PTC INDIA FINANCIAL SERVICES LIMITED v. VENKATESWARLU KARI AND ANOTHER

A Depositories Act, every ‘depository’, on receipt of intimation from a participant, is required to transfer the security in the transferee’s name. Further, on registration of transfer of security in the transferee’s name, the transferee is registered as the ‘beneficial owner’. 9.4 Power and right to transfer ownership of a dematerialised B security vests with the ‘beneficial owner’, same as in the case of buying and selling physical securities. The difference lies in the delivery process in case of sale, and receipt in case of purchase, which is affected by the depository on instructions from the participant. Every person recorded as the ‘beneficial owner’ to transact and deal in securities must act through a participant who is an agent of the depository. Section 1070 C 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 D 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: E (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 F hypothecation to the depository and such depository shall thereupon make entries in its records accordingly. (3) Any entry in the records of a depository under sub-section (2) shall be evidence of a pledge or hypothecation.” 70

10. Rights of depositories and beneficial owner: G (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 H to all the liabilities in respect of his securities held by a depository.

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ANOTHER [SANJIV KHANNA, J.]

In terms of sub-section (1) of Section 12, a ‘beneficial owner’ A can create a pledge or hypothecation regarding the security owned by him through ‘the depository’, subject to prior approval of ‘the depository’. Section 12 or for that matter the Depositories Act does not define pledge or hypothecation, and thereby accepts and adapts their meaning as known in the commercial sense to people in the trade.This means that the B Depositories Act recognises the principles relating to pledge prescribed by the Contract Act and the common law. Depositories Act states that such a pledge or hypothecation should be made in accordance with the regulations and by-laws made under the Depositories Act. A ‘beneficial owner’ as the pawnor is required to intimate such pledge or hypothecation to the depository, which thereupon makes entries in its records. This C entry, made by ‘the depository’, is evidence of pledge or hypothecation. 9.6 Prior to the Depositories Act, physical shares and securities were pledged and such transactions have resulted in several decisions of the Supreme Court and the High Courts. In most cases, the pledge of shares was accompanied by blank transfer deeds, and consequent dispute as to the correct nature of the transaction as was the case in Sri Raja Kakarklhpudi Venkata Sudarsana Sundara Narasayamma Garu (supra),Mohd. Sultan and Ors.(supra)and even in Madholal Sindhu (supra). In Sri Raja Kakarklhpudi Venkata Sudarsana Sundara Narasayamma Garu(supra),the Andhra Pradesh High Court, after referring to Madholal Sindhu (supra),agreed with the view expressed in Kannambra Nayar Veetil Valia Ammukutti Neithiar’s Son Kunhunni Elaya Nayar Avargal (Deceased) and Another v. P.N. Krishna Pattar and Two Others71 that such transactions because of execution of the blank transfer deeds should not be treated as mortgages. A pledge of shares can be accompanied by execution of blank transfer deeds, which was a convenient mode of exercising the right to sell when the pawnee is entitled to do so. In absence of blank transfer deeds, the pawnee must take recourse to the court when he wishes to enforce the securities. 9.7 Clearly, Section 12 of the Depositories Act is not ex-facie inconsistent with pawnee and pawnor’s contractual rights and obligations under the Contract Actand 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’. 71 AIR 1943 Mad 74. H

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A 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 defacto 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 notget 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 and pawnor. This aspect has been elaborated in some detail subsequently in this judgement. D 9.9 Under Section 25 of the Depositories Act, the Securities and Exchange Board of India72 has been vested with the power to make Regulations to carry out the purpose of the Depositories Act. Clause (d) to sub-section (2) to Section 25 states that the regulations may provide for the manner of creating a pledge or hypothecation in respect of a security owned by a ‘beneficial owner’ under sub-section (1) to Section E 12 of the Depositories Act. 9.10 In exercise of this power, the Board notified the 1996 Regulations. The relevant portion of Regulation 58 reads as under: “58. xx xx xx F (2) The participant after satisfaction that the securities are available for pledge shall make a note in its records of the notice of pledge and forward the application to the depository. (3) The depository after confirmation from the pledgee that the securities are available for pledge with the pledgor shall within G fifteen days of the receipt of the application create and record the pledge and send an intimation of the same to the participants of the pledgor and the pledgees. (4) On receipt of the intimation under sub-regulation (3) the participants of both the pledgor and the pledgee shall inform the 72 H Hereinafter referred to as “Board”.

