PTC INDIA FINANCIAL SERVICES LIMITED v. VENKATESWARLU KARI AND ANOTHER

The Judgment of the Court was delivered by D 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) E Regulations, 19961 has the legal effect of overwriting the provisions relating to the contracts of pledge under the Indian Contract Act, 1872 2 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 F 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 G (ii) Pawnee has a special and not general right in the pledged property (iii) Accretion on pawned goods

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A 2.3 On17th November 2017,the Corporate Debtor filed a petition invoking Section 10 of the Insolvency and Bankruptcy Code, 201610 before the National Company Law Tribunal, Hyderabad,11 initiating the corporate insolvency resolution process. The petition was admitted under Section 10(4) of the IBC on 18th January 2018. Mr. Venkateswarlu Kari, respondent No.1, was appointed as the Interim Resolution Professional.12 B 2.4 On 28th December 2017, PIFSL issued a notice under the Pledge Deed apprising MHPL on the default son the part of Corporate Debtor and that if the debt due was not discharged within seven days, PIFSL would exercise the rights in terms of the Pledge Deed. C 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.

D 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.

E 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 F 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 status of ‘beneficial owner’, MHPL no longer has any title or right over 31,80,678 shares. Accordingly, MHPL had stepped into the shoes of PIFSL as a creditor G of the Corporate Debtor to the extent of the value of 31,80,678 shares of NEVPL now owned by PIFSL.

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2.10 Contrarily, on 10th February 2018, PIFSL submitted Form C A with a financial claimof Rs.169,19,17,637/-, being the amount due and payable to PIFSL by the Corporate Debtor as of 18th January 2018, the date on which the Adjudicating Authority admitted the Section 10 application of the Corporate Debtor. The value of 31,80,678 pledged shares was not accounted for or reduced. B 2.11 On 19th February 2018, the IRP, by two separate emails, informed that MHPL’s claim could not be crystalized as it was not possible to ascertain the value of 31,80,678 shares ‘transferred’ to PIFSL. Similarly, PIFSL’s claim cannot be crystalized due to the settlement in whole/part of its claim and the need to arrive at the valuation at the time of ‘transfer’ of shares to PIFSL. C

2.12 PIFSL and MHPL preferred separate applications before the Adjudicatory Authority against the rejections of their claims. 2.13 By a common order dated 6thJuly 2018, the Adjudicating Authority disposed of the applications filed by PIFSL and MHPL, D accepting the MHPL’s claim by primarily relying on the Depositories Act and Regulation 58 of the 1996 Regulations. The Adjudicating Authority agreed with MHPL that PIFSL having exercised its right under the Pledge Deed to‘transfer’31,80,678 pledged shares, MHPL’s shareholding in NEVPL got reduced by 31,80,678 shares. Therefore, MHPL is a financial creditor of the Corporate Debtor to the extent of the value of 31,80,678 E shares. Further,16th January 2018, the date on which the pledge was invoked by PIFSL, is the crucial date for determining the extent to which PIFSL and MHPL are the financial creditors of the Corporate Debtor. The IRP was directed to appoint an independent valuer to assess the fair market value of 31,80,678 shares of NEVPL as on 16th January F 2018. 2.14 PIFSL challenged the orders before the National Company Law Appellate Tribunal, New Delhi,13 but the appeals were dismissed vide the impugned judgment dated 20thJune 2019. The Appellate Authority has held that PIFSL had exercised its rights under Clause 6.1 of the G Pledge Deed on 16th 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, 13 Hereinafter referred to as ‘Appellate Authority’. H

