2023 (9) TMI 363 - HC - Companies Law

Court upholds bank's rights in pledge dispute, dismisses fraud claims.

The Court dismissed the Plaintiff's Interim Application, upholding Yes Bank and JCF's rights to exercise voting rights and transfer the pledged shares as ... Deed of pledge of shares - voting right - whether the rights of a Pledgee limited to those prescribed in Section 176 of the Contract Act? - whether the Deed of Pledge can include terms governing the pledge over and above those contained in Sections 172 to 179 of the Contract Act? Seeking injunction restraining the defendant from exercising rights including voting rights in respect of the suit shares - restraint from transferring, alienating, creating any third party rights in respect of the suit shares - injunction restraining from interfering and/or seeking to participate in the management and affairs of the Defendant/Respondent No. 3 by claiming rights under the suit shares. HELD THAT:- It is the Plaintiff’s contention that the conferring of voting rights upon the Pledgee by the contract i.e. the Pledge Deeds would constitute contracting out of Section 176 which is prohibited - this contention is misplaced. This Court in Madhaolal Sindhu [1946 (8) TMI 19 - BOMBAY HIGH COURT] was not concerned with the issue which arises herein namely whether the conferring of voting rights upon the Pledgee constitutes contracting out of Section 176. It is a settled position that the Contract Act, including law of pledge is not exhaustive. In the present case, the mandatory provision of Section 176 of the Contract Act which provides for giving a reasonable notice prior to sale has infact been complied with. The Pledge Deeds mandate reasonable notice to be given before the sale i.e. Clause 7.3 and 8 of the Pledge Deed. The Pledgee has in compliance with the clauses of the Pledge Deeds which are in terms of the mandatory provision of Section 176 of the Contract Act issued notice of sale to the Plaintiff and the Plaintiff’s right to redeem the Suit shares from JCF remains intact - the Pledge Deeds in the present case which confer voting rights on the Pledgee beyond what is specified and expressly provided for under Section 176 of the Contract Act cannot be voided as it is permissible for the parties to incorporate into the Pledge Deeds any incident which is not contrary to or inconsistent with the said provisions governing Pledges in the Contract Act. In the present case the use of the pledged goods will include exercise of voting rights since the pledged goods are shares. Thus, the Pledge Deeds by including in its terms the exercise of voting rights of the Pledgee will neither be contrary to law nor lead to conversion nor would amount to mortgage of movables. The express terms of the Deed of Pledge will prevail and where there are no express terms, the Pledgee may hold or assign the pledged goods, until the debt is discharged. This has also been held in the English case of Donald Vs. Suckling. The Pledgee has a right to protect the pledged goods and its interest therein during the subsistence of the pledge. Having perused the relevant provisions of the Depositories Act, it is clear that the Depositories Act does not contemplate different kinds of beneficiary owners. There is no limitation on the Pledgee’s rights as beneficial owner and / or limitation as to the Pledgee having right to sell but having no other right. Thus, the contention on behalf of the Plaintiff and / or Dish TV to the effect that the only rights which the Pledgee has upon being transposed as beneficial owner, under the Depositories Act and the Depository Regulations is only for effecting the sale and does not contemplate the exercise of voting rights by the Pledgee upon invocation of the pledge does not merit acceptance - the contention of the Plaintiff, namely Section 5(3) of the SARFAESI Act is caveated by the words “unless otherwise expressly provided by this Act” and since Section 31(b) of the SARFAESI Act excludes the application of the Act to a contract for pledge, Section 5(3) of the SARFAESI Act is not applicable to Pledge Deeds cannot be accepted. Having held that the transfer to JCF is lawful and the Pledgee can contractually exercise voting rights, the allegations of fraud are now dealt with. The Plaintiff has in the amended Plaint alleged that the Deeds of Pledge are vitiated by fraud - the Plaintiff had prior knowledge of the alleged fraud i.e. prior to the filing of the present Suit but despite which the Plaintiff did