PTC INDIA FINANCIAL SERVICES LIMITED VS VENKATESWARLU KARI AND ANOTHER Case

PTC INDIA FINANCIAL SERVICES LIMITED VS VENKATESWARLU KARI AND ANOTHER Supreme Court Case Judgment 2022

Landmark Cases of India / सुप्रीम कोर्ट के ऐतिहासिक फैसले



REPORTABLE
IN THE SUPREME COURT OF INDIA
CIVIL APPELLATE JURISDICTION
CIVIL APPEAL NO. 5443 OF 2019
PTC INDIA FINANCIAL SERVICES LIMITED ..... APPELLANT
VERSUS
VENKATESWARLU KARI AND ANOTHER ..... RESPONDENTS
J U D G M E N T
SANJIV KHANNA, J.
The primary legal issue which arises for consideration in this
appeal is whether the Depositories Act, 1996 read with the
Regulation 58 of the Securities and Exchange Board of India
(Depositories and Participants) Regulations, 19961
 has the legal
effect of overwriting the provisions relating to the contracts of
pledge under the Indian Contract Act, 18722
 and the common law
as applicable in India. To facilitate analysis, this judgment has
been divided into sections as follows:
1 For short, ‘1996 Regulations’.
2 For short, ‘Contract Act’.
Civil Appeal No. 5443 of 2019 Page 1 of 86
A. Factual background of the case
B. Relevant provisions of the Contract Act
C. Analysis of case laws under the Contract Act:
(i) What is pledge and the legal difference between
ownership, pledge and mortgage
(ii) Pawnee has a special and not general right in the
pledged property
(iii) Accretion on pawned goods
(iv) Notice of sale by pawnor and his right to sale
(v) Sale of the pledged goods by the pawnee to self
D. Effect and Purpose of the Depositories Act, 1996 and the
Securities and Exchange Board of India (Depositories and
Participants) Regulation 1996
E. Effect of the Depositories Act, 1996 and the Securities and
Exchange Board of India (Depositories and Participants)
Regulation, 1996 on the pledge under the Contract Act,
1872
F. Four decisions
G. Analysis of facts and application of law of pledge to the
facts of this case
H. Conclusion
A. Factual background of the case
2.1 The appellant – PTC India Financial Services Limited,3
 is an
existing company under the Companies Act, 2013. It is a whollyowned subsidiary of PTC India Limited, which in 1999 was
promoted by four public sector undertakings, namely, NTPC
Limited, Power Finance Corporation Limited, NHPC Limited, and
3 Hereinafter referred to as “PIFSL”.
Civil Appeal No. 5443 of 2019 Page 2 of 86
Power Grid Corporation of India Limited. PIFSL is registered with
the Reserve Bank of India4
 as a Non-Banking Finance Company5
and classified as an Infrastructure Finance Company.6
 The
principal business of PIFSL is to invest in power and energy sector
projects in India.
2.2 PIFSL, by way of a Bridge Loan Agreement dated 10th March
2014, had advanced a loan of Rs. 125 crores to NSL Nagapatnam
Power and Infratech Limited.7
 As per Clause 3.1.1 of the Bridge
Loan Agreement, the loan is required to be secured. In
accordance with sub-clause (6) of Clause 3.1.1, on 10th March
2014 thereof, the second respondent, Mandava Holdings Private
Limited,8
 executed a Pledge Deed in favour of PIFSL, thereby,
pledging 31,80,678 shares, equivalent to 26% of the shares of
NSL Energy Ventures Private Limited.9
 NNPIL and NEVPL are
subsidiaries of MHPL.
2.3 On 17th 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
4 Hereinafter referred to as “RBI”.
5 Hereinafter referred to as “NBFC”.
6 Hereinafter referred to as “IFC”.
7 Hereinafter referred to as “NNPIL” or “Corporate Debtor”.
8 Hereinafter referred to as “MHPL”.
9 Hereinafter referred to as “NEVPL”.
10 For short, ‘IBC’.
11 Hereinafter referred to as “Adjudicating Authority”.
Civil Appeal No. 5443 of 2019 Page 3 of 86
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
2.4 On 28th December 2017, PIFSL issued a notice under the Pledge
Deed apprising MHPL on the defaults on 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.
2.5 On 16th January 2018, as the debt remained unpaid, PIFSL wrote
to the Depository Participant invoking its rights in terms of Clause
6.1 of the Pledge Deed. Acting on the request, the Depository
Participant has accorded PIFSL the status of ‘beneficial owner’ of
31,80,678 pledged shares of NEVPL.
