Delhi High Court
Stci Finance Ltd vs Cedar Infonet Pvt Ltd & Ors on 8 May, 2018
Equivalent citations: AIRONLINE 2018 DEL 827
Author: Rajiv Sahai Endlaw
Bench: Rajiv Sahai Endlaw
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of decision: 8th May, 2018
+ CS(COMM) 247/2017 & IA No.10782/2017 (u/O XXXVII R-
3(5) CPC)
STCI FINANCE LTD ..... Plaintiff
Through: Mr. Raj Shekhar Rao with Mr.
Abhishek Agarwal, Mr.
Abhinav Mukhi & Mr. Sameer
Dawar, Advs.
Versus
CEDAR INFONET PVT LTD & ORS ..... Defendants
Through: Mr. Ashim Vachher, Mr.
Pawash Piyush, Mr. Vaibhav
Dabas & Mr. Sumeet, Advs. for
D-1 to 3.
Ms. Ruhi Chopra with Mr.
Shashank & Ms. Rukhmini,
Advs. for D-4.
CORAM:
HON'BLE MR. JUSTICE RAJIV SAHAI ENDLAW
1. Application of the three defendants, viz. i) Cedar Infonet Pvt.
Ltd., ii) Lt. Col. Hardeep Singh Bedi (Retd.), and, iii) Maninder Bedi,
for leave to defend this suit for recovery of Rs.80,82,38,057.51 with
pendente lite and future interest filed under Order XXXVII of the CPC
is for consideration.
2. The counsel for the plaintiff and the counsel for the defendants
no.1 to 3 were heard on 6th March, 2018 and part order also dictated
on that date and further hearing was adjourned to 8th March, 2018. On
CS(COMM) No.247/2017 Page 1 of 21
8th March, 2018, the counsels were further heard but the remaining
order not dictated as it was remembered that judgment on similar legal
issue, in applications for interim relief in CS(OS) No. 2281/2006 titled
Tendril Financial Services Pvt. Ltd. & Ors. Vs. Namedi Leasing &
Finance Ltd. & Ors. had been reserved for 8th May, 2017.
3. The defendant no.4 HDFC Ltd. is admittedly a proforma
defendant and no relief has been claimed against it.
4. The facts, insofar as required to be set out for the purpose of
this judgment, considering the course the hearing has taken, are i) that
the defendant no.1 had availed financial assistance from the plaintiff
and pledged with the plaintiff the shares held by the defendants
no.1&2 in Tulip Telecom Ltd; the defendants no.2&3 had also stood
as personal guarantors for repayment of the loan / financial assistance
availed by the defendant no.1 from the plaintiff; ii) that the shares
which were pledged were held by the defendants no.1&2 in de-
materialized form and the pledge was created in accordance with the
Securities and Exchange Board of India (Depositories and
Participants) Regulations, 1996 and Regulation 58 whereof is as
under:
"58. Manner of creating pledge or hypothecation.
(1) If a beneficial owner intends to create a pledge on a
security owned by him, he shall make an application to the
depository through the participant who has his account in
respect of such securities.
CS(COMM) No.247/2017 Page 2 of 21
(2) The participant after satisfaction that the securities are
available for pledge shall make a note in its records of the notice
of pledge and forward the application to the depository.
(3) The depository after confirmation from the pledgee that
the securities are available for pledge with the pledgor shall
within fifteen days of the receipt of the application create and
record the pledge and send an intimation of the same to the
participants of the pledgor and the pledgees.
(4) On receipt of the intimation under sub-regulation (3) the
participants of both the pledgor and the pledgee shall inform the
pledgor and the pledgee respectively of the entry of creation of
the pledge.
(5) If the depository does not create the pledge, it shall send
along with the reasons an intimation to the participants of the
pledgor and the pledgee.
(6) The entry of pledge made under sub-regulation (3) may be
cancelled by the depository if the pledgor or the pledgee makes
an application to the depository through its participant:
Provided that no entry of pledge shall be cancelled by the
depository with the prior concurrence of the pledgee.
(7) The depository on the cancellation of the entry of pledge
shall inform the participant of the pledgor.
