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TMI Blog2022 (5) TMI 813X X X X Extracts X X X X X X X X Extracts X X X X ..... ation which he can adjust against the debt due. The pledge creates special rights including the right to sell the pawn to a third party and adjust the sale proceeds towards the debt in terms of Section 176 of the Contract Act. The reasoning that prior notice under Section 176 of the Contract Act would interfere with transparency and certainty in the securities market and render fatal blow to the Depositories Act and the 1996 Regulations is farfetched as it fails to notice that the right of the pawnee is to realise money on sale of the security. The objective of the pledge is not to purchase the security. Purchase by self, as held above, is conversion and does not extinguish the pledge or right of the pawnor to redeem the pledge. Equally, it may be a disincentive for both the pawnor and the pawnee in many cases, if we accept this interpretation and ratio, which would inhibit them from entering into a transaction creating a pledge. Difficulties and disputes regarding price, valuation, right to redemption etc. could invariably arise. There would also be difficulties in case the dematerialised securities are not traded as in the present case. If the case pleaded by MHPL is to be acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inued and, therefore, they, on 16th January 2018, in exercise of its right under Clause 6.1 of the pledge deed, have applied for transfer of the pledged shares in its name. Consequently, all the rights in the pledged shares, including but not limited to the right of attending general body meetings, voting rights, and rights to receive dividends and other distributions, now vests with them as per Clause 2.3(A)(ii)(b), This intimation to MHPL is without prejudice to any rights or remedies PIFSL has in terms of the pledge deed or security documents executed in pursuance of the bridge loan agreement. PIFSL expressly reserved its right to transfer and sell pawned shares for value providing five days notice as required under Clause 6.2 of the pledge deed and Section 176 of the Contract Act. We would, without hesitation, therefore hold that on becoming the beneficial owner in the records of the depository , the pawnee had complied with the procedural requirement of Regulation 58(8) to enforce the right to sell the shares. Thereafter, such a sale should be made according to Sections 176 and 177 of the Contract Act. Violation of the said provisions, if made by PIFSL, would have its c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... SANJIV KHANNA, J. The primary legal issue which arises for consideration in this appeal is whether the Depositories Act, 1996 read with the Regulation 58 of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996, For short, 1996 Regulations has the legal effect of overwriting the provisions relating to the contracts of pledge under the Indian Contract Act, 1872, For short, Contract Act and the common law as applicable in India. To facilitate analysis, this judgment has been divided into sections as follows: A. Factual background of the case B. Relevant provisions of the Contract Act C. Analysis of case laws under the Contract Act: (i) What is pledge and the legal difference between ownership, pledge and mortgage (ii) Pawnee has a special and not general right in the pledged property (iii) Accretion on pawned goods (iv) Notice of sale by pawnor and his right to sale (v) Sale of the pledged goods by the pawnee to self D. Effect and Purpose of the Depositories Act, 1996 and the Securities and Exchange Board of India (Depositories and Participants) Regulation 1996 E. Effect of the Depositories Act, 1996 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... discharged within seven days, PIFSL would exercise the rights in terms of the Pledge Deed. 2.5 On 16th January 2018, as the debt remained unpaid, PIFSL wrote to the Depository Participant invoking its rights in terms of Clause 6.1 of the Pledge Deed. Acting on the request, the Depository Participant has accorded PIFSL the status of beneficial owner of 31,80,678 pledged shares of NEVPL. 2.6 On 23rd January 2018, PIFSL wrote to MHPL informing that due to continued defaults in payment on the part of the Corporate Debtor, it had exercised the right under Clause 6.1, while reserving its right to sell the shares under Clause 6.2 of the Pledge Deed read with Section 176 of the Contract Act. 2.7 On 17th January 2018, PIFSL filed an application before the Adjudicating Authority under Section 7 of the IBC as a financial creditor to whom Rs. 167,29,23,507/- was due and payable by the Corporate Debtor. 2.8 On 30th January 2018, the Adjudicating Authority allowed PIFSL to withdraw the application with liberty to file proof of financial claim before the IRP in Form C. 2.9 On 6th February 2018, MHPL made a claim before the IRP, inter alia, stating that PIFSL having been conferred ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th January 2018 and consequently, the pledged shares stood transferred in the name of PIFSL. The fact that PIFSL had not thereafter sold the shares under Clause 6.2 of the pledge deed would not matter. As PIFSL had become the 100% owner of the pledged shares, it could realize its dues in whole or part by sale and transfer of the shares according to the law. Once PIFSL has exercised right to become the owner of the shares, PIFSL cannot take advantage of Section 176 of the Contract Act to reclaim the debt. Section 176 of the Contract Act cannot be taken into consideration by the IRP for collating the financial claim of PIFSL under Section 18 of the IBC. 2.15 Other aspects which