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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. (6) The entry of pledge made under sub-regulation (3) may be cancelled by the depository if the pledgor or the pledgee makes an application to the depository through its participant: Provided that no entry of pledge shall be cancelled by the depository with the prior concurrence of the pledgee. C (7) The depository on the cancellation of the entry of pledge shall inform the participant of the pledgor. (8) Subject to the provisions of the pledge document, the pledgee may invoke the pledge and on such invocation, the depository shall register the pledgee as beneficial owner of such securities and amend its records accordingly. (9) After amending its records under sub-regulation (8) the depository shall immediately inform the participants of the pledgor and pledgee of the change who in turn shall make the 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 H

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A to the ‘depository’ for cancelling the pledge. In this case, the entry can be cancelled by the ‘depository’ with the prior concurrence of the pawnee. On cancellation of the pledge entry, the ‘depository’ is to inform the participant of the pawnor. 9.11 Sub-regulation (8) to Regulation 58 uses the expression”subject to the provisions of the pledge document” with a specific purpose and objective. In other words,sub-regulation (8) to Regulation 58 does not seek to curtail or restrict, but on the other hand respects party autonomyand freedom to decide the terms of the pledge, including the event of default that would entitle the pawnee to invoke the pledge and sell the pawn. The sub-regulation does not expressly nullify any provision of the Contract Act. However, the stipulation that the pawnee may invoke the pledge, and on such invocation, the pawnee is to be recorded as the ‘beneficial owner’ of the pledged securities is mandatory. A pledge document cannot stipulate to the contrary, and any contravening contractual stipulation would not be binding. The records maintained by the ‘depository’ are to be amended on the pawnee invoking the pledge and thereupon, the ‘depository’ shall register the pawnee as the ‘beneficial owner’ of the securities.Consequent to the change and in terms of sub-regulation (9) to Regulation 58, the ‘depository’ is to inform the participants of the pawnor and pawnee, with a direction that they shall make necessary changes in their records and that the participants shall inform the pawnor and pawnee, respectively. 9.12 Thus, the non-obstante part of sub-regulation (8) to Regulation 58 serves a limited objective and purpose: the pawnee must record itself as a ‘beneficial owner’ before he proceeds to sell the pledged securities. Without the pawnee being accorded the status of a ‘beneficial owner’, a F pawnee cannot proceed to sell the pledged dematerialized securities. A contractual term cannot overwrite the requirement of Sections 7 and 10 of the Depositories Act, which is reflected in sub-regulation (8) to Regulation 58as pe which the pawnee must be recorded as the ‘beneficial owner ’ before the pledged dematerialized securities are sold. G Section38(1)(e) of the Depositories Act requires the ‘depository’ to maintain, inter alia, records of all approvals, notices, entries and cancellations of pledge and hypothecation, as the case may be. This mandate of sub-regulation (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 H

