Holding

The transaction is a finance lease, and a custodian under the Special Courts Act does not acquire ownership of the notified party’s property but holds it in the same position as the notified party, remaining bound by the notified party’s obligations.

Summary

Asea Brown Boveri Ltd. entered into a lease‑finance agreement with Fairgrowth Financial Services Ltd. for 56 cars, paying all rentals, security deposit and a terminal fee, after which ownership was to vest in the lessee. Fairgrowth was later notified as a party to illegal transactions under Section 3(2) of the Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992, and the Central Government appointed IFCI as custodian of its assets. The Special Court treated the arrangement as a simple lease and ordered the appellant to surrender the cars to the custodian, despite the appellant’s claim that the transaction was a finance lease and that all dues had been fully settled. The Supreme Court held that the transaction was indeed a finance lease, explained the nature of a financial lease, and clarified that a custodian under the Act does not acquire ownership but merely holds the property in the same position as the notified party. Consequently, the Supreme Court set aside the Special Court’s order, restored the appellant’s application, and directed the Special Court to determine any remaining amount payable, if any, before ordering attachment of the cars.

Issues considered

What is the true nature of the transaction between the appellant and Fairgrowth – a lease or a finance lease?
Do the properties of a notified party vest in the custodian appointed under Section 3(1) of the Special Courts Act?
What obligations, if any, remain payable by the appellant to the custodian after full settlement of the finance‑lease agreement?

Legislation cited

Industrial Finance Corporation of India Act, 1948
Special Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992s. 3(1), s. 3(2), s. 3(3)

Subjects

finance leaselease finance agreementcustodiannotified partySpecial Courts Actattachment of propertyownership transfercommercial leasing

Judgment

ASEA BROWN BOVERI LTD. A
v.
INDUSTRIAL FINANCE CORPORATION OF INDIA AND ORS.

OCTOBER 27, 2004

[R.C. LAHOTI, CJ. AND ASH OK BHAN, 1.] B

Special Courts (Trial of offences Relating to Transactions in Securities
Act, 1992-Sections 3(1), 3(2), JO-Custodian of notified party-Powers
of-Properties of notified party-Held, do not vest with custodian at any C
point of time, he is not a receiver or a final liquidator-Further Held-
Position of custodian is same as that of notified person and he remains bound
by the obligations incurred

Words and Phrases-Lease Finance Agreement-Meaning of-
Financial /ease-Explained-Held, such a lease is non-cancel/able. D
Appellant entered into a Lease Finance Agreement with Mis Fairgrowth
Financial Services Limited ('Fairgrowth'), the respondent No. 3 taking 56
cars under lease finance with the appellant. Appellant deposited total security
amount on the 56 cars. The terms of the lease finance agreement mutually
agreed to by the parties, prescribed all the required payments to be made by E
the appellant. The cars were to be transferred to the appellant at the end of
initial lease period of 5 years the terminal fee was to be 20%. Fairgrowth
became a notified party under sub-section (2) of Section 3 of the Special
Courts (Trial of offences Relating to Transactions in Securities) Act, 1992
due to certain illegal transactions. The Central Government appointed IFCI F
as the custodian, under Section 3(1) of the Act, over the properties belonging
to Fairgrowth. Appellant Company continued to make payment to IFCI in place
of Fairgrowth as per lease finance agreement Appellant squared up fully and
finally its liability for all payments subject to adjustment of security deposit
and interest agreed thereon and all that remained to be done thereafter was
transfer of the 56 cars in favour of the appellant after cancellation of the G
hypothecation which obligation was to be discharged by the custodian which
had taken over the properties of Fairgrowth.

The Special Court refused to treat the transaction between the appellant

671 H
672 SUPREME COURT REPORTS [2004] SUPP. 5 S.C.R.

A and Fairgrowth as one oflease finance and instead treated it to be a transaction
of lease only and directed the appellant to hand over possession of all the 56
cars to the custodian within one week.

