TaxTMI 
TaxTMI 
2022 (5) TMI 813
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....ct Act: (i) What is pledge and the legal difference between ownership, pledge and mortgage (ii) Pawnee has a special and not general right in the pledged property (iii) Accretion on pawned goods (iv) Notice of sale by pawnor and his right to sale (v) Sale of the pledged goods by the pawnee to self D. Effect and Purpose of the Depositories Act, 1996 and the Securities and Exchange Board of India (Depositories and Participants) Regulation 1996 E. Effect of the Depositories Act, 1996 and the Securities and Exchange Board of India (Depositories and Participants) Regulation, 1996 on the pledge under the Contract Act, 1872 F. Four decisions G. Analysis of facts and application of law of pledge to the facts of this case H. Conclusion A. Factual background of the case 2.1 The appellant - PTC India Financial Services Limited, Hereinafter referred to as "PIFSL" is an existing company under the Companies Act, 2013. It is a whollyowned subsidiary of PTC India Limited, which in 1999 was promoted by four public sector undertakings, namely, NTPC Limited, Power Finance Corporation Limited, NHPC Limited,....
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....6.2 of the Pledge Deed read with Section 176 of the Contract Act. 2.7 On 17th January 2018, PIFSL filed an application before the Adjudicating Authority under Section 7 of the IBC as a financial creditor to whom Rs. 167,29,23,507/- was due and payable by the Corporate Debtor. 2.8 On 30th January 2018, the Adjudicating Authority allowed PIFSL to withdraw the application with liberty to file proof of financial claim before the IRP in Form C. 2.9 On 6th February 2018, MHPL made a claim before the IRP, inter alia, stating that PIFSL having been conferred status of 'beneficial owner', MHPL no longer has any title or right over 31,80,678 shares. Accordingly, MHPL had stepped into the shoes of PIFSL as a creditor of the Corporate Debtor to the extent of the value of 31,80,678 shares of NEVPL now owned by PIFSL. 2.10 Contrarily, on 10th February 2018, PIFSL submitted Form C with a financial claim of Rs.169,19,17,637/-, being the amount due and payable to PIFSL by the Corporate Debtor as of 18th January 2018, the date on which the Adjudicating Authority admitted the Section 10 application of the Corporate Debtor. The value of 31,80,678 pledged shares was not accounted for or red....
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....der Section 18 of the IBC. 2.15 Other aspects which require to be noted are: (a) as per PIFSL, the principal and interest amount due to them by the Corporate Debtor as of 23rd December 2021 are Rs.3,76,13,03,389/-; (b) the shares of NEVPL are unlisted, and there are no open market transactions, and (c) the value of the pledged shares is disputed. On 13th August 2018, the IRP has submitted a valuation report of an independent valuer who has valued the pledged shares at Rs.179 crores as of 16th January 2018. MHPL relies on the 2013 valuation report of Axis Capital and the annual report of MHPL for the financial year 2012-13. As per the annual report relied on by MHPL, shares of NEVPL as of 31st March 2013 were valued at Rs.1229.66 crores. Accordingly, MHPL claims that the fair value of each of the 1,22,33,378 shares of NEVPL (100% of the total equity shares - all held by MHPL) was Rs.1,005.17p per share. Therefore, the total value of the 31,80,678 pledged shares was equivalent to Rs. 319 crores at the time of the creation of the pledge. On the other hand, PIFSL claims that the actual value per share of NEVPL, as calculated on 31st March 2016, is only Rs. 58.97. Thus, the total val....
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....ch they were bailed has been accomplished. Section 161 states that if there is a default by the bailee and the goods are not returned, delivered, or tendered at the proper time, the bailee is responsible to the bailor for any loss, destruction, or deterioration of the goods from that time. As per Section 163, in the absence of any contract to the contrary, the bailee is bound to deliver to the bailor, or in accordance with his directions, any increase or profit that may accrue from the goods bailed. 3.3 Section 172 of the Contract Act is reproduced as under: "172. 'Pledge', 'pawnor' and 'pawnee' defined - The bailment of goods as security for payment of a debt or the performance of the promise, is called a 'pledge'. The bailor is in this case called the 'pawnor'. The bailee is called 'pawnee'". As per Section 172, creating a valid pledge requires delivery of the possession of goods by the pawnor to the pawnee by way of security upon the promise of repayment of a debt or the performance of a promise, thereby, creating an estate that vests with the pawnee. 3.4 Sections 176, 177 and 179 of the Contract Act read thus: "176. Pawnee's right where pawnor makes d....
