The provisions
of the Depositories Act and in particular section 12 thereof and the
Regulations in particular 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 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.
For a pledge to be valid, it is mandatory that the pawnor creates
it in the manner prescribed by the Depositories Act and the
Regulations. This is clear from the words in section (2) of Section
12 : "Every beneficial owner shall give intimation of such pledge.....".
Section 176 of the Contract Act deals with the right of a pawnee
upon the default in the payment of the debt or performance of the
promise. Thus, even assuming that section 176 of the Contract Act
applies to pledges created under the Depositories Act, 1996, and that
respondent Nos.1 and 2 failed to exercise their rights as pawnees in
accordance with the provisions of section 176 of the Contract Act, it
would make no difference as far as respondent No.3 is concerned for
two reasons. Firstly, the appellant failed to create the pledge in
accordance with the provisions of the Depositories Act. Such a party
cannot take advantage of it's own wrong. If it is permitted to do so, it
would enable the parties to defraud and even otherwise prejudice the
interests of genuine, innocent third parties. Secondly, in view of
respondent Nos.1 and 2 having deposited the shares with respondent
No.3 as margin in accordance with clause 12 of the loan agreement,
the question of their giving notice for any sale of the shares by
respondent No.3 does not arise. Respondent No.3 was not bound to
give any notice to the appellant of its proposed sale of the shares kept
with it as margin by respondent Nos.1 and 2.
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
APPEAL (LODG) NO. 92 OF 2014
IN
NOTICE OF MOTION (LODG) NO. 2150 OF 2013
IN
SUIT NO. 131 OF 2014
Pushpanjali Tie Up Pvt. Ltd.,
Versus
Mr. Renudevi Choudhary,
CORAM : S.J. VAZIFDAR, &
B.P. COLABAWALLA, JJ.
THURSDAY, 12TH JUNE, 2014.
Citation;2014(5) ALLMR 52
1. Admit. The appeal is, with the consent of the parties, heard
finally.
2. This is an appeal against the order of the learned single Judge
dismissing the appellant's Notice of Motion for interim reliefs.
3. The parties are arrayed as they were in the suit - the appellant is
the plaintiff and respondent Nos.1 to 5 are defendant Nos.1 to 5.
Respondent No.2 is the daughter of respondent No.1.
Respondent No.3 is C.D. Equisearch Pvt. Ltd., a stock broker.
Respondent Nos.1 and 2 have their stock trading accounts with
respondent No.3. Respondent No.4 is the Central Depositories
Securities Limited. Respondent No.5 is the National Securities
Depositories Limited. Respondent Nos.4 and 5 are depositories.
4. The case briefly is this. Under two loan agreements, respondent
Nos.1 and 2 advanced a sum of Rs.5 crores to the appellant. In both
agreements, the suit shares were pledged by the appellant in favour of
respondent Nos.1 and 2 as security for repayment of the loans. By
clause 12 of each of the loan agreements the appellant conferred the
following right upon respondent Nos.1 and 2 i.e. : "The Lender will
keep the rights to utilize the provided securities/shares, which can be
used as collateral for his own margin purpose." Respondent
Nos.1and 2 accordingly, placed the pledged shares with respondent
No.3 as margin in respect of their transactions with respondent No.3.
The appellant's case is that despite having repaid the loans to
respondent Nos.1 and 2, respondent Nos.1 and 2 have not returned the
shares. The appellant further claims that respondent No.3 also has no
right, title or interest in respect of the said shares. The appellant,
accordingly, contends that respondent Nos.1 and 2 as well as
respondent No.3 have wrongly appropriated and retained the said
shares. The appellant, therefore, inter-alia, claims a return of the said
shares remaining in the possession of respondent Nos.1 to 3 and
compensation for the shares sold in excess of the claim of respondent
Nos.1 and 2 against the appellant.
(B) The appeal against respondent Nos.1 and 2 is allowed by the
appointment of a Court Receiver of the shares in their possession.
(C) We have, however, dismissed the appeal so far as respondent No.3
is concerned on two grounds. Firstly, by clause 12 of the loan
agreements, the appellant permitted respondent Nos.1 and 2 to use the
shares as margin with respondent No.3. Respondent Nos.1 and 2 have
not repaid the amounts due by them to respondent No.3. Clause 12 did
not limit the authority conferred upon respondent Nos.1 and 2 to place
the shares as margin. It is not open, therefore, to extinguish the security
created in favour of respondent No.3 by way of margin merely because
the appellant has paid its dues to respondent Nos.1 and 2.
Secondly, the pledge was admittedly not created in accordance
with the provisions of the Depositories Act, 1996 and in particular,
section 12 thereof. We have held that the provisions of section 12 are
mandatory and enacted with a view to giving notice of a pledge to
third parties. The alleged pledge, therefore, cannot affect the rights of
respondent No.3 who is a third party without notice of the pledge,
rending the pledge invalid qua the third party.
5. The appellant/plaintiff filed the suit for (i) an order directing
respondent Nos.1 and 2 to pay it a sum of Rs.50,30,000/- received by
them over and above the amount outstanding under loan agreements
dated 8th March, 2013 and 19th March, 2013 being the shares sold in
excess of the amount payable by the appellant to respondent Nos.1
and 2; (ii) an order directing respondent Nos.1 and 2 to transfer into its
DP account, the balance shares lying in the various accounts of
respondent Nos.1 and 2 which were handed over as collateral security
in pursuance of the said agreements; (iii) an order directing respondent
Nos.1 and 2 to return the additional documents of security in respect
of the loans granted by respondent Nos.1 and 2 to the appellant under
the said agreements and (iv) a permanent order and injunction
restraining respondent Nos.1, 2 and 3 from selling, transferring and/or
alienating the balance share lying in their various DP accounts
including in the pool account of respondent No.3.