2.6 On 23rd January 2018, PIFSL wrote to MHPL informing that due to
continued defaults in payment on the part of the Corporate Debtor,
it had exercised the right under Clause 6.1, while reserving its
right to sell the shares under Clause 6.2 of the Pledge Deed read
with Section 176 of the Contract Act.
12 Hereinafter referred to as “IRP”.
Civil Appeal No. 5443 of 2019 Page 4 of 86
2.7 On 17th January 2018, PIFSL filed an application before the
Adjudicating Authority under Section 7 of the IBC as a financial
creditor to whom Rs. 167,29,23,507/- was due and payable by the
Corporate Debtor.
2.8 On 30th January 2018, the Adjudicating Authority allowed PIFSL to
withdraw the application with liberty to file proof of financial claim
before the IRP in Form C.
2.9 On 6
th 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 of the Corporate Debtor to the extent of the value of
31,80,678 shares of NEVPL now owned by PIFSL.
2.10 Contrarily, on 10th February 2018, PIFSL submitted Form C with a
financial claim of 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.
Civil Appeal No. 5443 of 2019 Page 5 of 86
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.
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 6th July 2018, the Adjudicating Authority
disposed of the applications filed by PIFSL and MHPL, 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 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
Civil Appeal No. 5443 of 2019 Page 6 of 86
market value of 31,80,678 shares of NEVPL as on 16th January
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 20th June 2019. The Appellate
Authority has held that PIFSL had exercised its rights under
Clause 6.1 of the 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, it could
realize its dues in whole or part by sale and transfer of the shares
according to the law. Once PIFSL has exercised right to become
the owner of the shares, PIFSL cannot take advantage of Section
176 of the Contract Act to ‘reclaim’ the debt. Section 176 of the
Contract Act cannot be taken into consideration by the IRP for
collating the financial claim of PIFSL under Section 18 of the IBC.
2.15 Other aspects which require to be noted are: (a) as per PIFSL, the
principal and interest amount due to them by the Corporate Debtor
as of 23rd December 2021 are Rs.3,76,13,03,389/-; (b) the shares
of NEVPL are unlisted, and there are no open market
13 Hereinafter referred to as ‘Appellate Authority’.
Civil Appeal No. 5443 of 2019 Page 7 of 86
transactions, and (c) the value of the pledged shares is disputed.
On 13th August 2018, the IRP has submitted a valuation report of
an independent valuer who has valued the pledged shares at
Rs.179 crores as of 16th January 2018. MHPL relies on the 2013
valuation report of Axis 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 on 31st 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 Bailment’.
Sections 148 to 171 lay down the general law pertaining to
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. Commissioner of Wealth Tax (Central) and
Others, 1994 Supp. (3) SCC 46.
Civil Appeal No. 5443 of 2019 Page 8 of 86
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
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 deterioration of the bailed goods if he acts in
conformity with Section 151. As per Section 153, a contract for
bailment is voidable at the option of the bailor if the bailee does
any act with regard to the goods bailed, inconsistent with the
conditions of the bailment. Section 154 lays down that the bailee
shall be liable for damage arising from unauthorized use of the
bailed goods. The bailee, with the consent of the bailor, can mix
the goods bailed with his own goods, in which event, the bailor
and the bailee will have interest in proportion to their respective
shares in the mixture.15 However, if the bailee, without the bailor’s
consent, mixes the bailed goods with his own, and the goods can
be separated or divided, the property in the goods remain with the
parties respectively.16 Further, the bailee is bound to bear the
expense of separation or division of the goods, as well as any
15 Section 155, Contract Act.
16 Section 156, Contract Act.
Civil Appeal No. 5443 of 2019 Page 9 of 86
damage arising from the mixture. Section 157 provides that when
the goods are so mixed without the bailor’s consent and cannot be
separated, the bailor is liable to be compensated, and the bailee is
liable for the loss. Under Section 160, the bailee has to return or
deliver, as per the bailor’s directions, the goods, without demand,
as soon as the time for which they were bailed has expired or the
purpose for which they were bailed has been accomplished.
Section 161 states that if there is a default by the bailee and the
goods are not returned, delivered, or tendered at the proper time,
the bailee is responsible to the bailor for any loss, destruction, or
deterioration of the goods from that time. As per Section 163, in
the absence of any contract to the contrary, the bailee is bound to
deliver to the bailor, or in accordance with his directions, any
increase or profit that may accrue from the goods bailed.
3.3 Section 172 of the Contract Act is reproduced as under:
“172. ‘Pledge’, ‘pawnor’ and ‘pawnee’ defined – The
bailment of goods as security for payment of a debt or
the performance of the promise, is called a ‘pledge’.
The bailor is in this case called the ‘pawnor’. The
bailee is called ‘pawnee’”.