(8) Subject to the provisions of the plegded document, the
pledgee may invoke the pledge and on such invocation, the
depository shall register the pledgee as beneficial owner of such
securities and amend its records accordingly.
(9) After amending its records under sub-regulation (8) the
depository shall immediately inform the participants of the
CS(COMM) No.247/2017 Page 3 of 21
pledgor and pledgee of the change who in turn shall make the
necessary changes in their records and inform the pledgor and
pledgee respectively.
(10) (a) If a beneficial owner intends to create a hypothecation
on a security owned by him he may do so in accordance with the
provisions of sub-regulations (1) to (9).
(b) The provisions of sub-regulations (1) to (9) shall mutatis
mutandis apply in such cases of hypothecation:
Provided that the depository before registering the hypothecate
as a beneficial owner shall obtain the prior concurrence of the
hypothecator.
(11) No transfer of security in respect of which a notice or entry
of pledge or hypothecation is in force shall be effected by a
participant without the concurrence of the pledgee or the
hypothecate, as the case may be."
(Emphasis added)
iii) that it is not in dispute that the plaintiff, in or about 2011-12 (the
dates are disputed), in accordance with Clause (8) of Regulation 58
aforesaid invoked the pledge and the depository viz. the National
Securities Depositories Ltd. (NSDL) transferred the said shares from
depository participant of the defendants no.1&2 viz. Karvy Stock
Broking Limited to the depository participant of the plaintiff viz.
HDFC Ltd; and, iv) that the plea of the defendants in their application
for leave to defend inter alia is that on the date when the plaintiff
invoked the pledge as aforesaid, the market value of the pledged
shares was Rs.1,57,13,07,650/- and the amount claimed by the
CS(COMM) No.247/2017 Page 4 of 21
plaintiff in this suit is much less than the value of the shares, pledge
qua which was invoked as aforesaid.
5. Per contra, the plea of the plaintiff is that though it had invoked
the pledge but the same did not amount to sale of the shares within the
meaning of Section 176 of the Contract Act, 1872. Section 176 of the
Contract Act, 1872 is as under:
―176. Pawnee's right where pawnor makes default.--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.
If the proceeds of such sale are less than the amount due in
respect of the debt or promise, the pawnor is still liable to pay the
balance. If the proceeds of the sale are greater than the amount so
due, the pawnee shall pay over the surplus to the pawnor.‖
The argument of the counsel for the plaintiff is that since the plaintiff
did not realize any money and the defendants also, after 2011-12,
several times renewed the financial facility agreements and offered
additional security, the said defence is not available to the defendants.
It is further contended that though the defendants are pleading the
value of the pledged shares on the date of invocation aforesaid to be
much more than the amount due from the defendants to the plaintiff
but the defendants at no time demanded the excess amount from the
plaintiff and have not filed a counter-claim now even.
CS(COMM) No.247/2017 Page 5 of 21
6. Though the other questions which arise, as to what was the
price of the shares on the date of invocation, whether the defendants
by their conduct are disentitled from taking the plea as has been taken
etc., cannot be decided at the stage of leave to defend and leave to
defend will have to be granted to determine the said questions but if
the counsel for the plaintiff is correct in his contention that the
plaintiff, under Section 176 supra was entitled to, notwithstanding the
invocation, continue to hold on to the pledged shares and not required
to effect the sale thereof in realization of its dues, all the other
questions aforesaid would not arise for determination and leave to
defend would be declined to the defendants.
7. I may record that the counsel for the plaintiff has at the outset
informed that besides the financial facility subject matter of this suit,
meted out by the plaintiff to the defendants, another financial facility
was also meted out by the plaintiff to a sister concern of the defendant
no.1 and to which financial facility also the defendants no.2&3 had
stood guarantors and the claims of the plaintiff under the said
transaction were subject matter of an arbitration and which claims of
the plaintiff have been declined and objections under Section 34 of the
Arbitration & Conciliation Act, 1996 of the plaintiff are pending as
OMP No.340/2017 in this Court. Though the option of granting leave
to defend and clubbing the hearing of the legal question along with
OMP No.340/2017 was open but since the arbitral award does not
bind me, the hearing proceeded and after the hearing has been held for
CS(COMM) No.247/2017 Page 6 of 21
considerable time, it is not deemed appropriate to merely grant leave
to defend without deciding the legal question.