By an amendment, the appellant also sought an order directing
respondent Nos.1, 2 and 3 to transfer into its account, the balance
shares lying in the DP accounts of respondent Nos.1 and 2 as well as
in the account of respondent No.3, including the pool account of
respondent No.3 which were handed over as collateral security by the
appellant to respondent Nos.1 and 2 under the said agreements and an
order restraining respondent No.3 from selling / transferring,
alienating, adjusting any of the balance of the said shares lying in the
DP accounts of respondent Nos.1 and 2 as well as the accounts of
respondent No.3, including the pool account of respondent No.3.
6(A). A loan agreement dated 8th March, 2013, was entered into
between respondent No.1 and the appellant under which respondent
No.1 agreed to grant the appellant, a loan of Rs.3 crores on the terms
and conditions contained therein. Clauses 1, 2, 3, 4, 5, 7 and 12 of the
agreement read as under :
"1. The lender agrees to extend and give a Loan to the
borrower a sum of Rs.3,00,00,000/- (Rupees Three Crores)
provided value of securities provided with the lender is
sufficient to give coverage as provided under clause 2
hereafter.
2. The borrower agrees to keep at all times during the
currency of the Loan securities to be approved by the lender
of 2.25 times the value of loan including interest accrued
thereon. For example, Shares worth Rs.6,75,00,000/- will be
kept as a security for availing the Loan of Rs.300.00 lacs.
3. Without prejudice to the provisions hereinabove, Loan
facility will be available for a period of 90 days i.e. from
March 12, 2013 to June 10, 2013 and the Borrower shall
repay the same on due date. The lender may at its absolute
discretion agree to renew the facility on a written request
received from the borrower.
In the absence of a written consent for renewal, the Borrower
shall be bound to repay the entire outstanding amount
together with accrued interest thereon on expiry of 90 days
from the date of disbursement of the loan. In case maturity
falls on a Bank Holiday, the provisions of the Negotiable
Instruments Act, 1961, as regards the date of payment shall
apply.
4. The Loan shall carry interest @ 18.00% (Eighteen
percent) per annum to be payable on monthly basis on
reducing balance method i.e. on the outstanding amounts.
5. In consideration of the said Loan facility, the original
securities mentioned in Schedule 'A' attached to this
Agreement are hereby provided by the borrower in favour of
the lender as exclusive charge to the lender towards
repayment of the principal amount, interest, costs and any
other charges etc., due to the lender under the Loan
agreement or otherwise. Any change in the securities hereby
provided may be effected by execution of as supplementary
schedule(s).
Such Supplementary Schedule (s) would be deemed to form
part and parcel of this Agreement and would not require
execution of a fresh agreement. Such change in the Schedule
would, inter alia, include substitution / replacement with fresh
securities or additional securities.
... ... ... ...
7. In case of expiry of the due date or in case of any other
default, the lender shall have full rights to sell, dispose of or
otherwise deal with the said securities on such terms and
price that the lender may think fit and apply the net proceeds
towards satisfaction of the Loan amount outstanding the
Borrower along with interest, charges etc.
... ... ... ...
12. The Lender will keep the rights to utilize the provided
securities/shares, which can be used as collateral for his own
margin purpose." (emphasis supplied)
Schedule A mentioned in clause 5 above referred to 3,15,000
equity shares of Flexituff International Limited as the "Nos.of shares
pledged / transferred".
(B) On 8th March, 2013, the appellant transferred 3,15,000 shares
of Flexituff into the demat account of respondent No.1.
(C) Under cover of a letter dated 8th March, 2013, the appellant
forwarded to respondent No.1, documents by way of additional
security viz. receipt for the loan amount, demand promissory note,
post dated cheques for interest and principal, an undertaking letter for
the post dated cheques, the original loan agreement, resolutions of the
Board and KYC documents.
7(A) On 19th March, 2013, an identical loan agreement was entered
into between the appellant and respondent No.2 where-under
respondent No.2 agreed to advance a loan of Rs.2 crores on the terms
and conditions contained therein. Except the amount of the loan, the
terms and conditions were identical to those contained in the loan
agreement dated 8th March, 2013. Annexure-A to this agreement
referred to 2,10,000 equity shares of Flexituff as the "number of shares
pledged / transferred".
(B) On 19th March, 2013, the appellant transferred the said
2,10,000 shares of Flexituff into the demat account of respondent No.2
maintained with respondent No.3.
(C) Under cover of a letter dated 19th March, 2013, the appellant
forwarded to respondent No.1, as and by way of an additional security,
documents similar to those forwarded as additional security in respect
of the loan agreement dated 8th March, 2013.
8(A). Respondent Nos.1 and 2 advanced Rs.5 crores against the
pledge of 5,25,000 shares of Flexituff. As mentioned earlier, the
shares were transferred by the appellant to respondent Nos.1 and 2.
(B). Between the period March to June, 2013, the interest in respect
of the said loans was repaid by the said post dated cheques and, in one
case, by RTGS transfer.
(C). On 18th June, 2013 and 19th June, 2013, the appellant repaid
Rs.2 crore in respect of the first loan agreement.
9(A). On 29th June, 2013, respondent Nos.1 and 2 sold 78000 shares
of Flexituff for an aggregate amount of Rs.1.76 crore.
(B)(i). The appellant states that on becoming aware of the sale of
the shares during the week ending 29th June, 2013, it had a meeting
with respondent No.2 and the husband of respondent No.1 at which it
objected to the sale and requested respondent Nos.1 and 2 to return the
balance shares and the excess amount of about Rs.76 lakhs. The
appellant further alleges that respondent Nos.1 and 2 refused to do so
and retained the balance shares as collateral security on the basis that
the balance loan amount of Rs.2 crore was still outstanding. The
appellant alleges that one Akshay Seksaria, an officer of respondent
No.3 was present at the meeting. Mr. Chagla, the learned senior
counsel appearing on behalf of respondent No.3, however, denies the
same and contends that the presence of the said Akshay Seksaria was
alleged for the first time only in an affidavit in rejoinder.