require to be noted are: (a) as per PIFSL, the principal and interest amount due to them by the Corporate Debtor as of 23rd December 2021 are Rs.3,76,13,03,389/-; (b) the shares of NEVPL are unlisted, and there are no open market transactions, and (c) the value of the pledged shares is disputed. On 13th August 2018, the IRP has submitted a valuation report of an independent valuer who has valued the pledged shares at Rs.179 crores as of 16th January 2018. MHPL relies on the 2013 valuation report of Axis C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an be separated or divided, the property in the goods remain with the parties respectively., Section 156, Contract Act. Further, the bailee is bound to bear the expense of separation or division of the goods, as well as any damage arising from the mixture. Section 157 provides that when the goods are so mixed without the bailor s consent and cannot be separated, the bailor is liable to be compensated, and the bailee is liable for the loss. Under Section 160, the bailee has to return or deliver, as per the bailor s directions, the goods, without demand, as soon as the time for which they were bailed has expired or the purpose for which they were bailed has been accomplished. Section 161 states that if there is a default by the bailee and the goods are not returned, delivered, or tendered at the proper time, the bailee is responsible to the bailor for any loss, destruction, or deterioration of the goods from that time. As per Section 163, in the absence of any contract to the contrary, the bailee is bound to deliver to the bailor, or in accordance with his directions, any increase or profit that may accrue from the goods bailed. 3.3 Section 172 of the Contract Act is reproduced as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r. Section 177 gives statutory right to the pawnor, who is at default in payment of the debt or performance of the promise, to redeem the pledged goods at any time before actual sale by the pawnee. However, in such cases, the pawnor must pay in addition the expenses that have arisen from his default. Section 179 states that the limited interest that a pawnor has in the goods can be validly pledged. Having understood the broad statutory contours of pledge, we would now examine the relevant opinio juris on the law of pledge. Legal jurisprudence relating to law of pledge is required to be examined in some detail for determining the issue before us. C. Analysis of law of pledge and case laws relating to pledge (i) What is pledge and the legal difference between ownership, pledge and mortgage. 4.1 Md. Sultan and Others v. Firm of Rampratap Kannayalal, Hyderabad, by its partners, AIR 1964 AP 201 observes that a contract of pledge should satisfy the following conditions: (i) there should be a bailment of goods as defined in Section 148 of the Contract Act, that is, delivery of goods; (ii) the bailment must be by way of security; and (iii) the sec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idation) v. Pritams, AIR 1960 Punj 42). In India, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 defines it under Section 2(1)(n) as a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance and includes floating charge and crystallisation of such charge into fixed charge on movable property. An owner has: (a) right of possession; (b) right of enjoyment; and (c) the right of disposition. A pawnee does not have the right of ownership, but has limited right to retain possession till debt is paid or promise is performed. A pawnee s right of disposition is limited to disposition of the pledge rights only, and the right to sell after reasonable notice. Even when the pawnor makes default in payment of debt or performance of the promise, the pawnor has the right to redeem the pawn till actual sale of the pawn by the pawnee. However, the pawnor in addition to the debt, must pay to the pawnee expenses that have arisen because of the default. 4.3 Where money is advan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... i.e., the property pledged should be actually or constructively delivered to the pawnee, See also Morvi Mercantile Bank Ltd. v. Union of India, AIR 1965 SC 1954: 20. In English Law a pledge arises when goods are delivered by one person called the pledgor to another person called the pledge to be held as security for the payment of a debt or for discharge of some other obligation upon the express or implied understanding that the subject-matter of the pledge is to be restored to the pledger as soon as the debt or other obligation is discharged. It is essential for the creation of a pledge that there should be a delivery of the goods comprised therein. In other words, a pledge, cannot be created except by delivery of the possession of the thing pledged, either actual or constructive. It involved a bailment. If the pledger had actual goods in his physical possession, he could effect the pledge by actual delivery; but in other cases he could give possession by some symbolic act, such as handing over the key of the store in which they were. If, however, the goods were in the actual physical possession of a third person, who held for the bailor so that in law his possession was t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a payment of the debt or the performance of the promise, but for the interest of the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged. entitles the pawnee to retain the goods pledged for the payment of the debt. Section 176, elucidating on the rights of the pawnee, states that in case of default by the pawnor, the pawnee has: (a) a right to sue upon the debt and to retain the goods as collateral security, and (b) sell