2018 (4) TMI 1793 - HC - Indian Laws

Sale/transfer of shares - restarint from transferring alienating encumbering or otherwise dealing with or parting with possession of the 15, 00, 000 shares - HELD THAT - The plaintiffs are not entitled to the continuation of the ad interim order which has remained in force for the last 12 years. List on 21st May 2018.

Issues Involved:
1. Legality of the sale of pledged shares.
2. Compliance with Section 176 of the Indian Contract Act, 1872.
3. Applicability of the Depositories Act, 1996 and SEBI Regulations.
4. Jurisdiction of the Civil Court.
5. Rights of the plaintiffs as pledgors and the defendants as pledgees and purchasers.

Detailed Analysis:

1. Legality of the Sale of Pledged Shares:
The plaintiffs contended that the sale of 15,00,000 pledged shares by defendant no.7 Morgan to defendants no.1 to 4 was illegal, void, and in contravention of the terms of the pledge agreement and statutory provisions. They argued that the sale was conducted without prior notice, as required by Section 176 of the Indian Contract Act, 1872, and that the shares were sold at manipulated prices. The plaintiffs sought declarations to nullify the sale and to re-transfer the shares back to them.

2. Compliance with Section 176 of the Indian Contract Act, 1872:
The plaintiffs argued that the sale of the pledged shares was invalid due to non-compliance with Section 176, which mandates reasonable notice before the sale of pledged goods. They contended that the lack of notice rendered the sale void. The defendants, however, argued that the provisions of the Contract Act were not applicable to dematerialized shares and that the sale was conducted in accordance with the Depositories Act and SEBI Regulations, which do not require prior notice.

3. Applicability of the Depositories Act, 1996 and SEBI Regulations:
The court considered the applicability of the Depositories Act and SEBI Regulations, which govern the pledge and sale of dematerialized shares. It was noted that Regulation 58 of the SEBI (Depositories and Participants) Regulations, 1996, allows the pledgee to invoke the pledge and register as the beneficial owner of the securities without prior notice to the pledgor. The court concurred with the view that the provisions of the Depositories Act and SEBI Regulations supersede the requirements of the Contract Act in the context of dematerialized shares.

4. Jurisdiction of the Civil Court:
The defendants argued that the jurisdiction of the Civil Court was barred by Section 23E of the Depositories Act and Section 15Y of the SEBI Act, which vest exclusive jurisdiction in the Securities Appellate Tribunal (SAT) for matters related to securities. The plaintiffs contended that their claims were not barred and that the Civil Court had jurisdiction to adjudicate the dispute. The court held that the jurisdiction of the Civil Court was not barred and that it could entertain the suit.

5. Rights of the Plaintiffs as Pledgors and the Defendants as Pledgees and Purchasers:
The court examined the rights of the plaintiffs as pledgors and the defendants as pledgees and purchasers. It was noted that the pledge agreement and the arbitral award allowed the pledgee to sell the shares without prior notice. The court also considered the bona fide nature of the purchase by defendants no.1 to 4 through market transactions. It was held that the plaintiffs had waived their right to prior notice under the pledge agreement and the arbitral award, and that the sale of the shares was valid and binding.

Conclusion:
The court dismissed the plaintiffs' application for interim relief and vacated the ad interim order restraining the transfer of the shares. It held that the sale of the pledged shares was conducted in accordance with the Depositories Act and SEBI Regulations, and that the plaintiffs were not entitled to any relief. The court also noted that the plaintiffs had not diligently prosecuted the suit and that the balance of convenience favored the defendants. The suit was set down for further hearing on the issue of dismissal.

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