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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 laws. Further, if the terms of the pledge document violate Regulation 58(8), the pledge is not rendered void or illegal, albeit enforcement of the pledge viz. the dematerialised securities will be rendered unattainable unless steps are taken to act in accordance with the procedure prescribed by the 1996 Regulations. The pawnee would be entitled to sue the pawnor for recovery of money, breach of contract and may even apply for injunction/restrain on sale of dematerialised securities. However, third-party rights on transfer of the dematerialized securities, unless injuncted by a prior court order, would not be affected as long as the transfers are in terms of the Depositories Act and the 1996 Regulations. E. Effect of the Depositories Act, 1996 and the Securities and Exchange Board of India (Depositories and Participants) Regulation,1996 on the pledge under the F Contract Act, 1872 10.1 As per the 1996 Regulations, the pledgor/pawnor is not entitled to sell the pledged/pawned securities. The special rights of the pledgee/ pawnee in the pawn remain intact under the Depositories Act and the 1996 Regulation. However, the right to sell dematerialized securities is G conferred and given to the ‘beneficial owner’, who exercises this right through the participants. Consequently, if a pawnee wants to exercise his right to sell dematerialized security it is mandatory for the pawnee first to get himself recorded as a ‘beneficial owner’ in the ‘depository’’s records. Without the said exercise, the pawnee cannot exercise its rights H

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A to sell the pledge and retrieve the monies dueby taking recourse to its rights under Section 176 of the Contract Act. Right to sell the pledge after reasonable notice is one of the options, albeit, both under the common law and under the Contract Act, the pawnee has the choice even after issue of notice for sale to sue for the debt due while retaining possession of the pledged goods. Similarly, the pawnor under the Contract B Act and the common law has the right to redeem the pledged goods till ‘actual sale’. Sale by the pawnee to self does not defeat the right of redemption of the pawnor. It may amount to conversion in law. Other provisions of the Contract Act enumerated in Chapter IX may well apply. 10.2 The Depositories Act (except for Section 10 which has been examined by us in some detail in re its application (supra)) and the 1996 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 apply to pawned dematerialised securities as they apply to other pawned goods. 10.3 The Depositories Act and the 1996 Regulations do not state or impliedly reflect that sale of the pledged securities by the pawnee to self, which amounts to conversion and does not affect the rights of the pawnor under Section 177, are no longer applicable. Doing so would tantamount to reading and adding words to Section 12 and Regulation 58 to defy Sections 176 and 177 of the Contract Act. Law of pledge is dynamic and as observed above must adapt itself in the context of the current commercial environment, albeit we would avoid palpable conflict H

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that would arise in view of the enactment of the Depositories Act and A the 1996 Regulations, or else the operation of law in practice would lead to compliance difficulties and complications. While interpretating the law relating to commercial matters and commerce the court must consider the real-world impact and consequences. Therefore, the expression ‘actual sale’ in Section176 read in the context of the Depositories Act B and the 1996 Regulations have to be given a meaning. The expression ‘actual sale’ used in Section 177 in our opinion should be read as‘the sale by the pawnee to a third person made in accordance with the Depositories Act and applicable by-laws and rules’. It also means and requires compliance with Section 176 of the Contract Act. Mere exercise of the right by the pawnee to record himself as the ‘beneficial owner’, C which is a necessary precondition before the pawnee can exercise his right to sell, is not ‘actual sale’ and would not affect the rights of the pawnor of redemption under Section 177 of the Contract Act. Every transfer or sale is not ‘actual sale’ for the purpose of Section 177 of the Contract Act. To equate ‘sale’ with ‘actual sale’ would negate the legislative intent. 10.4 In Madholal Sindhu (supra) and several other decisions, the expression ‘actual sale’ in Section 177 of the Contract Act has been interpreted to mean lawful sale to a third person and not conversion or unlawful sale contrary to Section 176 of the Contract Act. According to us, exercise of right on the part of the pawnee and consequent action on the part of the ‘depository’ recording the pawnee as the ‘beneficial owner’ is not ‘actual sale’. The pawnor’s right to redemption under Section 177 of the Contract Act continues and can be 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 H