the goods after reasonable notice of the intended sale to the pawnor. Once the pawnee, by virtue of his right under Section 176, sells the goods, the right of the pawnor to redeem them is extinguished. But, thereupon, the pawnee is bound to apply the sale proceeds towards satisfaction of the debt and pay the surplus, if any, to the pawnor. So long as the sale does not occur, the pawnor is entitled to redeem the goods on payment of the debt. Even when the pawnee files a suit for recovery of the debt, though he is entitled to retain the goods, the pawnee must return the goods on payment. Another significant observation in this judgment is that if the pawnee sues on the debt denying the pledge, an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the pawned goods if the pledge remains unredeemed. Reference in this regard was made to the decision of this Court in Karnataka Pawnbrokers Association and Others v. State of Karnataka and Others, (1998) 7 SCC 707 wherein it is observed that the pawnee has a conditional general property interest in the pledge, subject to the condition that he can pass on that general property if the pledge is brought to sale in accordance with the law. (iii) Accretion on pawned goods 6.1 In Standard Chartered Bank and Another v. Custodian and Another, (2000) 6 SCC 427 a Division Bench of this Court interpreting provisions of Sections 148, 160 and 172 of the Contract Act held that when the goods are bailed for securing payment of a debt or performance of a promise, the bailor will get the right for the return of the said goods when the purpose is accomplished, namely, the debt is returned, or the promise is performed. Referring to Section 163 of the Contract Act, it is observed that in the absence of a contract to the contrary, the bailee is bound to deliver to the bailor, or according to his directions, any increase of profit that may have accrued from the bailed goods. An e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ise that discretion, no blame can be put on him. Even where the value of the goods deteriorates due to time, no relief can be granted to the pawnor against the pawnee as the pawnor is legally bound to clear the debt and obtain possession of the pawned goods. 7.3 A Division Bench of the Calcutta High Court in Hulas Kunwar v. Allahabad Bank Ltd., AIR 1958 Cal 644 has held that law does not require that the pawnee arrange for a sale beforehand and then give notice to the pawnor as to the date, time and place of sale. Notice under Section 176 has to be given of the pawnee s intention to sell in default of payment by the pawnor within the specified time. This notice does not require specification of the date, time and place of sale. 7.4 The Calcutta High Court in Haridas Mundra v. National and Grind-Lays Bank Ltd., AIR 1963 Cal 132 refers to two earlier decisions in the cases of Hulas Kunwar (supra) and Kunj Behari Lal v. The Bhargava Commercial Bank, Jubbulpore, AIR 1918 All 363 (2) where the courts have held that the notice under Section 176 is required before the sale to show the pawnee s intention to sell the good in order to give the pawnor reasonable information ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fficial Assignee of Bombay v. Madholal Sindhu and Others, AIR 1947 Bom 217 the judgment of the Bombay High Court authored by Chief Justice Leonard Stone referred to the Commentaries on the Law of Bailments, Eighth Edition, by Mr. Justice Story, wherein it is observed on page 262: Another right resulting, by the common law, from the contract of pledge is the right to sell the pledge, where there has been a default in the pledge in complying with his engagement, but a sale before default would be a conversion. Such a right does not divest the general property of the pawner but still leave in him (as we shall presently see) a right of redemption. The following passage at page 263 was quoted: The common law of England, existing in the time of Glanville, seems to have required a judicial process to justify the sale, or at least to destroy the right of redemption. But the law as at present established leaves an election to the pawnee. He may file a bill in equity against the pawner for foreclosure of sale and sale; or, he may proceed to sell ex mero motu, upon giving notice of his intention to the pledger. In this case, the judgment of Chief justice Leonard Stone also r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nee, is a special protection that the statute has given to the pawnor, and the parties cannot agree that the pawnee may sell the pledged goods without notice to the pledgor. Dwelling on the aspect of the pawnor s right of redemption under Section 177, the judge held that the right remains till the actual sale of the pledged goods. The expression actual sale in Section 177 must be a sale in conformity with the provisions of Section 176 which gives the pledgee the right to sell; and if the sale is not in conformity with those provisions, then the equity of redemption with the pledgor is not extinguished. The sale by the pawnee to himself being void does not put an end to the pledge, but the pawnor is bound by resale(s) duly effected by the pawnee to the third parties after such abortive sales to himself. Chagla J. on the rights of the pawnee held that the Contract Act provides two rights to the pawnee when the pawnor makes a default in payment of the debt: (a) bring the suit against the pawnor for the debt and retain the goods pledged as collateral security; and (b) sell the goods pledged, which power, however, can be exercised in terms of Section 176 on giving the pawnor a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olicy . After referring to