(ii). It is pertinent to note that despite this grievance, the appellant
did not adopt any proceedings or take any steps to protect and enforce
its rights and interests in respect of the said shares.
10(A)(i). During the week ending 21st September, 2013, a further
40231 shares of Flexituff were sold by respondent Nos.1 and 2 from
their DP accounts of an aggregate value of Rs.88,50,000/-.
(B)(i). The appellant's case is that on 15th and 28th October,
2013, meetings took place between respondent Nos.1 and 2 and itself
whereat the appellant objected to the sale and requested respondent
Nos.1 and 2 to return the excess shares. Respondent Nos.1 and 2,
however, returned only 13600 shares and 27100 shares on 15th
October, 2013 and 28th October, 2013, respectively. Once again, the
plaintiff contends that at the said meeting the said Akshay Seksaria
was present.
(C). The appellant also alleges that at the meeting held on 28th
October, 2013, it came to know that till that date, a further about
42000 shares of Flexituff had been sold by respondent Nos.1 and 2 for
an aggregate sum of Rs.90,00,000/-.
(D). It is important to note that despite the above grievances for the
second time at the meeting held on 15th October 2013 the appellant
did not adopt any proceedings or take any steps to protect / enforce its
rights and interests in respect of the said shares.
11. The appellant, therefore, contends that by this time respondent
Nos.1 and 2 had recovered / received a sum of Rs.354.50 lakhs against
the outstanding dues of Rs.3 crores and interest thereon.
12. In these circumstances, the appellant filed the above suit on
29th October, 2013, inter alia, for recovery of the balance about
3,52,169 shares of Flexituff pledged / transferred under the loan
agreement.
13. Before dealing with the case on merits, we will refer to what
transpired in connection with the appellant's application for urgent adinterim
reliefs. Mr. Chinoy submitted that the conduct of the
respondent No.3 was dishonest and aimed at frustrating any ad-interim
reliefs. The appellant has in fact filed proceedings alleging contempt
of the ad-interim order.
(A) On 29th October, 2013, the appellant made an exparte
application at 11:00 a.m., without notice to the respondents, for an
injunction restraining them from selling / transferring the said shares.
We are informed that the learned Judge, however, directed the
appellant to give even a half-hour notice to the respondents and then
renew the application. There is considerable dispute as to when
exactly the notice was served upon respondent No.3. It is difficult at
this stage to express a final opinion in this regard. The appellant's
case is that respondent No.3 was sought to be served at 3:00 or 3:15
p.m. whereas respondent No.3 contends that service was sought to be
effected on it only at 3:41 p.m. Respondent No.3 has relied upon a
recording obtained from a coverage by the CCTV installed by it in its
premises. The appellant contends that respondent No.3 refused to
accept service keeping the person deputed to serve the notice waiting
under the pretext of acknowledging it. According to respondent No.3,
the service was effected only at 8:45 a.m. on 30th October, 2013. The
appellant contends that it is upon receipt of the said notice that
respondent Nos.1 and 2 started selling the shares through respondent
No.3 and that the same resulted in the price of the Flexituff shares
dropping from Rs.220/- to Rs.171/- per share. On 29th October,
2013, itself 74575 shares were sold for an aggregate consideration of
Rs.1.43 crore. By then i.e. on 29th October, 2013 itself, the shares had
been transferred from the demat account of respondent Nos.1 and 2 to
the margin account of respondent No.3.
(B) By an order passed on 29th October, 2013, the learned single
Judge stood over the matter to 30th October, 2013, at 3:00 p.m. and in
the meantime, granted an ad-interim order in terms of prayer clauses
(a) and (b). By this order respondent Nos.1, 2 and 3 were restrained
from transferring the balance shares lying in the various DP accounts
of respondent Nos.1 and 2 which were handed over to them as
collateral security under the said loan agreements and respondent
Nos.4 and 5 were restrained from transferring the said balance shares.
The appellant contends that by its several e-mails sent on 29th
October, 2013, it forwarded copies of the ad-interim order to
respondent No.3 and also provided respondent No.3, a soft-copy of the
Notice of Motion and the affidavit in support thereof. An e-mail was
also sent to one Jayesh Vora an executive of respondent No.3.
(C) The learned single Judge passed an ad-interim order on 30th
October, 2013. The learned Judge permitted the appellant to amend
the plaint and the Notice of Motion in terms of the draft amendment
tendered in Court and directed the amendments to be carried out by
31st March, 2013; recorded the statement on behalf of respondent
No.3 that 2,61,528 shares had not been sold till date and that the
consideration for the shares sold by respondent No.3 on 29th October,
2013, was yet to be received by it; recorded that respondent Nos.1 and
2 were unable to assist the court in any manner and observed that,
prima facie, it appeared that respondent Nos.1 and 2 had played a
fraud on the appellant as well as on respondent No.3. He, however,
gave the parties an opportunity of filing affidavits. The ad-interim
order dated 29th October, 2013, was continued upto 11th November,
2013. The learned Judge ordered that the consideration received
thereafter for the sale of any shares by respondent No.3 shall not be
adjusted towards the account maintained by respondent No.3 for
respondent Nos.1 and 2, but would be retained in a separate account
which would be subject to orders passed on the next date of hearing.
The remaining shares were directed not be traded in nor provided as
security by respondent Nos.1 and 2 to any third party.
14. It is difficult to express any view regarding these disputes at this
stage. Even assuming that the respondent No.3 appropriated the
shares and sold them hastily, it would make no difference considering
the view that we have taken on merits. If the respondents have
committed contempt of the orders of the learned single Judge, it is a
different matter and that will be decided in an appropriate application.
We were informed that the proceedings have been adopted by the
appellant for the alleged breach of the ad-interim orders passed by the
learned single Judge. We do not intend expressing any view in respect
thereof. The questions of contempt are a different matter altogether
and will be decided on their own merits.