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A 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, by-laws and rules, it would materially impact certitude in the transaction in listed dematerialised securities which would become vulnerable to challenge even when the arm’s length purchasers are innocent third- partybuyers for valuable considerations. Open market operations would be affected. To this extent, therefore, we do hold that the dictum in Madholal Sindhu (supra) and Nabha Investment (supra), that the pawnor has a right to redemption against third parties when the pawnee does not give reasonable notice under Section 176 of the Contract Act, would not apply to listed dematerialised securities which are sold by the pawnee in accordance with the provisions of the Depositories Act, by- laws and rules. In fact, the stipulations in Section 12 of the Depositories Act and Regulation 58 of the 1996 Regulations have in built provisions in terms of which the pawnor and the pawnee are informed about the change of status with the pawnee making a request and being accorded a status of the ‘beneficial owner’. The pawnee cannot make the sale of dematerialised securities without being registered as a ‘beneficial owner’, which is a step that a pawnee must take before he proceeds to sell the pledged dematerialised securities. 10.6 Beyond the additional need to comply with Sections 10 and 12 of the Depositories Act and Regulation 58 of the 1996 Regulations in specific terms, we do not see any disharmony between these provisions and Sections 176 and 177 of the Contract Act. They can be read harmoniously without nullifying or altering their effect, subject to the exception in case of sale of listed securities to third parties in terms of paragraph 10.5 (supra). They apply independently without hindering and obstructing their application as the field and subject matter of Sections 176 and 177 of the Contract Act differ from the subject matter and the objectof Sections 7, 10 and 12 of the Depositories Act and sub-regulation G (8) to Regulation 58 of the 1996 Regulations. F. Four decisions 11.1 The case of the Bombay High Court relied upon by the MHPL in JRY Investments Private Limited v. Deccan Leafine Services Ltd. H

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and Others73 is distinguishable as it dealt with a different factual matrix. A In the said case, there was a transfer of shares and not a pledge, a factum specifically noticed and held in terms of the finding recorded in paragraphs 16 to 20 of the said judgment.74 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 B 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 terms of Section C 10 of the Depositories Act. Section 10 is a non-obstante clause for the purpose of effecting the transfer of ownership of security on behalf of the ‘beneficial owner’. Accordingly, the transfer of shares must be done in accordance with the provisions of the Depositories Act, which means that a person recorded as a ‘beneficial owner’ alone can exercise the power of transfer. Thereafter, Regulation 58 is quoted. It is observed that the Depositories Act and the Regulations contain a whole and self- contained procedure for creating a pledge. This statement and the statement that the pledge of dematerialized securities would require compliance and creation in accordance with the provisions of the Depositories Act, are substantially correct, but have to be read and understood in terms our findings and opinion recorded above. However, we overrule this decision of the Bombay High Court to the extent it holds that dematerialised securities cannot be made subject matter of a pledge under the Contract Act as it is not possible to transfer physical possession. We have referred to the case law, including earlier judgments of this Court, in Lallan Prasad (supra) and Maharashtra State Co- operative Bank Limited (supra), which hold that delivery of possession of goods for pledge can be actual or constructive.In the case before the Bombay High Court, there was no pledge in terms of Regulation 58. On 73 (2004) 121 Comp Cas 12. 74 “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.” H

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A the other hand, the shares were transferred and held by the transferee as a ‘beneficial owner’ upon transfer. The final outcome, therefore, would remain undisturbed in spite of our finding. 11.2 In Pushpanjali Tie Up Pvt. Ltd. v. Renudevi Choudhary and Others,75 a Division Bench of the Bombay High Court had expressed reservation on the finding in JRY Investments Private Limited (supra)that the goods in dematerialised form cannot be pledged.76 The said finding in JRY Investments Private Limited (supra) as held above is contrary to the view expressed by this Court in Morvi Merchantile Bank Limited (supra)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 E Lal v. Mathura Prasad and Others,77 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 High Court had observed that F Section 179 of the Contract Act clarifies that if a person has a limited interest in the goods and pledges them, the pledge is valid to the extent of that interest only. Reliance was placed on Judge Story’s book on ‘Bailments’, which records as under: “The pawnee may by the common law deliver over the pawn to a G stranger for safe custody without consideration; or he may sell or 75 2014 SCC OnLine Bom 3661. 76 “25. ……….. For the purpose of this judgment, we refrain from expressing any opinion regarding the finding of the leaned single Judge in paragraph 16 that it is impossible to hold that the goods in dematerialized form are capable of delivery that is by handing over de-facto possession. We will presume that it is possible to do so…….” 77 AIR 1958 All. 66. H