As per Section 172, creating a valid pledge requires delivery
of the possession of goods by the pawnor to the pawnee by way
of security upon the promise of repayment of a debt or the
Civil Appeal No. 5443 of 2019 Page 10 of 86
performance of a promise, thereby, creating an estate that vests
with the pawnee.
3.4 Sections 176, 177 and 179 of the Contract Act read thus:
“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 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
177. 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
179. 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
Civil Appeal No. 5443 of 2019 Page 11 of 86
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.
Section 177 gives statutory right to the pawnor, who is at
default in payment of the debt or performance of the promise, to
redeem the pledged goods at any time before ‘actual sale’ by the
pawnee. However, in such cases, the pawnor must pay in addition
the expenses that have arisen from his default.
Section 179 states that the limited interest that a pawnor has
in the goods can be validly pledged.
Having understood the broad statutory contours of pledge,
we would now examine the relevant opinio juris on the law of
pledge. Legal jurisprudence relating to law of pledge is required to
be examined in some detail for determining the issue before us.
C. Analysis of law of pledge and case laws relating to pledge
(i) What is pledge and the legal difference between ownership,
pledge and mortgage.
Civil Appeal No. 5443 of 2019 Page 12 of 86
4.1 Md. Sultan and Others v. Firm of Rampratap Kannayalal,
Hyderabad, by its partners17 observes that a contract of pledge
should satisfy the following conditions:
(i) there should be a bailment of goods as defined in Section
148 of the Contract Act, that is, delivery of goods;
(ii) the bailment must be by way of security; and
(iii) the security must be for payment of debt or performance of a
promise.
The decisions in Md. Sultan (supra) and Sri Raja
Kakarklhpudi Venkata Sudarsana Sundara Narasayamma
Garu (died) and others v. The Andhra Bank Ltd. Vijayawada
and others18 observe that hypothecation and mortgage of
movables, though not specifically mentioned in the Contract Act,
are valid and enforceable in India as the Contract Act is not an
exhaustive law on the subject. Such transactions beyond the
statutory framework are given effect to and interpreted by the
courts according to the principles of justice, equity, and good
conscience. There is no standard format and incidents in a
contract of pledge can be different. A term mutually agreed by the
parties is valid as long as it is not contrary to or inconsistent with
any provision of the Contract Act. In the context of the present
17 AIR 1964 AP 201.
18 AIR 1960 AP 273.
Civil Appeal No. 5443 of 2019 Page 13 of 86
case, the aforesaid principles relating to the law of pledge
reflecting flexibility are important in the milieu of a transitional and
commercial environment wherein significant changes have
occurred across the capital market with inter alia advent of
institutional investors, regulatory mechanisms, and the new
insolvency regime, albeit the fundamentals of the law of pledge,
except when permitted or required to be eschewed, should be
applied. This is the principle of interpretation which we have
applied to answer the conundrum.
4.2 These two decisions highlight distinction between a pledge, which
creates an estate or a right that vests with the pawnee, and a
wider and general right of an owner; as well as mortgage or
hypothecation.19 An owner has: (a) right of possession; (b) right of
enjoyment; and (c) the right of disposition. A pawnee does not
have the right of ownership, but has limited right to retain
possession till debt is paid or promise is performed. A pawnee’s
right of disposition is limited to disposition of the pledge rights
19 In the context of the present case, we need not examine the difference between pledge and
hypothecation. It is sufficient to note that in hypothecation possession does not transfer and remains
with the debtor. Hypothecation has been defined as a right which a creditor has over a thing
belonging to another, and which consists in the power to cause it to be sold in order to be paid his
claims out of the proceeds. It is an act of pledging a thing as security for a debt or demand without
parting with the possession. It follows as a consequence that although the property remains in the
possession of the debtor, it cannot be transferred to a third party without the express consent or
permission of the creditor (See, Simla Banking and Industrial Co., Ltd., Simla (In Liquidation) v.
Pritams, AIR 1960 Punj 42). In India, Securitisation and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 defines it under Section 2(1)(n) as a charge in or upon
any movable property, existing or future, created by a borrower in favour of a secured creditor without
delivery of possession of the movable property to such creditor, as a security for financial assistance
and includes floating charge and crystallisation of such charge into fixed charge on movable property.
Civil Appeal No. 5443 of 2019 Page 14 of 86
only, and the right to sell after reasonable notice. Even when the
pawnor makes default in payment of debt or performance of the
promise, the pawnor has the right to redeem the pawn till ‘actual
sale’ of the pawn by the pawnee. However, the pawnor in addition
to the debt, must pay to the pawnee expenses that have arisen
because of the default.
4.3 Where money is advanced by way of the loan upon the security of
goods, the transaction may take the form of a mortgage or pledge.
