2014 (1) TMI 1969 - HC - Companies Law

Gujarat HC recalls order ratifying pledged share assignment after equity shareholders weren't heard in proceedings

Girish Bhagwatprasad HUF Versus Industrial Development Bank of India Ltd. (IDBI Ltd.)

Gujarat HC recalled its order ratifying assignment of pledged shares and company debts. Applicants, equity shareholders who pledged shares as security for ... Parties to company application - applicants, as equity shareholders whose shares were pledged - order ratifying the assignment of rights, title, and interests in the pledged shares and debts of the company, should be recalled due to the applicants not being heard - HELD THAT:- What appears to be not in dispute is that the applicants were not debtor of the IDBI but they had pledged their 1344 equity shares with IDBI in the month of March 1985 as security against loan advanced by IDBI to the company. There appears to be also no dispute that after IDBI recovered Rs. 19 lacs out of total dues of the company, the IDBI executed deed of assignment on 25.8.2007 transferring all rights in debt of the company with underlying security and rights in pledged shares in favour of respondent No.2 for consideration of Rs. 15 lacs. The pledged goods are not debt but are security and creditor is under obligation to preserve such security till his dues are repaid by the borrower. As held by the Hon'ble Supreme Court in ICICI Bank Ltd. [2010 (9) TMI 236 - SUPREME COURT], the debt is an asset in the hands of the bank as a secured creditor and the bank can always transfer its assets and such transfer in no way affects any rights or interest of the borrower. However, Hon'ble supreme Court has clearly distinguished between the rights to transfer debt and the assignment of obligation for promisor and held that assignment of the obligation for the promisor owed to the promisee is not possible without novation of the contract with the promisor. The Company Court would not have jurisdiction to entertain any such application for ratification of any act or agreement between two independent parties. If the creditor of the company assigns his rights in the debts of the company in favour of any other party by any agreement, the assignee steps into the shoes of the creditor of the company and such assignee thereafter will be at liberty to move application before the Company Court to substitute him in place of creditor and to recognize him as creditor of the company in the winding up proceedings. The Company Court has inherent powers under Rule 9 of the Rules to pass necessary orders to do complete justice to the parties by recalling its order if it finds that there was total lack of jurisdiction to deal with particular application whereon the order was made and it was not properly apprised of the correct facts or correct position of law by party in whose favour the order is passed. Present is not the case where the applicants are seeking review under the guise of seeking modification/ clarification or recalling of the order. Conclusion - This Court is of the view that to do complete justice in the matter, the order dated 25.8.2008 passed in the application needs to be recalled. Application allowed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment include:Whether the applicants, as equity shareholders whose shares were pledged, should have been made parties to the Company Application No.414 of 2007 filed by IDBI.Whether the order dated 25.8.2008, ratifying the assignment of rights, title, and interests in the pledged shares and debts of the company, should be recalled due to the applicants not being heard.Whether the IDBI had the authority to assign rights in the pledged shares without notifying the applicants.Whether the application for recall of the order is barred by limitation.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Whether the applicants should have been made parties to the Company Application No.414 of 2007.Relevant Legal Framework and Precedents: Sections 173-176 of the Indian Contract Act, 1872, which outline the rights of pawnee and pawnor, were central to this issue. The court also referred to precedents such as Prabhat Bank Ltd. v. Babu Ram and Tapanga Light Foundry v. State Bank of India, which emphasize the necessity of reasonable notice before the sale of pledged goods.Court's Interpretation and Reasoning: The court held that the applicants, being directly affected by the assignment of their pledged shares, were necessary parties to the application. It was emphasized that no order affecting their rights should have been passed without hearing them.Key Evidence and Findings: The court noted that the applicants were not made parties to the original application, despite being directly concerned with the pledged shares. The absence of their participation was deemed a significant oversight.Application of Law to Facts: The court applied the principles of natural justice, which mandate that affected parties must be heard before any adverse order is passed against them.Treatment of Competing Arguments: The respondent argued that the assignment was valid without the applicants' participation, relying on a power of attorney. However, the court found that the absence of notice and hearing rendered the process flawed.Conclusions: The court concluded that the applicants should have been made parties to the application, and their exclusion warranted recalling the order.Issue 2: Whether the order dated 25.8.2008 should be recalled.Relevant Legal Framework and Precedents: The court referred to its inherent powers under Rule 9 of the Company Court Rules, 1959, and precedents like Asit Kumar Kar v. State of West Bengal, which allow for recalling orders passed without hearing necessary parties.Court's Interpretation and Reasoning: The court emphasized that the principles of natural justice were violated when the order was passed without hearing the applicants.Key Evidence and Findings: The court found that the applicants had not been given an opportunity to present their case, which was a fundamental error.Application of Law to Facts: The court applied the principle that orders passed without hearing affected parties can be recalled to rectify the miscarriage of justice.Treatment of Competing Arguments: The respondent contended that the application was essentially a review disguised as a recall. The court rejected this, distinguishing between review and recall based on the lack of initial participation.Conclusions: The court decided to recall the order dated 25.8.2008 to ensure justice and due process.Issue 3: Whether the IDBI had authority to assign rights without notifying the applicants.Relevant Legal Framework and Precedents: Sections 173-176 of the Indian Contract Act, 1872, particularly Section 176, which requires reasonable notice before the sale of pledged goods.Court's Interpretation and Reasoning: The court held that IDBI, as a pawnee, could not transfer the rights in the pledged shares without notifying the applicants.Key Evidence and Findings: The court noted the lack of evidence showing that the applicants were notified about the transfer of their pledged shares.Application of Law to Facts: The court applied the statutory requirement of notice under Section 176, finding that IDBI's actions were contrary to law.Treatment of Competing Arguments: The respondent's reliance on a power of attorney was insufficient to override the statutory notice requirement.Conclusions: The court concluded that IDBI acted beyond its authority by not notifying the applicants before assigning the shares.Issue 4: Whether the application for recall is barred by limitation.Relevant Legal Framework and Precedents: Article 137 of the Limitation Act, 1963, which provides a three-year limitation period for applications not otherwise provided for.Court's Interpretation and Reasoning: The court held that when a patent error resulting in injustice is found, it can exercise its inherent powers to recall the order, regardless of the delay.Key Evidence and Findings: The court found that the applicants were unaware of the proceedings and thus could not be penalized for the delay in filing the recall application.Application of Law to Facts: The court applied its inherent powers to address the injustice, setting aside the limitation argument due to the fundamental nature of the error.Treatment of Competing Arguments: The respondent's argument on limitation was dismissed, as the court prioritized correcting the injustice over procedural timelines.Conclusions: The court decided that the application for recall was not barred by limitation due to the exceptional circumstances.3. SIGNIFICANT HOLDINGSVerbatim Quotes of Crucial Legal Reasoning: 'The Company Court has inherent powers under Rule 9 of the Rules to pass necessary orders to do complete justice to the parties by recalling its order if it finds that there was total lack of jurisdiction to deal with particular application whereon the order was made and it was not properly apprised of the correct facts or correct position of law by party in whose favour the order is passed.'Core Principles Established: The principles of natural justice require that all affected parties be heard before an order is passed. The court has inherent powers to recall orders passed without jurisdiction or without hearing necessary parties.Final Determinations on Each Issue: The court recalled the order dated 25.8.2008, restored the Company Application No.414 of 2007 to file, and directed that the applicants be made parties to the application, ensuring they are heard in subsequent proceedings.