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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.” C

Significantly, regarding the Depositories Act and the 1996 Regulations, this judgment rightly observes that dematerialised shares must comply with the said pledge requirements to enable the pawnee to exercise the right to sell. A third party would be entitled to and justified in presuming that there is no pledge unless the procedure prescribed under the Depositories Act is followed. To this extent, the Depositories Act has introduced a new regime. The legislative intent is to provide an inode of putting the third parties concerned to express notice of the pledge. Subject to the pledgor’s rights, only a party with express notice of the pledge created by the ‘beneficial owner’, following the manner prescribed for the creation of a pledge, deals with the securities at his own risk. This safeguards innocent third parties who would otherwise have no means of being aware of the pledge in case of dematerialised shares. The provisions of the Depositories Act, and in particular Section 12 thereof, and the 1996 Regulations, and in particular Regulation 58, are salutary as they introduced transparency and certainty in the securities market. There is no other discernible reason for the legislature to have 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 H

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A 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. B Regulation 38(1)(e)78 requires a depository to maintain, inter alia, records of all approvals, notices and entries, and cancellation of pledge or hypothecation, as the case may be. 11.3 We have already referred to the judgment of the Allahabad High Court in Firm Thakur Das Marakhan Lal (supra) and the view C expressed by Justice Story on the Law of Bailment. On the identical issue, there is another decision, which was noticed by Chagla, J. in Madholal Sindhu (supra), in the case of Donald v. Suckling,79 wherein ‘A’ had deposited debentures with ‘B’ as security for payment of a bill endorsed by ‘A’ and discounted by ‘B’. Before the maturity of the bill, D ‘B’ deposited the debentures with ‘C’ to be kept by him as a security until the repayment of the loan from ‘C’ to ‘B’ for an amount larger than the bill. The bill was dishonoured and while it was still unpaid, ‘A’ brought detinue action against ‘C’ for debentures. The Court held that the repledge by ‘B’ to ‘C’ did not put an end to the contract of pledge between ‘A’ and ‘B’, and that ‘A’ could not maintain detinue action without having E 78

38. Records to be maintained. (1) Every depository shall maintain the following records and documents, namely :— (a) records of securities dematerialised and rematerialised; (b) the names of the transferor, transferee, and the dates of transfer of securities; (c) a register and an index of beneficial owners; (cc) details of the holding of the securities of beneficial owners as at the end of each day; F (d) records of instructions received from and sent to participants, issuers, issuers’ agents and beneficial owners; (e) records of approval, notice, entry and cancellation of pledge or hypothecation, as the case may be; (f) details of participants; (g) details of securities declared to be eligible for dematerialisation in the depository; and G (h) such other records as may be specified by the Board for carrying on the activities as a depository. (2) Every depository shall intimate the Board the place where the records and documents are maintained. (3) Subject to the provisions of any other law the depository shall preserve records and documents for a minimum period of five years. 79 H (1866) L.R. 1 Q.B. 585.

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paid or tendered the amount of the bill. One of the Judges in the judgment had observed: “and I think that, although he (pledgee) cannot confer upon any third person a better title or a greater interest than he possesses, yet, if nevertheless he does pledge the goods to a third person 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. C 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, D 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.” E

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 pawnee to repledge the pawn for a higher amount. The aspect, whether this can be permitted and allowed, and whether the interpretation of the relevant clause of the document of pledge in Pushpanjali Tie Up Pvt. Ltd. (supra) is correct, are not examined by us and are left open. 11.4 Our attention was also drawn to a Single Judge Bench judgment of the Delhi High Court in Tendril Financial Services Pvt. Ltd. & Ors. v. Namedi Leasing& Finance Ltd. and Ors., 80 which supports the MHPL’s case. However, a careful reading of the judgment would show that it was passed in peculiar facts therein as there was an ad interim order which had remained in force for twelve years, consequent to which the pawnee was unable to sell the shares. We 80 2018 SCC OnLine Del 8142 H

