AI Drafter 
TaxTMI 
TaxTMI 
2018 (4) TMI 1793
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....ase of the plaintiffs in the plaint: (a) that on the request of the defendant no.9 Morepen Laboratories Ltd. (Morepen), the plaintiffs, who are investment companies, vide letter dated 7th February, 2003, pledged 15,00,000 equity shares of defendant no.8 Blue Coast Hotels & Resorts Ltd. (Blue Coast) owned by them in favour of defendant no.7 Morgan Securities and Credits Pvt. Ltd. (Morgan) as security for the financial facility availed of by the defendant no.9 Morepen from the defendant no.7 Morgan; (b) that the defendants no.1 to 4 companies, though distinct legal entities, have a discernible inter-relationship with each other, with the pivotal control in the hands of the Directors of defendant no.7 Morgan; (c) that the defendant no.8 Blue Coast is the owner of a prestigious five star hotel in the name and style of ‗Park Hyatt Goa Resort & Spa' at Goa; (d) that defendant no.9 Morepen is the holding company of Dr. Morepen Ltd. which is the owner of popular medicinal brands ‗Burnol' and ‗Lemolate'; (e) that disputes arose between the parties as to the amount remaining unpaid under the aforesaid financial facili....
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.... the defendant no.7 Morgan purports to have sold the pledged shares in contravention of the terms of the pledge and in breach of statutory provisions including Section 176 of the Indian Contract Act, 1872, requiring mandatory prior legal notice preceding such sale and in breach of fiduciary duty of a pledgee to act honestly and fairly; the shares are purported to have been sold at manipulated/artificial price to defendants no.1 to 4; thus the said sales are void and non est. (k) that though the alleged sale is purported to have taken place from 16th December, 2003 to 25th March, 2004 but was concealed from the Executing Court and no prior permission from the Executing Court was taken for the purported sale after the date of filing of Execution Petitions; on the contrary, defendant no.7 Morgan obtained orders from the Executing Court to the effect that the defendant no.8 Blue Coast shall not increase its equity share capital so as to dilute the value of the pledged shares held by the defendant no.7 Morgan as security, demonstrating that the defendant no.7 Morgan itself till then believed that it continued to hold the said shares when it claims to have completed the sale pri....
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....ferred RFA(OS) No.66/2016 against order dated 12th July, 2016 and which was allowed vide judgment dated 21st September, 2016 and suit along with all pending applications, restored. 10. The senior counsel for the plaintiffs, the counsel for defendants no.1 to 4 and the senior counsel for the defendant no.7 Morgan were heard on (a) IA No.13721/2006 of the plaintiffs under Order XXXIX Rules 1 and 2, (b) IA No.14158/2006 of defendant no.7 Morgan and (c) IA No.291/2007 of the defendants no.1 to 4, both under Order XXXIX Rule 4 of the CPC, on 18th November, 2016, 22nd November, 2016, 14th December, 2016, 28th April, 2017 and 9th May, 2017 and orders reserved with liberty to the counsels to also submit in bullet points their respective contentions. 11. The counsels during the hearing, also submitted Convenience Volumes to save the time in rummaging through the voluminous records. 12. During the hearing, i) it was informed that defendant no.8 Blue Coast had approached Securities and Exchange Board of India (SEBI) with a complaint with respect to the sale of 15,00,000 shares aforesaid and of violation of the Takeover Code; ii) that SEBI held in favour of defendant no.8 Blue Coast b....
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....t divest the plaintiffs of title in the shares and the second, of actual sale of shares only on happening whereof the plaintiffs were to stand divested of the title to shares; ix) it was enquired from the senior counsel for the plaintiffs as to what difference it made, whether the plaintiffs were divested of the title in the shares on 6th / 9th December, 2003 or on 25th March, 2004 inasmuch as unless the plaintiffs had redeemed the pledge within the meaning of Section 177 of the Contract Act till then, the sale would still be valid; x) the senior counsel for the plaintiffs contended that no notice of sale in accordance with Section 176 of the Contract Act was given and the sale of shares was thus bad; xi) it was the contention of the senior counsel for the plaintiffs that till 25th March, 2004, a sum of approximately Rs. 37.5 lacs out of over Rs. 6 crores due had been repaid; and, xii) it was the contention of the senior counsel for the plaintiffs that the plaintiffs learnt of the sale only in the year 2005; till then, the defendant no.7 Morgan, in the execution proceedings, by obtaining injunction against defendant no.8 Blue Coast enhancing its share capital, kept the plaintiffs u....