foreign, Wilson v. Mcintosh, 1894 A.C. P. 129.; Corporation of the City of Tornoto v. John Russel, D. Jones Smiths Reports, 1908 Ac. 493; Selwyn v. Grafit, 38 Ch. D.P. 273; Griffiths v. The Earl of Dudley, 9, Q.B.D. P. 357 and Indian authorities, Vellayan Chettiar v. Government of the Province of Madras, I.L.R. 1948 Mad. p. 214; Raja Chetty v. Jagannadhadas Govindas, 1949 II M.L.J. P. 694 on waiver, Sri Raja Kakarklhpudi Venkata Sudarsana Sundara Narasayamma Garu (supra) categorically observes that in terms of Section 176, its requirements are mandatory and that, even if there is a term in the contract of a pledge to waive notice, still, the pledgee is not relieved of his obligation to give notice before the sale. 7.9 Of particular importance is the reference in Sri Raja Kakarklhpudi Venkata Sudarsana Sundara Narasayamma Garu (supra) to the following observations of Farelli J. in Soho Square Syndicate Ltd. v Poland Co.:, 1940-1 Ch 638 at p. C43 If it be right to say that a mortgagee, by merely getting the consent of the mortgagor, can avoid the ..... necessity of applying to the Court. a large part of the protection which this Act was intend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ved by his conduct. In Halsbury's Laws of England, Vol. 8, Third Edn., para 248 at p. 143 it is stated thus: As a general rule, any person can enter into a binding contract to waive the benefits conferred upon him by an Act of Parliament, or, as it is said, can contract himself out of the Act, unless it can be shown that such an agreement is in the circumstances of the particular case contrary to public policy. Statutory conditions may, however, be imposed in such terms that they cannot be waived by agreement, and, in certain circumstances, the legislature has expressly provided that any such agreement shall be void. However, there is a difference between statutory provisions meant for the benefit of a person and statutory provisions which mandate contracts to be in a specific manner. One cannot waive the statutory obligations where the statute restraints explicitly or mandates parties to contract in a particular manner. Formalities and requirements for making contracts have generally been held to be mandatory. G.P. Singh, Principles of Statutory Interpretation, 14th Edition, Lexis Nexis (2016) at page 462. Where a statute prescribes that a contract shall be in a sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is wholly contrary to the express provisions of the law. The phrase contract to the contrary in Section 106 of the Act cannot be read to mean that the parties are free to contract out of the express provisions of the law, thereby defeating its very intent. 7.11 In Nabha Investment Pvt. Ltd. v. Harmishan Dass Lukhmi Dass, 1995 SCC OnLine Del 239 a decision of Delhi High Court, reference is made to the decision in Sri Raja Kakarklhpudi Venkata Sudarsana Sundara Narasayamma Garu (supra) wherein the High Court of Andhra Pradesh had agreed with the opinion expressed by Chagla J. in Madholal Sindhu (supra), that in cases of unauthorized sale by the pawnee, the pawnor could seek to file a suit for redemption by depositing the money, treating the sale as if it had never taken place, or where the suit of redemption is not filed, to ask for damages on the ground of conversion. However, the decision in Nabha Investment (supra) disagreed with the view taken in these two judgments that the pawnor cannot file the suit for redemption of the pledge unless preceded by tender or accompanied by pledged money. Nevertheless, the judgment agrees with other principles of law laid down by Chag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansferred the shares, he is entitled to call upon the transferee for the same because the transferee does not acquire anything more than the right, title and interest of the pledgee which is to retain the goods as a pledge till the debt is paid off. If the pledgor may not be in a position to redeem, he may contend himself with merely suing the pledgee for conversation if any damage has resulted by reason of the goods being sold without proper notice (para 59). (vi) There is no analogy between Section 69(3) of T.P. Act and Section 176 Contract Act; there is a marked contrast between the two. Former protects the innocent purchaser, the latter does not do so. In the absence of any provision in Section 176 of the Contract Act in favour of the innocent purchaser, to import such protection from the provisions of another statute is with respect wholly fallacious and unjustifiable. It is always dangerous to draw analogy between one statute and another; 22.9 Vide para 64 Chagla, J. did not agree with the following statement of law contained in Coote on Mortgages (Volume-II, 9th Edition page 1472):- The pledgee has on default a right to sell the pledge if the payment is to be made ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he pawnee is ready and willing to deliver the property pledged. The position would be different where the pawnee declares in advance his inability to return the pledged property, in which case the pawnor s claim cannot be defeated through a useless ceremony of tender. Section 51 of the Contract Act relating to reciprocal promises was relied upon. 7.13 Section 176 of the Contract Act requires that the pawnee may sell the thing pledged on giving the pawnor reasonable notice of the sale. It does not prescribe any fixed form of notice or specify any fixed period of notice. The object and purpose of giving notice is to make the pawnor know about the pawnee s intent to sell the pawn and give him an opportunity to exercise his statutory right of redemption, which as per Section 177 can be exercised