TaxTMI 
TaxTMI 
2003 (3) TMI 601
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....k an order and direction to the defendants to transfer the said 6,50,000 shares of ETC Network lying to the credit of the demat account of defendant Nos. 1 to 21 and 35, particularly set out in exhibit F to the plaint to the plaintiff's demat account maintained with defendant No. 22, i.e., the Stock Holding Corporation of India. In the alternative, the plaintiff has prayed for an order and decree in the sum of Rs. 1,95,00,000 as per particulars of claim. 4. The plaintiff is an investment company. Defendant No. 1 is a company which carries on the business of providing finance. The plaintiff claims that defendant Nos. 2 to 21 are companies and individuals who have participated in fraudulently receiving equity shares of ETC Network Ltd., which belong to the plaintiff. The plaintiffs aver that they parted with 6,50,000 shares in favour of defendant No. 1 in order to secure repayment of a loan of Rs. 1,12,50,000 proposed to be taken from defendant No. 1. Eventually, defendant No. 1-company did not give the loan. However, it transferred the shares to other defendants. Today, according to the plaintiffs, defendant No. 18 has 1,00,000 shares, defendant No. 14 has, 1,00,000 shares and defe....
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....ing, refinancing, transferring the rights/obligation of the stock, during the continuance of this agreement." Clause 15 which confers voting rights in respect of the shares on defendant No. 1 during the subsistence of the agreement, reads as follows : "15. The borrower agrees that during the continuance of this agreement, the voting right in respect of the security hereunder given shall exclusively vest on the lender." 5. It is an undisputed fact that the plaintiffs did not write a request letter to defendant No. 1 for loan and therefore defendant No. 1 has not given a loan to the plaintiffs. The shares have been transferred by the plaintiffs to defendant No. 1 as follows : 1,50,000 shares on May 29, 2001; 2,50,000 shares on June 16, 2001; 11,00,000 shares on June 18, 2001. Totalling to 15,00,000 shares. Of the 15,00,000 shares deposited with defendant No. 1, the plaintiffs have taken back about 8,50,000 shares on or about August 24, 2001. 6. Defendant No. 1 has transferred to defendant No. 1,81,00,000 shares on May 29, 2001, in an off-market transaction, i.e., directly and not through the stock exchange. Defendant No. 14 purchased 1,00,000 shares on June 27, 2001, from the....
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....emat form. The letter, at exhibit A to the plaint, stated that the loan would be disbursed to the plaintiffs after confirmation of the transfer of demat shares into the demat account. It was specifically stipulated that under clause 10 of the agreement which was being signed by the plaintiffs, defendant No. 1 would acquire an absolute and unconditional right to transfer and trade on the scrips transferred to them as security without attributing any reason whatsoever. That clause is reproduced again for the sake of convenience. "10. The lender shall be entitled to trade, sell, assign or transfer its rights and obligations under this agreement to any person(s) of the lender's choice, either in whole or in part and in such manner and on such terms as the lender may decide. The borrower further agrees that, he shall not object to such a trading/lending, selling, assigning, refinancing, transferring the rights/obligations of the stock, during the continuance of this agreement." 10. It must be noted that there is no dispute that the agreement continues, i.e., subsists. In fact, defendant No. 1 has stated that it is willing to finance the amount, if so desired by the plaintiffs. Even ot....
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....y defendant No. 1 of shares in favour of the other defendants is void in the absence of the notice by defendant No. 1 of their intention to sell the shares. Reliance is placed on a decision of the Division Bench of this Court in Official Assignee v. Madholal Sindhu AIR 1947 Bom. 217, in which this court held that section 176 of the Contract Act is mandatory; its provisions are not like other provisions of the Contract Act, subject to the "contract to the contrary". Therefore, where the pledgor fails to redeem, the pledgee cannot sell the goods without notice to the pledgor unless it is proved to have been waived by the pledgor. In the view I am taking, it is not necessary to consider whether the view taken by the judgment holds the field since the judgment has been reversed by the Federal Court in Madholal Sindhu v. Official Assignee of Bombay [1949] 51 BLR 906. The same view as of this court has been taken by other High Courts. 14. Mr. Doctor, learned counsel for defendant No. 14, strongly contended that no case whatsoever of a pledge of shares has been made out; primarily because of the nature of the shares in the demat form, particularly since the procedure prescribed for pledg....
