9911796707
|
Home
Forgot password New User/ Regiser ⇒ Register to get Live Demo
2014 (6) TMI 1065 - HC - Indian LawsValidity of pledge - 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 - pledge created in accordance with the provisions of the Depositories Act, 1996 or not - whether the alleged pledge can 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? - HELD THAT - 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. 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. 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 - 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. 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 - 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. Appeal dismissed.
Issues Involved:
1. Whether the appellant is entitled to the return of the pledged shares after repayment of the loan. 2. Whether respondent No. 3 has any right over the pledged shares. 3. Validity of the pledge under the Depositories Act, 1996. 4. Compliance with Section 176 of the Indian Contract Act, 1872. 5. Conduct of respondent No. 3 in relation to the sale of shares. 6. Entitlement to interim reliefs. Issue-Wise Detailed Analysis: 1. Entitlement to Return of Pledged Shares: The appellant claimed that after repaying the loans to respondent Nos. 1 and 2, it was entitled to the return of the pledged shares. The court acknowledged that the loan agreements created a pledge of the shares, which were kept by the appellant with respondent Nos. 1 and 2 as security for the loan. Clause 7 of the agreements allowed respondent Nos. 1 and 2 to sell or dispose of the shares to satisfy the outstanding amounts, but this did not constitute a sale of the shares by the appellant to respondent Nos. 1 and 2. Therefore, the appellant was entitled to the return of the shares from respondent Nos. 1 and 2 after repaying the loan. 2. Rights of Respondent No. 3 Over Pledged Shares: The court dismissed the appeal against respondent No. 3 on two grounds. Firstly, Clause 12 of the loan agreements allowed respondent Nos. 1 and 2 to use the shares as collateral for their own margin purposes with respondent No. 3. Since respondent Nos. 1 and 2 had not repaid their dues to respondent No. 3, the security created in favor of respondent No. 3 could not be extinguished merely because the appellant had repaid its dues to respondent Nos. 1 and 2. Secondly, the pledge was not created in accordance with Section 12 of the Depositories Act, 1996, which mandates giving notice of a pledge to third parties. Therefore, the alleged pledge could not affect the rights of respondent No. 3, rendering the pledge invalid concerning the third party. 3. Validity of the Pledge Under the Depositories Act, 1996: The court held that the appellant did not follow the provisions of the Depositories Act, 1996, and the Regulations made thereunder for creating a pledge. Section 12 of the Depositories Act requires a beneficial owner to create a pledge with the previous approval of the depository and to give intimation of such pledge to the depository. The court emphasized that the provisions of the Depositories Act introduce transparency and certainty in the securities market by ensuring third parties have notice of a pledge. Since the appellant did not comply with these provisions, the pledge was invalid concerning third parties. 4. Compliance with Section 176 of the Indian Contract Act, 1872: The appellant argued that the sale and appropriation of the shares by the respondents were contrary to Section 176 of the Indian Contract Act, as no notice of sale was given to the appellant. The court noted that even if Section 176 applied, the appellant's failure to create the pledge in accordance with the Depositories Act deprived it of the benefit of notice, rendering the pledge invalid concerning third parties. Additionally, respondent No. 3 was not required to give notice of the sale of shares kept as margin by respondent Nos. 1 and 2. 5. Conduct of Respondent No. 3 in Relation to the Sale of Shares: The court found no evidence indicating that the creation of margin by respondent Nos. 1 and 2 with respondent No. 3 was fraudulent. Respondent No. 3 provided a reasonable explanation for selling the shares, including the need to replace Flexituff shares removed from the approved list of securities by the National Stock Exchange (NSE). Respondent No. 3 was entitled to sell the margin shares pledged with it to protect its interests. 6. Entitlement to Interim Reliefs: The court concluded that the appellant was not entitled to interim reliefs. The appellant's delay in adopting proceedings to protect its rights, despite being aware of the sale of shares, adversely affected the functioning and sentiment of the securities market. Granting injunctions in such cases would derail the system of maintaining margin by utilizing securities and create uncertainty regarding the value of securities deposited as margin. Conclusion: The court dismissed the appeal against respondent No. 3 and allowed the appeal against respondent Nos. 1 and 2 by appointing a Court Receiver for the shares in their possession. The court emphasized the importance of complying with the Depositories Act for creating a valid pledge and the need to protect the interests of third parties in the securities market.
|