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A agree that normally a court would not grant interim injunction on the prayer of the pawnor alleging non-compliance of Section 176 of the Contract Act. The object and purpose requiring the pawnee to issue notice to the pawnor before selling the pawn is to give an opportunity to the pawnor to redeem the pledged goods before the ‘actual sale’. The requirement of issue of reasonable notice under Section 176 would be satisfied once the pawnor is made aware and has knowledge of the pawnee’s desire/intent to sell. Continuation of interim orders predicated on the ground of lack of reasonable notice under Section 176 would not be a justification when the pawnee in his written statement clarifies and takes a clear position. The written statement itself can be treated as reasonable notice. We have made these observations as we have come across cases where such injunctions have been granted and confirmed even after the pawnee has entered appearance.81 11.5 On other aspects the judgment has placed reliance on JRY Investments Private Limited (supra) and made certain observations regarding Section 176 and Regulation 58 to hold that a notice under Section 176 would be in derogation of Regulation 58 by giving the following reasoning: “21. I have considered the controversy and for the reasons following, am of the view that the plaintiffs are not entitled to the continuation of the ad interim order which has remained 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 F 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. G 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 81 However, cases praying for an injunction on the plea that the full/part amount of debt has been paid or the event of default etc. has not occurred would have to be examined H on their facts. See, infra para 11.7.

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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 ownership of pledged shares changes from that of the pledgor to that of the pledgee and which is equivalent to sale under Section 176. To hold that a prior notice under Section 176 of Contract Act is also required in the case of pledge of dematerialized shares would interfere with transparency and certainty in the securities market, rendering fatal blow to the Depositories Act and Regulations and the object of enactment thereof. F. The distinction sought to be drawn by the senior counsel for the plaintiffs between “invocation” and “sale” is also not in consonance with Regulation 58. I may notice that there is no such distinction in Contract Act either. While Section 176 of Contract Act entitles pledgee to, on default of pledgor, sell the pledged thing i.e. transfer title and possession thereof to purchaser, Regulation 58 entitles the pledgee to, on default on pledgor, invoke the pledge by intimating to the depository and mandates the depository to in its records record the pledgee in place of the pledgor as the beneficial owner of pledged shares, thereby transferring title as beneficial owner, from the pledgor to pledgee. The only condition imposed on invocation of pledge by the pledgee, under Regulation 58 (8) is of the same being required to be “subject to the provisions of the pledge documents” i.e. of creation of pledge in the manner provided in Regulation 58(1) to 58(6)-of which the participant of the pledgee and the depository have been made aware and with which they are thereby required to comply with. It is not the case of plaintiffs that there was any condition of prior notice in the pledge documents. Though it is not the plea that the Letters of Pledge and Arbitral Award were intimated to the participant or the depository but even they do not provide for prior notice. On G the contrary, they provide otherwise. The distinction drawn in the Letters of Pledge aforequoted between invocation of pledge, whereupon the beneficial ownership in pledged shares, under Regulation 58, was to stand transferred from that of pledgor to that of pledgee, and sale of said shares by pledgee, to realize its dues, is only for the purpose of determining the amount which H

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A was to be offset from the debt to secure which the pledge was made. However such agreement cannot be interpreted as the pledgor continuing to have title in the shares. The only title in dematerialized shares, under 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 D 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 such registration 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 accepted, the entire dues of PIFSL stand paid without in fact a single penny coming to the coffer of PIFSL. Whether or not PIFSL will be able to find a willing buyer and sell the shares is unknown given the fact