15. The Notice of Motion was ultimately dismissed by the
impugned order dated 5th February, 2014.
16. The clauses of the loan agreements set out earlier support Mr.
Chinoy's submission that the loan agreements created a pledge of the
shares referred to therein. They expressly state that the shares were
kept by the appellant with respondent Nos.1 and 2 as security for
availing the loan. That clause 7 permitted respondent Nos.1 and 2 to
sell, dispose of or otherwise deal with the said shares on such terms
and conditions as they thought fit and to apply the net proceeds
towards satisfaction of the outstanding amounts under the loan
agreements does not make any difference. Clause 7 conferred a right
upon respondent Nos.1 and 2 to enforce the securities for repayment
of the outstanding amounts under the loan agreements. Clause 7 does
not constitute a sale of the shares by the appellant to respondent
Nos.1 and 2.
17. Mr. Chinoy submitted that the appellant having repaid the loan
is entitled to the return of the shares pledged under the loan
agreements. He submitted that respondent No.3 is also bound to
return the said shares as it acquired no right in respect thereof.
18. That the said shares were not sold by virtue of the loan
agreements does not, however, affect the rights of respondent No.3.
Firstly, respondent No.3 was not a party to the loan agreements. Nor
was it aware of the same. Respondent No.3 was not bound by the
terms and conditions thereof.
Even assuming respondent No.3 was aware of the loan
agreements, it would make no difference. It may well make its case
stronger. Clause 12 of the loan agreements expressly permitted the
lender i.e. respondent Nos.1 and 2 to utilize the said shares as
collateral for their own margin purpose. It is obvious that the parties
to the loan agreement contemplated respondent Nos.1 and 2 utilizing
the said shares towards maintaining the required margin with third
parties. There was no question of their utilizing the same as margin
with the appellant. The appellant, therefore, expressly permitted
respondent Nos.1 and 2 to represent to third parties that the shares
could be used as margin. A third party would be entitled to exercise
its rights in respect of the shares placed with it as margin by
respondent Nos.1 and 2 pursuant to the authority conferred upon
respondent Nos.1 and 2 by clause 12. Having permitted respondent
Nos.1 and 2 to utilize the shares for margin purpose, it would not be
open to the appellant to contend that the third party holding the shares
as margin would be bound to return the shares even if the appellant
had repaid the entire loan advanced by respondent Nos.1 and 2. By
conferring the powers under clause 12, the appellant expressly
permitted respondent Nos.1 and 2 to create rights in favour of third
parties which cannot be affected by the dealings between the appellant
and respondent Nos.1 and 2.
19. A view to the contrary would render such arrangements
meaningless and devoid of commercial sense. Why would a party
accept securities as a margin if the same could be withdrawn or
rendered ineffective without the purpose for which they were
furnished, being accomplished. It would be not merely an ineffective
but a meaningless security. The authority conferred by clause 12 was
unconditional. Neither was it restricted in time nor dependent upon
the happening of any event including the discharge by the appellant of
its dues to respondent Nos.1 and 2. Hence as far as respondent No.3
is concerned, the rights in respect of the shares deposited as margin
with it would be dependent only upon the rights between the
respondent Nos.1 and 2 on the one hand and respondent No.3 on the
other and would not be dependent upon the rights qua those shares
between the appellant and respondent Nos.1 and 2.
20. A view to the contrary would also cause enormous injustice to
third parties irrespective of whether or not such third parties are
aware of the transactions between the appellant and respondent Nos.1
and 2. A view to the contrary would, in fact, enable parties such as the
appellant and respondent Nos.1 and 2 to deceive third parties. Take a
simple illustration. Parties could enter into loan agreements under
which the borrower furnishes security to the lender to secure the
repayment of amounts allegedly advanced and also permits the lender
to use the security as margin. The lender would then, in turn, furnish
the said securities as margin to a third party in respect of its
transactions with the third party. The borrower could then contend
that it has repaid the amounts to the lender and demand the return of
securities now lying with the third party as margin even though the
lender has defaulted in its transactions with the third party. By this
simple devise, the third party would be prejudiced, be exposed to a
fraud. We hasten to add that even if the transaction is not fraudulent,
the borrower could not, in such circumstances, demand return of the
securities as it permitted the third party to alter its position to its
detriment by virtue of permitting the lender unconditionally to create
rights in respect of the security in favour of a third party. Such a view
would make no commercial sense whatsoever. In this view of the
matter alone, the appellant is not entitled to interim reliefs.
21. The judgment of a Division Bench of the Allahabad High Court
in Firm Thakur Das Marakhan Lal v. Madhura Prasad and Ors. AIR
1958 All. 66 does not support the appellant's case. In that case, the
plaintiff pawned three ornaments to one Manni Ram who, in turn, subpledged
them to defendant No.3. Two of the three ornaments subpledged
were redeemed and were again sub-pledged with defendant
No.4. The plaintiff made part-payment of the amounts due to the
original pawnee - Manni Ram. The balance amount stood
extinguished by virtue of the Debt Redemption Act. The plaintiff,
therefore, sued to recover possession of the three ornaments which
were pledged contending that he was not bound by the sub-pledges
made to defendant Nos.3 and 4 and as the original debt had been
satisfied he was entitled to get the ornaments from defendant No.4.
