trust oriented pledges, and not pledge-oriented trusts. In the former case, it has been pleaded, it did not make much difference if some element of pledge also co-existed. A pledge, it is pointed out, normally does not require transfer of ownership. The existence of such transfers, in the presents cases, thus is a pointer to the creation of trusts and that the banks are holding the shares for the benefit of the original holders.

29. From the side of the petitioner, however, it has been urged that the creation of trust is primarily a matter of intention and overt act of the concerned parties. In the present cases both the debtors and the banks have not claimed that any trusts have come into being. They make no secret that the transfers of shares were in the course of extending securities for the loans. None had thus the intention to create trusts and, therefore, the Public Trustee is not justifies to thrust such trusts on them.

30. In our considered opinion, it is the entire course of conduct and dealings which must be kept in view. One cannot be oblivious that there can be cases where the legal effect of such course of dealings may, in fact, result in the creation of trusts though the parties may not have envisaged so. There should be no reason not to give effect to such trusts if they otherwise satisfy the ingredients of a legal trust. Thus, the Bombay High Court in the case of Fazalbhai Mills Ltd. (In liquidation), In re [1936] 6 Comp Case 351; AIR 1936 Bom 296, observed that fiduciary relationship may established without the use of the word "trust". A person may become a trustee by his own acts and conduct so as to deprive himself of all beneficial ownership of a property and declare that he will hole the same in trust for another. The more fact that the owner retains an interest in the property would not necessarily go against the foundation of a trust.

31. However, the significant factor, which provides the entire course of dealings is that the transfers of shares in favor of the banks were effected primarily for the purposed of providing securities to the loans accounts. It was not within the purview of the parties, nor was it intended that thereby they were creating any trusts. This is amply reflected from the circumstance how they have vigorously contested in these writs the creation of any such trusts. In fact, these transfers seem to have resulted from the directives of the Reserve Bank of India to which reference had already been made above. The real object behind them continued to be to obtain absolute safeguard for the loans advanced. Perhaps it could as ell be said that the necessity for these transfer was dictated by the desire to secure fully the interest of the bank lest any surreptitious disposing of those shares by the debtors in any manner took place.

32. The present are not cases of the nature where trusts are created to enable individuals to derive personal advantages by way of control over companies to curb which s. 153B was interdicted in the Companies Act. Rather the banks have obtained transfers of shares for protection of their own interest and for their benefit. This does not appeal compatible with the creation of a trust as in that case the beneficiary should be a third party or such party and the owner. Furthermore, a trustee is generally not entitled to dispose of or appropriate the trust property for his benefit. It the present cases, however, the rights of the banks to appropriate the shares to their benefit or dispose them of and utilised the amounts thereof for adjustment of the loan amounts due to them, in case the debtors do not discharge them, remain. The obligation requiring the transfer of shares back to the debtors can only arise where the debtors clear their dues to the banks on the basis of those loans. All these thus plainly show that the retention of shares by the banks during the subsistence of the loans is for the protection of their own interest.

33. It so far as the credit of the dividend amounts received by the banks in the case credit accounts of the debtors, it would, no doubt, seemingly appear that the beneficial interest in those dividends remains with the debtors. However, a careful scrutiny would bring out that this is what superficially seems to be so. In reality, the banks are partly recovering the amounts of the loans advanced by them by appropriating the dividends towards the amounts due to them.

34. We are further of the opinion that there appears no basis for the Public Trustee to assume that the voting rights are retained by the debtors even after the transfer of the shares to the shares to the banks. The Reserve Bank directive in this regard makes the matter sufficiently clear. It is enjoined that those voting rights are exercisable by the banks only, and that too under the directions of the Reserve Bank. Thus, an equally independent body keeps supervisions and control over the exercise of those voting rights which can rule out any connivance of misfeasance. There is nothing to assume that the banks have any ulterior objects to enter into collusions to enable individuals to derive personal gains or to unwarrantedly abdicate their voting powers incidental to the transfer of shares in their favor, which the Reserve Bank has so specially required. The Reserve Bank plays as good a role as a watch dog in this respect as the Public Trustee could, and in case of any default, the Public Trustee may in his advisory capacity guide the Reserve Bank.

35. We are, therefore, of the considered opinion that in the circumstances of the present cases, it could not be said that any trusts were created when the banks got the shares in dispute transferred in their favor as a sort of security for the loan amounts advanced by them.

36. As regards the locus standi of the Gwalior Rayon to more the writ, it was clearly there, as it would have suffered penalties in case it did not serve notice and other documents on the Public Trustee. The Sutlej Cotton, however, it seems has no right over the shares as long as they stand transferred in favor of the bank and the loan amount is not discharged. However, it cannot here also be ignored that the transfer of these shares was in the context of extending security to the loan and the company has a right to obtain back their transfer as and when the loan is discharged.

37. The result, therefore, is that we allow these writs to the extent that the notice issued by the Public Trustee to the petitioners and the Punjab National Bank are quashed, and the Public Trustee is restrained from proceeding against the petitions for any violation of those notices. Looking at the circumstances we make or order as to costs.

Ranganathan, J.

38. I agree. I think that in interpreting s. 153B one should give due weight to the very careful language used in it, particularly when considered in contrast with that employed in s. 153 and s. 187C. Section 153 is very widely worded and embraces within its sweep all types of trusts, express, implied or constructive. Section 187C, again, though somewhat akin to s. 153B, has a wise application and seeks disclosure of all types of beneficial interest in shares; in particular sub-s. (6) thereof covers, by specific mention, charges, hypothecation and all types of agreements "created, executed or entered into" in relation to any share. Section 153B, on the other hand, is narrow in scope and takes in only cases where shares are held by a person under a trust created by an instrument in writing. The decisions referred to by my learned brother show that the expression, "trust", used in similar contexts, has been held applicable only to express trusts and as not appropriate to comprehend obligations in the nature of trusts or constructive trusts. Having regard to these consideration, I think that s. 187B is attracted only where one or more documents expressly create or constitute a trust in the full sense of s. 3 of the Trusts Act where a person transfers property to another with certain obligations annexed thereto as a result of confidence reposed by him in that other and declared and accepted by the other and not merely where some sort of fiduciary obligations can be spelt out from several documents executed by and between the parties.