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Section 16 states that specific performance of a contract cannot be enforced in favour of a person 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 the terms the performance of which has been prevented or waived by the defendant. Explanation which applies to clause (c) states where a contract involves payment of money, it is not essential that the plaintiff should actually tender to the defendant or deposit in court any money except when so directed by the court. However, the plaintiff must prove performance of, or readiness and willingness to perform, the contract as per its true construction. These aspects must be kept in mind by the court while examining the question of grant of injunction, albeit the fundamental principles relating to law of pledge being the special law should be applied as the plaintiff has to establisha prima facie case, balance of convenience and irreparable harm. These aspects on most occasions would be fact and situation specific. 11.8 Our attention was drawn to the decision of the Securities D Appellate Tribunal, Mumbai, in the case of Liquid Holdings Private Limited v. The Securities Exchange Board of India.93 In this case, on exercising his rights, the pawnee was registered as a ‘beneficial owner’, but pursuant to a settlement, the pawnor was re-recorded as the ‘beneficial owner’. The Board had claimed and succeeded in establishing that there was a transfer of the dematerialised securities resulting in violation of Regulation 7 and 11(1) of the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 1997. This decision, we may note, primarily deals with the takeover regulations and in the passing refers toand interprets Regulation 58 of the 1996 Regulations. The judgment is in the context of the takeover regulations and the legal violation thereof and on the issue whether change in ‘beneficial ownership’ would trigger the takeover regulations. The provisions of the Contract Act and the law of pledge have not been noted and examined. The appeal preferred was dismissed by a non-reasoned order. This decision, therefore, would not help us decide 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 93 (2011) SCC Online SAT 40. H

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A 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. Analysis of facts and application of law of pledge to the facts of this case 12.1 The relevant Clauses of the Pledge Deed dated 10th March, 2014are reproduced as under: D “6.1 Registration in the Name of the Bridge Loan Lender: The pledgor agrees that, upon the receipt of a notice of occurrence of Event of Default issued by the Bridge Loan Lender, the Bridge Loan Lender shall have the right to have the Pledged Shared E transferred in its name or its nominees.” 6.2 Enforceability and Sale: Upon occurrence of an Event of Default, the Bridge Loan Lender or its nominee may without further authority and without prejudice to their other rights under applicable law but after giving notice to F the Pledgor 5 (five) days’ notice (which period of notice the Pledgor agree is reasonable notice) sell or otherwise dispose off all or any part of the Pledged Shares in such manner and for such consideration as the Bridge Loan Lender may in its sole judgment deem fit (whether by private sale or otherwise) and apply the net proceeds of any such sale or disposition in accordance with section G 11 thereof.” 12.2 As per Clause 6.1, on receipt of the notice of the occurrence of ‘event of default’ by the pledgor/pawnor, the pledgee/pawnee has the right to have the pledged shares transferred in its name or its nominees. Under Clause 6.2, the pawnee or its nominee may, without further H

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authority and prejudice to their other rights under the law, but on giving five days’ notice to the pawnor, sell or otherwise dispose of any or all of the pledged shares in such manner and for such consideration as it in its sole discretion deems fit. The net proceeds of such sale or disposition are then applied in the manner prescribed under Clause 11 of the Pledge Deed.94 Clause 14.195 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 C 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 pledge shares were registered in its name as ‘beneficial owner’. This step was necessary to enable PIFSL to exercise its right and enforce the sale of pledge shares. Whether or not it would be successful in selling the pledge shares is unknown and uncertain even today. The amount of money that would be received is also unknown and uncertain. 12.4 Clauses 6.1 and 6.2, therefore, draw a clear distinction between a mere transfer of the pledged shares in the name of the pawnee or its nominee as a ‘beneficial owner’ and the ‘actual sale’ of the pledged shares. The right to sell is without prejudice to any other right under the

11. APPROPRIATIONS OF PAYMENTS: All monies, sums, distributions, and monetary accretions received or recovered by the Bridge Loan Lender under or pursuant to this Deed of Pledge shall be applied, and appropriated in accordance with the Transaction Documents. Any surplus of such monies following payment of the Amounts Outstanding in full, held by the Bridge Loan Lender shall until such surplus amounts are paid to the Pledgor, be held in trust for the benefit of the Pledgor. 95