Before this Court, appellant contended that all sums due and payable
under the lease finance agreement were already paid and nothing was due
B and payable at all to any of the respondents. Termination ofhypothecation and
transferring on paper of the ownership of the cars to the appellant was only
a matter of formality and that in no case the 56 cars could have been directed
to be delivered to the custodian, and that inspite of having made full payment,
direction for delivery of cars to the custodian has caused failure of justice.
C The custodian contended that it has filed a calculation sheet prepared b a
Chartered Accountant appointed by the Special Court and, according to his
calculation, an amount ofRs.6,48,370 was due and payable by the appellant to
respondent No.3.

During the course of having before the Supreme Court it conceded that
D the transaction was of lease finance. The issue was to work out right and
obligations of the parties accordingly.

Allowing the Appeal, the Court

HELD: 1. Financial lease is a transaction current in the commercial
E world, the primary purpose whereof is the financing of the purchase by the
financier. The purchase of assets or equipments or machinery is by the
borrower. For a!I practical purposes, the borrower becomes the owner of the
property inasmuch as it is the borrower who chooses the property to be
purchased, takes delivery, enjoys the use and occupation of the property, bears
F the wear and tear, maintains and operates the machinery/equipment,
undertakes indemnity and agrees to bear the risk of loss or damage, if any.
He is the one who gets the property insured. He remains liable for payment
of taxes and other charges and indemnity. He cannot recover from the lessor,
any of the above mentioned expenses. The period ·of lease extends over and
covers the entire life of the property for which it may remain useful divided
G either into one tern or divided into tWo terms with clause for renewal. In either
case, the lease is non-cancellable. [679-A-D]

Dictionary of Accounting & Finance by R. Brockington (Pitman
Publishing, Universal Book Traders, 1996, Page136. Lease Financing & Hire
Purchase by Dr. J.C. Verma (4th Edition, 1999 at p.33) Lease Financing &
H
ASEA BROWN BOVERI LTD. v. INDUS. FINANCE CORPN. OF INDIA 673

Hire Purchase by Vinod Kothari (Second Edition, 1986, at pp., 6 and 7), A
referred to.

2. Once a party has been notified under sub-section (2) Section 3 of the
Act then under sub-section (3), notwithstanding anything contained in any
other law for the time being in force with effect from the date of notification
under sub-section (2), any property, movable or immovable or both belonging B
to notified party stands attached simultaneously with the issue of the
notification and becomes liable to be dealt with by the custodian in such manner
as the Special Court may direct. The properties of the notified persons,
whether attached or not, do not at any point of time, vest in the custodian. He
is merely a custodian and not a receiver nor is he a final liquidator so as to C
enjoy control over the properties. In other words, the position of the custodian
is the same as that of the notified person himself. The custodian remains by
the obligations incurred by the notified party itself, if not incurred fraudulently
or to defeat the provisions of the Act. B. OJ. Finance Ltd. v. Custodian and
Ors., (1997) 10 SCC 488, referred to. [679-G-H; 680-A-B)
D
3. The Court directed that the impugned order passed by the Special
Court stands aside, the application filed by the appellant shall stand restored
on the file of the Special Court, the Special Court shall look ·into the accounts
after affording the parties an opportunity of hearing and determine if any
amount, and if so to what extent, remains still payable by the appellant to the E
custodian, for and on behalf of Fairgrowth, respondent No.3. In the event of
any amount being held liable to be so paid, the same shall be paid by the
appellant within the time appointed by the Special Court failing which the
appellant shall be liable to be proceeded against including for attachment of
property. (681-A-B-C]
F
CIVIL APPELLATE JURISDICTION: Civil· Appeal No. 3574of1998.

From the Judgment and Order dated 28.7.98 of the Special Court (Trial
of Offences Relating to Transactions in Securities) at Bombay in Misc.
Application No. 263of1997.
G
Uday Umesh Lalit, (A.C.), Rattan K. Singh, Nikhilesh Krishnan, R.K.
Choudhary, Sagar Saxena, Jayan Mehta, Ms. Vandana Singh and Kanhaiya
Priyadarshi, with him for the Appellant.