till the date of actual sale . Whether or not a notice was given and the period of notice was reasonable would depend upon the facts of the case. In view of the above discussion, the pawnor can communicate his willingness and desire to the pawnee that the pledged goods may be sold. In case any such request is made, a pawnee may well act upon the request without violating Section 176 of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8.3 A Division Bench of the Madras High Court in S.L. Ramaswamy Chetty and Another v. M.S.A.P.L. Palaniappa Chettiar, 1929 SCC OnLine Mad 62 relying upon the decision of the Privy Council in Neikram Dobey (supra), opined that where the pawnee has the power to sell in default, takes over upon himself the property pledged without the authority of the pawnor by crediting its value in the account with him, this act, though an unauthorized conversion would not put an end to the contract of pledge., This decision also holds that the pawnor would be entitled to redeem without payment. This proposition is contrary to several decisions including decision of the Privy Council in Neikram Dobey (supra). 8.4 There is one solitary judgment of the single judge of the Punjab and Haryana High Court in Dhani Ram and Sons v. The Frontier Bank Ltd. and Another, AIR 1962 P H 321 which holds that the sale of the pawned goods by the pawnee to himself is not void, and the pawnee was held to be the legal owner of the pledged shares. This decision proceeds with the incorrect understanding of the ratio in Neikram Dobay (supra), and thus, we deem it appropriate to overrule this ratio in Dhani Ram ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... capital market also felt pain due to lack of confidence and consequently, the growth was cramped. To pave the way for smooth, fast and constancy in the transfer of securities and to promote and deal with an increase in trading of stocks and shares in a transparent manner, there was a need for regulating the methodology of trading of securities. 9.3 The Depositories Act is enacted to lay down a process and rules for the dematerialization of securities by converting them into electronic data stored in the computers of the depository . Section 2(1)(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). The Depositories Act establishes the depository eco-system and introduces the concepts of a registered owner Section 2(1)(j): registered owner means a depository whose name is entered as such in the register of the issuer; and beneficial owner . Section 2(1)(a): beneficial owner means a person whose name is recorded as such with a depository; Every owner of a physical sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ights 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. states that notwithstanding any other law for the time being in force, the depository shall be deemed as the registered owner and is entitled to affect the transfer of ownership of the security on behalf of the beneficial owner . No person, including the pawnee, can transfer the pawn held in dematerialised form without being registered as a beneficial owner . 9.5 Section 12 of the Depositories Act permits pledge and hypothecation of securities held by a depository and reads: 12. Pledge or hypothecation of securities held in a depository: (1) Subject to such regulations and bye-laws, as may be made on 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nor s contractual rights and obligations under the Contract Act and the common law. On the other hand, the Depositories Act expressly concedes that the securities held by the depository can be pledged and hypothecated by the beneficial owner . It simplifies the process by bringing transparency and certainty. It checks and curtails possibilities of disputes as the pledge must be registered with the depository. 9.8 Undoubtedly, the Depositories Act distinguishes between the registered owner and the beneficial owner , i.e., the de facto owner, but this does not in any manner contradict or lay down a rule which is contrary to the provisions of Sections 176 and 177 of the Contract Act. These sections, given the objective and purpose behind them, would still apply to any pledge deed and do not get diluted or overridden by the provisions or requirements of the Depositories Act. Section 10, a non obstante provision, which prevails over existing enactments by law, treats the depository as the registered owner and the shareholder/holder as a beneficial owner . It does not undermine or rewrite the provisions of the law of pledge and mutual obligations and rights of the pawnee an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... necessary changes in their records and inform the pledgor and pledgee respectively. A reading of Regulation 58 would show that a beneficial owner is entitled to create a pledge on security owned by him. To do so, he must apply to the depository through the participant who has his account in respect of the securities. Sub-regulation (2) requires the participant to accord its satisfaction that the securities are available for pledge and make a note in this regard in its records. The note is to be forwarded to the depository . In terms of sub-regulation (3), the depository is required to within fifteen days create and record a pledge and send an intimation to the participants of the pledgor/pawnor and the pledgee/pawnee. The participants of the pawnor and pawnee are required to inform the pawnor and the pawnee as to the entry of creation of the pledge. If the depository does not create the pledge, intimation of the reasons has to be given to the participants of the pawnor and the pawnee. The depository can cancel the pledge if the