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A 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 176of 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. B 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 C 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 Capital and the annual report of MHPL for the financial year 2012-13. As per the annual report relied on by MHPL, shares of NEVPL as of 31st March 2013 were valued at Rs.1229.66 crores. Accordingly, MHPL claims that the fair value of each of the 1,22,33,378 shares of NEVPL (100% of the total equity shares – all held by MHPL) was Rs.1,005.17p per share. Therefore, the total value of the 31,80,678 pledged shares was equivalent to Rs. 319 crores at the time of the creation of the pledge. On the other hand, PIFSL claims that the actual value per share of NEVPL, as calculated on31st March 2016,is only Rs.58.97. Thus, the total value of pledged shares comes to only Rs.18,75,64,582/-.14 B. Relevant provisions of the Contract Act 3.1 Chapter IX of the Contract Act deals with ‘Contracts of F Bailment’. Sections 148 to 171 lay down the general law pertaining to bailments, while Sections 172 to 179 delineate specific provisions concerning pledges, which are a subset of bailments. 3.2 As per Section 151,a bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under G similar circumstances, take of his goods of the same bulk, quality and value as the goods bailed. Section 152 states that a bailee, in the absence of a special contract, will not be liable for any loss, destruction, or 14 There are different recognised and established methods for valuation of unlisted securities – See, (i)Commissioner of Wealth Tax v. Mahadeo Jalan and Mahabir Prasad Jalan and Others Etc., (1973) 3 SCC 157; and (ii) Bharat Hari Singhania and Others v. H Commissioner of Wealth Tax (Central) and Others, 1994 Supp. (3) SCC 46.

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deterioration of the bailed goods if he acts in conformity with Section A

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A “176. Pawnee’s right where pawnor makes default.— If the pawnor makes default in payment of the debt, or performance; at the stipulated time or the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the B pawnor reasonable notice of the sale. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor.” xx xx xx

177Copy pinpoint177. Defaulting pawnor’s right to redeem. – If a time is stipulated for the payment of the debt, or performance of the promise, for which the pledge is made, and the pawnor makes default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of them, but he must, in that case, pay, in addition, any expenses which have arisen from his default.” xx xx xx

179Copy pinpoint179. Pledge where pawnor has only limited interest.–Where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest.” As per Section 176, when a pawnor makes a default in payment of debt or performance of a promise, the pawnee may bring a suit against the pawnor upon such debt or promise and retain the goods pledged as collateral security, or he may sell the goods pledged upon giving the pawnor reasonable notice of the sale. If the pledged goods are sold, and the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance amount to the pawnee. If the proceeds of such sale exceed the amount due, the pawnee will be liable to pay the surplus to the pawnor. G 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. H

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A has only special property in the pledge but the general property therein remains in the pawnor and wholly reverts to him on discharge of the debt. The right to property vests in the pawnee only as far as is necessary to secure the debt. A pawn or pledge is an intermediate between a simple lien and a mortgage, which wholly passes the property.A pawnor has an absolute right to redeem the pledged property upon tendering the amount B advanced but that right would be lost if the pawnee in the meantime has lawfully sold the pledged property. If the pawnee sells, he must appropriate the proceeds of the sale towards the pawnor’s debt, for the sale proceeds are the pawnor’s monies to be so applied and the pawnee must pay the pawnor any surplus after satisfying the debt. C 5.2 Accordingly, the judgment refers to Section 172, which states that a pledge is a contract for bailment of goods as security for payment of debt or performance of promise. Section 17325 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 D 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 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 E third person, who held for the bailor so that in law his possession was that of the bailor, this pledge could be effected by a change of the character of the possession of the third party, that is by an order to him from the pledgor to hold for the pledgee, the change being perfected by the third party attorning to the pledgee, thus acknowledging that he thereupon held for the latter. There was thus a change of possession and a constructive delivery: the goods in the hands of the third party came by this process constructively in the possession of the pledgee. But where goods were represented by documents the transfer of the documents did not change the possession of the goods, save for one exception, unless the custodian (carrier, warehouseman or such) was notified of the transfer and agreed to hold in future as bailee for the pledgee. The one exception was the case of bills of lading, the transfer of which by the law merchant operated as a transfer of the possession of, as well as the property in, the goods. This exception has been explained on the ground that the goods being at sea the master could not be notified; the true explanation was perhaps that it was a rule of the law merchant, developed in order to facilitate mercantile transactions, whereas the process of pledging goods on land was regulated by the narrower rule of the common law.” The quotation reflects flexibility. 25

173. Pawnee’s right of retainer.—The pawnee may retain the goods pledged, not only for 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. H

