TaxTMI 
TaxTMI 
2023 (9) TMI 363
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....o.. JUDGMENT : 1. By this Interim Application, the Applicant/Plaintiff has sought an injunction restraining Defendant No. 2-Yes Bank Limited (for short 'Yes Bank') and Defendant No. 10-J.C. Flowers Asset Reconstruction Private Limited (for short "JCF") from exercising rights including voting rights in respect of the suit shares. Further injunction is sought restraining the Yes Bank Limited and JCF from transferring, alienating, creating any third party rights in respect of the suit shares. Consequential relief is sought by way of injunction restraining the Defendant/Respondent Nos. 1 and 2 and the Defendant/Respondent No. 10 - JCF 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. 2. The Plaintiff is a holder of 9,52,100/- (0.05%) shares of Defendant No. 3-Dish TV India Limited ("Dish TV") and Pledgor of 44,00,54,852 shares of Dish TV. The Plaintiff is admittedly a part of the Promoter Group of Dish TV i.e. Jawahar Lal Goel Group. 3. Defendant No. 1-Catalyst Trusteeship Limited (for short "Catalyst") is a Pledgee and security trustee for the beneficial interest of Yes B....
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....(i) the Plaintiff pledged all of its rights (including voting rights in or rights to control or direct the affairs of Dish TV) and interest in the Suit Shares to the Pledgee [Clause 2.1(b)]; (ii) during the currency of the Pledge Deeds and even prior to any default, the Plaintiff was required to vote on the Suit Shares in a manner that is not prejudicial to the interest/ rights of the Pledgee and/or Yes Bank (the Lender) and/or not inconsistent with the Transaction Documents [Clauses 10.3(d) & 5(b)]; (iii) upon default, the Pledgee is entitled to exercise voting rights in relation to the Suit Shares to the exclusion of the Plaintiff [Clause 7.1 (g)]; (iv) upon default, the Pledgee is entitled to enforce the security interest and take possession of or dispose of all or any part of the Suit Shares in any manner permitted by Law upon such terms as the Pledgee determines and to cause all or any part of the Suit Shares to be transferred into its name or its nominees [Clause 7.1(a) and (c)]; (v) the Pledgee, under its powers of realization upon enforcement of security, is entitled to transfer or cause any of the Suit Shares to be transferred to and reg....
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.... July 2019 Yes Bank, through its security trustee, i.e. Catalyst, invoked the pledges as per the provisions of the Pledge Deeds and retained the suit shares as collateral security in terms of Section 176 of the Indian Contract Act, 1872. Notices of sale were issued to the Borrowers under the said provision. Catalyst stated that there was a default on the part of the Borrowers and payment of the entire overdue sum was sought within one day of the date of the said Notice. It was further stated by Catalyst that failing payment, the suit shares would either be sold or taken into Yes Bank's own depository account without further notice. 10. The Plaintiff addressed a letter dated 24th July, 2019 to Catalyst inter alia acknowledging and admitting the creation of pledge of over 44,00,54,852 shares of Dish TV i.e. the suit shares in favour of Yes Bank. 11. The then CEO and Managing Director of Yes Bank, Mr. Rana Kapoor was arrested by the Enforcement Directorate on 8th March 2020 on allegations of large-scale fraud by the top management of Yes Bank. The top management of Yes Bank was subsequently changed. 12. On 13th March 2020, Yes Bank was reconstructed under a Central Government....
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....lled upon the Borrowers to repay the debt owed to Yes Bank. On 29th July 2020, Yes Bank called upon some of the Borrowers to show cause as to why they should not be declared Willful Defaulters under the RBI's Master Circular on Willful Defaulters ("SCN"). 18. Pursuant to the said SCN's issued by the Yes Bank, the Borrowers filed Suits before the Saket District Court, New Delhi for quashing of the SCN's. The Borrowers relied upon the Subhash Chandra's criminal complaint dated 22nd June 2021 and FIR dated 12th September 2021. By an exparte ad-interim order dated 13th October 2020, the Saket Court restrained Yes Bank from selling 44,53,48,990 shares of Dish TV. The order operated for over nine months, until the Saket Court proceedings were withdrawn on 3rd August 2021 with the Borrowers seeking liberty to file proceedings before the appropriate forum. 19. On 26th April 2021, a One Time Settlement ("OTS") proposal was furnished to Yes Bank by the Essel Group, inter alia acknowledging the legitimacy of the loans and the Pledge Deeds. It is stated therein that the funds have been utilized for the actual purpose for which the loan was sanctioned and there is no diversion of funds. T....
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....2020. In the EOW Complaint, Yes Bank has excluded amounts that were diverted to pay off the loan of a third party, namely the Videocon Group. 25. It is necessary to note that EOW by letter dated 21st April 2022 addressed to Yes Bank informed Yes Bank that the Preliminary Enquiry No. 203 of 2021 dated 3rd August 2021 was closed. 26. On 5th November 2021, the Crime Branch, Gautam Buddh Nagar, issued Notices under Section 102 of the Code of Criminal Procedure, 1973 ("CrPC"), to Yes Bank and National Securities Depository Limited (NSDL), in furtherance of the Subhash Chandra Complaint and ensuing FIR. Pursuant to the Section 102 Notices, Yes Bank was restrained from dealing in or exercising its rights over 44,53,48,900 equity shares of Dish TV till the completion of the investigation on the Subhash Chandra Complaint or further orders. 27. Yes Bank had thereafter, adopted proceedings i.e. Company Petition No. 411 of 2021 filed on 22nd November 2021, referred to as an Oppression & Mismanagement Petition, against Dish TV, its Board of Directors and its Promoter/Promoter Group shareholders, including the Plaintiff, before NCLT, Mumbai. Yes Bank has referred to the EOW complaint in....