Defendant No.3 contended that he was a transferee of the ornaments
in good faith and not a sub-pawnee thereof and was, therefore, not
bound to return the ornaments. The Division Bench held that there
was no transfer in the title and that the ornaments had been subpledged
to defendant Nos.3 and 4. Paragraph 5 of the judgment, relied
upon by Mr. Chinoy, reads as under :
"5. So far as a sub-pledgee is concerned, the law
admits of no doubt. Section 179 of the Indian Contract Act
makes it clear that if a person with a limited interest in
goods pledges them, the pledge is valid to the extent of that
interest only. The principle enacted in this section is a wellestablished
principle of common law which has been stated
by Judge Story in his book on 'Bailments', Ss. 324-327 in
these words :
"The pawnee may by the common law deliver over the
pawn to a stranger for safe custody without
consideration; or he may sell or assign all his interest
in the pawn; or he may convey the same interest
conditionally by way of pawn, to another person
without in either case destroying or invalidating his
security. But if the pawnee should undertake to
pledge the property (not being negotiable securities)
for a debt beyond his own, or to make a transfer
thereof as if he were the actual owner, it is clear that
in such case he would be guilty of a breach of trust,
and his creditor would acquire no title beyond that
held by the pawnee.
Whatever doubt may be indulged in, in the case of a
mere factor, it has been decided in the case of a strict
pledge, that if the pledgee transfers the same to his
own creditor the latter may hold the pledge until the
debt of the original owner is discharged."
If, therefore, Manni Ram sub-pledged to the appellant the
ornaments which the plaintiff had pledged to him, Manni
Ram having only a limited interest in them the pledge was
valid only to the extent of the interest which Manni Ram
himself possessed in the ornament. In other words, Manni
Ram could not give to the appellant rights superior to those
of his own. The only right he had in the ornaments was to
retain them as security for the satisfaction of the loan which
he had himself advanced.
If this right of his came to an end on the satisfaction of
his debt, the appellant could not claim a higher right simply
because he had advanced a larger amount to Manni Ram
on the security of the ornaments. Once, therefore, the debt
of Manni Ram was satisfied the plaintiff who was the
original pawner became entitled to get back the ornaments
without payment of any further amount. The appellant
could not fix upon him the liability for the larger amount
which he had himself advanced to Manni Ram."
The judgment is of no assistance to the appellant for two reasons.
Firstly, the agreement in that case did not permit the pawnee to create a
sub-pledge. The loan agreements in the case before us specifically
permitted respondent Nos.1 and 2 to use the said shares as margin. The
Division Bench did not hold that even in such cases, the pawnee's
creditor is bound to return the goods sub-pledged upon the pawnor
paying the pawnee's dues although the pawnee has not paid his i.e. the
pawnee's creditors' dues. Where such an authority is conferred it cannot
be said that the pawnee's creditor holds the goods pledged only until the
debt of the original owner is discharged. Secondly, the provisions of the
Depositories Act did not fall for consideration in that matter. Indeed, the
Depositories Act was introduced in the year 1996.
SRP 24/45
::: Downloaded on - 20/09/2014 11:21:35 :::
Bombay High Court
APPL92.14.doc
We must clarify that we do not express any opinion regarding
the issue decided by the Division Bench of the Allahabad High Court.
It appears that different High Courts have taken different views.
Suffice it to state that even assuming that we agree with the judgment,
it is of no assistance to the appellant's case.
22. There is yet another hurdle in the appellant's way. The appellant
admittedly did not follow the provisions of the Depositories Act, 1996,
and the Regulations made thereunder relating to the creation of a
pledge. Before referring to the provisions of the Depositories Act,it is
necessary to refer to the following provisions of the Indian Contract
Act relied upon by Mr. Chinoy.
"148. "Bailment", "bailor" and "bailee defined.-- A
'bailment' is the delivery of goods by one person to another
for some purpose, upon a contract that they shall, when the
purpose is accomplished, be returned or otherwise disposed
of according to the directions of the person delivering them.
The person delivering the goods is called the 'bailor'. The
person to whom they are delivered is called the 'bailee'."
149. Delivery to bailee how made. - The delivery
to the bailee may be made by doing anything which has
the effect of putting the goods in the possession of the
intended bailee or any person authorised to hold them on
his behalf.
SRP 25/45
::: Downloaded on - 20/09/2014 11:21:35 :::
Bombay High Court
APPL92.14.doc
172. 'Pledge', 'pawnor' and 'pawnee' defined. -- The
bailment of goods as security for payment of a debt or
performance of a promise is called 'pledge'. The bailor is in
this case called the 'pawnor'. The bailee is called 'pawnee'."
... ... ... ...
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 pledged 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.
... ... ... ...
178. Pledge by mercantile agent.- Where a mercantile
agent is, with the consent of the owner, in possession of goods
or the documents of title to goods, any pledge made by him,
when acting in the ordinary course or business of a
mercantile agent, shall be as valid as if he were expressly
authorised by the owner of the goods to make the same
provided that the pawnee acts in good faith and has not at the
time of the pledge notice that the pawnor has no authority to
pledge.
179. Pledge where pawnor has only a limited
interest.- Where a person pledges goods in which he has only
a limited interest, the pledge is valid to the extent of that
interest."
23. The relevant provisions of the Depositories Act, 1996, are as
follows :
"2. Definitions.- (1) In this Act, unless the context otherwise
requires, -
SRP 26/45
::: Downloaded on - 20/09/2014 11:21:35 :::
Bombay High Court
APPL92.14.doc
(a) “beneficial owner” means a person whose name is
recorded as such with a depository;
(b) “Board” means the Securities and Exchange Board of
India established under Section 3 of the Securities and
Exchange Board of India Act, 1992 (15 of 1992);
... ... ... ...
(e) “depository” means a company formed and registered
under the Companies Act, 1956 (1 of 1956) and which has
been granted a certificate of registration under sub-section (1-
A) of Section 12 of the Securities and Exchange Board of
India Act, 1992 (15 of 1992);
(f) “issuer” means any person making an issue of securities;
(g) “participant” means a person registered as such under subsection
(1-A) of Section 12 of the Securities and Exchange
Board of India Act, 1992 (15 of 1992);
... ... ... ...