pawnee applies to the depository through its participants. The pawnor can also apply through its participant to the depository for cancelli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation (8) to Regulation 58 will apply whenever the pledged/pawned goods are dematerialized securities. To reiterate, this requirement of sub-regulation (8) to Regulation 58 does not circumscribe or limit the contractual rights and obligations agreed upon between the parties on the agreed terms, including the pawnee s right to sell the pawned goods. While the contractual terms are fundamental and determine the rights and obligations inter se the parties including when the pawnee would be entitled to get his name substituted as a beneficial owner under the 1996 Regulations, however, the contractual terms are not permitted to override the Contract Act as explained above in so far as it regulates the rights and obligations of the pawnee and pawnor, and the requirement of compliance with Regulation 58(8). It is absolutely necessary that the pawnee must be accorded status of beneficial owner to enable him to exercise his right to sell the pledged dematerialized securities. The object is to ensure compliance with the procedure prescribed for the sale of dematerialised securities and not to interfere with the freedom to contract as long as they comply with the Contract Act and other la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 996 Regulations do not expressly state that their provisions prevail over the Contract Act or any other law in force. On the other hand, Section 28 states that the provisions of this Act shall be in addition to and not in derogation of any other law for the time force relating to the holding and transfer of securities. Thus, the Depositories Act is in addition to other laws relating to the holding and transfer of securities. Our reasoning does not mean that compliance with Section 12 and Regulation 58 is not compulsory or mandatory. Violations of the statute may lead to penalties and even criminal action when permitted and warranted. Nevertheless, given the nature and requirements under Section 12 or Regulation 58, do not by implication or due to conflict over-write and undo the legislative mandate of Sections 176 and 177 of the Contract Act. We do not read any legislative intent in the Depositories Act and the 1996 Regulations to change the law of pledge requiring issue of reasonable notice; or as allowing sale to self, or abolishing the right of the pawnor to redeem the pledged goods till actual sale . Sections 176 and 177 are not obliterated, in so far as they would equally a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exercised even after the pawnee has been registered and has acquired the status of beneficial owner . The right of redemption would cease on the actual sale , that is, when the beneficial owner sells the dematerialised securities to a third person. Once the actual sale has been affected by the pawnee, the pawnor forfeits his right under Section 177 of the Contract Act to ask for redemption of the pawned goods. 10.5 We, however, accept that the Depositories Act, by-laws and rules relating to sale of dematerialised securities would be gravely undermined in case the pawnor is entitled to redeem the dematerialised shares from the third party on the ground that reasonable notice, as postulated under Section 176 of the Contract Act, was not given to the pawnor. To this extent, we would accept that there is a conflict between the Depositories Act and the interpretation given in Madholal Sindhu (supra), which has been followed in other cases, including the judgment of the Delhi High Court in Nabha Investment (supra). If this principle is applied to dematerialised securities that have been transferred to the third parties in accordance with the provisions of the Depositories Act, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raphs 16 to 20 of the said judgment. 20. It does not appear that the transfer of shares in the present case can be taken to be a pledge in law. Therefore, there can be no question of applicability of Section 176 of the Contract Act which requires the pledgee to give a notice to the pledgor of his intention to transfer the pledged goods. This aspect is being considered because at one stage it was argued by learned counsel for the plaintiffs that the transfer by defendant No. 1 of shares in favour of the other defendants is void in the absence of the notice by defendant No. 1 of their intention to sell the shares. However, certain observations are made concerning the Contract Act and the procedure prescribed for pledging the shares by the Depositories Act. The Court observed that the provisions of the Depositories Act are for accurately recording the transfer and pledging of shares held in dematerialized form. The Depositories Act contemplates the existence of a depository that holds the shares in the name of the beneficial owner . The depository acts as a registered owner of the shares for effecting the transfer of ownership security on behalf of the beneficial owner in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Bank of Bihar (supra). It would also be contrary to the principle that the Contract Act is not an exhaustive law on pledge and mortgage of movables. In Pushpanjali Tie Up Pvt. Ltd. (supra), the deed of pledge had permitted the lender to use the pawn as a collateral for his margin with the third party, which right had been exercised by the pawnee. In this background, the Court rejected the claim of the pawnor for the redemption of the pawn as the pawnee had transferred the rights in respect of the pawned shares by depositing them as margin with the