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....me detail for determining the issue before us. C. Analysis of law of pledge and case laws relating to pledge (i) What is pledge and the legal difference between ownership, pledge and mortgage. 4.1 Md. Sultan and Others v. Firm of Rampratap Kannayalal, Hyderabad, by its partners, AIR 1964 AP 201 observes that a contract of pledge should satisfy the following conditions: (i) there should be a bailment of goods as defined in Section 148 of the Contract Act, that is, delivery of goods; (ii) the bailment must be by way of security; and (iii) the security must be for payment of debt or performance of a promise. The decisions in Md. Sultan (supra) and Sri Raja Kakarklhpudi Venkata Sudarsana Sundara Narasayamma Garu (died) and others v. The Andhra Bank Ltd. Vijayawada and others, AIR 1960 AP 273 observe that hypothecation and mortgage of movables, though not specifically mentioned in the Contract Act, are valid and enforceable in India as the Contract Act is not an exhaustive law on the subject. Such transactions beyond the statutory framework are given effect to and interpreted by the courts according to the principles of justice, equity, and good co....
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....e does not have the right of ownership, but has limited right to retain possession till debt is paid or promise is performed. A pawnee's right of disposition is limited to disposition of the pledge rights only, and the right to sell after reasonable notice. Even when the pawnor makes default in payment of debt or performance of the promise, the pawnor has the right to redeem the pawn till 'actual sale' of the pawn by the pawnee. However, the pawnor in addition to the debt, must pay to the pawnee expenses that have arisen because of the default. 4.3 Where money is advanced by way of the loan upon the security of goods, the transaction may take the form of a mortgage or pledge. The difference between a pledge and a mortgage of movable property is that while under a pledge there is only a bailment, whereas under a mortgage there is transfer of the right of the property by way of security. The distinction is aptly brought out in the following passage in Halsbury's Laws of England:, Hailsham Edn., (2nd Edn.), para 330, page 226 of Volume XXIII. "A mortgage of personal chattels is essentially different from a pledge or pawn under which money is advanced upon the security ....
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....d be a delivery of the goods comprised therein. In other words, a pledge, cannot be created except by delivery of the possession of the thing pledged, either actual or constructive. It involved a bailment. If the pledger had actual goods in his physical possession, he could effect the pledge by actual delivery; but in other cases he could give possession by some symbolic act, such as handing over the key of the store in which they were. If, however, the goods were in the actual physical possession of a third person, who held for the bailor so that in law his possession was that of the bailor, this pledge could be effected by a change of the character of the possession of the third party, that is by an order to him from the pledgor to hold for the pledgee, the change being perfected by the third party attorning to the pledgee, thus acknowledging that he thereupon held for the latter. There was thus a change of possession and a constructive delivery: the goods in the hands of the third party came by this process constructively in the possession of the pledgee. But where goods were represented by documents the transfer of the documents did not change the possession of the goods, save ....
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....n 176, sells the goods, the right of the pawnor to redeem them is extinguished. But, thereupon, the pawnee is bound to apply the sale proceeds towards satisfaction of the debt and pay the surplus, if any, to the pawnor. So long as the sale does not occur, the pawnor is entitled to redeem the goods on payment of the debt. Even when the pawnee files a suit for recovery of the debt, though he is entitled to retain the goods, the pawnee must return the goods on payment. Another significant observation in this judgment is that if the pawnee sues on the debt denying the pledge, and it is found that he was given possession of the goods pledged and had retained the same, the pawnor has the right to redeem the pledged goods on payment of the debt. If the pawnee is not in a position to redeliver the goods, the pawnee cannot benefit from the repayment of the debt and the goods pledged. Where the value of the pawned goods is less than the debt and the pawnee denies the pledge or is otherwise not in a position to return the pawned goods, the pawnee has to give credit for the value of the goods and would be entitled only to recover the balance. 5.3 In Bank of Bihar v. The State of Bihar....