8. The counsel for the plaintiff has referred to Lallan Prasad Vs.
Rahmat Ali AIR 1967 SC 1322 to contend that the plaintiff, as the
pawnee, was not entitled to purchase the shares itself and thus the
invocation of the pledge under Clause (8) of Regulation 58 supra does
not amount to sale. It is yet further contended that else it is not open
to the defendants as pawnors to contend that the plaintiff ought to have
sold the pledged shares at an appropriate time and fetch the price
thereof rather than keeping the shares till the same were left of no
value whatsoever.
9. In this context, it is also contended that the plaintiff admittedly
did not give any notice to the defendants of invocation and which
would have been given had there been a sale within the meaning of
Section 176(1) of the Contract Act. It is further contended that the
procedure prescribed in Regulation 58 supra envisages notice to the
pawnor / pledgor.
10. I enquired from the counsel for the plaintiff, whether not the
purpose of the reasonable notice prescribed in Section 176 supra is to
merely ensure that optimum price is received on such sale and whether
not even if the notice were not to be given, the sale would remain
valid subject to the decision whether the price fetched on sale was
optimum and if found to be less, set off of the optimum price has to be
given to the pawnor.
CS(COMM) No.247/2017 Page 7 of 21
11. The counsel for the plaintiff responded that it has been held in
The Official Assignee of Bombay Vs. Madholal Sindhu ILR 1948
Bom 1 that sale under Section 176, without reasonable notice is valid
and the only remedy of the pawnor is to sue the pawnee for damages.
12. Thus the legal question for adjudication is, whether the
invocation of the pledge under Clause (8) of Regulation 58 supra is
sale of the pledged shares by the plaintiff as pawnor to itself. While
the counsel for the plaintiff contends that it is not and therefore the
entitlement of the plaintiff to its dues remains, the counsel for the
defendants contends that it amounts to a sale and the defendants are
entitled to offset from the amounts due to the plaintiff the price
prevalent of the shares on the date of invocation aforesaid.
13. The counsel for the plaintiff has contended that the Depositories
Act, 1996 and the Regulations supra are not intended to change the
law relating to pledge as contained in Section 176 of the Contract Act.
It was contended that the law cannot be different for shares in physical
form and shares in de-materialized form and the law of pledge cannot
be different for shares in fungible form than with respect to any other
kind of goods capable of being pledged.
14. The counsel for the plaintiff also referred to Section 28 of the
Depositories Act which provides that the provisions thereof shall be in
addition to and not in derogation of any other law for the time being in
force relating to the holding and transfer of securities and on the basis
thereof contended that the provisions of the Contract Act relating to
CS(COMM) No.247/2017 Page 8 of 21
pledges, including of shares, and the judgements pronounced thereon
would be applicable to pledge of shares in dematerialized form also.
Attention was also invited to Section 31 titled ‗Repeal and Saving' of
the Depositories Act and it was contended that had the intention of the
Legislature while enacting the Depositories Act been to repeal Section
176 of the Contract Act which generally lays down the law relating to
bailments and pledges, it would have been provided so under the said
Section 31.
15. The counsel for the plaintiff also drew attention to Clauses 3.1
and 3.2 of the Share Pledge Agreement, at pages 133 to 155 of
Volume II of Part II(A) file, as under:
―3.1 On the occurrence of an Event of Default, the Lender shall be
entitled, at its sole discretion:
3.1.1 to invoke the pledge on the Collateral and / or transfer or
register in its name or in the name of any of its nominees or any
other person, as it shall deem fit, all or any of the Collateral at the
cost of the Pledgors;
3.1.2 to take all such actions including vote on all or any part
of the Collateral (whether or not transferred in the name of the
Lender, its nominee or any other person) and otherwise act with
respect thereto as though it were the owner thereof; and
3.1.3 to sell the Collateral (or any part thereof) in exercise of
the power conferred under Section 3.5 hereof (Power of Sale),
without the intervention of the court and without any consent of
or further notice to the Pledgor at public or private sale or on any
securities exchange for cash, upon credit or for future delivery or
transfer or procure registration in the name of the Lender, or any
CS(COMM) No.247/2017 Page 9 of 21
of its nominees at the cost of the Pledgors, as the Lender may
deem commercially reasonable and apply the proceeds thereof
towards payment of the Obligations, provided that the Lender
shall not be obliged to make any sale of any Collateral if it determines not
to do so.