(i) “record” includes the records maintained in the form of
books or stored in a computer or in such other form as may be
determined by regulations;
(j) “registered owner” means a depository whose name is
entered as such in the register of the issuer;
(k) “regulations” means regulations made by the Board;
(l) “security” means such security as may be specified by the
Board;
... ... ... ...
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.
SRP 27/45
::: Downloaded on - 20/09/2014 11:21:35 :::
Bombay High Court
APPL92.14.doc
(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.
... ... ... ...
12. Pledge or hypothecation of securities held in a
depository.- (1) Subject to such regulations and bye-laws, as
may be made in this behalf, a beneficial owner may with the
previous approval of the depository create a pledge or
hypothecation in respect of a security owned by him through a
depository.
(2) Every beneficial owner shall give intimation of such
pledge or hypothecation to the depository and such depository
shall thereupon make entries in its records accordingly.
(3) Any entry in the records of a depository under subsection
(2) shall be evidence of a pledge or hypothecation.
... ... ... ...
25. Power of Board to make regulations.-
... ... ... ...
(2) In particular, and without prejudice to the generality of
the foregoing power, such regulations may provide for -
(a) ... ... ... ...
(d) the manner of creating a pledge or
hypothecation in respect of security owned by a
beneficial owner under sub-section (1) of section 12;
... ... ... ...
28. Application of other laws not barred.- The provisions of
this Act 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."
24. In exercise of powers conferred by section 25 of the
Depositories Act, SEBI made The Securities and Exchange Board of
India (Depositories and Participants) Regulations, 1996. Regulation
38(1)(e) requires the depository to maintain, inter alia, records of all
SRP 28/45
::: Downloaded on - 20/09/2014 11:21:35 :::
Bombay High Court
APPL92.14.doc
approvals, notices, entries and cancellation of pledge or
hypothecation, as the case may be. Regulation 38(1) reads as under :
"38.(1) Every depository shall maintain the following
records and documents, namely.-
(a) ... ... ... ...
(e) records of approval, notice, entry and cancellation of
pledge or hypothecation, as the case may be;
... ... ... ..."
Regulation 58 reads 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.
(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 pledgee.
(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."
SRP 29/45
::: Downloaded on - 20/09/2014 11:21:35 :::
Bombay High Court
APPL92.14.doc
25. The learned single Judge followed the judgment of another
learned single Judge (S.A. Bobde, J. as His Lordship then was) in the
case of Jry Investments Private Limited v. Deccan Leafine Services
Ltd. & Anr. (2004) 121 Comp. Cases 12 (Bom.). There is no dispute
that the judgment supports the respondents case. Mr. Chinoy,
however, submitted that the judgment ought to be over-ruled, inter
alia, on the ground that it does not take into consideration the
provisions of section 28 of the Depositories Act.
In that case, the plaintiff sought a declaration that certain shares
lying to the credit of the demat account of some of the defendants
maintained with the other defendants belonged to it and for an order
directing the defendants concerned to transfer the same to the
plaintiffs demat account. In the alternative, a money decree was
prayed for. The plaintiffs case was that it had parted with the said
shares in order to secure repayment of a loan proposed to be taken
from defendant No.1. Defendant No.1, however, did not give the loan
but transferred the shares to other defendants. It was contended on
behalf of the plaintiffs that under the loan agreements the plaintiffs
had transferred the shares with the intention of creating a security and
SRP 30/45
::: Downloaded on - 20/09/2014 11:21:35 :::
Bombay High Court
APPL92.14.doc
that it did not intend and, in fact, did not transfer the title in the shares
to defendant No.1. Therefore, defendant No.1 did not have any
authority to transfer the shares in favour of the other defendants. The
shares were transferred merely as a security and in order to create a
pledge for the money that was to be borrowed by the plaintiff as a loan
from the defendants. Since defendant No.1 did not give the loan, the
consideration for the security had failed. Since no title in the shares
vested in defendant No.1, defendant No.1 could not have transferred
the shares. The plaintiff, therefore, continued to be the owner of the
shares and was entitled to an injunction and the appointment of a
Court Receiver in respect of the shares. After construing the
provisions of the agreement entered into between the plaintiff and
defendant No.1, the learned Judge came to the conclusion that there
was no pledge and that the intention was to transfer the shares in
favour of defendant No.1 in consideration of the amount that was to be
advanced by defendant No.1 at the request of the plaintiff. The
learned Judge held that, in any event, that is what had been done. The
learned Judge held that merely because the consideration had failed, it
cannot be said that the transfer of shares in favour of defendant No.1
SRP 31/45
::: Downloaded on - 20/09/2014 11:21:35 :::
Bombay High Court
APPL92.14.doc
was not a transfer.
It was also contended on behalf of one of the defendants that no
case of a pledge of shares had been made out in view of the provisions
of the Depositories Act, 1996. It was contended that the procedure
prescribed for pledging shares by the Depositories Act had not been
complied with. The learned Judge upon construing the provisions of
the Depositories Act held :
"15. It must be remembered that the shares in question are
demated shares, i.e. shares in the dematerialised form. In
other words, the shares are not in the physical form of share
certificates bearing a certificate number but are shares which
are stored with or deposited as shares of the company in the
dematerialised form without individual identity. They are in a
fungible form. It is, therefore, clear that such shares cannot
be pledged in accordance with the provisions of the Indian
Contract Act, 1872, which requires delivery of the goods
pledged. ... ... ... ...
16. It would, however, be impossible to hold that such
goods in a dematerialised form are capable of delivery that
is by handing over de facto possession. Since such goods
are invisible and intangible it would be impossible and in
any case difficult to fix the fact of time and place of
delivery. Even if it is possible according to some protocol,
it does not seem to have been recognised by the law yet.
Dematerialised shares cannot be delivered physically nor
can physical possession of such dematerialised shares be
handed over.
17. In fact, it appears that the provisions have been
enacted in the Depositories Act, 1996, for the purpose of
recording accurately the transfers and pledges of shares
including those in a dematerialised form.