third party. The view expressed was that the said transaction by the pawnee could not be ignored; otherwise, it would render the arrangement agreed upon as meaningless and devoid of commercial sense. This judgment also refers to an earlier decision of the Allahabad High Court in Firm Thakur Das Marakhan Lal v. Mathura Prasad and Others, AIR 1958 All. 66 which was a case in which the three ornaments had been sub-pledged. The debt payable having been extinguished by virtue of a debt redemption act, the pawnor had sued for recovery of the ornaments on the ground that the sub-pledges did not bind him. In this context, the Allahabad H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e provided for a particular manner alone for creating a pledge of shares in a dematerialised form. More significant for our purpose are the observations, with which we again agree, that the prescription in the Depositories Act and the 1996 Regulations are for the manner in which creation and transfer of the dematerialised shares can be achieved. It is to regulate the creation and transfer of dematerialised securities, including how the pledge can be transferred to a third party. The Contract Act does not stipulate that a pledge can be created only in a particular manner. The Depositories Act prescribes how the dematerialised securities can be pledged. The provisions of the Depositories Act and the 1996 Regulations are not in derogation of the Contract Act but in addition to it. In this regard, reference is made to Section 28 of the Depositories Act, which we have referred to earlier. Therefore, the object of the Depositories Act is not to rewrite the provisions of the Contract Act but to regulate the creation and transfer of dematerialised securities. Regulation 38(1)(e), 38. Records to be maintained. (1) Every depository shall maintain the following records and documents, namel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erson for a greater interest than he possesses, such an act does not annihilate the contract of pledge between himself and the pawnor; but that the transaction is simply inoperative as against the original pawnor, who upon tender of the sum secured immediately becomes entitled to the possession of the goods, and can recover in an action for any special damage which he may have sustained by reason of the act of the pawnee in repledging the goods. xx xx xx Another Judge had observed: In detinue the plaintiff's claim is based upon his right to have the chattel itself delivered to him; and if there still remain in Simpson, or in the defendant as his assignee, any interest in the goods, or any right of detention inconsistent with this right in the plaintiff, the plaintiff must fail in detinue, though he may be entitled to maintain an action of tort against Simpson or the defendant for the damage, if any, sustained by him in consequence of their unauthorized dealing with the debentures. We should not be seen as commenting upon the merits of the decision in Pushpanjali Tie Up Pvt. Ltd. (supra), as one of the findings recorded therein was that the pawnor had permitted the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned in force for the last 12 years: xx xx xx 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 ownershi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er 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. 11.6 In view of the discussion in the preceding paragraphs, we do not agree with the reasoning in the aforesaid sub-paragraphs and consequent ratio decidendi in Tendril Financial Services (supra). We do not find any derogation or conflict between Section 176 of the Contract Act and sub-regulations (8) and (9) of Regulation 58. Regulation 58(8) entitles the pawnee to record himself as a beneficial owner in place of the pawnor. This does not result in an actual sale . The pawnee does not receive any money from suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... decision of the Single Judge Bench of the Delhi High Court in GTL Limited v. IFCI Ltd. Ors. 2011 SCC OnLine Del 3628 which takes a contrary view and holds that compliance with Section 176 is required to be made in respect of pledged dematerialized securities. In GTL Limited (supra) temporary injunction was granted. We have briefly commented that injunction should not be normally granted in such cases. Supra para 11.4 Clause (c) to sub-section (3) to Section 38, Section 38. Perpetual injunctions when granted: (3) When the defendant invades or threatens to invade the plaintiff's right to, or enjoyment of, property the court may grant a perpetual injunction in the following cases, namely:- (c) where the invasion is such that compensation in money would not afford adequate relief; of the Specific Relief Act, 1963 states that perpetual injunction may be granted when the defendant invades the plaintiff s right to or enjoyment of the property where the invasion is such that the compensation in money would not afford adequate relief. Subsection (2) to Section 38, Section 38(2): When any such obligation arises from contract, the court shall be guided by the rules and provisions co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specific performance of contracts connected with trusts enforceable. Section 14, Section 14. Contracts not specifically enforceable and Section 16., Section 16. Personal bars to relief: Specific performance of a contract cannot be enforced in favour of a person- (a) who has obtained substituted performance of contract under Section 20; or (b) who has become incapable of performing, or violates any essential term of, the contract that on his part remains to be performed, or acts in fraud of the contract, or wilfully acts at variance with, or in subversion of, the relation intended to be established by the contract; or (c) who fails to prove that he has performed or has always been ready and willing to perform the essential terms of the contract which are to be performed by him, other than terms the performance of which has been prevented or waived by the defendant. Explanation.