3.2 Consequence of Invocation:
3.2.1 Irrespective of anything contained in this Agreement, on
invocation of pledge, the shares comprised in the Collateral will
not become and will not be deemed to have become the property
of the Lender, even though transferred or credited to the account
of the Lender with the Depository. The Lender will not be
required to acquire any such shares in their own individual
account or on account of any funds or client accounts that are
managed by the Lender.
3.2.2 The economic risk attached to the said shares comprised in the
Collateral (including due to variations in market price) will
continue to be to the account of the Pledgors until such time as
they are actually sold to a third person.
3.2.3 Any appreciation and / or depreciation in the price of the said
shares between the time of invocation and the sale of such shares
will continue to be to the account of the Pledgors.‖
(Emphasis added)
16. It was argued that invocation of pledge by the plaintiff and the
resultant transfer of shares from the account of the depository
participant of the defendants no. 1 and 2 to the account of the
depository participant of the plaintiff did not result in sale by the
plaintiff of the shares in satisfaction of the financial assistance
rendered by the plaintiff to the defendant no. 1 and in accordance with
CS(COMM) No.247/2017 Page 10 of 21
the Agreement aforesaid between the parties, the economic risk
attached to the shares including due to variations in market price
continued to be on account of defendants no. 1 and 2 and since the
shares continue to be held by the plaintiff and are incapable of
fetching any price today, the plaintiff is entitled to recover the amount
due from the defendants. Reliance in this regard was also placed on
plethora of documents of the date after the invocation of the pledge as
aforesaid by the plaintiff and wherein the defendants admitted their
liability to the plaintiff. It was argued that the parties also thus, at the
contemporaneous time, understood the contract and the law as is
argued by the plaintiff today.
17. Per contra, the counsel for the defendants has referred to
Section 10 of the Depositories Act which is as under:
"10. Rights of depositories and beneficial owner.
(1) Notwithstanding anything contained in any other law for the
time being in force, a depository shall be deemed to be the
registered owner for the purposes of effecting transfer of
ownership of security on behalf of a beneficial owner.
(2) Save as otherwise provided in sub-section (1), the
depository as a registered owner shall not have any voting rights
or any other rights in respect of securities held by it.
(3) The beneficial owner shall be entitled to all the rights and
benefits and be subjected to all the liabilities in respect of his
securities held by a depository.‖
CS(COMM) No.247/2017 Page 11 of 21
and has contended that sub-Section (1) thereof commences with a non-
obstante clause and which inter alia means that insofar as the law
relating to plege with respect to shares is concerned, the same is
codified in the Depositories Act and the Regulations framed
thereunder and anything to the contrary contained in the Contract Act
or in any other law would be of no avail. Reliance in this regard was
placed on JRY Investments Pvt. Ltd. Vs. Deccan Leafine Services
Ltd. 2003 SCC OnLine Bom 1134.