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....s of Sections 148, 160 and 172 of the Contract Act held that when the goods are bailed for securing payment of a debt or performance of a promise, the bailor will get the right for the return of the said goods when the purpose is accomplished, namely, the debt is returned, or the promise is performed. Referring to Section 163 of the Contract Act, it is observed that in the absence of a contract to the contrary, the bailee is bound to deliver to the bailor, or according to his directions, any increase of profit that may have accrued from the bailed goods. An example in this Section states that if a calf is born to the cow, then the bailee is bound to deliver the calf as well as the cow to the bailor. In other words, the pledge extends to accretions and additions, and therefore, when the pawnee returns the pledged goods, the accretions and additions must be returned to the pawnor. It also follows that the pawnee's right to retain and sell the pledged goods stretches to the right to retain and sell any increase and accumulations to the pledged goods. 6.2 Accordingly, in Seth Motilal Hirabhai and Ors. v. Bai Mani, 1924 SCC OnLine PC 81 where the shares were already pledged, it is he....
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....s notice does not require specification of the date, time and place of sale. 7.4 The Calcutta High Court in Haridas Mundra v. National and Grind-Lays Bank Ltd., AIR 1963 Cal 132 refers to two earlier decisions in the cases of Hulas Kunwar (supra) and Kunj Behari Lal v. The Bhargava Commercial Bank, Jubbulpore, AIR 1918 All 363 (2) where the courts have held that the notice under Section 176 is required before the sale to show the pawnee's intention to sell the good in order to give the pawnor reasonable information to redeem the pawned goods. Further, the reasonableness of notice may vary from case to case. The right to retain the pawn and the right to sell is alternative and not concurrent. When the pawnor retains, he does not sell, but when he sells, he does not retain the pledged goods. However, the pawnee can sue on the debt or the promise concurrently with his right to retain the pawn or sell it. Even the sale of the pawn does not destroy the pawnee's right as the pawn is a collateral security, and the pawnor remains liable on the original promise to pay the balance due. The right to sell the pawned goods is necessary to make the security effectual for discharging the pawno....
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....ssage at page 263 was quoted: "The common law of England, existing in the time of Glanville, seems to have required a judicial process to justify the sale, or at least to destroy the right of redemption. But the law as at present established leaves an election to the pawnee. He may file a bill in equity against the pawner for foreclosure of sale and sale; or, he may proceed to sell ex mero motu, upon giving notice of his intention to the pledger." In this case, the judgment of Chief justice Leonard Stone also referred to Section 1 of the Contract Act, which reads, "1. Short title.- This Act may be called the Indian Contract Act, 1872. Extent, Commencement.- It extends to the whole of India except the State of Jammu and Kashmir; and it shall come into force on the first day of September, 1872. Saving - Nothing herein contained shall affect the provisions of any Statute, Act or Regulation not hereby expressly repealed, nor any usage or custom of trade, nor any incident of any contract, not inconsistent with the provisions of this Act." to hold that the instrument of pledge therein, giving unqualified power of sale, being inconsistent with Sec....
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....ng void does not put an end to the pledge, but the pawnor is bound by resale(s) duly effected by the pawnee to the third parties after such abortive sales to himself. Chagla J. on the rights of the pawnee held that the Contract Act provides two rights to the pawnee when the pawnor makes a default in payment of the debt: (a) bring the suit against the pawnor for the debt and retain the goods pledged as collateral security; and (b) sell the goods pledged, which power, however, can be exercised in terms of Section 176 on giving the pawnor a reasonable notice for sale. While upholding that the right of redemption given to the pawnor vide Section 177 of the Contract Act ends on the sale of the goods by the pawnee in conformity with the requirements of Section 176 of the Contract Act and not on unlawful or unauthorised sales, Chagla J. after extensively referring to the case law on the subject held that: (1) the pawnor does not become entitled to the possession of the goods pledged without tendering the amount due on the pledge; or in other words, without seeking to redeem the pledge; and (2) that without a proper tender of the amount due on the pledge, the only right of the pawnor....
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....ledge to waive notice, still, the pledgee is not relieved of his obligation to give notice before the sale. 7.9 Of particular importance is the reference in Sri Raja Kakarklhpudi Venkata Sudarsana Sundara Narasayamma Garu (supra) to the following observations of Farelli J. in Soho Square Syndicate Ltd. v Poland & Co.:, 1940-1 Ch 638 at p. C43 "If it be right to say that a mortgagee, by merely getting the consent of the mortgagor, can avoid the ..... necessity of applying to the Court. a large part of the protection which this Act was intended to provide would virtually disappear. People in the position of such persons as I have mentioned might easily be persuaded to give a consent without really knowing what exactly was involved in such consent, and an opportunity of expressing their reasons for their inability to pay, whatever they may he, and of stating their difficulties, which is now afforded to them by the necessity of an application to the court would be entirely removed. Moreover, difficult questions might also arise whether the consent had in fact been obtained, or whether it was a consent which was binding, and similar questions.'' Where the Contract....