not avoid the Pledge Deeds. The alleged fraud does not in my prima facie view render the loan transaction void but at the highest would render the transaction voidable at the instance of the defrauded party. The parties to the Pledge Deeds including the Plaintiff were fully aware of the character and nature of the documents namely the Deeds of Pledge that were executed. By the Deeds of Pledge, the Plaintiff was pledging certain shares held by it in favour of Catalyst for the benefit of Yes Bank as security for the Loans advanced by Yes Bank. Thus, no case has been made out of there being a fraud as to the character of the contract which would render the document void ab-initio - The Plaintiff has alleged illegality in respect of the use of the loans amount, which does not render the loans themselves illegal and / or unlawful. Prima facie, it is not found that a case of fraud as contemplated under Section 23 is made out. The Pledge Deeds itself provide that the consideration for the Pledgor under the Pledge Deeds is the advancement of the loan to the Borrowers. The Borrowers having received and utilized the loans, it cannot be said that the Plaintiff has not received any benefit from the loan transaction and Pledge Deed. Further, the Plaintiff has not clarified why the Suit shares were Pledged by them in the first place if no consideration / benefit was received by the Plaintiff under the Pledge Deeds - there are no merit in the Plaintiff’s claim to be an innocent party. Thus, JCF, presently registered as “beneficial owner”, is having all rights, benefits and liabilities attached to the securities held by the “depository” and including voting rights as well as the prima facie finding that no case of fraud having been established by the Plaintiff, the interim relief sought for in the present Interim Application cannot be granted. The Interim Application is disposed of. Issues Involved:1. Injunction against Yes Bank and JCF regarding voting rights and transfer of shares.2. Validity and enforceability of the Pledge Deeds.3. Allegations of fraud in the loan and pledge transactions.4. Rights of a Pledgee under the Indian Contract Act and other relevant laws.5. Transfer of shares from Yes Bank to JCF under the SARFAESI Act.Summary:1. Injunction against Yes Bank and JCF:The Plaintiff sought an injunction restraining Yes Bank and JCF from exercising voting rights and transferring the suit shares. The Court found that the Pledgee (Yes Bank/JCF) was entitled to exercise voting rights as per the Pledge Deeds and the Depositories Act, thus denying the injunction.2. Validity and Enforceability of the Pledge Deeds:The Court held that the Pledge Deeds, which included terms allowing the Pledgee to exercise voting rights, were valid and enforceable. The Pledgee's rights were not limited to those prescribed in Section 176 of the Indian Contract Act. The Court emphasized that the Contract Act is not exhaustive and parties can contractually agree upon additional terms unless they are in derogation of mandatory provisions.3. Allegations of Fraud:The Plaintiff alleged that the Pledge Deeds were vitiated by fraud, claiming that the loans were used for purposes other than those stated. The Court found that the alleged fraud, even if proven, would render the transaction voidable, not void. The Plaintiff had prior knowledge of the alleged fraud but did not avoid the Pledge Deeds, thus affirming them. The Court found no merit in the Plaintiff's claim that the Pledge Deeds were void under Sections 23 and 24 of the Contract Act.4. Rights of a Pledgee:The Court reiterated that a Pledgee has a 'special property' in the pledged goods, which allows the Pledgee to exercise rights such as voting. The Court referenced multiple precedents, including the Supreme Court's decision in PTC India, to support the view that the Pledgee can exercise voting rights under the terms of the Pledge Deeds.5. Transfer of Shares from Yes Bank to JCF:The Court found that the transfer of shares from Yes Bank to JCF was lawful under the SARFAESI Act. The Assignment Agreement between Yes Bank and JCF was valid, and JCF, as the new Pledgee, was entitled to all rights, including voting rights, attached to the pledged shares.Conclusion:The Court dismissed the Plaintiff's Interim Application, upholding the rights of Yes Bank and JCF to exercise voting rights and transfer the pledged shares as per the Pledge Deeds and relevant laws. The allegations of fraud were found insufficient to render the Pledge Deeds void.