SRP 32/45
::: Downloaded on - 20/09/2014 11:21:35 :::
Bombay High Court
APPL92.14.doc
18. The transaction in such shares are directly governed
by the Depositories Act, 1996, which contemplates the
existence of a depository, i.e., a company which acts as the
depository of such shares. The shares are held by the
depository in the name of the beneficial owner of the
shares. The depository is entitled to act as a registered
owner for the purpose of effecting transfer of ownership of
security on behalf of a beneficial owner vide Section 10 of
the Depositories Act, 1996. ... ... ...
19. It is important to note that Section 10 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 ... ... ...
... ... ... ...
21. It is, therefore, clear that the Act and the regulations
contain a whole and self-contained procedure for the
creation of pledges as contemplated by regulation 58. In
any case, since it is not possible to physically deliver
demated shares and therefore pledge them in accordance
with the Indian Contract Act, 1872, it must be held that a
pledge of such shares can only be validly created in
accordance with the provisions of the Depositories Act,
1996.
22. In the present case, it is an admitted fact by the
plaintiffs that the plaintiffs did not make any application to
the depository for the creation of a pledge as contemplated
by regulation 58. In any case, there is no dispute about the
fact that after the plaintiffs transferred the shares in favour
of defendant No.1 under the loan agreement, the shares
were held with the depository, i.e. National Securities
Depository Ltd. and defendant No.1 was shown as the
beneficial owner of the shares with the depository
participant, i.e., defendant No.22. It is the depository
participant who holds the account of various beneficial
owners for the purpose of transfer of share transactions of
the clients with the depository."
For the purpose of this judgment, we refrain from expressing
any opinion regarding the finding of the leaned single Judge in
paragraph 16 that it is impossible to hold that the goods in
dematerialized form are capable of delivery that is by handing over
de-facto possession. We will presume that it is possible to do so. We
are, however, entirely in agreement with the learned Judge that the
transfer of shares governed by the Depositories Act must be in
accordance with the provisions of that Act and that the pledge of the
shares can only be validly created in accordance with the provisions of
that Act.
We would however, like to add to the reasons furnished by the
learned Judge.
26. A party is entitled to assume and proceed on the basis that a
pledge, if any, would be created in the manner prescribed by the
Depositories Act, 1996, and the Regulations made thereunder. In
other words, if the shares have not been pledged in the manner
prescribed by the Depositories Act and the regulations thereunder, a
party would be entitled to and justified in presuming that there is no
pledge and that the person dealing with the shares does so on his own
behalf as the owner of the said shares or, in any event, for and on
behalf of the owner of the shares with his knowledge and consent.
This must be so in view of the new regime introduced by the
Depositories Act on account of dematerialisation of shares. The
intention of the Legislature was obviously to provide a mode of
putting the parties concerned to express notice of a pledge. Only a
party with express notice of a pledge created by the beneficial owner
following the manner prescribed for the creation of a pledge deals
with the securities at his own risk and subject to rights of the pledger.
27. The intention of the Legislature was obviously to ensure that
third parties have notice of a pledge. The value of notice of a pledge of
securities is too obvious to warrant any discussion. It safeguards
innocent third parties who would otherwise have no means of being
aware of a pledge especially of dematerialized shares. The provisions
of the Depositories Act and in particular section 12 thereof and the
Regulations in particular 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 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.
28. For a pledge to be valid, it is mandatory that the pawnor creates
it in the manner prescribed by the Depositories Act and the
Regulations. This is clear from the words in section (2) of Section
12 : "Every beneficial owner shall give intimation of such pledge.....".
29. Mr. Chinoy submitted that the judgment in Jry Investments Pvt.
Ltd.'s case does not take into consideration section 28 of the
Depositories Act which makes the provisions of the Act 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. The provisions of the
Indian Contract Act, therefore, according to him, are not excluded by
the provisions of the Depositories Act.
30. We will presume for the purpose of this appeal that the ambit of
the words "holding and transfer of securities" includes the creation /
transfer by way of a pledge. It would make no difference. The Indian
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 created. Even assuming that the
beneficial owner is entitled to create a pledge in a manner otherwise
than as required by the Depositories Act, he must, however, in any
event, also create the pledge in the manner prescribed by the
Depositories Act. If he fails to do so, he deprives a third party of the
benefit of notice of a pledge rendering the pledge invalid qua third
parties. Such a provision is not in derogation of the provisions of the
Indian Contract Act but in addition thereto.
31. Mr. Chinoy submitted that the sale and appropriation of the
shares by the respondents was contrary to section 176 of the Contract
Act as no notice of sale was given to the appellant. The sales, he
submitted, are, therefore, void.
32. Section 176 of the Contract Act deals with the right of a pawnee
upon the default in the payment of the debt or performance of the
promise. Thus, even assuming that section 176 of the Contract Act
applies to pledges created under the Depositories Act, 1996, and that
respondent Nos.1 and 2 failed to exercise their rights as pawnees in
accordance with the provisions of section 176 of the Contract Act, it
would make no difference as far as respondent No.3 is concerned for
two reasons. Firstly, the appellant failed to create the pledge in
accordance with the provisions of the Depositories Act. Such a party
cannot take advantage of it's own wrong. If it is permitted to do so, it
would enable the parties to defraud and even otherwise prejudice the
interests of genuine, innocent third parties. Secondly, in view of
respondent Nos.1 and 2 having deposited the shares with respondent
No.3 as margin in accordance with clause 12 of the loan agreement,
the question of their giving notice for any sale of the shares by
respondent No.3 does not arise. Respondent No.3 was not bound to
give any notice to the appellant of its proposed sale of the shares kept
with it as margin by respondent Nos.1 and 2.
33. There is nothing to indicate that creation of margin by the use
of the said securities by respondent Nos.1 and 2 with respondent No.3
was fraudulent. Respondent No.3 has given an explanation which is
difficult to reject at this stage. It is this.