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reasonable notice of the intended sale to the pawnor. Once the pawnee, A 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 B 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, and it is found that he was given possession of the goods pledged and had retained the same, the pawnor has the right to redeem the pledged goods on payment of the debt. If the pawnee is not in a position to redeliver the goods, the pawnee cannot benefit from the repayment of the debt and the goods pledged. Where the value of the pawned goods is less than the debt and the pawnee denies the pledge or is otherwise not in a position to return the pawned goods, the pawnee has to give credit for the value of the goods and would be entitled only to recover the balance. 5.3 In Bank of Biharv. The State of Bihar and Others,26 relying on the distinction between the right of ownership and the right of the pawnee under a pledge, this Court held that Section 173 of the Contract Act provides that the pawnee may retain the goods pledged only for payment of the debt, performance of the promise and also for interest on the debt, etc. The pawnee has a special property or interest in the thing pledged while the general property therein continues in the owner. The special interest exists in the pawnee so that the pawnee can compel payment of the debt or sell the goods when the right to do so arises. This special interest is distinguished from mere right of detention that the holder of lien possesses, since the pawnee may assign or pledge his special property or interest in the goods. Relying on Halsbury’s Law of England, 3rd Edition, Vol. 29, page 222, it is observed that on the bankruptcy of the pawnor, the pawnee is a secured creditor with respect to the things pledged before the date of receiving the order and without notice of a prior available act of bankruptcy. G

5.4 In Maharashtra State Cooperative Bank Limited v. Assistant Provident Fund Commissioner and Others,27 a three Judges’ 26 (1972) 3 SCC 196. 27 (2009) 10 SCC 123. H

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A Bench of this Court agreed with the ratio in Bank of Bihar (supra) and Lallan Prasad (supra) and proceeded to hold that in a contract of pledge, the property pledged should be actually or constructively delivered to the pawnee. The pawnee has only a ‘special property’ in the pledge, but the general property remains with the pawnor. The special property right in the pawned goods is higher than the mere right of detention of goods but lesser than the general property right. This means that the pawnee has the right to transfer the general property rights 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 Othersv. State of Karnataka and Others,28 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 Bankand Anotherv. Custodianand D Another,29 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 example in this Section states that if a calf is born to the cow, then the bailee is bound to deliver the calf as well as the cow to the bailor. In other words, the pledge extends to accretions and additions, and therefore, when the pawnee returns the pledged goods, the accretions and additions must be returned to the pawnor. It also follows that the pawnee’s right to retain and sell the pledged goods stretches to the right to retain and sell any increase and accumulations to the pledged goods. G 6.2 Accordingly, in Seth Motilal Hirabhai and Ors. v. Bai Mani,30 where the shares were already pledged, it is held that when fresh shares were issued taking the call money from the yearly dividend payable on 28 (1998) 7 SCC 707. 29 (2000) 6 SCC 427. 30 H 1924 SCC OnLine PC 81.

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the old shares, the new shares must be returned to pawnor along with A the old shares. Similarly, the Delhi High Court in M.R. Dhawan v. Madan Mohan and Others,31 has held that any accretion in the shape of dividends, bonuses or right shares issued in respect of the pledged shares, in the absence of any contract to the contrary, is the special property of the pawnee as a security for the debt. B (iv) Notice of sale by pawnor and the pawnee’s right to sue for recovery and sell the pawned goods 7.1 Relying upon Lallan Prasad (supra)and Bank of Bihar (supra), this Court in Balkrishan Gupta and Others v. Swadeshi Polytex Ltd. and Another32 has held that under Section 176, if the pawnor C makes default in payment of the debt or performance as promised, and in respect of which the goods were pledged, the pawnee may bring a suit on the pawnor upon the debt or promise and may retain the goods pledged as collateral security, or the pawnee may sell the things pledged on giving the pawnor reasonable notice of sale. D 7.2 Several High Courts in F. Nanak Chand Ramkishan Das of Hodel and Others v. Lal Chand and Others,33Bank of Maharashtra v. M/s. Racmann Auto (P) Ltd.34 and Rani Leasing & Finance Ltd. v. Sanjay Khemani35 have held that while the pawnee has a right to sell the goods after giving notice to the pawnor, he is not bound to sell at any particular time. The power of sale conferred on the pawnee is expressly for his benefit, and it is his sole discretion to exercise the power of sale or otherwise. If the pawnee does not exercise 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.36 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 G 31 AIR 1969 Del 313. 32 (1985) 2 SCC 167. 33 1958 SCC OnLinePunj 6. 34 AIR 1991 Del 278. 35 2015 SCC OnLine Cal 450. 36 AIR 1958 Cal 644. H

