HIGH COURT OF HIMACHAL PRADESH

Himachal Pradesh State Industrial Development Corporation Ltd.

v.

Pamwi Tissues Ltd.

Surjit Singh, J

Civil Suit No. 43 of 2000

December 19, 2006

Section 16 of the Securities Contract (Regulation) Act, 1956 - Power to prohibit contracts in certain cases - Plaintiff-Corporation provided equity assistance to defendant No.1-Company which allotted certain shares to plaintiff with stipulation that it would buy back said shares on expiry of five years from date of commencement of commercial production - Subsequently, defendant No. 1 became sick and in terms of rehabilitation package sanctioned by BIFR, its unit was leased out to defendant No. 2 - Thereafter, plaintiff entered into agreement with defendant No. 2 in terms of which defendant No. 2 agreed to purchase said shares over a period of eight years in instalments - After paying certain instalments, defendant No. 2 defaulted in payment and, therefore, plaintiff filed suit for recovery of remaining instalments - Whether when sale was not complete and it was to continue over a period of eight years, plaintiff could seek recovery of money on plea that a portion of sale consideration had remained unpaid - Held, no - Whether contract between plaintiff and defendant No. 2 for sale of shares of defendant No. 1 being apparently in contravention of notification dated 27-6-1969, issued under section 16(1) was illegal, in view of the provision of section 16(2) and, therefore, suit filed by plaintiff on basis of said agreement was liable to be dismissed - Held, yes

FACTS

The plaintiff-Corporation on request of defendant No.1-company, provided equity assistance of Rs. 60 lakhs to defendant No. 1 which allotted six lakh shares, each valuing Rs. 10 to the plaintiff with the stipulation that those shares would be bought back by it on expiry of five years from the date, the project would start commercial production. The defendant No.1 became seek and as per rehabilitation package sanctioned by BIFR, its industrial unit was leased out to defendant No. 2-company. Thereafter an agreement was entered into between plaintiff and defendant No. 2, in terms of which defendant No. 2 agreed to purchase the aforesaid shares and to pay Rs. 60 lakhs together with interest to the plaintiff in 32 quarterly instalments. Defendant No. 2, however, paid only 18 instalments and defaulted in payment of remaining instalments. The plaintiff, therefore, filed the instant suit for recovery of the remaining instalment with interest.

The defendants No. 1 opposed the suit contending that original agreement for buying back six lakhs shares from the plaintiff was not between the plaintiff and defendant No. 1 but the plaintiff and two promoters of defendant No. 1, both of whom were no more and therefore, the suit was not maintainable against defendant No. 1. Defendant No. 2 also denied its liability contending inter alia that the plaintiff was not entitled to recover amount from it and, moreover, the suit was barred under the provisions of the Securities Contracts (Regulation) Act, 1956.

HELD

As per the agreement entered into between the plaintiff and defendant No. 2, defendant No.1 should be purchasing the aforesaid number of shares over a period of eight years from the date of the agreement. Now, if the sale was not complete and it was to continue over a period of eight years, the claim for recovery of money on the plea that a portion of the sale consideration had remained unpaid was not sustainable. In other words, the plaintiff could not seek the recovery of the money on that plea.

One thing was clear from the reading of section 5 of the Sale of Goods Act, 1930 that the contract for the sale of goods (shares) should be complete in the present, that is to say, at the time of its making. In the instant case, the contract for sale of shares was not complete, when the writing was executed. The agreement clearly said that the shares were to be bought by defendant No. 2, over a period of eight years. The writing did not say that the sale of the shares had been made in the present. [Para 14]

Property in the shares could also not be said to have passed to defendant No. 2 at the time when the agreement was executed, because the agreement specifically stated that the shares were to be bought over a period of eight years in instalments. For that reason also, the plaintiff could not recover the price of those shares, which were still with it, and had not been purchased by defendant No. 2. Hence, the plaintiff could not be said to be entitled to recover the suit amount. [Para 15]

The Central Government has issued notification dated 27-6-1969, under sub-section (1) of section 16 of the Act. By this notification, the Central Government has declared that no person in the territory to which the Act stands extended shall, save with the permission of the Central Government, enter into any contract for the sale or purchase of securities, other than such spot delivery contract or contract for cash or hand delivery or special delivery in any securities as is permissible under the said Act, and the rules, bye-laws and regulations of a recognized stock exchange. There are two provisos to this notification. [Para 23]

The plaintiff submitted that its case was covered by the second proviso, which permits the ready forward contracts by a banking company and certain other institutions. It was submitted that plaintiff was a banking company, per notification dated 5-11-1976, issued by the Government of India, Department of Revenue and Banking (Banking Wing), in pursuance of sub-clause (j) of clause (a) and clause (c) of sub-section (1) of section 9 of the Industrial Development Bank of India Act, 1964. [Para 24]

From a bare reading of the sub-clause (i) of clause (a) and clause (c) of sub-section (1) of section 9 of the IDBI Act, it is clear that the plaintiff had been notified only for the purpose of granting loans and advances to it by the Industrial Development Bank of India and for subscribing to or purchase of its stock, shares, bonds or debentures. The plaintiff had not been notified as a banking company by the said notification. Therefore, argument that plaintiff having been declared as banking company was exempted from the operation of notification of 1969, issued in exercise of the powers under section 16 of the Securities Contracts (Regulation) Act, 1956 was of no avail. [Para 25]

The contract between the plaintiff and defendant No. 2 for the sale of the shares of defendant No. 1 was apparently in contravention of the notification dated 27-6-1969, issued under sub-section (1) of section 16 and was, thus, illegal, in view of the provision of sub-section (2) of section 16. [Para 28]