2013 (8) TMI 315 - HC - Companies Law

Pledgee s and Pledgor s Rights and duties u/s 176 - Whether the defence raised by the respondent was substantial - Section 176 of the Indian Contract Act,1872 deals with the pledgor s and pledgee s rights and duties which rule out the applicability of section 433 - Held that - The defence taken by the respondent-company was substantial, had been taken in good faith and had prima facie merit deserving deeper examination - there was prima facie proof of the facts on which the defence rests - It was well settled that winding-up proceedings were not a means of recovering the debts due from a company. The defence based on Section 176 of the Contract Act was an after-thought and no such defence was taken at any point of time during the prolonged exchange of correspondence between the parties which shows the lack of bona fide on the part of the respondent - The provisions of the section were mandatory and cannot be over-ridden by any contract to the contrary - The section deals with the pledgee s right where the pledgor makes default - Lallan Prasad v. Rahmat Ali 1966 (12) TMI 65 - SUPREME COURT - It had been highlighted that where the pawnor repays the debt he was entitled to the return of the pawned goods - the pawnee cannot be permitted to get repayment of the debt as also retain the pawned goods and thus gain an unjust double advantage - There was nothing which would militate against the issue sought to be raised by the respondent in the case - Decided against petitioner.

Summary

Issues Involved:
1. Loan Agreement and Pledge of Shares
2. Transfer and Sale of Pledged Shares
3. Statutory Notice and Winding-Up Petition
4. Respondent's Defense and Section 176 of the Indian Contract Act, 1872
5. Bona Fide Dispute and Substantial Defense

Comprehensive, Issue-Wise Detailed Analysis:

1. Loan Agreement and Pledge of Shares:
The petitioner advanced a loan of Rs. 3 crores in July 2008 to the respondent against the pledge of shares worth Rs. 5.50 crores. Another loan of Rs. 5 crores was given in August 2008, which was rolled over in October 2008. Due to a fall in the market value of the pledged shares, additional shares were pledged. The respondent repaid the Rs. 3 crores loan on 27-2-2009 and sought to roll over the Rs. 5 crores loan. The petitioner requested more shares to cover the loan, resulting in 18,75,000 shares being pledged.

2. Transfer and Sale of Pledged Shares:
Frustrated by repeated requests for roll-over, the petitioner transferred the pledged shares to its DEMAT account between 7-8-2009 and 2-9-2009. The petitioner sold 18,74,000 shares between March and May 2010, realizing Rs. 1,69,95,042 and credited Rs. 1,70,02,832 to the respondent, calculating the balance due at Rs. 4,93,17,156, including interest.

3. Statutory Notice and Winding-Up Petition:
The petitioner sent a statutory notice under section 434(1)(a) on 1-6-2010 demanding the outstanding amount and intimating winding-up proceedings if unpaid. The respondent replied on 15-6-2010, pointing out a Rs. 5 lacs payment not credited. The petitioner acknowledged this and reduced the outstanding to Rs. 4,88,17,156. The petitioner filed the winding-up petition under sections 433(e), 434, and 439 of the Companies Act, 1956.

4. Respondent's Defense and Section 176 of the Indian Contract Act, 1872:
The respondent argued that the shares ceased to be collateral once transferred to the petitioner's DEMAT account and that the market value on the transfer dates should determine whether the loan was repaid. The respondent contended that the petitioner delayed the sale of shares, causing a loss due to a fall in market value by March-May 2010. The respondent filed a Civil Suit (OS) No. 3116/2011 for recovery of Rs. 2.5 crores based on the market value at the transfer dates.

5. Bona Fide Dispute and Substantial Defense:
The court noted that a company would not be wound up if its defense is substantial. The respondent's defense was based on section 176 of the Contract Act, which mandates reasonable notice before selling pledged goods. The court found no evidence that the petitioner gave such notice before transferring the shares to its DEMAT account. The court also questioned whether the petitioner had the right to transfer the shares to itself under the loan agreement. The court held that the respondent's defense raised substantial issues deserving deeper examination and dismissed the winding-up petition.

Conclusion:
The court concluded that the respondent's defense was substantial, taken in good faith, and had prima facie merit. The winding-up petition was dismissed with no order as to costs.