Subramoni11m Prasad and Prasanjit Keswani for the Respondents.
H
674 SUPREME COURT REPORTS [2004] SUPP. 5 S.C.R.

A The Judgment of the Court was delivered by

R.C. LAHOTI, CJ. This is an appeal under Section I 0 of the Special
Courts (Trial of Offences Relating to Transactions in Securities) Act, 1992
(hereinafter 'the Act', for short), feeling aggrieved by an order dated 28.7.1998
whereby rejecting an objection petition preferred by the appellant, the Special
B Court has directed the appellant to hand over possession of all the 56 cars
to the custodian within one week from the date of the order.

The Industrial Finance Corporation oflndia (hereinafter 'IFCI', for short)
is a Corporation constituted under the Industrial Finance Corporation of India
C Act, 1948 and carries on the business of financing moneys to various borrowers.
Vide agreement dated 4.12.1990, the appellant entered into a Lease Finance
Agreement with M/s. Fairgrowth Financial Services Limited (hereinafter
'Fairgrowth', for short), the respondent No. 3. Pursuant to the letter of offer
dated 26.7.1990 under this lease finance agreement, the appellant had taken
lease finance of total 57 cars out of which one car was foreclosed in or about
D January, 1992, leaving 56 cars under lease finance with the appellant.

The case of the appellant as regards these 56 cars and the relationship
of the appellant and respondent No. 3 in so far as these cars are concerned
is stated as follows. The Appellant Company deposited total security amount
on the 56 cars of Rs. 20,97,447.25 paise. The total rental payable by the
E Appellant Company for 5-year period amounted to Rs. 85,35,379. The total
purchase price of 56 cars is Rs. 84,80,664. As per the tenns of the lease finance
agreement mutually agreed into by the parties, the Appellant Company was .-
required to pay 25% of the purchase price of the cars as security deposit
carrying interest@ 5% per annum compounded half yearly, a lease management
F fee of I% and lease rental of Rs. 15 per thousand Rupees per month of the
cash price of the assets· which was later revised to Rs. 16 per thousand
Rupees per month by a subsequent letter."

It is further alleged that it was the tacit understanding between the
parties that the cars were to be transferred to the Appellant Company at the
G end of initial lease period of 5 years for which the parties agreed in their
agreement by stating that the terminal fee will be 20%, meaning thereby that
on payment of 20% of the cost price of the cars the said cars would be
transferred by the Lessee Company to the Appellant Company or their nominee.
The tenn tenninal fee is a well known tenn in Lease Finance Transaction and
H has no other connotation than the amount payable for transfer of the leased
ASEA BROWN BOYER! LTD. v. INDUS. FINANCE CORPN. OF INDIA [LAHOTI, CJ.] 67 5

asset. This lease finance agreement was entered into on 4th December, 1990."· A
Fairgrowth became a notified party under sub-Section (2) of Section 3
of the Act due to certain illegal transactions covering the period between
l .4.1991 and 6.6.1992. The transaction entered into on 4.12.1990 pursuant to
letter of offer dated 26. l l. l 990 is not referable to the period during which the
alleged illegal transactions were entered into by Fairgrowth. B

The Central Government appointed IFCI as the custodian, under sub-
section ( 1) of Section 3 of the Act, over the properties belonging to Fairgrowth.
The Appellant Company continued to make payment to IFCI in place of
Fairgrowth as per lease finance agreement. An amount of Rs. 30,96,948.30 C
paise was paid by the appellant to Fairgrowth till December, 1992. An amount
of Rs.44,61,273 was paid by the appellant to the custodian IFCI. Thus the total
lease rentals actually paid by the appellant company are Rs.75,31,842 till May,
1997 whereas the rentals which were payable by the appellant company were
Rs.85,34,379 only.
D
According to the appellant company under lease finance agreement, it
had made a security deposit with Fairgrowth on which an interest of 5% per
annum compounded half yearly was to be paid. The appellant made a
communication to the custodian clarifying that the appellant would be entitled
under the agreement to the amounts on account of security deposit and
interest accrued thereon at the time of buyback or purchase of lease assets E
by the appellant. On 9.4.1997, the appellant forwarded a cheque of Rs. 17,800
in full and final settlement of dues under lease finance agreement dated
4.12.1990. According to the appellant, the payment of this amount squared up
fully and finally its liability for payment subject to adjustment of security
deposit and interest agreed thereon and all that remained to be done thereafter F
was to transfer the said 56 cars In favour of the appellant company after
cancellation of the hypothecation which obligation was to be discharged by
the custodian which had taken over the properties of Fairgrowth.