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A 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.37refers to two earlier decisions in the cases of Hulas Kunwar (supra) and Kunj Behari Lal v. The Bhargava Commercial Bank, Jubbulpore38 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 to redeem the pawned goods. Further, the reasonableness of notice may vary from case to case. The right to retain the pawn and the right to sell is alternative and not concurrent. When the pawnor retains, he does not sell, but when he sells, he does not retain the pledged goods. However, the pawnee can sue on the debt or the promise concurrently with his right to retain the pawn or sell it. Even the sale of the pawn does not destroy the pawnee’s right as the pawn is a collateral security, and the pawnor remains liable on the original promise to pay the balance due. The right to sell the pawned goods is necessary to make the security effectual for discharging the pawnor’s obligation. It continues despite the institution of a suit for recovery of the dues. 7.5 In Vimal Chandra Grover v Bank of India, 39 specific reference was made to the decisions on the law of pledge that the pawnee is under no compulsion to sell the pawned goods on the request of the pawnor as a means of discharging the debt. The reason is that Section 176 grants an option to the pawnee to either retain or sell the pawned goods for recovery of the debt. In the former case, the pawnee can also file the suit to recover debt while holding the goods. However, giving of reasonable notice to the pawnor for sale is required, but even when reasonable notice for sale has been given, the pawnee is not bound to sell the goods after the expiration of the period mentioned in the notice. At the same time, before the pledged goods are put to sale, the pawnor is entitled to redeem the pawned goods. The pawnor has the right to redeem them after discharging the debt. However, the court did not consider it necessary to go into legal niceties in view of the facts of the case as the bank, as a pawnee, on the request of the borrower-pawnor

37 AIR 1963 Cal 132. 38 AIR 1918 All 363 (2). 39 H (2000) 5 SCC 122.

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had agreed to sell a part of the shares to redeem the debt. In Vimal A Chandra (supra), the Court held that the bank as the pawnee was liable for negligence as it did not sell the pledged goods, after having agreed to do so. This failure amounted to negligence in service under the Consumer Protection Act, 1986. 7.6 At this stage we must refer to two detailed judgments of the B Bombay High Court and the Delhi High Court and the observations of the Andhra Pradesh High Court in Sri Raja Kakarklhpudi Venkata Sudarsana Sundara Narasayamma Garu (supra).In The Official Assignee of Bombay v. Madholal Sindhu and Others,40 the judgment of the Bombay High Court authored by Chief Justice Leonard Stone referred to the Commentaries on the Law of Bailments, Eighth Edition, C 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.” F In this case, the judgment of Chief justice Leonard Stone also referred to Section 1 of the Contract Act, which reads, “1. Short title.—This Act may be called the Indian Contract Act, 1872. Extent, Commencement.—It extends to the whole of India G except the State of Jammu and Kashmir; and it shall come into force on the first day of September, 1872. Saving—Nothing herein contained shall affect the provisions of any Statute, Act or Regulation not hereby expressly repealed, nor 40 AIR 1947 Bom 217. H

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A any usage or custom of trade, nor any incident of any contract, not inconsistent with the provisions of this Act.” to hold that the instrument of pledge therein, giving unqualified power of sale, being inconsistent with Section 176, was not valid, and the express provision of Section 176 shall prevail. The notice must be B given in all pledge cases, even when the instrument of pledge contains an unconditional power of sale. Another important observation made in this judgment is that the pawnor’s right to redeem remains until the ‘lawful sale’. Chief Justice Stone’s judgment is also relevant for another reason. C He has referred to, with approval, Mr. Justice Story’s commentaries on the Law of Bailments, Eight Edition, which at page 262 draws distinction between (actual) sale and conversion by the pawnee in the following passage: “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 is engagement, but a sale beforedefault 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.” Chagla J., in his concurring opinion, referring to Section 176, held that when the pawnor makes a default in the payment of the debt, the pawnee may sell the pawned goods on giving the pawnor reasonable notice of sale. He agreed that the requirement of giving the pawnor reasonable notice of sale is mandatory and it is not open to the parties to contract themselves out of this section. Section 176 of the Contract Act, F unlike some of the sections of the Contract Act, does not specifically provide that the contractual terms can override the provision by using the expression “in the absence of the contract to the contrary” or “subject to special contract to the contrary”. The notice, that is to be given for the intended sale by the pawnee, is a special protection that the statute has given to the pawnor, and the parties cannot agree that the pawnee G 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 H