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....en out which was allowed by order dated 8th April 2022. Further prayers were added including for an order and declaration that the pledge of suit shares by the Plaintiff including the pledge contracts and the action by the Defendants under such pledges are all void, illegal and vitiated by and fraud for Yes Bank to restore the suit shares in favour of the Plaintiff. Further amended prayer was sought for damages against Catalyst and Yes Bank. Therefore, further amendment was sought and allowed by order dated 17th January 2023 passed in Interim Application No. 1512 of 2022. The Plaintiff by the further amendment had added prayers including for Yes Bank and JCF to restore the suit shares in favour of the Plaintiff and claim for Damages against JCF, apart from Catalyst and Yes Bank. 32. The present Interim Application filed on 16th December, 2021 was heard for ad-interim relief by this Court on 23rd December 2021. This Court was not inclined to grant any ad-interim relief and upon request made by the learned Senior Counsel for the Plaintiff, this Court directed that the results / outcome of the AGM to be held on 30th December 2021 will abide by the decision in the Interim Applicatio....
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....which formed the subject matter of the present dispute is also directly linked with the commission of offence. 35. The Plaintiff has claimed that in view of the discovery that the consideration for the pledge and the objective of the loan transaction was illegal, fraudulent and therefore void ab initio under Section 23 of the Indian Contract Act, 1872, which the Plaintiff learnt in February 2022 from the EOW complaint, correspondence was addressed on 16th February 2022 by the Plaintiff to Yes Bank to produce the annexures to the EOW Complaint and in particular, Annexure 11. 36. The Plaintiff filed Interim Application (L) No. 4788 of 2022, wherein the Plaintiff sought relief restraining Yes Bank from transferring and/or selling, acting upon, using and/or exercising any rights in respect of the suit shares. Further relief was sought restraining Catalyst and Yes Bank from exercising any rights including voting rights in respect of the suit shares and/or interfering and/or seeking to participate in the management of Dish TV. The Plaintiff's Interim Application was disposed of on the very same day of its filing i.e. on 17th February 2022 as infructuous upon the statement made by t....
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....ing and final disposal of the Suit, Catalyst and Yes Bank be restrained from participating in the EGM dated 24th June 2022 and/or exercising any rights including voting rights in respect of the suit shares at the said EGM and that the Plaintiff be allowed to exercise its voting rights in respect of the suit shares at the said EGM. 43. The Division Bench of this Court by judgment dated 23rd June 2022, after examining the decision of the Supreme Court in PTC India. (supra) dismissed Commercial Appeal (L) No. 19252 of 2022. 44. Dish TV held its EGM on 24th June 2022 and disclosed the results on the same day. 45. The Special Leave Petition (Civil) No. 14796 of 2022 filed before the Hon'ble Supreme Court by the Plaintiff challenging the judgment dated 23rd June 2022 in Commercial Appeal (L) No. 19252 of 2022 was dismissed by the Supreme Court by an order dated 12th September 2022. The Supreme Court in the said order clarified that the observations in the impugned order of this Court are confined to the issue as to whether the Single Judge was justified in declining to exercise the discretion in an application for the grant of ad-interim relief. 46. On 26th September 2022, Di....
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....d to third parties. This has resulted in a situation where Yes Bank (and now JCF) have asserted that they are shareholders (members) of Dish TV in their own right, and not as Pledgees, and have, to all intents and purposes, started running and managing Dish TV through the illegal exercise of voting rights at the company's general meetings. Yes Bank has also asserted rights as a minority shareholder by filing proceedings before the National Company Law Tribunal ("NCLT") under Sections 241 and 242 of the Companies Act, 2013. i.e. operation and mismanagement and under Section 98 of the Companies Act, 2013, invoking the jurisdiction of the NCLT to call an Extra Ordinary General Meeting ("EOGM") of Dish TV. Yes Bank has purporting to act in the capacity of a shareholder of Dish TV, issued notice under Section 160 of the Companies Act, 2013 for appointment of Directors. These actions belie the protestations of both Yes Bank and JCF that they are mere Pledgees enforcing their right only in that capacity. 54. Mr. Seervai has submitted that contrary to the statutory law and judicial pronouncements which hold that a Pledgee has only a "special interest" in the pledged goods, Yes Bank has ....
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....oduced the Subhash Chandra Complaint, it actively suppressed its own EOW Complaint, which makes allegations that are in substance the same is that of the Subhash Chandra Complaint. He has submitted that the suggestion of Yes Bank that it did not produce the EOW Complaint because it did not think that it was material to the present case, has only to be stated to be rejected as an argument of desperation to cover up the active suppression of the EOW Complaint. 59. Mr. Seervai has submitted that the EOW Complaint encloses various Annexures that contain detailed findings for individual Borrowers and also, in particular, Annexure 11, being "Detailed Analysis of Submissions made by the Business Team and Risk Team". He has submitted that the Plaintiff despite made efforts made to obtain Annexure 11 of the EOW complaint from Yes Bank as well as by a notice to produce, finally a copy of the Annexure 11 was tendered during oral arguments in rejoinder. He has submitted that Annexure 11, reveals that while Tranche I of the loan amounts were disbursed in 2016-2017, further disbursements were approved on 29th December 2016 with an additional amount of Rs. 2,510 Crores being disbursed thereaft....
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....re 11 of Yes Bank's EOW Complaint, make out an overwhelming prima facie case as to the fraud that vitiates the loan transaction. 63. Mr. Seervai has submitted that the loan transaction is vitiated by fraud under Sections 23 and 24 of the Contract Act. He has submitted that under Sections 23 of the Contract Act, it provides that the consideration or object of an agreement is lawful unless it is, amongst other things, forbidden by law, defeats the provisions of any law or is fraudulent. Under Section 24, if the consideration for one or more objects is unlawful, the agreement is void. He has submitted that in the present case, the loan transaction is void, being for an unlawful object and consideration (namely the circumvention of applicable law on evergreening and the commission of offences under criminal laws). 64. Mr. Seervai has submitted that the consideration for the Pledge Deed is the loans extended by Yes Bank to the Borrowers. In view of the fact that the loan transaction being for an unlawful object and consideration and routed in a manner that constitutes a criminal offence under penal statutes, is ex facie vitiated by fraud, the secondary or collateral transaction, b....