A perusal of the detailed order passed by the Special Court shows that
the Special Court refused to treat the transaction between the appellant and G
Fairgrowth as one of lease finance and instead treated it to be a transaction
of lease only i.e. the appellant holding 56 cars as lessee of Fairgrowth. The
principal reason which prevailed according to the Special Court is that in its
application, the appellant had stated the transaction to be of "lease" and not

H
676 SUPREME COURT REPORTS [2004] SUPP. 5 S.C.R.

A of "lease finance". Thus the Special Court has rigidly applied the rules of
pleadings but a perusal of the order shows that there has been no effort to
scrutinize and interpret the documents evidencing the transaction so as to
determine the real nature thereof.

This appeal was filed on 31.7.1998. On 3.8.1998, the court passed an
B interim order protecting the possession of the appellant over the 56 cars.
On being noticed, the custodian has in its response filed a calculation
sheet prepared by a Chartered Accountant appointed by the Special Court
and, according to his calculation, an amount of Rs. 6,48,370 was due anc!
C payable by the appellant to the respondent No. 3. as per the agreement
entered into between the parties. A perusal of this calculation sheet shows
that the main factor responsible for the variation in the ultimate figure of
balance payable is attributable to an amount of Rs.4,89,923 being sales tax
calculated @5% on the amount of total lease rent including terminal fee which
figure of sales tax the chartered accountant feels is leviable on the transaction
D and hence payable by the appellant. This is a highly debatable issue but need
not detain us. Whether or not this amount is held to be due and payable by
the appellant, it will not change the nature of transaction. The correctness of
the calculation has been disputed in the rejoinder filed on behalf of the
appellant wherein it is submitted that all sums due and payable under the
E lease finance agreement dated 4.12.1990 were already paid and nothing was
due and payable at all to any of the respondents by the appellant. Even 20%
terminal fee, as purchase price of the 56 cars, had been paid and nothing had
remained to be done except termination of hypothecation and transferring on
paper of the ownership of the cars to the appellant which was only a matter
of formality necessarily flowing from the obligation of respondent No. 3 under
F the agreement and accounts having already squared up. The documents
show that the registration of the cars since inception stands in the name of
the appellant.

During the course of hearing before this Court, it was conceded at the
Bar that so far as the transaction between the respondent No. 3 and the
G appellant as evidenced by the agreement dated 4.12.1990 is concerned, it is
a transaction of lease finance and the rights and obligations of the parties
have to be worked out accordingly.

We have heard at length, the learned counsel for the parties. We also
H requested Shri Uday U. Lalit, Senior Adocate, to assist the Court by pointing
ASEA BROWN BOVERI LTD. v. INDUS. FINANCECORPN. OF INDIA [LAHOTI, CJ.] 677

out the correct position of law centering around lease finance transactions. A
We place on record our appreciation of the assistance rendered by the learned
senior counsel, Shri Uday U. Lalit.

What is a lease finance? According to Dictionary of Accounting and
Finance by R. Brockington (Pitman Publishing, Universal Book Traders, 1996
at page 136) :- B
"A Finance Lease is one where the Lessee uses the asset for
substantially the whole of its useful life and the lease payments are
calculated to cover the full cost together with interest charges. It is
thus a disguised way of purchasing the asset with the·help of a loan. C
SSAP 23 required that assets held under a finance lease be treated on
the balance sheet in the same way, as if they had been purchased and
a loan had been taken out to enable this."