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....d." However, there is a difference between statutory provisions meant for the benefit of a person and statutory provisions which mandate contracts to be in a specific manner. One cannot waive the statutory obligations where the statute restraints explicitly or mandates parties to contract in a particular manner. Formalities and requirements for making contracts have generally been held to be mandatory. G.P. Singh, Principles of Statutory Interpretation, 14th Edition, Lexis Nexis (2016) at page 462. Where a statute prescribes that a contract shall be in a specific form or shall or shall not contain certain terms, the statutory form must be followed. Craies on Statute Law by S.G.G. Edgar, 7th Edition, Sweet & Maxwell Limited (1971) at page 255. In reference to pledge, waiver by contract and statutorily mandated terms, the High Court of Calcutta in The Co-Operative Hindusthan Bank, Ltd. v. Surendranath De, 1931 SCC OnLine Cal 224 observed: "Section 176 of the Contract Act, unlike some other sections, e.g., sections 163, 171 and 174, does not contain a saving clause in respect of special contracts contrary to its express terms. The section gives the pawnee the right to sell....
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....ases of unauthorized sale by the pawnee, the pawnor could seek to file a suit for redemption by depositing the money, treating the sale as if it had never taken place, or where the suit of redemption is not filed, to ask for damages on the ground of conversion. However, the decision in Nabha Investment (supra) disagreed with the view taken in these two judgments that the pawnor cannot file the suit for redemption of the pledge unless preceded by tender or accompanied by pledged money. Nevertheless, the judgment agrees with other principles of law laid down by Chagla J. that Section 176 is mandatory observing that the applicability and sweep of Section 176 is not eclipsed or curtailed by the phrase "in the absence of the contract to the contrary". In other words, the parties cannot contract out of Section 176. The need for notice to the pawnor of the intended sale by the pawnee is the special protection given to the pawnor, and the parties cannot override the special protection by agreement. Further, the right to redeem can be exercised up to the actual sale of the goods pledged, i.e., the sale referred to in Section 177 in conformity with Section 176. The judgment in Nabha Investme....
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....een the two. Former protects the innocent purchaser, the latter does not do so. In the absence of any provision in Section 176 of the Contract Act in favour of the innocent purchaser, to import such protection from the provisions of another statute is with respect wholly fallacious and unjustifiable. It is always dangerous to draw analogy between one statute and another; 22.9 Vide para 64 Chagla, J. did not agree with the following statement of law contained in Coote on Mortgages (Volume-II, 9th Edition page 1472):- "The pledgee has on default a right to sell the pledge if the payment is to be made on a certain day; otherwise not; but a sale before default would be a conversion; yet the sale, whether wrongful or not, passes the title to the vendee as against the pledgor. 22.10 Chagla, J. has expressed his approval and agreement with the following statement of law in Story's Law of Bailments, (8th Edition, page 272):- "A pledgee of stock has no legal right to sell the same without notice to the pledgor and such sale passes no title as against the pledgor, even to a bonafide party". 22.11 The abovesaid principles deducible from the opi....
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....ixed period of notice. The object and purpose of giving notice is to make the pawnor know about the pawnee's intent to sell the pawn and give him an opportunity to exercise his statutory right of redemption, which as per Section 177 can be exercised till the date of 'actual sale'. Whether or not a notice was given and the period of notice was reasonable would depend upon the facts of the case. In view of the above discussion, the pawnor can communicate his willingness and desire to the pawnee that the pledged goods may be sold. In case any such request is made, a pawnee may well act upon the request without violating Section 176 of the Contract Act. However, a pawnee, unless he also agrees, cannot be compelled by the pawnor to sell the pledged goods. (v) Sale of the pledged goods by the pawnee to self 8.1 Dictum in the above judgments and Section 177 of the Contract Act, which confers on the defaulting pawnor the right to redeem the pledged goods till 'actual sale', does not support pawnee's sale to self. Sale to self would in terms of the judgment in Madholal Sindhu's case (supra) is a case of conversion and not 'actual sale', and therefore, would not affect the pawnor's rig....