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....ntract is bound to restore it, or to make compensation for it to the person from whom he received it. He has submitted that Yes Bank has acquired a pledge of the shares and derived a benefit under the Deeds of Pledge that have subsequently been discovered to be void. Consequently, the Plaintiff is entitled to restitution of the shares from Yes Bank and its successor-in-interest, JCF. These shares are required to be protected by an interim injunction from further transfers or sales pending the hearing and final disposal of the Suit. 69. Mr. Seervai has submitted that where a document is void ab initio (and not voidable), arguments as to prior knowledge or waiver or election are irrelevant, and are arguments of desperation. The Agreement is treated as a matter of law as though it never existed, being void ab initio, i.e. at the inception. In the present case, the Plaintiff never had knowledge of the EOW Complaint beforehand and hence, the question of election does not arise. 70. Mr. Seervai has thereafter, addressed the issue of the nature of a pledge and rights/interest of a Pledgee. He has submitted that assuming arguendo that the Pledge Deeds are valid and enforceable, the l....
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....o the security, even while the ownership of the pledged goods continues to vest in the Pledgor. A pledge does not envisage or contemplate the enjoyment by the Pledgee of the general property in the pledged goods; the indicia of ownership and the power to exercise proprietary rights remains at all times (i.e. throughout the period of the pledge) with the Pledgor. 75. Mr. Seervai has relied upon decision of the Supreme Court in Lallan Prasad Vs. Rahmat Ali & Anr. 1967 2 SCR 233, paras 16 to 17, wherein the Supreme Court has held that a Pawnee has only a special property in the pledge but the general property therein remains in the Pawnor and wholly reverts to him on discharge of the debt. The right to property vests in the Pledgee only so far as is necessary to secure the debt. In this sense a pawn or pledge is an intermediate between a simple lien and a mortgage which wholly passes the property in the thing conveyed. 76. Mr. Seervai has also relied upon Balkrishna Gupta Vs. Swadeshi Polytex Ltd 1985 2 SCC 167, para 33. wherein the Supreme Court had referenced an earlier decision viz. Bank of Bihar Vs. State of Bihar 1972 3 SCC 196. The Supreme Court found that in Bank of Bihar....
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....owner." Section 12 of the Depositories Act, mandates that a beneficial owner who creates a pledge must provide intimation of such pledge to the depository, who is then required to make entries in the records accordingly. He has then referred to Regulation 79 of the DP Regulations (in pari materia with the erstwhile Regulation 58 of the 1996 Regulations) which provides a mechanism for effectuating a pledge, including the requirement that upon invocation the depository shall register the Pledgee as the beneficial owner of such securities and amend its records accordingly. He has submitted that under the Depositories Act and DP Regulations, a Pledgee cannot transfer the pledged shares held in dematerialized form without being reflected as the "beneficial owner" in the records of the depository. 80. Mr. Seervai has submitted that when a pledge is invoked, the Pledgee is transposed as the "beneficial owner" for the limited and sole purpose of effectuating a prospective sale upon the invocation of the pledge. Neither the Depositories Act nor the DP Regulations envisage or contemplate the exercise of proprietary rights by a Pledgee upon invocation of a pledge, since the recording as "o....
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....DP Regulations in a pledge of dematerialized shares, finding that the two statues are to be construed harmoniously. The Supreme Court was also at pains to distinguish between a pledge and a mortgage, clearly delineating the legal incidents of each. 82. Mr. Seervai for the purpose of distinguishing a pledge and a mortgage relied upon PTC India (supra). The Supreme Court in PTC India (supra) relied upon the distinction between mortgage and pledge enunciated in Halsbury's Laws of England, which is that the mortgage conveys the whole legal interest in the chattels; whereas the pledge or pawn conveys only a special property, leaving the general property in the Pledgor or Pawnor; the Pledgee or Pawnee never has the absolute ownership of the goods but has a special property in them coupled with a power of selling and transferring them to a purchaser on default. 83. The Supreme Court in PTC India (supra) has held that unlike a Pledgee, a mortgagee acquires general rights in the thing mortgaged subject to the right of redemption of the mortgagor. 84. Mr. Seervai has submitted that the Supreme Court in PTC India (Supra) has held that the Pledgee has merely a special interest in the ....
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.... of JCF was sought to be bettered only in Sur-Rejoinder by referring to clauses of the Assignment Agreement. The disclosures made by JCF to SEBI expressly refer to the transfer of invoked equity shares from Dish TV under Section 5 of the SARFAESI Act. He has submitted that the arguments in Sur-Rejoinder premised on the Pledge deeds are no more than an afterthought. 91. Mr. Seervai has submitted that under Clause 2.1.2 of the Assignment Agreement dated 16th December 2022 executed between the Yes Bank and JCF, the assignee, viz. JCF has a right to enforce such security interests, pledges and to exercise all other rights in relation to such security interests, pledges under the Applicable Laws. Under Clause 2.1.3, the assignor, namely, Yes Bank is required to execute all documents as may be necessary for the purpose of perfecting the assignee's interest and therefore, such a document is essential for any assignment of the pledge as none of the clauses contemplate a direct transfer of the pledged shares. No assignment as contemplated under Clause 2.1.3 has been executed between JCF and Yes Bank. 92. Mr. Seervai has submitted that the Pledge Deeds have not themselves been transfer....
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....hat the same is permissible where a bank or financial institution has financed the purchase of the asset in question. This is admittedly not the case in these proceedings. 96. Mr. Seervai has submitted that in the first instance, it was impermissible to Yes Bank to transfer the pledged share to JCF; and thereafter, for JCF to exercise voting rights over the shares. In so doing, JCF, which is an Asset Reconstruction Company ("ARC"), is violating the provisions of Sections 9 and 10B of the SARFAESI Act, which provides that an ARC can take measures for the management of the business of a borrower only for the purposes of asset reconstruction. Dish TV, the company, whose shares have been pledged, is not even a "borrower" under the expanded definition in Section 2(f) of the SARFAESI Act. Mr. Seervai has submitted that while an acquisition of financial assets under Section 5(1)(b) may be permissible, the automatic transfer of shares in favour of the acquirer (viz. JCF) is impermissible in the case of a pledge. 97. Mr. Seervai has submitted that there is no case made out by Yes Bank/JCF in their arguments in Sur-Rejoinder that there are difficulties in the sale of the shares pledged....