(emphasis supplied)
D
In Lease Financing and Hire Purchase by Dr. J.C. Verma (4th Edition,
1999 at p.33), Financial Lease has been so defined :-

"Financial lease is a long-term lease on fixed assets, it may not be
cancelled by either party.
E
It is a source of long-term funds and serves as an alternative oflong-
term debt financing. In financial lease, the leasing company buys the
equipment and leases it out to the use of a person known as the
lessee. It is a full payout lease involving obligatory payment by the
lessee to the lessor that exceeds the purchase price of the leased
property and finance cost. F
Financial lease has been defined by International Accounting Standards
Committee as "a lease that transfers substantially all the risks and
rewards incident to ownership of an asset. Title may or may not
eventually be transferred." Lessor is only a financier and is not
interested in the assets. This is the reason that financial lease is G
known as full payout lease where contract is irrevocable for the
primary lease period and the rentals payable during which period are
supposed to be adequate to recover the total investment in the asset
made by the lessor."
(emphasis supplied) H
678 SUPREME COURT REPORTS [2004] SUPP. 5 S.C.R.

A According to Lease Financing and Hire Purchase by Vinod Kothari
(Second Edition, l 986, at pp. 6 and 7), a finance lease, also called a capital
lease, is nothing but a loan in disguise. It is only an exchange of money and
does not result into creation of economic services other than that of
intermediation. The learned author has quoted T.M. Clark, one of the most
B authentic writers on the subject who defines lease and operating lease in the
undergoing words :-

"A financial lease is a contract involving payment over an obligatory
period of specified sums sufficient in total to amortise the capital
outlay of the lessor and give some profit."
c "An operating .lease is any other type of·lease-that is to say, where
the asset is not wholly amortised during the non-cancellable period,
if any, of the lease and where the lessor does not rely for his profit
on the rentals in the non-cancellable period."

D The features of the financial lease, according to the learned author are
as under :

"I. The asset is use-specific and is selected for the lessee specifically.
Usually, the Jessee is allowed to select it himself.

E 2 The risks and rewards incident to ownership are passed on to the
lessee. The lessor only remains the legal owner of the asset.

3. Therefore, the lessee bears the risk of obsolescence.

4. The lessor is interested in his rentals and not in the asset. He
must get his principal back along with interest. Theref~re, the
F
lease is non-cancellable by either party.

5. The lease period usually coincides with the economic life of the
asset and may be broken into primary and secondary period.

6. The lessor enters into the transaction only as a financier. He does
G not bear the costs of repairs, maintenance or operation.

7. The lessor is typically a financial institution and cannot render
specialized service in connection with the asset.

8. The lease is usually full-pay-out, that is, the single lease repays
H
ASEA BROWN BOYER! LTD. v. INDUS. FINANCECORPN. OF INDIA (LAHOTI, CJ.) 679

the cost of the asset together with the interest." A
In our opinion, financial lease is a transaction current in the commercial
world, the primary purpose whereof is the financing of the purchase by the
financier. The purchase of assets or equipments or machinery is by the
borrower. For all practical purposes, the borrower becomes the owner of the
property inasmuch as it is the borrower who chooses the property to be B
purchased, takes delivery, enjoys the use and occupation of the property,
bears the wear and tear, maintains and operates the machinery/equipment,
undertakes indemnity and agrees to bear the risk of loss or damage, if any.
He is the one who gets the property insured. He remains liable for payment
of taxes and other charges and indemnity. He cannot recover from the lessor, C
any of the above mentioned expenses. The period of lease extends over and
covers the entire life of the property for which it may remain useful divided
either into one term or divided into two terms with clause for renewal. In either
case, the lease is non-cancellable.

All the abovesaid features are available in the transaction entered into D
by the appellant. In addition, we find that the registration of the 56 cars stood
in the name of the appellant from the very beginning and on payment of full
amount including termination fee, as agreed upon, nothing more was needed
to be done to vest the appellant \\'ith ownership and only loan documents
were needed to be discharged and cancelled.
E
There are certain tax benefits which by styling the transaction like a
financial lease become available to the lessor (financer) and the 'essee
(borrower) both. Accounting standards have been devised consistently with
which the entries are made in the accounts so as to satisfy the requirements
of tax laws and to avail the best benefits by way of tax planning to both the F
parties.