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A decision also examines the waiver of the right to reasonable notice under Section 176 of the Contract Act. Reference was made to the rule of waiver as stated in Maxwell on Interpretation of Statutes43 in the following words: “Every-one has a right to waive and to agree to waive the advantage of a law or rule made solely for the benefit and protection of the individual in his private capacity, which may be exercised with without infringing any public right of public policy”. After referring to foreign44 and Indian authorities45 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 D (supra) to the following observations of Farelli J. in Soho Square Syndicate Ltd. v Poland & Co.:46 “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 intended to provide would virtually disappear. People in the position of such persons as I have mentioned might easily be persuaded to give a consent without really knowing what exactly was involved in such consent, and an opportunity of expressing their reasons for their inability to pay, whatever they may he, and of stating their difficulties, which is now afforded to them by the necessity of an application to the court would be entirely removed. Moreover, difficult questions might also arise whether the consent had in fact been obtained, or whether it was a consent which was binding, and similar questions.’’

43 G (1953), 10th Edition, Sweet & Maxwell, page 368. 44 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. 45 Vellayan Chettiar v. Government of the Province of Madras, I.L.R. 1948 Mad. p. 214; Raja Chetty v. JagannadhadasGovindas, 1949 II M.L.J. P. 694. 46 1940-1 Ch 638 at p. C43 H

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Where the Contract Act prescribes a particular term that is binding, the statutory mandate must be followed by the parties. Neither party can contract out of it. Otherwise, the legislative command that the statute imposes would be violated with immunity by merely incorporating waiver as a contractual term, depriving the frailer party of the benefit of the legal protection. A condition prescribed to protect and benefit the public cannot be dispensed with when it lays down a rule of public policy. 7.10 Section 6347 of the Contract Act governs the domain of waiver. It is a general principle of law that everyone has a right to waive the advantage of a law or rule made solely for the benefit and protection of the individual in his private capacity.48 However, such a waiver cannot infringe any public right or public policy. In Krishna Bahadur v.Purna C Theatre and Others,49 this Court observed that, “10. A right can be waived by the party for whose benefit certain requirements or conditions had been provided for by a statute subject to the condition that no public interest is involved therein. Whenever waiver is pleaded it is for the party pleading the same to show that an agreement waiving the right in consideration of some compromise came into being. Statutory right, however, may also be waived by his conduct.” In Halsbury’s Laws of England,50 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 47

63. Promise may dispense with or remit performance of promisee.— Every promisee may dispense with or remit, wholly or in part, the performance of the promisee made to him, or may extend the time for such performance, or may accept instead of it any satisfaction which he thinks fit. 48 Cuilibet licet renuntiarejuri pro se introductoi.e., Any one may waive or renounce the benefit of a principle or rule of law that exists only for his protection. 49 (2004) 8 SCC 229. 50 Vol. 8, Third Edn., para 248 at p. 143. H

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A 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.51 Where a statute prescribes that a contract shall be in a specific form or shall or shall not contain certain terms, the statutory form must be followed.52 In reference to pledge, waiver by contract and statutorily mandated terms, the High Court of Calcutta in The Co-Operative Hindusthan Bank, Ltd. v. Surendranath De,53 observed: “Section 176 of the Contract Act, unlike some other sections, e.g., sections 163, 171 and 174, does not contain a saving clause in respect of special contracts contrary to its express terms. The section gives the pawnee the right to sell only as an alternative to the right to have his remedy by suit. Besides, section 177 gives the pawner a right to redeem even after the stipulated time for payment and before the sale. In our opinion, in view of the wording of section 176 as compared with the wordings of the other sections of the Act, to which we have referred, and also, in view of the right which section 177 gives to the pawner, and, in order that the provision of that section may not be made nugatory, the proper interpretation to put on section 176 is to hold that, notwithstanding any contract to the contrary, notice has to be given.” E Even when the general law provides liberty to contract, the parties cannot contract contrary to express provisions of law. In Park Street Properties Private Limited v. Dipak Kumar Singh and Another,54 in reference to Section 106 of the Transfer of Property Act, 1882, this Court held: F “While the agreement dated 7-8-2006 can be admitted in evidence and even relied upon by the parties to prove the factum of the tenancy, the terms of the same cannot be used to derogate from the statutory provision of Section 106 of the Act, which creates a fiction of tenancy in the absence of a registered instrument creating G 51 G.P. Singh, Principles of Statutory Interpretation, 14 th Edition, Lexis Nexis (2016) at page 462. 52 Craies on Statute Law by S.G.G. Edgar, 7 th Edition, Sweet & Maxwell Limited (1971) at page 255. 53 1931 SCC OnLine Cal 224. 54 H (2016) 9 SCC 268.