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.... Depositories Act, 1996, for the purpose of recording accurately the transfers and pledges of shares including those in a dematerialized form. 17. The transaction in such shares are directly governed by the Depositories Act, 1996, which contemplates the existence of a depository, i.e., a company which acts as the depository of such shares. The shares are held by the depository in the name of the beneficial owner of the shares. The depository is entitled to act as a registered owner for the purpose of effecting transfer of ownership of security on behalf of a beneficial owner vide section 10 of the Depositories Act, 1996, which reads as under : "Rights of depositories and beneficial owner.-(1) Notwithstanding anything contained in any other law for the time being in force, a depository shall be deemed to be the registered owner for the purposes of effecting transfer of ownership of security on behalf of a beneficial owner. (2) Save as otherwise provided in sub-section (1), the depository as a registered owner shall not have any voting rights or any other rights in respect of securities held by it. (3) The beneficial owner shall be entitled to all the rights and benefits and be s....
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....e participants of both the pledgor and the pledgee shall inform the pledgor and the pledgee respectively of the entry of creation of the pledge. (5) If the depository does not create the pledge, it shall send along with the reasons an intimation to the participants of the pledgor and the pledgee. (6) The entry of pledge made under sub-regulation (3) may be cancelled by the depository if the pledgor or the pledgee makes an application to the depository through its participant : Provided that no entry of pledge shall be cancelled by the depository without prior concurrence of the pledgee. (7) The Depository on the cancellation of the entry of pledge shall inform the participant of the pledgor. (8) Subject to the provisions of the pledged document, the pledgee may invoke the pledge and on such invocation, the depository shall register the pledgee as beneficial owner of such securities and amend its records accordingly. (9) After amending its records under sub-regulation (8) the depository shall immediately inform the participants of the pledgor and pledgee of the change who in turn shall make the necessary changes in their records and inform the pledgor and pledgee respectively.....
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....egulation 58(2). The important thing is that the security would have been accepted by the depository as a pledgor and the record would have shown the plaintiffs as the pledgor, and defendant No. 1 as pledgee. This has an important bearing on the question whether the plaintiffs intended to convey title in the shares in favour of defendant No. 1, or merely intended to create a pledge. In view of the fact that the plaintiffs did not follow the procedure provided by regulations for creating pledge, I am of the view prima facie, that the plaintiffs had not intended to create a pledge but intended to transfer and that in any case has been the effect. In any case, in fact they did not create a pledge, but transferred the shares. 24. The question whether there was a transfer or not, in favour of defendant No. 1 has a bearing in the present case on the purchase by the other defendants from defendant No. 1. The question is whether the other defendants who purchased shares from defendant No. 1 can be said to be bona fide purchasers for value without notice. There is no dispute about the fact that the shares in question were transferred by the plaintiffs to the demat account of defendant No. ....
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....chaser for a value without any knowledge or by virtue of any defect in the title of the person conveying the same. The Calcutta High Court has set out these classes of cases in Smt. Sumitra Debi Jalan v. Satya Narayan Prahladka AIR 1965 Cal. 355, wherein the Calcutta High Court observed as follows : "47. In this case it has been clearly established on evidence that title to shares such as the shares in suit, passes from hand to hand freely by delivery with blank transfer deeds duly signed by the registered holders. There is evidence also that the purchasers could not have found out if there were any defect in title to these shares at the time of purchase and, thus, in my opinion these shares are negotiable according to the law merchant, custom and/or practice of the Calcutta Stock Exchange. No doubt under the Sale of Goods Act 'shares' are goods but that do not preclude them from being negotiable according to custom, practice or the law merchant." (p. 362) 29. The Calcutta High Court has further observed as follows : "48. There may arise cases also when the true owner may be estopped from asserting his title against a bona fide purchaser for value without notice of any defect in....
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....1. In paragraph 10, the Supreme Court observed as under : "If an innocent purchaser or pledgee obtains goods from the person in possession thereof, whose possessory right is defeasible on the ground of fraud but had not actually been defeated at the time when the transaction took place, there is no reason why the rights of such innocent purchaser or pledgee should not be protected. The right in the possessor or bailee in such circumstances is determinable no doubt but so long as it is not determined it is sufficient to enable him to create title in favour of an innocent transferee for value without notice. This proposition is well recognised in English law and seems to us to be well founded on principle. In Cahn v. Pockett's Bristol Channel Steam Packet Co. [1899] 1 QB 643 (CA) at page 659(A) Collins L.J. made the following oft quoted observation: 'However fraudulent a person in actual custody may have been, in obtaining the possession, provided it does not amount to larceny by trick and however grossly he may abuse confidence reposed in him, or violate the mandate under which he got possession, he can, by his disposition, give a good title to the purchaser.'" (p.184) Their Lord....