However, so far as the Act is concerned, we have to go by the provisions
of the Act, keeping in view the real nature of the transaction ascertaining the
real intention of the contracting parties in the light of the facts and circumsrnnces
of a given case. Once a party has been notified under sub-Section (2) of G
Section 3 of the Act then under sub-Section (3), notwithstanding anything
contained in any other law for the time being in force with effect from the date
of notification under sub-Section (2), any property, movable or immovab1e or
both belonging to notified party stands attached simultaneously with the
issue of the notification and becomes liable to be dealt with by the custodian
H
680 SUPREME COURT REPORTS [2004] SUPP. 5 S.C.R.

A in such manner as the Special Court may direct. A person is liable to be
notified by reference to transaction in securities between 1.4.1991 and 6.6.1992.
Any contract or agreement entered into between 1.4.1991 and 6.6.1992, in
relation to any property of the notified party is liable to be cancelled, if found
to have been entered into fraudulently or to defeat the provisions of the Act.
B Analysing the provisions of the Act, it was held in B.O./. Finance Ltd v.
Custodian and Ors., [1997] 10 SCC 488, that the custodian under the Act is
required to assist in the attachment of the notified person's property and to
manage the same thereof. The properties of the notified persons, whether
attached or not, do not, at any point of time, vest in him. He is merely a
custodian and not a receiver nor is he a final liquidator so as to enjoy control
C over the properties. In other words, the position of the custodian is the same
as that of the notified person himself. We are, therefore, of the opinion that
the custodian remains bound by the obligations incurred by the notified party
itself, if not incurred fraudulently or to defeat the provisions of the Act.

For the purpose of deciding the controversy before us, it is not necessary
D for us to examine whether the transaction entered into between the appellant
and Fairgrowth, the respondent No. 3, would at all attract the applicflbility of
the provisions of the Act in view of sub-section (2) of Section 3 thereof. The
learned counsel for the appellant has taken a very fair stand submitting that
the appellant is prepared to pay if anything is still found to be due and
E payable by it but in any case the 56 cars could not have been held liable and
directed to be delivered to the custodian. It was a simple case of accounting.
If the appellants have cleared all their payments in accordance with the
agreement dated.4.12.1990, initially to Fairgrowth and thereafter to the custodian
including payment of terminal fee subject to adjustment for security ·deposit
and the interest accrued thereon, then all that had remained to be done was
F the transfer of ownership on paper which the custodian should have been
directed to do, submitted the leaned counsel. But, as we have already noticed,
the registration of the cars already stands in the name of the appellant. On
a scrutiny of the accounts, if in the opinion of the Special Court, nothing had
then remained to be paid by the appellant, then it was only a matter of
G calculation, the difference between the appellant's statement ofaccount and
the one prepared by the Chartered Accountant at the instance of the custodian
being bonafide, the appellant could, at best, have been directed to pay the
deficit. But in no case submitted the learned counsel for the appellant, the 56
cars could have been directed to be delivered to the custodian. In spite of
having made full payment (bonafide error or dispute as to calculation excepted),
H direction for delivery of cars to the custodian has caused failure of justice.
ASEA BROWN BOVERI LTD. v. INDUS. FINANCE CORPN. OF INDIA [LAHOTI, CJ.] 681

We find ourselves in agreement with the submission so made. A
The appeal is allowed. The impugned order dated 28.7.98 passed by the
Special Court is set aside. The application filed by the appellant shall stand
restored on the file of the Special Court. The Special Court shall look into the
accounts after affording the parties an opportunity of hearing and determine
if any amount, and if so to what extent, remains still payable by the appellant B
to the custodian, for and on behalf of Fairgrowth, the respondent No. 3. In
the event of any amount being held liable to be so paid, the same shall be
paid by the appellant within the time appointed by the Special Court failing
which the appellant shall be liable to be proceeded against including for
attachment of property. C
No order as to the costs.

VM Appeal allowed.