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.... without payment. This proposition is contrary to several decisions including decision of the Privy Council in Neikram Dobey (supra). 8.4 There is one solitary judgment of the single judge of the Punjab and Haryana High Court in Dhani Ram and Sons v. The Frontier Bank Ltd. and Another, AIR 1962 P&H 321 which holds that the sale of the pawned goods by the pawnee to himself is not void, and the pawnee was held to be the legal owner of the pledged shares. This decision proceeds with the incorrect understanding of the ratio in Neikram Dobay (supra), and thus, we deem it appropriate to overrule this ratio in Dhani Ram and Sons (supra). D. Effect and Purpose of the Depositories Act, 1996 and the Securities and Exchange Board of India (Depositories and Participants) Regulation 1996. 9.1 Interpretation of statutes must depend on the text and the context. To resolve a debate when two views are evident, it is best to interpret the provision when we know why the statute is enacted. If a statute is looked at, in the context of its enactment, with the glasses of the statute-maker provided by such context, its scheme, the sections, clauses, phrases and words may take colour and appear d....
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....company formed and registered under the Companies Act, 1956 (1 of 1956) and which has been granted a certificate of registration under sub-section (1-A) of Section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992). The Depositories Act establishes the depository eco-system and introduces the concepts of a 'registered owner' Section 2(1)(j): "registered owner" means a depository whose name is entered as such in the register of the issuer; and 'beneficial owner'. Section 2(1)(a): "beneficial owner" means a person whose name is recorded as such with a depository; Every owner of a physical share has to enter into an agreement with 'the depository' for availing its services. The physical certificate of security is cancelled. All securities held by 'the depository' are in a fungible form. 'The depository' becomes the 'registered owner' in respect of the security, whereas the person who surrenders the physical shares is recorded as 'the beneficial owner'. 'The depository', as the registered owner, does not have any voting right or any other right in respect of the securities held by it. 'The beneficial owner' shall be solely entitled to all rights, benefits, and liab....
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....t being registered as a 'beneficial owner'. 9.5 Section 12 of the Depositories Act permits pledge and hypothecation of securities held by a depository and reads: "12. Pledge or hypothecation of securities held in a depository: (1) Subject to such regulations and bye-laws, as may be made on this behalf, a beneficial owner may with the previous approval of the depository create a pledge or hypothecation in respect of a security owned by him through a depository. (2) Every beneficial owner shall give intimation of such pledge or hypothecation to the depository and such depository shall thereupon make entries in its records accordingly. (3) Any entry in the records of a depository under subsection (2) shall be evidence of a pledge or hypothecation." In terms of sub-section (1) of Section 12, a 'beneficial owner' can create a pledge or hypothecation regarding the security owned by him through 'the depository', subject to prior approval of 'the depository'. Section 12 or for that matter the Depositories Act does not define pledge or hypothecation, and thereby accepts and adapts their meaning as known in the commercial sense to people in the trade....
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....e facto owner, but this does not in any manner contradict or lay down a rule which is contrary to the provisions of Sections 176 and 177 of the Contract Act. These sections, given the objective and purpose behind them, would still apply to any pledge deed and do not get diluted or overridden by the provisions or requirements of the Depositories Act. Section 10, a non obstante provision, which prevails over existing enactments by law, treats the 'depository' as the 'registered owner' and the shareholder/holder as a 'beneficial owner'. It does not undermine or rewrite the provisions of the law of pledge and mutual obligations and rights of the pawnee and pawnor. This aspect has been elaborated in some detail subsequently in this judgement. 9.9 Under Section 25 of the Depositories Act, the Securities and Exchange Board of India, Hereinafter referred to as "Board" has been vested with the power to make Regulations to carry out the purpose of the Depositories Act. Clause (d) to sub-section (2) to Section 25 states that the regulations may provide for the manner of creating a pledge or hypothecation in respect of a security owned by a 'beneficial owner' under sub-section (1) to Sectio....
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....records. The note is to be forwarded to the 'depository'. In terms of sub-regulation (3), the 'depository' is required to within fifteen days create and record a pledge and send an intimation to the participants of the pledgor/pawnor and the pledgee/pawnee. The participants of the pawnor and pawnee are required to inform the pawnor and the pawnee as to the entry of creation of the pledge. If the 'depository' does not create the pledge, intimation of the reasons has to be given to the participants of the pawnor and the pawnee. The 'depository' can cancel the pledge if the pawnee applies to the depository through its participants. The pawnor can also apply through its participant to the 'depository' for cancelling the pledge. In this case, the entry can be cancelled by the 'depository' with the prior concurrence of the pawnee. On cancellation of the pledge entry, the 'depository' is to inform the participant of the pawnor. 9.11 Sub-regulation (8) to Regulation 58 uses the expression "subject to the provisions of the pledge document" with a specific purpose and objective. In other words, sub-regulation (8) to Regulation 58 does not seek to curtail or restrict, but on the other hand....
