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TMI Blog2014 (6) TMI 1065X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... odg) No. 2150 of 2013 in Suit No. 131 of 2014 - - - Dated:- 12-6-2014 - S.J. Vazifdar and B.P. Colabawalla, JJ. For the Appellant: Mr. Aspi Chinoy, Senior Counsel, Mr. Zal Andhyarujina, Mr. A.S. Daver and Ms. Ankita Singhania, i/b Mr. Ashok Dhanuka For the Respondent: Mr. Jayesh Gawde, i/b M/s. Thakore Jariwalla Associates for Respondent Nos. 1 and 2, Mr. I.M. Chagla, Mr. Arif Bookwala, Senior Counsels and Mr. Ajay Khandar, i/b Ajay N. Khandar Co. JUDGMENT S.J. Vazifdar, J. 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. Responde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... edge 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 re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unts. 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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/-. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereas 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 pra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 len ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The principle enacted in this section is a well-established 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 tim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itory 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. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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. 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 (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 mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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. 18. The transaction in such shares are directly governed by the Depositories Act, 1996, which contemplates the existence of a dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 obvi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dian 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ced 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. Thereafte ..... X X X X Extracts X X X X X X X X Extracts X X X X
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