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....e not for the somewhat unfortunate peculiarity of English Terminology involved in the established use of the words "special property" when "special interest" would seem better....". Mr. Andhyarujina has submitted that the reasoning of why "special interest" was more appropriate, the Privy Council (supra) observed that (i) the expression 'special property' excludes the notion of general property, which is the badge of ownership; (ii) the Pledgee holds possession only for the purpose of securing himself for the advance made; and (iii) the Pledgee cannot use the goods as his own. 100. Mr. Andhyarujina has submitted that in regard to the meaning of "special property" or "special interest" in the pledged goods, it is the right to property in the pledged goods only so far as is necessary to secure the debt advanced. In this context he has relied upon the decision of the Supreme Court in Maharashtra State Cooperative Bank Limited (supra) at Paragraphs 49 and 54 as well as the decision of the Supreme Court in Lallan Prasad (supra) at paragraph 16. He has submitted that it is the right that exists so that a Pledgee can compel the payment of the debt due. In this context he has relied upo....
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....hings mortgaged .... In comparison, a Pawnee has only the special rights in the goods pledged." The Supreme Court in Maharashtra State Cooperative Bank Limited (supra) has at paragraph 49 considered the "special property" to be a crucial ingredient of a pledge and makes a pledge "an intermediate between a simple lien and a mortgage which wholly passes the property in the thing conveyed". 105. Mr. Andhyarujina has submitted that the rights of a Pledgee does not include the right to enjoyment of property but only the right of possession and this has been held in the case of Md. Sultan (supra) and Shatzadi Begum Saheba (Supra). It is further held by the Andhra Pradesh High Court in Shatzadi Begum Saheba (supra) at paragraph 23 and 29 that where the Pledgees were allowed to inter alia exercise rights of a shareholder, vote on shares, lodge shares with the company, the rights were more than what could vest in a Pledgee and the transaction could not be a pledge but was, in fact, a mortgage. 106. Mr. Andhyarujina has submitted that in PTC India (supra) the Supreme Court has held that that the right to enjoyment is a right arising from ownership and not from a pledge [Paragraph 29 of....
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....er referred to the Power of Attorney dated 1st May 2019 which has consciously provided for voting, in case of default of the debt by the Pledgor, by appointing proxy(ies) to attend meetings and vote as is evident from clause 3 of the same. 111. Mr. Andhyarujina has submitted that to the extent to which the Pledge Deed provides that voting rights stand pledged namely clause 2.1 (b) of the Pledge Deed, the same is ineffective as it is contrary to and inconsistent with the very concept of the 'special property' in the goods pledged and to the settled law that voting is a privilege incidental to ownership of shares. He has accordingly submitted that the Pledgee with limited rights being 'special property' would not be entitled to vote on the shares. 112. Mr. Andhyarujina has submitted that a security over shares with the right to vote/enjoyment is not a pledge but a mortgage of movables. In this context, he has relied upon Shatzadi (supra) and Md. Suptan (supra) wherein it is held that there is no enjoyment of goods in the case of a pledge. He has submitted that a Pledgee has only limited rights or 'special property' in law, on default, the Pledgee can only either bring a suit or....
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.... pledged dematerialised securities." 115. Mr. Andhyarujina has submitted that the decision of PTC India (supra) makes it clear that the transfer of dematerialized shares from the dematerialized account of the Pledgor into the dematerialized account of the Pledgee is merely a step in aid of an immediate sale to be made to a third party. 116. Mr. Andhyarujina has also relied upon Paragraph 86 of PTC India (supra) which held that "do not see any disharmony between these provisions and Section 176 and 177 of the Contract Act. They can be read harmoniously without nullifying or altering their effect, subject to the exception in case of sale of listed securities to third parties...They apply independently without hindering and obstructing their application as the field and subject-matter of Sections 176 and 177 of the Contract Act differ from the subject-matter and the object of Sections 7, 10 and 12 of the Depositories Act and sub-regulation (8) of Regulation 58 of the 1996 Regulations." 117. Mr. Andhyarujina has submitted that the registration of the Pledgee as a "beneficial owner" does not make the Pledgee "the beneficial owner" in the true meaning of the term as generally un....
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.... all other cases. In this case, the owner of shares would be the Pledgor. It is not a reference to a Pledgee who has been given such status only for the purpose of sale of such pledged dematerialized shares to a third party. Any other reading would render the entire law of pledges otiose and would be contrary to the decision of the Supreme Court in PTC which in Paragraph 86 has held that there has been no change to the law of pledges. 124. Mr. Andhyarujina has thereafter referred to the definition of "beneficial owner" under Section 2(1) of the Depositories Act, wherein it defines "beneficial owner" as "a person whose name is recorded as such with a depository". He has submitted that Section 2(1) is prefaced with the important words "(1) In this Act, unless the context otherwise requires". In this case, the context does require for the term "beneficial owner" to be read differently for pledges. 125. Mr. Andhyarujina has referred to the decision of the Supreme Court in K.V. Muthu Vs. Angamuthu Ammal (1997) 2 SCC 53, wherein it has been held that the phrase "unless context otherwise requires" must be applied and given effect to where the definition or expression is preceded by ....
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....ration (so far as to the knowledge to Dish TV) and such alleged transfer would be contrary to Section 176 of the Contract Act which provides the Pledgee with only two (2) options on default of the debt by the Pledgor. 130. Mr. Andhayarujina has submitted that Section 176 of the Contract Act is mandatory and its applicability is not curtailed by the words "in the absence of the contract to contrary". The parties cannot contract out of Section 176 of the Contract Act and on default of payment of debt, there were only two (2) options namely to bring the Suit or sell the pledged shares after giving reasonable notice. 131. Mr. Andhayarujina has submitted that shares could not have been assigned by Yes Bank to J.C. Flowers and J.C. Flowers have no rights in the shares. 132. Mr. Andhayarujina has submitted that even given the transfer to Yes Bank is illegal for the reasons set out above, the assignment to J.C. Flowers also fails and J.C. Flowers would have no rights in respect of the Suit shares. Mr. Andhayarujina has submitted that the provisions Viz. Sections 5(2), 5(2A), and 5(3) of the SARFAESI Act, which was relied upon on behalf of J.C. Flowers are not applicable. Section 5....