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....e would be entitled to get his name substituted as a 'beneficial owner' under the 1996 Regulations, however, the contractual terms are not permitted to override the Contract Act as explained above in so far as it regulates the rights and obligations of the pawnee and pawnor, and the requirement of compliance with Regulation 58(8). It is absolutely necessary that the pawnee must be accorded status of 'beneficial owner' to enable him to exercise his right to sell the pledged dematerialized securities. The object is to ensure compliance with the procedure prescribed for the sale of dematerialised securities and not to interfere with the freedom to contract as long as they comply with the Contract Act and other laws. Further, if the terms of the pledge document violate Regulation 58(8), the pledge is not rendered void or illegal, albeit enforcement of the pledge viz. the dematerialised securities will be rendered unattainable unless steps are taken to act in accordance with the procedure prescribed by the 1996 Regulations. The pawnee would be entitled to sue the pawnor for recovery of money, breach of contract and may even apply for injunction/restrain on sale of dematerialised securit....
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....n 12 and Regulation 58 is not compulsory or mandatory. Violations of the statute may lead to penalties and even criminal action when permitted and warranted. Nevertheless, given the nature and requirements under Section 12 or Regulation 58, do not by implication or due to conflict over-write and undo the legislative mandate of Sections 176 and 177 of the Contract Act. We do not read any legislative intent in the Depositories Act and the 1996 Regulations to change the law of pledge requiring issue of reasonable notice; or as allowing sale to self, or abolishing the right of the pawnor to redeem the pledged goods till 'actual sale'. Sections 176 and 177 are not obliterated, in so far as they would equally apply to pawned dematerialised securities as they apply to other pawned goods. 10.3 The Depositories Act and the 1996 Regulations do not state or impliedly reflect that sale of the pledged securities by the pawnee to self, which amounts to conversion and does not affect the rights of the pawnor under Section 177, are no longer applicable. Doing so would tantamount to reading and adding words to Section 12 and Regulation 58 to defy Sections 176 and 177 of the Contract Act. Law of ....
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.... rules relating to sale of dematerialised securities would be gravely undermined in case the pawnor is entitled to redeem the dematerialised shares from the third party on the ground that reasonable notice, as postulated under Section 176 of the Contract Act, was not given to the pawnor. To this extent, we would accept that there is a conflict between the Depositories Act and the interpretation given in Madholal Sindhu (supra), which has been followed in other cases, including the judgment of the Delhi High Court in Nabha Investment (supra). If this principle is applied to dematerialised securities that have been transferred to the third parties in accordance with the provisions of the Depositories Act, by-laws and rules, it would materially impact certitude in the transaction in listed dematerialised securities which would become vulnerable to challenge even when the arm's length purchasers are innocent third-party buyers for valuable considerations. Open market operations would be affected. To this extent, therefore, we do hold that the dictum in Madholal Sindhu (supra) and Nabha Investment (supra), that the pawnor has a right to redemption against third parties when the pawnee d....
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....favour of the other defendants is void in the absence of the notice by defendant No. 1 of their intention to sell the shares." However, certain observations are made concerning the Contract Act and the procedure prescribed for pledging the shares by the Depositories Act. The Court observed that the provisions of the Depositories Act are for accurately recording the transfer and pledging of shares held in dematerialized form. The Depositories Act contemplates the existence of a 'depository' that holds the shares in the name of the 'beneficial owner'. The 'depository' acts as a 'registered owner' of the shares for effecting the transfer of ownership security on behalf of the 'beneficial owner' in terms of Section 10 of the Depositories Act. Section 10 is a non-obstante clause for the purpose of effecting the transfer of ownership of security on behalf of the 'beneficial owner'. Accordingly, the transfer of shares must be done in accordance with the provisions of the Depositories Act, which means that a person recorded as a 'beneficial owner' alone can exercise the power of transfer. Thereafter, Regulation 58 is quoted. It is observed that the Depositories Act and the Regulations cont....