18. It was further contended: (i) that the plaintiff is mixing up the
Agreement subject matter of the present suit, and the Agreement
between the plaintiff and Sukhmani Technologies Pvt. Ltd.; the
defendants, along with their application for leave to defend have filed
a copy of the Agreement, subject matter of the other financial facility
granted by the plaintiff to sister concern namely Sukhmani
Technologies Pvt. Ltd., of defendant no.1 and at pages 133 to 155 of
Volume II of Part II(A) file filed copy of the said agreement; (ii) that
the counsel for the plaintiff has drawn attention to Clauses 3.1.1 and
3.1.2 of the Agreement with Sukhmani Technologies Pvt. Ltd.; (iii)
the agreement subject matter of this suit is different and is at pages 50
to 73 of Part-III file and does not contain any clauses as reported
above; (iv) that the defendants, in para 18 of the affidavit of the
defendant no. 2 accompanying the application for leave to defend,
have given particulars of invocation by the plaintiff of pledge qua
1,41,59,000 shares out of total 2,77,75,000 shares, commencing from
24th November, 2011 till 3rd October, 2012; the plaintiff, by 9th
CS(COMM) No.247/2017 Page 12 of 21
February, 2012 had invoked the pledge of shares of the value of
Rs. 1,05,17,92,500; till that date, the Agreement with Sukhmani
Technologies Pvt. Ltd. did not even exist; (v) that there is no Share
Pledge Agreement with respect to the transaction subject matter of the
present suit; (vi) that the dicta in JRY Investments Pvt. Ltd supra has
been approved of by the Division Bench of the Bombay High Court in
Pushpanjali Tie Up Pvt. Ltd. Vs. Renudevi Choudhary AIR 2015
Bom 1; and, (vii) that the plaintiff did not even give any intimation to
the defendants of the invocation or of the transfer of shares to the
account of its depository participant and the defendants were unaware
thereof.
19. The counsel for the defendants also referred to SICPA India
Pvt. Ltd. Vs. Brushman (India) Ltd. MANU/DE/2424/2013, where on
similar facts, a petition for winding up was dismissed relegating the
parties to recovery proceedings on the same aspect. It is thus argued
that on same parity, leave to defend should also be granted.
20. The counsels, on enquiry stated that there was no other
judgment till then dealing with the issue.
21. It was however informed that National Consumer Disputes
Redressal Commission (NCDRC) and Securities Appellate Tribunal
(SAT) have dealt with the question in Deepali Sharma Vs. Federal
Bank Ltd. 2015 LawSuit (CO) 2024 and Liquid Holdings Pvt. Ltd.
Vs. Securities & Exchange Board of India MANU/SB/0017/2011.
CS(COMM) No.247/2017 Page 13 of 21
22. The counsel for the plaintiff fairly stated that the view taken by
both the Tribunals tends to be against the proposition canvassed by
him. It was also stated that the decision of the NCDRC is pending
consideration in the Supreme Court.
23. I have since pronounced judgment in Tendril Financial
Services Pvt. Ltd supra reported as 2018 SCC Online Del 8142, on the
applications for interim relief therein and have held:-
―B. The High Court of Bombay, in JRY Investments Private
Limited supra is found to have, held i) that the shares in
dematerialized form cannot be pledged in accordance with the
provisions of the Contract Act which requires delivery of the goods
pledged; ii) it is obvious from the provisions of the Contract Act,
that for a valid pledge, there must be a delivery of goods i.e. a
physical possession of the goods; it would however be impossible to
hold that such goods in a dematerialized form are capable of delivery
i.e. by handing over de facto possession; since goods are invisible
and intangible, it would be impossible and in any case difficult to fix
the fact of time and place of delivery; dematerialized shares cannot
be delivered physically nor can physical possession of such
dematerialized shares be handed over; iii) provisions have been
enacted in the Depositories Act for the purpose of recording
accurately the transfers and pledges of shares including those in a
dematerialized form; iv) the transactions in such shares are directly
governed by the Depositories Act which contemplates the existence
of a depository; the shares are held by the depository in the name of
the beneficial owner of the shares; the depository is entitled to act as
a registered owner for the purpose of effecting transfer of ownership
of security on behalf of a beneficial owner vide Section 10 of the
Depositories Act which begins with a non-obstante clause and
therefore ownership and transfer of shares governed by the Act must
be in accordance with the provisions of the Depositories Act; v)
Section 12 of the Depositories Act provides for pledge or
hypothecation of the security and Section 20 thereof renders anyone
who acts in contravention of the Act or any regulations or bye-laws,
punishable with imprisonment; vi) SEBI in exercise of the powers
under Section 25 of the Depositories Act has made the Regulations
aforesaid which require the depository to maintain records of all
approvals, notices, entries and cancellation of pledge; vii) the
CS(COMM) No.247/2017 Page 14 of 21
Depositories Act and the Regulations aforesaid contain a whole and
self-contained procedure for the creation of pledges; viii) in any
case, since it is not possible to physically deliver demated shares and
therefore pledge them in accordance with the Contract Act, it must
be held that a pledge of such shares can only be validly created in
accordance with the provisions of the Depositories Act; ix) though in
the facts of the case, pledge was not created by the plaintiff in the
suit and the title in the shares was conveyed to the defendant no.1 in
the suit but even if it were to be assumed that the plaintiff did not
convey title in the shares to defendant no.1, still, it could not be said
that the other defendants who purchased the shares from the
defendant no.1 would not get any title in the share; and, x) the shares
stood in the name of defendant no.1 as beneficial owner and the
circumstances of the shares standing in the name of defendant No.1
as beneficial owner of the shares in the records of the depository
participant was clearly attributable to the plaintiff and the plaintiff
was estopped from asserting its title against bona fide purchasers for
value without notice of any defect in the title.