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.... rights of ownership such as the right to vote and participate in management of Dish T.V. by inter alia requisitioning of meetings, bringing oppression and mismanagement proceedings and act beyond the scope of a Pledgee, which it cannot be permitted to do in law. He has accordingly submitted that Yes Bank /J.C. Flowers are not entitled to vote in respect of the pledged shares. 136. Mr. Khambata, the learned Senior Counsel appearing for Defendant No. 2 and Defendant No. 10 viz. Yes Bank and J.C. Flowers has referred to the provisions under the Contract Act which concerns Pledgees. He has submitted that from Section 172 of the Contract Act, it is clear that a Pledge is nothing but a form of bailment. Thus, the provisions constituting setting out the law of bailment viz. Sections 148 to 171, 180 and 181 of the Contract Act would apply to Pledges. He has submitted that since admittedly Section 148 of the Contract Act applies to Pledges and Section 149 to 171 and 180 to 181 of the Contract Act apply to bailments as defined under Section 148 of the Contract Act. It follows that the said provisions also apply to Pledges. Bailment itself contemplates contractual conditions of use and po....
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....y other provision of the Contract Act. This will include exercise of voting rights if the pledged goods are shares. 140. Mr. Khambata has submitted that it is a settled position of law that the Contract Act, including on the law of pledge, is not exhaustive. In this context, he has relied upon the decision of the Supreme Court in Irrawaddy Flotilla Company Limited Vs. Bugwandass (1891) SCC OnLine PC 11. He has submitted that in the decision of PTC India (supra) the Supreme Court has held that the law of pledge must reflect "flexibility" in the "milieu of a transitional and commercial environment wherein significant changes have occurred across the capital market." 141. Mr. Khambata has also relied upon the decision of this Court in Madholal Sindhu (Supra), wherein it has been held that "The scheme of the Indian Contract Act is that it is competent to parties to incorporate into any contract any incident which is not contrary to or inconsistent with any provision contained in the Act." 142. Mr. Khambata has submitted that under common law as can be seen from Chitty on Contracts - Law of Contracts, The Common Law Library, 34th Edition, Volume II., "(T)he right of the Pledgee....
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....greement containing all such rights and obligations (including that of pledge) would be contrary to law, or would lead to conversion, or would amount to a mortgage of movables. 148. Mr. Khambata has referred to the decision of Supreme Court in PTC India (supra), wherein the Supreme Court expressly noted and recognized the contractual rights of the Petitioner-Pledgee to transfer shares into its name or in the name of its nominee and to exercise voting rights over the pledged shares. PTC India does not hold that such contractual rights would "convert" the pledge into a mortgage of movables. 149. Mr. Khambata has submitted that the Plaintiff has relied upon the decision of the Calcutta High Court in Mahamaya Debi (supra) to contend that only right available to a mortgagee is the right of foreclosure. He has submitted that this contention is misconceived in view of the decision viz. Arjun Prasad and Ors. Vs. Central Bank of India Ltd. (1891) SCC OnLine PC 11, wherein the Patna Court has held that even a mortgagee has a right of sale. Further, the Madras High Court in L&T Finance Ltd. Vs. J.K.S. Constructions Pvt. Ltd. 2014 SCC OnLine Mad 302 has expressed doubt as to the ratio an....
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....ould include voting rights. 153. Mr. Khambata has referred to the decision of Supreme Court in Lallan Prasad (supra) which had been relied upon by the Plaintiff and Dish T.V. to contend that that a pledge is an intermediate between a simple lien and a mortgage. He has submitted that in that case, the Supreme Court had considered the issue, whether a Pledgee can sue to recover the underlying debt and also keep the pledged property. In this context, the Supreme Court, while determining the rights of a Pledgee, referred to the Pledgee's "special property" and the Pledgor's general property rights in the pledged goods and held that satisfaction of a debt extinguishes a pledge/pawn and that upon such satisfaction the Pledgee is bound to redeliver the pledged property. He has submitted that in Lallan Prasad (supra) there is reference of Halliday Vs. Holgate [L.R.] 3 Exch. 299 which elucidates what special property would mean for a bailee with respect to bailed goods i.e. a Pledgee has the whole present interest in the pledged property until the debt is paid off. 154. Mr. Khamabata has submitted that the express terms of the contract of pledge will prevail and if there are no expres....
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....anner is not to be misconstrued as "decoupling" the right to vote from the share. He has submitted that post enactment of the Depositories Act, 1996, the Depositories Act and the Depositories Regulations are to be read harmoniously with provisions relating to contracts of pledge under the Contract Act as held in PTC India (supra). Insofar as pledges of dematerialized shares are concerned, upon invocation of the pledge, the Depositories Act requires that the Pledgee's name be registered as the 'beneficial owner' of the dematerialized shares in the records of the depository. 160. Mr. Khamaba has referred to the relevant provisions of the Companies Act, 2013, the Depositories Act and Depositories Regulations on beneficial owner / member. He has submitted that under the 1996 Regulations, upon invocation of the pledge, the depository "shall register the Pledgee as beneficial owner". In the decision of PTC India (supra), the Supreme Court held that "No person, including the Pawnee, can transfer the pawn held in dematerialised form without being registered as a 'beneficial owner". This is a "mandatory" stipulation which does not seek to curtail or restrict, but on the other hand respec....
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.... right (as contented by the Plaintiff and Dish TV). The Supreme Court in PTC India (supra) expressly notes and recognizes the contractual right of the petitioner-beneficial owner therein to transfer shares into its name or in the name of its nominees and to exercise voting rights over the pledged shares. 164. Mr. Khambata has submitted that a company is duty bound in law to recognize only a beneficial owner / member whose name appears on the register of members as having all rights and benefits, including voting rights in relation to shares. He has relied upon Section 106(1) & (2) of the Companies Act as well as Swadeshi Polytex (supra) at Paragraphs 29 and 36 in this context. 165. Mr. Khambata has submitted that the definitions of 'beneficial owner' and 'member' under Section 2(1)(a) of the Depositories Act and Section 2(55) of the Companies Act is caveated by the words "unless the context otherwise requires". These definitions must be read down in the context of the said common law principle to mean a 'Pledgee-beneficial owner' who cannot have the full rights of a 'member'. He has submitted that Dish T.V. has not demonstrated that the context of the definition of "member" i....