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....ights in respect of the pawned shares by depositing them as margin with the third party. The view expressed was that the said transaction by the pawnee could not be ignored; otherwise, it would render the arrangement agreed upon as meaningless and devoid of commercial sense. This judgment also refers to an earlier decision of the Allahabad High Court in Firm Thakur Das Marakhan Lal v. Mathura Prasad and Others, AIR 1958 All. 66 which was a case in which the three ornaments had been sub-pledged. The debt payable having been extinguished by virtue of a debt redemption act, the pawnor had sued for recovery of the ornaments on the ground that the sub-pledges did not bind him. In this context, the Allahabad High Court had observed that Section 179 of the Contract Act clarifies that if a person has a limited interest in the goods and pledges them, the pledge is valid to the extent of that interest only. Reliance was placed on Judge Story's book on 'Bailments', which records as under: "The pawnee may by the common law deliver over the pawn to a stranger for safe custody without consideration; or he may sell or assign all his interest in the pawn; or he may convey the same interes....
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....d party. The Contract Act does not stipulate that a pledge can be created only in a particular manner. The Depositories Act prescribes how the dematerialised securities can be pledged. The provisions of the Depositories Act and the 1996 Regulations are not in derogation of the Contract Act but in addition to it. In this regard, reference is made to Section 28 of the Depositories Act, which we have referred to earlier. Therefore, the object of the Depositories Act is not to rewrite the provisions of the Contract Act but to regulate the creation and transfer of dematerialised securities. Regulation 38(1)(e), 38. Records to be maintained. (1) Every depository shall maintain the following records and documents, namely :- (a) records of securities dematerialised and rematerialised; (b) the names of the transferor, transferee, and the dates of transfer of securities; (c) a register and an index of beneficial owners; (cc) details of the holding of the securities of beneficial owners as at the end of each day; (d) records of instructions received from and sent to participants, issuers, issuers' agents and beneficial owners; (e)....
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....on of the act of the pawnee in repledging the goods. xx xx xx Another Judge had observed: "In detinue the plaintiff's claim is based upon his right to have the chattel itself delivered to him; and if there still remain in Simpson, or in the defendant as his assignee, any interest in the goods, or any right of detention inconsistent with this right in the plaintiff, the plaintiff must fail in detinue, though he may be entitled to maintain an action of tort against Simpson or the defendant for the damage, if any, sustained by him in consequence of their unauthorized dealing with the debentures." We should not be seen as commenting upon the merits of the decision in Pushpanjali Tie Up Pvt. Ltd. (supra), as one of the findings recorded therein was that the pawnor had permitted the pawnee to repledge the pawn for a higher amount. The aspect, whether this can be permitted and allowed, and whether the interpretation of the relevant clause of the document of pledge in Pushpanjali Tie Up Pvt. Ltd. (supra) is correct, are not examined by us and are left open. 11.4 Our attention was also drawn to a Single Judge Bench judgment of the Delhi High Court in Tendril Financi....
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....rovisions 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 of the pledgor to that of the pledgee and which is equivalent to sale under Section 176. To hold that a prior notice under Section 176 of Contract Act is also required in the case of pledge of dematerialized shares would interfere with transparency and certainty in the securities market, rendering fatal blow to the Depositories Act and Regulat....
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....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." 11.6 In view of the discussion in the preceding paragraphs, we do not agree with the reasoning in the aforesaid sub-paragraphs and consequent ratio decidendi in Tendril Financial Services (supra). We do not find any derogation or conflict between Section 176 of the Contract Act and sub-regulations (8) and (9) of Regulation 58. Regulation 58(8) entitles the pawnee to record himself as a 'beneficial owner' in place of the pawnor. This does not result in an 'actual sale'. The pawnee does not receive any money from such registration which he can adjust against the debt due. The pledge creates special rights including the right to sell the pawn to a third party and adjust the sale proceeds towards the debt in terms of Section 176 of the Contract Act. The reasoning that prior notice under Section 176 of the Contract Act would interfere with transparency and certainty in the securities marke....