C. No merit is found in the contention of the senior counsel for
the plaintiffs of aforesaid judgment being on a finding of bona fide
purchase and which is not so in the present case; sale of shares in the
present case is admittedly through market transactions and the
finding of the SAT, being a specialized Tribunal, in this regard and
which has attained finality, would bind the parties. What was held
by a Single Judge of the Bombay High Court in JRY Investments
Private Limited supra qua the pledge of dematerialized shares being
not possible under the provisions of the Contract Act and being
governed solely by the Depositories Act and the Regulations made
thereunder was concurred with by the Division Bench of the same
High Court in Pushpanjali Tie Up Pvt. Ltd. supra. The Division
Bench further added that a) a party is entitled to assume and proceed
on the basis that the pledge, if any, would be created in the manner
prescribed by the Depositories Act and the Regulations made
thereunder; b) the provisions of the Depositories Act, particularly
Section 12, and the Regulations, particularly Regulation 58, are
salutary as they introduce transparency and certainty in the securities
market; there is no other discernible reason for the legislature having
introduced these provisions; if a pledge could be created in any other
manner, there was no reason for the legislature to have provided for
a particular manner alone for creating a pledge of shares in a
dematerialized form; c) the Contract Act does not prescribe the
manner in which a pledge is to be created; it does not stipulate that a
pledge can be created only in a particular manner; the Depositories
Act however prescribes the manner in which a pledge must be
CS(COMM) No.247/2017 Page 15 of 21
created; thus even if owing to Section 28 of the Depositories Act, it
were to be held that the provisions of the Contract Act are not
excluded, provision in the Depositories Act and the Regulations
thereunder of the manner of creation of pledge in dematerialized
shares is not in derogation of the provisions of the Contract Act but
in addition thereto; d) even assuming that Section 176 of the
Contract Act applies to pledges created under the Depositories Act
and the pledgee fails to exercise its right in accordance with the
provisions of Section 176 of the Contract Act, it would make no
difference as far as the purchaser of the dematerialized shares from
the pledgee is concerned; and, e) if injunctions are granted in such
cases, it would adversely affect the functioning and sentiments of the
securities market - it would derail the entire system of maintaining
the margin by utilizing securities.
D. I have no reason to take a view different from that taken by
the High Court of Bombay in JRY Investments Private Limited
supra and in Pushpanjali Tie Up Pvt. Ltd. supra and respectfully
concur with the same and am for the same reasons unable to find the
plaintiffs entitled to any interim relief as they have enjoyed for the
last 12 years.
E. I may however add, that a notice under Section 176 of
Contract Act is in derogation of Regulation 58 supra. While Section
176 entitles the pledgee/pawnee to, on default by the
pledgor/pawnor, sell the thing pledged, ―on giving the pawnor
reasonable notice of the sale‖, Regulation 58(8) entitles the pledgee
to, ―subject to the provisions of the pledge document‖ , ―invoke the
pledge‖ and mandates the depository to ―on such invocation‖ i.e. by
the pledgee, ―register the pledgee as beneficial owner of such
securities‖ i.e. the securities pledged and further mandates the
depository to ―amend its records accordingly‖. There is no place for
a prior notice under Section 176, in the scheme of Regulation 58(8).