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....79 to 83 that a Power of Attorney authorizing the Pledgee to vote is binding and enforceable as against the Pledgor where the power of attorney was a part of the Pledge Deed. 167. Mr. Khambata has submitted that the transfer of the Suit Shares i.e. the Security Assets under the Pledge Deeds as defined at Clause 1.1 thereof, first in the name of Catalyst, then to Yes Bank and finally to JCF is permitted under the terms of the Pledge Deeds, POAs, and under law. He has submitted that upon enforcement of security, the Plaintiff has authorised the Pledgee to transfer or cause any of the Security Assets to be transferred to and registered in the name of any of its successors, assigns or transferees. He has relied upon Clause 4.1(b) of the Pledge Deeds in this context. He has submitted that upon default, the Pledgee is entitled to enforce the security interest and take possession of or dispose of all or any part of the Suit Shares in any manner permitted by law upon such terms as the Pledgee determines and to cause all or any part of the Suit Shares to be transferred into its name or its nominees as has been provided for in Clause 7.1 (a) and (c) of the Pledge Deeds. Further, the Plain....
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..../or through security trustees) are now held by JCF (by itself, through Yes Bank (in its capacity as the agent of its security trustee and through its security trustee). 171. Mr. Khambata has submitted that Section 5 of the SARFAESI Act provides for acquisition of a 'financial asset' by an asset reconstruction company and prescribes the rights of the ARC on such acquisition. He has referred to the definition of the 'financial asset' in Section 2(l) which includes a pledge of movable property. He has also referred to Section 5(1), Section 5(2) and Section 5(3) of the SARFAESI Act which inter alia provides for acquisition of financial assets by an Assets Reconstruction Company (ARC) by way of an Agreement with the bank for transfer of financial assets. In that event the buyer of these assets viz. ARC would be treated as the lender for all purposes. He has submitted that there can be no doubt that the ARC is the new Pledgee of these shares and its right to deal with these pledged shares is absolute. Therefore, the ARC is required to be recognised as Pledgee by all third parties, including statutory authorities. He has relied upon the decision of Delhi High Court in UV Asset Reconstr....
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....ations of the Plaintiff with regard to fraud in relation to the Pledge Deeds. He has submitted that Section 17 and 19 of the Contract Act inter alia provide that when consent to an agreement is caused by fraud/coercion, the agreement is a contract voidable at the option of the party whose consent was so caused. He has submitted that Section 23 of the Contract Act deals with contracts that are rendered void due to unlawful consideration or object and provides that if the object or consideration of an agreement is unlawful (for inter alia being fraudulent), the agreement is void. Section 24 further adds that if any part of a single consideration for one or more objects, or any part of several considerations for a single object, is unlawful, the agreement is void. 175. Mr. Khambata has submitted that the Plaintiff's case of fraud is based on the Complaint dated 24th September, 2021 filed by Yes Bank with the Economic Offences Wing, Mumbai (EOW). The Plaintiff has claimed that the complaint was "recently discovered" by the Plaintiff and it confirms and reiterates the contents of the criminal Complaint dated 22nd June 2020 filed by Mr. Subhash Chandra. The Plaintiff has placed relian....
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....mstances. It cannot be stretched to apply to cases of fraud and/or misrepresentation as to contents of the document, such as in the present matter. 178. Mr. Khambata has submitted that in the present case all the parties to the Pledge Deeds including the Plaintiff were fully aware of the character and nature of the documents that were being executed i.e. the documents were deeds of pledge whereby 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. 179. Mr. Khambata has submitted that it is a settled position under English Law and Indian Law that a transaction is void in the case of a fraudulent misrepresentation as to the character of the document and in the case of a fraudulent misrepresentation as to the contents of the document, the transaction is merely voidable and continues to be valid until it is avoided. He has relied upon the authorities which have considered this position which are as under : (i) The House of Lords in Saunders (executrix of the estate of Rose Maud Gallie, deceased) Vs. Anglia Building Society [1970] 3 WLR 1078 (ii) Ningawwa Vs. Byrapp....
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....t New Delhi which refers to and annexes the FIR registered pursuant to Subhash Chandra Compliant and ongoing criminal investigation into the Subhash Chandra Complaint. It is the Plaintiff's own case that the EOW Complaint confirms and reiterates the contents of the Subhash Chandra Complaint. However, the Suit filed by Defendant No. 5, Essel Co-operative Resources Pvt. Ltd. in Saket District Court at New Delhi only seek to invalidate the invocation of the pledge and not the pledge itself. Identical suits were filed by other Borrowers but all the Suits were ultimately withdrawn by the Borrowers with liberty to file fresh Suits. However, no such fresh suits have been filed. 183. Mr. Khambata has submitted that the Oppression & Mismanagement Petition, being Company Petition No. 411 of 2021 filed by Yes Bank before the NCLT, Mumbai demonstrates that the Subhash Chandra Complaint and the alleged fraud was within the knowledge of the Plaintiff as early as on 20th November 2021. The Plaintiff is Respondent No. 15 in the Oppression & Mismanagement Petition and has admittedly been served a copy of the Oppression & Mismanagement Petition. The Oppression & Mismanagement Petition contains a ....
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....3 Cal 162 (iii) Mumbai International Airport Pvt. Ltd. Vs. Golden Chariot Airport & Anr. (2010) 10 SCC 422 187. Mr. Khambata has thereafter dealt with the Plaintiff's case on fraud under Section 23 of the Contract Act. He has submitted that the contention of the Plaintiff that the consideration for the pledge of the Suit Shares (under the Pledge Deeds) being the advancement of Loans by Yes Bank, is tainted by fraud and renders the pledge of the Suit Shares void under Section 23 read with Section 24 of the Contract Act is misconceived. He has submitted that Section 23 of the Contract Act deals with contracts that would be rendered void due to unlawful consideration and/or object. In the present case, nothing about the granting of the Loans which are the "stated consideration" under the Pledge Deeds is illegal / unlawful since the Loans were advanced by Yes Bank and accepted by the Borrowers. He has submitted that the Plaintiff is alleging illegality in use of the Loan amounts, which does not render the Loans themselves illegal and/or unlawful. He has submitted that even if the allegations contained in Subhash Chandra compliant to the effect that the Borrowers were induce....