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....er to himself, its group companies or to any outsider. 9 (ii) The pledgor/s shall pledge the dematerialised securities in favour of the Lender in accordance with the provisions of the Depositories Act, 1996, the regulations made pursuant thereto and the Regulations and Bye-laws of the concerned depository. (viii) Notwithstanding what is stated above, if so permitted by the Bye-laws and Regulations of the concerned depository, the Lender may sell, realize and / or dispose-off the dematerialised Pledged Securities or any of them without having the same first transferred or registered in the name of the Lender. 10. That you shall have Irrevocable right to sell, dispose off or realize the said securities on such terms and for such price as you may think fit and shall apply the net proceed towards satisfaction of the total outstanding against the borrower. If the net sum realized by such a sale should be insufficient to cover the full amount due in respect of the said ICD facility together with interest, over due interest and other charges and expenses as per your claim. We agree to pay you forthwith a delivery of the said amount and any balance due to you on ....
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....to all the parties of this Settlement. The Borrower, Guarantors and Surety and Pledgers fully agree and undertake that they shall not raise any objection on the said decision of the Lender and shall accept the statement containing the share sale transactions carried out by the Lender in relation thereto; without any protest or objection. (ii) It is also agreed by the Borrower and Pledgers that in case they failed to make the payment in terms of this Memorandum of Settlement or the price of equity shares pledged falls below the price mentioned in para 3(iii) above, the Lender shall be at liberty to sell / dispose off the whole or the part of the said shares at its sole discretion as it may deem fit at any point of time at the price available in the market for which the Borrower / Pledgers shall have no objection whatsoever. The proceeds on account of the sale of said shares will be credited accordingly to the Borrower's account and adjusted against the overdue amount. (iii) In case of default the Lender shall have absolute right, title and interest to appropriate the security and sell the security at fetchable market price. However, the Lender undertakes that p....
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....m defendant no.9 Morepen and Execution Petition No.18/2004 was filed by defendant no.7 Morgan for recovery of dues from defendant no.8 Blue Coast; (e) that the defendant no.7 Morgan claimed to be entitled to Rs. 18 crores and sold the 15,00,000 shares to defendants no.1 to 4 for Rs. 1.57 crores; (f) that Execution Petitions No.18/2004 and 6/2004 have been disposed of as satisfied; (g) that in the said Execution Petitions, no credit of the amounts realized by the defendant no.7 Morgan from sale of the 15,00,000 shares was given; (h) that the legal question for adjudication is whether the plaintiffs lose right and title in the shares merely on invocation of the pledge or on sale of the shares; if it is held that the plaintiffs lose right / title on invocation of the pledge, no challenge to the sale can be made; (i) that it is however the contention of the plaintiffs that on mere invocation of pledge, the plaintiffs as pledgors did not lose right or title in the shares; this is evident from the shares at the time of first invocation though having been transferred from the Demat Account of the plaintiffs to the Demat Account of defendant no.7 Morgan, having been returned to the Demat A....
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....y 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 with the 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 plegde 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. (10)(a) If a beneficial owner intends to create a hypothecation on a security owned by him he may do so in accordance with the provisions of sub-regulations (1) to (9). (b) The provisions of sub-regulations (1) to (9) shall mutatis mutandis apply in such cases of hypothecation: Provided that the ....
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....In pursuance of any power conferred by or under this Act." bars the jurisdiction of the Civil Court; (o) that Section 15Y of the Securities and Exchange Board of India Act, 1992 as under: "15Y. Civil Court not to have jurisdiction. - No civil court shall have jurisdiction to entertain any suit or proceeding in respect of any matter which an Adjudicating officer appointed under this Act or a Securities Appellate Tribunal constituted under this Act is empowered by or under this Act to determine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act." also bar the jurisdiction of the Civil Court; and, (p) that the plaintiffs in the present case are admittedly investment companies of the borrowers viz. defendant no.8 Blue Coast and defendant no.9 Morepen, of the defendant no.7 Morgan. 16. The counsel for the defendants no.1 to 4 informed/argued, (a) that the defendants no.1 to 4 purchased the shares from the market; (b) that the defendant no.8 Blue Coast, while disclosing its shareholding pattern as on 1st January, 2004, disclosed the shares held by the defenda....
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.... provisions of the Contract Act and thus the jurisdiction of the Civil Court is not barred and notice under Section 176 of the Contract Act would still be required. It was further contended that the notice claimed to have been given has been given to defendant no.9 Morepen and not to the plaintiffs as pledgors. It is further informed that the plaintiffs filed a petition under Section 570 of the Companies Act, but had subsequently withdrawn the same. It was yet further argued that the balance of convenience is in favour of the plaintiffs, particularly as the trial is underway. 18. The counsel for the plaintiffs along with his written submissions has filed copies of following judgments though all of them were not cited at the time of hearing: (i) Neikram Dobay Vs. Bank of Bengal 1891 LR 60; (ii) Ramdeyal Prasad Vs. Sayed Hasan AIR (31) 1944 Patna 135; (iii) The Official Assignee Vs. Madholal Sindhu (1946) 48 BOMLR 828; (iv) Nabha Investment Pvt. Ltd. Vs. Harmishan Dass Lukhmi Dass 1995 (33) DRJ 496; (v) Hulas Kunwar Vs. Allahabad Bank Ltd. AIR 1958 Cal 644; (vi) Balkrishan Gupta Vs. Swadeshi Polytex Ltd. (1985) 2 SCC 167; ....