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the same. If the argument advanced on behalf of the respondents is taken to its logical conclusion, this lease can never be terminated, save in cases of breach by the tenant. Accepting this argument would mean that in a situation where the tenant does not default on rent payment for three consecutive months, or does not commit a breach of the terms of the lease, it is not open to the lessor to terminate the lease even after giving a notice. This interpretation of Clause 6 of the agreement cannot be permitted as the same 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.” C 7.11 In Nabha Investment Pvt. Ltd. v. Harmishan Dass Lukhmi Dass,55 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 D (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 Chagla J. that Section 176 is mandatory observing that the applicability and sweep of Section 176 is not eclipsed or curtailed by the phrase “in the absence of the contract to the contrary”. In other words, the parties cannot contract out of Section 176. The need for notice to the pawnor of the intended sale by the pawnee is the special protection given to the pawnor, and the parties cannot override the special protection by agreement. Further, the right to redeem can be exercised up to the actual sale of the goods pledged, i.e., the sale referred to in Section 177 in conformity with Section 176. The judgment in Nabha Investment G (supra) elucidates: “22.8. Here I may utilize this opportunity for extracting other principles of law laid down by Chagla, J. in his illuminating judgment which are based on several authorities. They are:— 55 1995 SCC OnLine Del 239. H

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A (i) The provisions of Section 176 Contract Act are mandatory. The applicability and sweep of Section 176 unlike several other provisions on the same subject is not eclipsed by the phrase-”in the absence of a contract to the contrary.” The notice that is to be given to the pledgor of the intended sale by the pledgee is a special protection which statute has given to the pledgor and parties cannot agree that in the case of any pledge, the pledgee may sale the pledged articles without notice to the pledgor (para 55). (ii) If a sale is held of the shares under authority of the pledgor then it could convey to the purchaser full title in the shares; sale under Section 27 of Sale of Goods Act title conveyed to the purchaser would not be a title better than that of the seller. (Para 56). (iii) Notice under Section 176 of Contract Act must be given before the power of sale can be exercised. If the notice is essential, the purchaser, however innocent cannot acquire a title better than his vendor has (Para 56). (iv) Right to redeem under Section 177 can be exercised right upto time the actual sale of the goods pledged takes place. The actual sale referred to in Section 177 must be a sale in conformity with the provisions of Section 176 which gives the pledgee the right to sale; and if the sale is not in conformity with those provisions, then the equity of redemption in the pledgor is not extinguished (para 57). (v) The pledgor has a right to call upon the pledgee to redeem the shares or payment of the debt. If the pledgee has transferred 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).

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(vi) There is no analogy between Section 69(3) of T.P. Act and A 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 B another statute is with respect wholly fallacious and unjustifiable. It is always dangerous to draw analogy between one statute and another; 22.9Vide para 64 Chagla, J. did not agree with the following statement of law contained in Coote on Mortgages (Volume-II, 9th Edition page 1472):— C

“The pledgee has on default a right to sell the pledge if the payment is to be made on a certain day; otherwise not; but a sale before default would be a conversion; yet the sale, whether wrongful or not, passes the title to the vendee as against the pledgor. D

22.10 Chagla, J. has expressed his approval and agreement with the following statement of law in Story’s Law of Bailments, (8th Edition, page 272):— “A pledgee of stock has no legal right to sell the same without E notice to the pledgor and such sale passes no title as against the pledgor, even to a bonafide party”. 22.11 The abovesaid principles deducible from the opinion recorded by Chagla, J. with which I find myself in full agreement lend strength to the plaintiff’s case….” F 7.12 The view of the Delhi High Court in Nabha Investment (supra) expressing limited divergence56from the ratio in Madholal Sindhu (supra) and Sri Raja Kakarklhpudi Venkata Sudarsana Sundara Narasayamma Garu (supra) does not appeal to us. The reason given by the Delhi High Court that there is no provision in any statute or principle G of law to hold that the pawnor has only two remedies, as elucidated by Chagla, J. in Madholal Sindhu (supra), is not correct. Section 177, which gives right of redemption to the pawnor till ‘actual sale’, itself postulates not only payment of the debt due but also expenses of the 56 See paragraphs 22.7, 23 and 24 of the judgment in Nabha Investment. H