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....e that noncompliance with RBI guidelines may attract penal action from the RBI, however, such non-compliance does not render the transactions void. Therefore, evergreening which is prohibited/impermissible under extant law would not make the loan transactions themselves unlawful. He has in this context relied upon decision of the Supreme Court in BOI Finance Vs. Custodian & Ors. (1997) 10 SCC 488 He has also relied upon the decision of the Supreme Court in IL&FS Financial Services Ltd. Vs. SKIL Infrastructure Ltd. & Ors. 2020 SCC OnLine Bom 4862 where the Supreme Court held that non-observance of prudent lending norms, including in relation to evergreening, would not render the loan transactions void. 191. Mr. Khambata has submitted that the Plaintiff's case of alleged fraud and that Yes Bank advanced huge Loans worth INR 5,270 Crores to the Borrowers - Essel Group so that a sum of INR 1,500 Crores (approx.) could be utilised by the Videocon Group to repay its outstanding dues to Yes Bank is an incredible argument. He has submitted that this does not make any commercial sense as no bank would advance upwards of INR 5,000 Crores to evergreen outstanding dues worth INR 1,400 Crore....
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....e Pledge Deeds, whereas the Plaintiff received "no benefit"; and therefore it is Yes Bank who is bound to restore the Suit Shares to the Plaintiff who is purportedly an innocent third party. He has submitted that this is contrary to (a) clauses of the Pledge Deeds which expressly state that the consideration for the Pledgor under the Pledge Deeds is advancement of the Loans to the Borrowers who have in fact received and utilized the Loan amounts. The Plaintiff has not clarified why it pledged the Suit Shares in the first place if no consideration/benefit was received by it under the Pledge Deeds. Thus, the Plaintiff cannot claim to be an innocent third party. The Plaintiff had knowledge of the alleged fraud even prior to the filing of the present Suit. Further, there is interconnection between the Essel Group and the Jawahar Lal Goel Group. 195. Mr. Khambata has submitted that the Plaintiff cannot conflate two separate types of fraud and substitute one for the other. It is settled law that the fraud must prove as pleaded in its Plaint that a charge of fraud must be substantially proved as laid and when one kind of fraud is charged another kind of fraud cannot be substituted in i....
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.... shares. 200. Section 176 of the Contract Act reads as under :- "176. If the Pawnor makes default in payment of the debt, or performance, at the stipulated time of the promise, in respect of which the goods were pledged, the Pawnee may bring a suit against the Pawnor upon the debt or promise, and retain the goods pledge as a collateral security; or he may sell the thing pledged, on giving the Pawnor reasonable notice of the sale..." 201. In Madholal Sindhu (Supra), the Division Bench of this Court had considered the question as to whether the terms of Section 176 of the Contract Act are mandatory and override the provisions of any contract to the contrary. This Court has in that context held as under:- "Therefore, the question is whether the terms of Section 176 of the Indian Contract Act are mandatory and override the provisions of any contract to the contrary. The scheme of the Indian Contract Act is that it is competent to parties to incorporate into any contract any incident which is not contrary to or inconsistent with any provision contained in the Act. But they can only override a specific provision contained in the Act provided the particular Section....
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....spect of the pledge goods viz. shares. 204. 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. 205. Thus in my prima facie view, 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. 206. There have been submissions made by the Plaintiff and / or Dish TV on the distinction between Pledge and mortgage of movables and contending that the right of enjoyment of pledged go....
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....these decisions holding that voting rights cannot be exercised by a Pledgee under Contract of Pledge. These cases do not consider as in the present case a contract conferring additional rights on the Pledgee i.e. to vote or otherwise, beyond Section 172 to 179 of the Contract Act. In not one of these cases was there a finding that the additional rights conferred on the Pledgee were contrary to the Contract Act. "Special Property" or "Special Interest" are concepts under common law and there is no statutory bar under the Contract Act from conferring any additional rights on a Pledgee by a contract, save and except any term that violates the mandatory provisions of the Contract Act. 210. The authorities relied upon by the Yes Bank / JCF which include the judgments of this Court in IL and FS Limited (supra), Sarvopari Investments Pvt. Ltd. (supra) and Bambino Finance Pvt. Ltd. (supra) have all considered contracts conferring special rights on the Pledgee, including the right to vote and in none of these cases was there a finding to the effect that additional rights conferring on the Pledgee were contrary to the Contract Act. Further, in PTC India (Supra), the Supreme Court has note....
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....lict with the doctrine that voting rights cannot be decoupled from the shares. 214. In the present case, the Plaintiff has under the Deeds of Pledge authorized the Pledgee to exercise voting rights in respect of the Suit shares and this is borne out from Clauses 2.1(b), 5(b), 7.1(g), 10.3(d), 12(i) and (iii) of the Pledge Deeds. Further, independent POAs have been executed under which the Plaintiff has appointed the Pledgee as its proxy in law, including for the purposes of voting at the Dish TV's shareholder meetings. It is well settled that a proxy / Power of Attorney or a contractual obligation to vote in a particular manner is not to be misconstrued as decoupling the right to vote from the share. The decision relied upon by the Plaintiff viz. Swadeshi Polytex (Supra) in support of its contention that the Pledgor Company in that case was permitted to exercise the voting rights with respect to the pledged shares is inapplicable to the facts of the present case. In that case unlike the present cases, the Pledgee had neither invoked the pledged shares nor was the Pledgee registered as a member of the company in its Register of Members. In my view, the said decision confirms that....
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....he depository." Further, the Supreme Court in PTC India (Supra) at Paragraph 80 has held as under:- "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". Further, the beneficial owner "shall be solely entitled to all rights, benefits...." in respect of the shares (Section 10(3) read with PTC India (paragraph 69). Thus, a Pledgee is not deemed to be a beneficial owner by some legal fiction but is in fact the beneficial owner with all rights, benefits and full status of beneficial ownership." 219. Thus, it is necessary for the Pawnee / Pledgee to be accorded the status of beneficial owner for the Pledgee to exercise his right to sell the pledged dematerialized securities. In my prima facie view, this does not limit the status and right of the beneficial owner and / or in any manner dilute or restrict such status. 220. 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 ....