14. RELEASE AND TERMINATION: 14.1 This Deed of Pledge shall terminate upon the repayment in full of the Amounts Outstanding 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.). H

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A applicable law. Thus, there are two stages before the pledge can be enforced by a sale. At the first stage, the pawnee must give notice to the pawnor under Clause 6.1 to exercise the rights to have the pledge shares transferred in its name or its nominees. This does not result in the discharge of the debt equal to the value of the shares. The discharge of debt in whole or partoccurs when the pawnee exercises his right to sell the shares after giving five days’ notice to the pawnor in accordance with Clause 6.2 and sells the pawn. Upon the actual sale, the pawnee can apply the net proceeds of the sale or disposition in accordance with Clause 11 of the Pledge Deed. 12.5 As discussed above, Clause 6.1 permits PIFSL to get itself recorded as a ‘beneficial owner’ of the shares pledged, a mandate and a requirement to enable PIFSL as a pawnee to sell the shares pledged. Clause 6.2 is for the sale of the said shares, and in this regard, we must refer to sub-clauses (k) and (m) of Clause 5.1 of the Pledge Deed, which read thus: D “5.1 The Pledgor’s Undertakings: The Pledgor assures, undertakes and agrees with the Bridge Loan Lender that throughout the continuance of the pledge created pursuant to this Pledge Deed and until the repayment of the Amounts Outstanding in full under the Transaction Documents, E the Pledgor:- xx xx xx (k) hereby irrevocably waives any right it may have under the Depositories Act, the Depositories Regulations or any other applicable law to the extent the same is inconsistent with the F undertakings as aforesaid and the pledge of the Pledged Shares pursuant to this Pledge Deed; xx xx xx (m) remain the sole beneficial owner at all times of the Pledged Shares except on a sale by the Bridge Loan Lender of the Pledged G 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 H

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the beneficial owner of the shares pledged at all times, except on the A 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 B 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 C MHPL in terms of Clause 6.1 that there has been an occurrence of default, which has continued 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)96 of the pledge deed. 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 consequences as per the law. Pawn has 96 2.3. Voting rights and dividends (A) So long as no event of default or potential event of default has occurred and is continuing, subject to the provisions of the Transaction Documents: G (ii) the Pledgor shall be entitled to receive and retain any and all dividends and other distributions paid in respect of the Pledged Shares only with prior written approval of Bridge Loan Lender, provided, however, that any and all: (b) dividends and other distributions paid or payable in cash in respect of or in con‘nection with any liquidation or dissolution or in connection with a reduction of capital; H

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A not been sold and there is no violation of the Contract Act or for that matter the Depositories Act and the 1996 Regulations. PIFSL has not overlooked its obligations under Sections 176 and 177 of the Contract Act by relying upon sub-regulation (8) to Regulation 58, which has an entirely different object and purpose. Recording change in the register of the ‘depository’, whereby PIFSL as the pawnee has become the B ‘beneficial owner’, is only to enable the pawnee to sell and transfer the shares in accordance 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. E H. Conclusion 13.1 For the aforesaid reasons, the present appeal must be allowed and the impugned order passed by the Appellate Authority dated 20thJune 2019 upholding the orders of the Adjudicating Authority dated 6 th July 2018 and the emails of the IRP dated 19th February 2018 are set aside. F It is held that MHPL is not a secured creditor of the Corporate Debtor, namely NNPIL, to the extent of the value of the 31,80,678 shares. PIFSL has rightly made a claim as financial creditor of the Corporate Debtor without accounting for the value of 31,80,678 shares of NEVPL in its claim petition. Insolvency proceedings against the Corporate Debtor, namely NNPIL, will proceed accordingly. G 13.2 The appeal is allowed in the aforesaid terms without any order as to costs.

Ankit Gyan Appeal allowed. (Assisted by : Mahendra Yadav, LCRA) H