On the contrary, Regulation 58(9) requires the depository to, after so
amending its records under Regulation 58(8), inform the participants
of the pledgor and the pledgee of the same and mandates the said
participants to inform the pledgor and the pledgee. Thus, (a) while
Section 176 provides for a notice to pledgor prior to effecting sale,
Regulation 58 provides for notice post invocation and on which
invocation beneficial ownership of pledged shares changes from that
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 dematerialised
shares would interfere with transparency and certainty in the
CS(COMM) No.247/2017 Page 16 of 21
securities market, rendering fatal blow to the Depositories Act and
Regulations and the object of enactment thereof.
F. The distinction sought to be drawn by the senior counsel for
the plaintiffs between ―invocation‖ and ―sale‖ is also not in
consonance with Regulation 58. I may notice that there is no such
distinction in Contract Act either. While Section 176 of Contract Act
entitles pledgee to, on default of pledgor, sell the pledged thing i.e.
transfer title and possession thereof to purchaser, Regulation 58
entitles the pledgee to, on default on pledgor, invoke the pledge by
intimating to the depository and mandates the depository to in its
records record the pledgee in place of the pledgor as the beneficial
owner of pledged shares, thereby transferring title as beneficial
owner, from the pledgor to pledgee. The only condition imposed on
invocation of pledge by the pledgee, under Regulation 58 (8) is of
the same being required to be ―subject to the provisions of the
pledge documents‖ i.e. of creation of pledge in the manner provided
in Regulation 58(1) to 58(6) - of which the participant of the
pledgee and the depository have been made aware and with which
they are thereby required to comply with. It is not the case of
plaintiffs that there was any condition of prior notice in the pledge
documents. Though it is not the plea that the Letters of Pledge and
Arbitral Award were intimated to the participant or the depository
but even they do not provide for prior notice. On the contrary, they
provide otherwise. The distinction drawn in the Letters of Pledge
aforequoted between invocation of pledge, whereupon the beneficial
ownership in pledged shares, under Regulation 58, was to stand
transferred from that of pledgor to that of pledgee, and sale of said
shares by pledgee, to realize its dues, is only for the purpose of
determining the amount which was to be offset from the debt to
secure which the pledge was made. However such agreement cannot
be interpreted as the pledgor continuing to have title in the shares.
The only title in dematerialised shares, under the Depositories Act, is
as beneficial owner in the records of the participant and the
depository and which beneficial ownership changes on invocation of
pledge in terms of Regulation 58. Even otherwise, a plea of a
pledgor, of the pledgee, though after notice under Section 176,
having sold the pledged thing for less than optimum price cannot be
a ground for invalidating the sale. The mere fact that the parties, in
terms of Arbitral Award reversed the earlier invocation also cannot
change the said position. Such agreement is also not found to be
inconsistent with Regulation 58. The quantum of consideration does
not affect the transfer of title as beneficial owner.
CS(COMM) No.247/2017 Page 17 of 21
H. Supreme Court in Vimal Chandra Grover Vs. Bank of India
(2000) 5 SCC 122, did not accept the defence of Sections 172 - 177
of the Contract Act in the context of a claim under the Consumer
Protection Act, 1986 and further reasoned that the Bank as pledgee
in that case having agreed to the request of pledgor for sale of
pledged shares, could not take the plea of being entitled under
Section 176 of the Contract Act to retain the pledged shares and sue
for recovery of its dues.
I. There is another aspect. Provision of notice under Section
176, even if were to be held to be required to be given, is for the
benefit of the pledgor and has no element of public law or public
interest. A provision, even in law, for personal benefit, if not in
public interest, can always be waived by that person. The plaintiffs,
in the Letters of Pledge and in the Arbitral Award, are found to have
waived such notice.
K. I am thus unable to interpret Section 176 of the Contract Act
as entitling the plaintiffs to seek restraint against dealing with shares
or return of the shares, as the plaintiffs have sought in this suit, even
if the notice under Section 176 of the Contract Act was held to be
required to be given and having not been given.