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.... neither of these Acts envisage a curtailment / colouring of the definition of "beneficial owner" under Section 2(1) (a) of the Depositories Act by restricting the rights of a Pledgee who has been conferred the status of beneficial owner. 223. Now coming to the contention of the Plaintiff and / or Dish TV that the transfer of the Suit shares first in the name of Catalyst then to Yes Bank and finally to JCF is in violation of law. I do not find any merit in this contention. In my prima facie view, these transfers are permitted by the Pledge Deeds under which the Plaintiff has authorised the Pledgee to transfer or cause any of the Suit shares defined as security assets therein to be transferred to and registered in the name of any of its successors, assigns or transferees as provided in Clause 4.1(b) of the Deeds of Pledge. It has been further provided under Clause 7.1(a) and (c) of the Deeds of Pledge that the Pledgee is entitled to enforce the security interest and take possession and dispose of all or any part of the suit shares in any manner permitted by law upon such terms as the Pledgee determines and to cause all or any part of the Suit Shares to be transferred into its nam....
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.... shares from Yes Bank to JCF is permitted and JCF as ARC is deemed to be a party to the Pledge Deeds as the Pledgee. The Pledge Deeds under Section 5(3) of the SARFAESI Act read with the definition of 'financial asset' are enforceable against JCF. It has been held in the decision of the Delhi High Court in U.V. Asset Reconstruction Company Ltd. Vs. Union of India 2022 SCC OnLIne Del 4289, that the ARC upon acquisition of the financial assets and / or NPA account along with all assets including pledge shares, is to be recognized as Pledgee of all third parties including statutory authorities. 227. 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. If this interpretation of the Plaintiff is to be accepted, in my prima facie view this would render Section 5(1) and 5(2) read with definition of financial asset in Section 2(l) otiose in respect of Pledges. Thus, this interpretation of the Plaintiff c....
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....of selling the shares, there were circumstances which prevented it from doing so including orders passed in the proceedings before the Saket District Court as well as Notice issued by Uttar Pradesh Police under Section 102 of Code of Criminal Procedure, 1973 constraining Yes Bank from selling the Suit shares. Further, the Plaintiff by the present Interim Application has sought a restraint on Yes Bank / JCF from creating third party rights in any manner in respect of the Suit shares. 232. 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. It is the contention of the Plaintiff that the alleged fraud was recently discovered by the Plaintiff i.e. from the complaint dated 24th September, 2021 filed by Yes Bank with the Economic Offences Wing, Mumbai ("EOW"). The Plaintiff has maintained that the EOW complaint confirms and reiterates the contents of the criminal complaint dated 22nd June, 2020 filed by Mr. Subhash Chandra. The Plaintiff contends that as per the EOW Complaint, Yes Bank has admi....
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....on and / or pledge deeds and has in fact elected to affirm them. The Plaintiff's election can be seen from the Plaint (unamended) where the Plaintiff proceeds on the basis that the pledge deeds and underlying / related transactions are valid. A reference has been made on behalf of the Yes Bank / JCF to the paragraphs of the Plaint wherein the Plaintiff has proceeded to propound the pledges by acknowledging that there exist valid Pledge Deeds in respect of which the Plaintiff possesses rights under Section 176 of the Contract Act. These paragraphs remain in the Plaint (as amended). 235. In my prima facie view, the Plaintiff's allegation of fraud vitiating the pledge deeds and rendering them illegal and unlawful is misconceived. This is upon considering the fraud alleged viz. loan advances by Yes Bank being unlawfully used for collateral purposes i.e. greening of loans by Yes Bank. At the highest the fraud alleged would be one which falls under Section 17 and 19 of the Contract Act. Thus, the alleged fraud being voidable, it was necessary for the Plaintiff to have avoided the pledge deeds in the event the Plaintiff's case of fraud is accepted. It is well settled that in the event ....
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....nd in the case of fraudulent misrepresentation as to the contents of the document, the transaction is merely voidable and continues to be valid until it is avoided. The decision of the The House of Lords in Saunders (executrix of the estate of Rose Maud Gallie, deceased) (supra), Ramesh Mali (supra) and Dularia Devi (supra) relied upon by the Yes Bank is apposite in this context. 238. I find no merit in the contention on behalf of the Plaintiff that the case of fraud falls under Sections 23 and 24 of the Contract Act. The Plaintiff has relied upon these provisions in contending that the consideration for the pledge of the Suit Shares under the Pledge Deeds being the advancement of loans by Yes Bank, the same is tainted by fraud and is unlawful. Section 23 of the Contract Act deals with contracts that would be rendered void due to unlawful consideration and / or object. This provision is not attracted in the present case where there is nothing about the granting of loans (the stated consideration under the Pledge Deeds) being illegal / unlawful consideration since the loans were advanced by Yes Bank and accepted by the Borrowers. The Plaintiff has alleged illegality in respect of....
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.... dues to Yes Bank is of much merit. Further, there is no explanation provided as to whether the balance INR 4000 Crores was used by the Borrowers for extraneous purposes. 242. In the event the Plaintiff's case of alleged fraud and the Plaintiff being entitled to avoid the Pledge Deeds is accepted, the benefit received by the Plaintiffs / Borrowers under the loan transaction and Pledge Deeds are required to be returned to Yes Bank / JCF under Section 64 and 65 of the Contract Act which provides for restitution under voidable / void contracts. It is provided that a party rescinding a voidable contract, is bound to restore the benefit received thereunder to the person from whom it was received. This will apply to a contract which is discovered to be void or when the contract becomes void. It is insufficient for the Plaintiff to seek return of the Suit shares from Yes Bank / JCF on the ground that it is entitled to avoid the Pledge Deeds and / or the Pledge Deeds are required to be declared void. They must also return the benefit received under the loan transactions and the Pledge Deeds to Yes Bank / JCF. I prima facie do not find any merit in the contention of the Plaintiff that th....