Respondent Nos.1 and 2 have been the clients of respondent
No.3 since April / May, 2012. A KYC form had been executed and
exchanged in April / May 2012 by Respondent Nos.1 and 2.
Respondent Nos.1 and 2 have carried out several transactions even a
year and half before the suit was filed. The transactions were in the
cash / derivative segment and included future and option transactions.
Respondent Nos.1 and 2 provided margin for availing the exposure
limits from respondent No.3. The margin was initially provided in
cash. Subsequently, the same was replaced with shares of certain
companies. The shares of those companies had been removed by the
National Stock Exchange (NSE) from the approved list of shares to be
accepted towards margin. The same were, therefore, replaced with the
shares of Flexituff International Limited (hereinafter referred to as
"Flexituff") and Mandhana Limited. Respondent No.1 and 2 had also
undertaken transactions in the shares of Flexituff through respondent
No.3 during the period 25th June, 2013 to 17th September, 2013.
NSE had, by a circular dated 25th October, 2013, removed the shares
of Flextiuff from the approved list of securities with effect from 1st
November, 2013. Respondent No.3 had, therefore, called upon
respondent Nos.1 and 2 to replace the Flexituff shares with other
approved shares. Respondent Nos.1 and 2 agreed to replace the
Flexituff shares or to sell the same in a phased manner before 31st
October, 2013. They, however, failed to do so till 27th October, 2013.
On 28th October, 2013 and 29th October, 2013, respondent No.1 sold
meagre quantities of Flexituff shares in the market. Respondent No.3,
contends that it therefore, had no option but to protect itself by
exercising its rights by selling 42695 shares in the account of
respondent No.1. Respondent No.3 was forced to sell the Flexituff
shares for had respondent No.3 not done so, with effect from 1st
November, 2013, there would have been a huge margin shortfall and
possible huge naked debit cash of eventual squaring up of the open
position in the accounts of respondent Nos.1 and 2 forcing respondent
No.3 to pay NSE itself. Respondent No.3 would also have been liable
to pay penalties to the NSE for short margin as per SEBI guidelines.
Respondent No.3 was, therefore, entitled to sell the margin shares
pledged with it.
34. The appellant is not entitled to interim orders even on the facts
of this case. We mentioned earlier that the appellant itself stated that
on 29th June,2013 respondent Nos.1 and 2 sold 78,000 shares of
Flexituff for an aggregate amount of Rs.1.76 crores, which was
objected to by the appellant at the meeting held on 29th June,2013.
The appellant further stated that at the meeting it had requested
respondent Nos.1 and 2 to return the balance shares but that
respondent Nos.1 and 2 failed to do so. Despite the same, the
appellant did not adopt any proceedings or take any steps to protect or
enforce its rights and interests in respect of the said shares. Thereafter
in September, 2013 a further 40231 shares of Flexituff was sold by
respondent Nos.1 and 2. The appellant stated that the meetings were
held on 15th October, 2013 and 28th October, 2013 with respondent
Nos.1 and 2 whereat it once again objected to the sale and requested
respondent Nos.1 and 2 to return the excess shares. The suit was filed
on 29th October, 2013. Thus even after the meeting of 15th October,
2013, the appellant waited for another fortnight before adopting the
proceedings. In matters such as these especially in the facts and
circumstances of this case, where the rights of third parties are
involved and can be affected by any delay, the proceedings ought to
have been adopted immediately. As noted earlier, on 28th and 29th
October, 2013 the transfer of the balance shares have already taken
place.
35. If injunctions are granted in such cases, it would adversely
affect the functioning and sentiment of the securities market. It would
derail the entire system of maintaining the margin by utilizing
securities. It would require the persons to deposit cash or some other
equivalent security. This is on account of the uncertainty that would be
created regarding the value of the securities deposited / furnished as
margin.
36. Thus, as far as respondent No.3 is concerned, the appeal ought
to be dismissed. However, prima facie, the dues of respondent Nos.1
and 2 appear to have been paid. They are not entitled, therefore, to
enforce the pledge with respect to the said shares still in their
possession. In fact, the learned Judge in paragraph 20 has expressly
held that as between the appellant and respondent Nos.1 and 2, the
latter are bound to re-transfer the shares to the appellant. We are, at
the interlocutory stage, in agreement with the learned Judge. It must
follow then that the appeal against respondent Nos.1 and 2 must
succeed.
37. In the circumstances, the appeal is disposed of by the following
order :
(i) The appeal against respondent No.3 is
dismissed.
(ii) The appeal against respondent Nos.1 and 2
is disposed of by appointing the Court Receiver of
this Court as Receiver of the said shares or any
accretions thereto in the possession of respondent
Nos.1 and 2.
Liberty to the parties to apply to the trial
court in the event of there being a fluctuation or a
likelihood of a fluctuation in the price of the said
shares.
Till the Court Receiver takes possession of
the shares, respondent Nos.1 and 2 are restrained
from disposing of, alienating, encumbering and/or
creating any third party rights and/or interest in any
manner whatsoever in the said shares or any
accretions thereto.
Mr. Daver, the learned counsel appearing on
behalf of the appellant seeks a stay of this order,
insofar as it concerns respondent No.3, for a period
of eight weeks. He states that the value of the shares
is twice the amount of the third respondent's claim
against respondent Nos.1 and 2. Mr. Chagla, on
instructions, states that the value is about one and a
half times the third respondent's claim against
respondent Nos.1 and 2. In view thereof, the interim
order shall continue upto and including 10th August,
2014. Liberty, however, to the respondent No.3 in
the meantime to apply to have this order modified in
the event of there being a fluctuation or a likelihood
of a fluctuation adverse to the interests of respondent
No.3.
There shall, however, be no order as to costs.
B.P. COLABAWALLA, J. S.J. VAZIFDAR, J.
No comments:
Post a Comment