N. The counsel for the plaintiffs, in written submissions, has
relied upon Neikram Dobay supra and Ramdeyal Prasad supra to
contend that sale to oneself is void.
O. However in Neikram Dobay supra also, after holding the sale
by the pledgee to himself to be bad, it was held that liability of such
a pledgee would also be for damages only; similarly, in Ramdeyal
Prasad supra, it was held that such an Act of the pledgee does not
put an end to the pledge so as to entitle the pledgor to recover the
pledged goods without payment of the amount thereby secured and
the pledgor is bound by the re-sales duly effected by the pledgee to
third persons.
P. Reference in this context may also be made of Dhani Ram &
Sons Vs. The Frontier Bank Ltd. ILR [XV-(1)] 1961 Punj 79. It
was held, relying on Neikram Dobay supra, that the sale of the
pledged things by the pledgee to itself, though unauthorised, cannot
be said to be void. Finding it to be not the pledgor's case that the
value credited to its account is below the market value, it was held
that no interim injunction could be granted. Similarly in the present
case there is no whisper of the prevalent price on date of sale or of
damage if any caused to plaintiffs.‖
CS(COMM) No.247/2017 Page 18 of 21
24. Regulation 58(8) supra of course is ―subject to the provisions of
the pledged document...‖. Though on a reading of Clauses 3.1.1 and
3.1.2 reproduced above it appeared that the same will prevail and it
being not in dispute that the plaintiff has not sold the shares and its
debt remains, can now sue therefor, but it was pointed out that the
agreement to which attention was drawn, was not of the suit
transaction. The counsel for plaintiff attempted to show that the
Agreement subject matter of suit transaction though different, means
the same but is not in as many words. It is perhaps for this reason
only, that the counsel for the plaintiff also drew attention to the other
agreement.
25. I am at this stage unable to distinguish on facts, the present case
from Tendril Financial Services Pvt. Ltd. supra. Once the liability of
defendant no.1 is disputed at this stage, the liability of defendants no.2
and 3 also cannot be said to be without any plausible defence. It has
thus but to be held that the defence of the defendants, that the plaintiff
as pledgee/pawnee, on invocation of pledge and on transfer of the
pledged shares from the account of the depository participant of the
defendants to the account of the depository participant of the plaintiff
was entitled to sell the shares at the then prevalent value thereof and to
appropriate the sale proceeds in satisfaction of the amounts due to it
from the defendants, is such which within the meaning of IDBI
Trusteeship Services Ltd. Vs. Hubtown Ltd. 2017 (1) SCC 568
entitles the defendants to leave to defend. Opportunity has to be given
CS(COMM) No.247/2017 Page 19 of 21
to the defendants to prove that the plaintiff, in spite of having invoked
the pledge and being entitled to sell the pledged shares to satisfy the
debt owed by the defendants, having not done so, is not entitled to
recover the debt or the entire debt. The same constitutes a substantial
defence, which if proved is likely to succeed and the defendants are
thus entitled to unconditional leave to defend.
26. Accordingly, IA No. 10782/2017 of the defendants for leave to
defend is allowed and the defendants are granted leave to defend.
27. IA No. 10782/2017 is disposed of.
28. I may however state that the aforesaid will not disentitle the
plaintiff from, after the completion of pleadings, admission / denial of
documents and other preliminaries, contending that no trial is
necessary or applying under Order XIIIA of the CPC as applicable to
commercial suits and the observations aforesaid are only for the
purposes of consideration of leave to defend and will not bind the
parties at future stage of the suit.
29. The defendants to file written statement within prescribed time.
30. Replication within four weeks thereafter.
CS(COMM) No.247/2017 Page 20 of 21
31. The parties to file affidavits of admission/denial of each other's
documents before the next date of hearing.
32. List for framing of issues, if any, on 27th September, 2018.
RAJIV SAHAI ENDLAW, J.
MAY 08, 2018 ‗gsr'/SRwt..
CS(COMM) No.247/2017 Page 21 of 21