-For the purposes of clause (c),- (i) where a contract involves the payment of money, it is not essential for the plaintiff to actually tender to the defendant or to deposit in court any money except when so directed by the court; (ii) the plaintiff must prove aver performance of, or read ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ide the issue in controversy. We, however, do observe that in view of our findings and reasoning, the Board may re-examine the 1996 Regulations as well as the takeover regulations to avoid discord or ambiguity resulting in instability or confusion. Clarity is necessary. The takeover regulations may have its own impact and in a given case, may be a detriment and a negative factor for the creditor who wants to secure himself by a deed of pledge. The pertinent question is, should takeover regulations apply when the pawnee exercises his right to be recorded as a beneficial owner , while reserving his right to sell the pledge. There would be tax and accounting implications which may be detrimental and shackle financial market and deals. It may inhibit financial institutions from accepting dematerialized securities as a pawn. A holistic review of the impact of pledge viz. dematerialized securities, registration of the pawnee as the beneficial owner without the pawnee enforcing the right to sell the pledge goods is required and necessary for the smooth functioning of the securities market and free flow of transactions without hindrance and to avoid uncertainty in fiscal matters. G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tstanding or upon a sale, transfer or other disposition of all the Pledged Shares in accordance with the terms of this Deed of Pledge. 14.2 Upon termination of this Deed of Pledge, following the repayment in full of the Amounts Outstanding, the Bridge Loan Lender shall, at the Pledgor s cost and expense, release the Pledged Shares from the pledge created under this Deed of Pledge and intimate the Pledgor of such release, other than such of the Pledged Shares that may have been sold or disposed off (sic.). clarifies that the Pledge Deed shall terminate only upon the repayment in full of the outstanding debt to the lender. 12.3 In the context of the present case, the contract of pledge envisages that PIFSL is entitled to get itself recorded as beneficial owner without forfeiting its right in terms of Clause 6.2 to sell the shares. The contention of MHPL that Clauses 6.1 and 6.2 are in the alternative and once PIFSL has exercised option under Clause 6.1, the option under Clause 6.2 is closed must be rejected as absolutely untannable. We do not find any such condition in the two clauses. As noticed above, PIFSL could not have exercised the right under Clause 6.2 unless the p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Pledged Shares. As per Clause 5.1(m), the pawnor agrees that throughout the continuance of the pledge created pursuant to the pledge deed and until the repayment of the amount outstanding in full under the transaction document, that is, the Bridge Loan Agreement, the pawnor shall remain the beneficial owner of the shares pledged at all times, except on the sale made by the pawnee as the bridge loan lender. Further, vide Clause 5.1(k), the pawnor has irrevocably waived any right it may have under the Depositories Act, the 1996 Regulations, or any other applicable law to the extent it is inconsistent with the provisions of the Pledge Deed. Clause 5.1(k) would only apply if the Depositories Act, the 1996 Regulations, or any other law permits the parties to contract out of the regulations by mutual agreement. It is a settled position of law and as discussed above, a contract cannot be inconsistent with the provisions of any existing law, including regulations, unless the said law permits the parties to enter into a contract inconsistent with the provision. 12.6 PIFSL by the letter dated 23rd January 2018 had informed MHPL in terms of Clause 6.1 that there has been an occurren ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce with the Depositories Act and the 1996 Regulations. The object and purpose of sub-regulation (8) to Regulation 58 is not to nullify the obligation of MHPL i.e., the pawnor, and PIFSL i.e., the pawnee, under the Contract Act but to enable PIFSL to exercise its rights under Section 176. It also follows that MHPL is entitled to redeem the pledge before the sale to a third party is made. 12.7 In view of the aforesaid findings, it has to be held that registration of the pawn, that is the dematerialised shares, in favour of PIFSL as the beneficial owner does not have the effect of sale of shares by the pawnee. The pledge has not been discharged or satisfied either in full or in part. PIFSL is not required to account for any sale proceeds which are to be applied to the debt on the actual sale . The two options available to PIFSL as the pawnee under Section 176 of the Contract Act remain and are not exhausted. H. Conclusion 13.1 For the aforesaid reasons, the present appeal must be allowed and the impugned order passed by the Appellate Authority dated 20th June 2019 upholding the orders of the Adjudicating Authority dated 6th July 2018 and the emails of the IRP dated 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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