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....rmally granted in such cases. Supra para 11.4 Clause (c) to sub-section (3) to Section 38, Section 38. Perpetual injunctions when granted: (3) When the defendant invades or threatens to invade the plaintiff's right to, or enjoyment of, property the court may grant a perpetual injunction in the following cases, namely:- (c) where the invasion is such that compensation in money would not afford adequate relief; of the Specific Relief Act, 1963 states that perpetual injunction may be granted when the defendant invades the plaintiff's right to or enjoyment of the property where the invasion is such that the compensation in money would not afford adequate relief. Subsection (2) to Section 38, Section 38(2): When any such obligation arises from contract, the court shall be guided by the rules and provisions contained in Chapter II. states that when any obligation arises from a contract, the court shall be guided by the rules and provisions contained in Chapter II. Chapter II: Specific Performance of Contract Section 10, Section 10. Cases in which specific performance of contract enforceable.- Except as otherwise provided in this Chapter, the specific performance of ....
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....of contract under Section 20; or (b) who has become incapable of performing, or violates any essential term of, the contract that on his part remains to be performed, or acts in fraud of the contract, or wilfully acts at variance with, or in subversion of, the relation intended to be established by the contract; or (c) who fails to prove that he has performed or has always been ready and willing to perform the essential terms of the contract which are to be performed by him, other than terms the performance of which has been prevented or waived by the defendant. Explanation.-For the purposes of clause (c),- (i) where a contract involves the payment of money, it is not essential for the plaintiff to actually tender to the defendant or to deposit in court any money except when so directed by the court; (ii) the plaintiff must prove aver performance of, or readiness and willingness to perform, the contract according to its true construction. Clause (c) to Section 16 states that specific performance of a contract cannot be enforced in favour of a person who fails to prove that he has performed or has always been ready and willing to perfo....
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....ations may have its own impact and in a given case, may be a detriment and a negative factor for the creditor who wants to secure himself by a deed of pledge. The pertinent question is, should takeover regulations apply when the pawnee exercises his right to be recorded as a 'beneficial owner', while reserving his right to sell the pledge. There would be tax and accounting implications which may be detrimental and shackle financial market and deals. It may inhibit financial institutions from accepting dematerialized securities as a pawn. A holistic review of the impact of pledge viz. dematerialized securities, registration of the pawnee as the 'beneficial owner' without the pawnee enforcing the right to sell the pledge goods is required and necessary for the smooth functioning of the securities market and free flow of transactions without hindrance and to avoid uncertainty in fiscal matters. G. Analysis of facts and application of law of pledge to the facts of this case 12.1 The relevant Clauses of the Pledge Deed dated 10th March, 2014 are reproduced as under: "6.1 Registration in the Name of the Bridge Loan Lender: The pledgor agrees that, upon the receipt....
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....e Bridge Loan Lender shall, at the Pledgor's cost and expense, release the Pledged Shares from the pledge created under this Deed of Pledge and intimate the Pledgor of such release, other than such of the Pledged Shares that may have been sold or disposed off (sic.). clarifies that the Pledge Deed shall terminate only upon the repayment in full of the outstanding debt to the lender. 12.3 In the context of the present case, the contract of pledge envisages that PIFSL is entitled to get itself recorded as 'beneficial owner' without forfeiting its right in terms of Clause 6.2 to sell the shares. The contention of MHPL that Clauses 6.1 and 6.2 are in the alternative and once PIFSL has exercised option under Clause 6.1, the option under Clause 6.2 is closed must be rejected as absolutely untannable. We do not find any such condition in the two clauses. As noticed above, PIFSL could not have exercised the right under Clause 6.2 unless the pledge shares were registered in its name as 'beneficial owner'. This step was necessary to enable PIFSL to exercise its right and enforce the sale of pledge shares. Whether or not it would be successful in selling the pledge shares is unknown and....
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....document, that is, the Bridge Loan Agreement, the pawnor shall remain the beneficial owner of the shares pledged at all times, except on the sale made by the pawnee as the bridge loan lender. Further, vide Clause 5.1(k), the pawnor has irrevocably waived any right it may have under the Depositories Act, the 1996 Regulations, or any other applicable law to the extent it is inconsistent with the provisions of the Pledge Deed. Clause 5.1(k) would only apply if the Depositories Act, the 1996 Regulations, or any other law permits the parties to contract out of the regulations by mutual agreement. It is a settled position of law and as discussed above, a contract cannot be inconsistent with the provisions of any existing law, including regulations, unless the said law permits the parties to enter into a contract inconsistent with the provision. 12.6 PIFSL by the letter dated 23rd January 2018 had informed MHPL in terms of Clause 6.1 that there has been an occurrence of default, which has continued and, therefore, they, on 16th January 2018, in exercise of its right under Clause 6.1 of the pledge deed, have applied for transfer of the pledged shares in its name. Consequently, all the r....