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Act. Judgment of the Calcutta High Court in Haridas Mundra (supra) A also states this rule. Earlier, the Privy Council in Neikram Dobay v. Bank of Bengal,59 observed that the sale of goods by the bank as the pawnee to itself is unauthorized but did not entitle the pawnor to have the goods back. The pawnor would be required to pay back the debt for which the goods were pledged as security to redeem the goods. If the loan remains unpaid after the demand, the pawnee is entitled to sell the goods and credit the proceeds towards the outstanding debt. After the goods are sold to a third party, the pledge ends. The pawnee in such cases would be liable if he fails to credit the loan account with the proceeds on the sale of the pawned goods. The pawnee may also be liable, subject to the contract, for damages for converting the goods for his use. 8.2 Several other High Courts have similarly opined and weagree that the Contract Act does not conceive of sale of the pawn to self and consequently, the pawnor’s right to redemption in terms of Section 177 of the Contract Act survives till ‘actual sale’ .In Ramdeyal Prasad v. D Sayed Hasan,60 the Patna High Court has held that the sale by the pawnee to himself of the securities pledged is void; it does not put an end to the contract of the pledge to entitle the pawnor to recover the goods without payment of the amount thereby secured, nor does it entitle the pawnor to damages. The pawnor is bound by the resale duly effected by the pawnee to third persons. However, where the pawnee has erroneously represented to the pawnor before such resales that the securities have been sold and, therefore, no longer available for redemption, the pawnee becomes liable for the value as conversion. 8.3 ADivision Bench of the Madras High Court inS.L.Ramaswamy Chetty and Another v. M.S.A.P.L. Palaniappa Chettiar,61 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. 62 G 59 ILR (1892) 19 Cal 322. 60 AIR 1944 Pat 135. 61 1929 SCC OnLine Mad 62. 62 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 NeikramDobey(supra). H

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A 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,63 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 B thus, we deem it appropriate to overrule this ratio in Dhani Ram and Sons(supra). D. Effect and Purpose of the Depositories Act, 1996 and the Securities and Exchange Board of India (Depositories and Participants) Regulation 1996. C 9.1 Interpretation of statutes must depend on the text and the context. To resolve a debate when two views are evident, it is best to interpret the provision when we know why the statute is enacted. If a statute is looked at, in the context of its enactment, with the glasses of the statute-maker provided by such context, its scheme, the sections, D clauses, phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context.64 This principle may equally apply when we examine interplay between two statutes. The provisions of the Contract Act, which is substantive and general law relating to contracts, and the Depositories Act, which is a primarily a law relating securities, must be interpreted harmoniously. E This does not mean that any provision of one enactment could nullify the provisions of the other. This end can be best achieved by examining the objects and the subject matter of the Depositories Act vis-a-vis the Contract Act, which will clarify their separable spheres of operation to avoid any conflict or overlap between them.It means that the two statutes shall be read together consistently and harmoniously to complement each other so far as it is reasonably possible to do so, and where such conciliation is not possible to clarify the legal position by application of principles of interpretation applicable to such situations. 65 9.2 Thus, we begin by referring to the object and purpose behind the enactment of the Depositories Act and which would underpin our interpretation of the 1996 Regulations. Introduction to the Depositories 63 AIR 1962 P&H 321. 64 Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. and Others, (1987) 1 SCC 424, para 33. 65 Vasudev Ramachandra Shelat v. PranlalJayanand Thakkar and Others, (1974) 2 SCC 323, para 5. H

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7. Registration of transfer of securities with depository: (1) Every depository shall, on receipt of intimation from a participant, register the transfer of security in the name of the transferee. (2) If a beneficial owner or a transferee of any security seeks to have custody of such security, the depository shall inform the issuer accordingly. H

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