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.... back as on 3rd May, 2012, no affidavit by way of examination- in-chief even was filed by the plaintiffs till 12 th July, 2016 when the suit was dismissed for non-prosecution on that account; c) though in appeal, the suit was restored but not by finding the plaintiffs to have been diligent but for the reason of an application pending consideration; d) even after the order of restoration of the suit, the plaintiffs are found to have tendered the affidavit by way of examination-in-chief of their first witness on 4th July, 2017 and whose examination-in-chief itself was deferred on the request of the counsel for the plaintiffs that certain judicial files summoned had not been received; thereafter on 24th August, 2017 and 13th December, 2017 again, the witness of the plaintiffs was found to have not appeared and adjournment was sought; it is thus quite evident that the trial of the suit is unlikely to be near conclusion. B. The High Court of Bombay, in JRY Investments Private Limited supra is found to have, held i) that the shares in dematerialized form cannot be pledged in accordance with the provisions of the Contract Act which requires delivery of the goods pledged; ii) it i....
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....d not convey title in the shares to defendant no.1, still, it could not be said that the other defendants who purchased the shares from the defendant no.1 would not get any title in the share; and, x) the shares stood in the name of defendant no.1 as beneficial owner and the circumstances of the shares standing in the name of defendant No.1 as beneficial owner of the shares in the records of the depository participant was clearly attributable to the plaintiff and the plaintiff was estopped from asserting its title against bona fide purchasers for value without notice of any defect in the title. C. No merit is found in the contention of the senior counsel for the plaintiffs of aforesaid judgment being on a finding of bona fide purchase and which is not so in the present case; sale of shares in the present case is admittedly through market transactions and the finding of the SAT, being a specialized Tribunal, in this regard and which has attained finality, would bind the parties. What was held by a Single Judge of the Bombay High Court in JRY Investments Private Limited supra qua the pledge of dematerialized shares being not possible under the provisions of the Contract Act ....
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....rs. E. I may however add, that a notice under Section 176 of Contract Act is in derogation of Regulation 58 supra. While Section 176 entitles the pledgee/pawnee to, on default by the pledgor/pawnor, sell the thing pledged, "on giving the pawnor reasonable notice of the sale", Regulation 58(8) entitles the pledgee to, "subject to the provisions of the pledge document" , "invoke the pledge" and mandates the depository to "on such invocation" i.e. by the pledgee, "register the pledgee as beneficial owner of such securities" i.e. the securities pledged and further mandates the depository to "amend its records accordingly". There is no place for a prior notice under Section 176, in the scheme of Regulation 58(8). On the contrary, Regulation 58(9) requires the depository to, after so amending its records under Regulation 58(8), inform the participants of the pledgor and the pledgee of the same and mandates the said participants to inform the pledgor and the pledgee. Thus, (a) while Section 176 provides for a notice to pledgor prior to effecting sale, Regulation 58 provides for notice post invocation and on which invocation beneficial ownership of pledged shares changes from that....
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....s beneficial owner in the records of the participant and the depository and which beneficial ownership changes on invocation of pledge in terms of Regulation 58. Even otherwise, a plea of a pledgor, of the pledgee, though after notice under Section 176, having sold the pledged thing for less than optimum price cannot be a ground for invalidating the sale. The mere fact that the parties, in terms of Arbitral Award reversed the earlier invocation also cannot change the said position. Such agreement is also not found to be inconsistent with Regulation 58. The quantum of consideration does not affect the transfer of title as beneficial owner. G. There is another aspect of the matter. According to the senior counsel for the plaintiffs also, after the first invocation by defendant no.7 Morgan, there were disputes between the parties which were subject matter of arbitration resulting in an Arbitral Award and which under the Arbitration & Conciliation Act, 1996 has the force of a decree. Under the said Arbitral Award, having the force of decree, the defendant no.7 Morgan was entitled to sell the shares, without any notice and the plaintiffs had agreed not to raise disputes. The in....
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....f the shares, as the plaintiffs have sought in this suit, even if the notice under Section 176 of the Contract Act was held to be required to be given and having not been given. L. This Court in Nabha Investment Pvt. Ltd. supra, ofcourse dismissed an application under Order VII Rule 11 of the CPC in a suit by pawnor, only for declaration as bad of further pledge by the pledgee of pledged shares without suing for redemption and held the suit to be maintainable but in that case the pawnor had prior to the pledgee further pledging the shares, requested the pledgee to return the pledged shares against payment of loan amount. Also, the suit was held to be maintainable because the pledgee in that case was found to be not in a position to return the pledged shares even if the pawnor had sued for redemption. This judgment however is of prior to the Depositories Act and does not relate to demateralised shares. Though this judgment is found to have been followed, after the coming into force of Depositories Act, in GTL Limited Vs. IFCI Ltd. 182 (2011) DLT 696, but without considering the Depositories Act. The same thus do not bind me. M. I may also notice that even if the sa....