The difference between a pledge and a mortgage of movable
property is that while under a pledge there is only a bailment,
whereas under a mortgage there is transfer of the right of the
property by way of security. The distinction is aptly brought out in
the following passage in Halsbury's Laws of England:20
“A mortgage of personal chattels is essentially different
from a pledge or pawn under which money is
advanced upon the security of chattels delivered into
the possession of the lender, such delivery of
possession being an essential element of the
transaction. A mortgage conveys the whole legal
interest in the chattels; a pledge or pawn conveys only
a special property, leaving the general property in the
pledger or pawnor; the pledgee or pawnee never has
the absolute ownership of the goods, but has a special
property in them coupled with a power of selling and
transferring them to a purchaser on default of payment
at the stipulated time, if any, or at a reasonable time
after demand and non-payment if no time for payment
is agreed upon.”
20 Hailsham Edn., (2nd Edn.), para 330, page 226 of Volume XXIII.
Civil Appeal No. 5443 of 2019 Page 15 of 86
Therefore, unlike a pledgee, a mortgagee acquires general
rights in the things mortgaged subject to the right of redemption of
a mortgagor. In other words, the legal estate in the goods
mortgaged passes on to the mortgagee. In comparison, a pawnee
has only the special right in the goods pledged, namely, the right
of possession as security and in case of default, he can bring a
suit against the pawnor as well as sell the goods after giving a
reasonable notice.21 Whether a particular transaction is a
mortgage of moveable property or a pledge can only be
determined by reference to the intention of the parties, and other
surrounding circumstances.22
(ii) Pawnee has a special and not general right in the pledged
property.
5.1 This Court, in Lallan Prasad v. Rahmat Ali and Another,
23
observes that under the common law, a pledge is a bailment of
personal property as security for payment of debt or engagement.
The two essential ingredients of pledge are (i) the pawn i.e., the
property pledged should be actually or constructively delivered to
the pawnee24 and (ii) a pawnee has only special property in the
21 Para 20, Sri Raja Kakarklhpudi Venkata Sudarsana Sundara Narasayamma Garu (supra)
22 Arjun Prasad and others v. Central Bank of India, Ltd., 1954 SCC OnLine Pat 138.
23 AIR 1967 SC 1322.
24 See also Morvi Mercantile Bank Ltd. v. Union of India, AIR 1965 SC 1954: “20. In English Law a
pledge arises when goods are delivered by one person called the ‘pledgor’ to another person called
the ‘pledge’ to be held as security for the payment of a debt or for discharge of some other obligation
upon the express or implied understanding that the subject-matter of the pledge is to be restored to
the pledger as soon as the debt or other obligation is discharged. It is essential for the creation of a
pledge that there should be a delivery of the goods comprised therein. In other words, a pledge
Civil Appeal No. 5443 of 2019 Page 16 of 86
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 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.
5.2 Accordingly, the judgment refers to Section 172, which states that
a pledge is a contract for bailment of goods as security for
cannot be created except by delivery of the possession of the thing pledged, either actual or
constructive. It involved a bailment. If the pledger had actual goods in his physical possession, he
could effect the pledge by actual delivery; but in other cases he could give possession by some
symbolic act, such as handing over the key of the store in which they were. If, however, the goods
were in the actual physical possession of a third person, who held for the bailor so that in law his
possession was 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.
Civil Appeal No. 5443 of 2019 Page 17 of 86
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 the pawnor, the pawnee has: (a) a right
to sue upon the debt and to retain the goods as collateral security,
and (b) sell the goods after reasonable notice of the intended sale
to the pawnor. Once the pawnee, by virtue of his right under
Section 176, sells the goods, the right of the pawnor to redeem
them is extinguished. But, thereupon, the pawnee is bound to
apply the sale proceeds towards satisfaction of the debt and pay
the surplus, if any, to the pawnor. So long as the sale does not
occur, the pawnor is entitled to redeem the goods on payment of
the debt. Even when the pawnee files a suit for recovery of the
debt, though he is entitled to retain the goods, the pawnee must
return the goods on payment. Another significant observation in
this judgment is that if the pawnee sues on the debt denying the
pledge, 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
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.
Civil Appeal No. 5443 of 2019 Page 18 of 86
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 Bihar v. 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
26 (1972) 3 SCC 196.
Civil Appeal No. 5443 of 2019 Page 19 of 86
respect to the things pledged before the date of receiving the
order and without notice of a prior available act of bankruptcy.
5.4 In Maharashtra State Cooperative Bank Limited v. Assistant
Provident Fund Commissioner and Others,
27 a three Judges’
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 Others v. 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.
27 (2009) 10 SCC 123.
28 (1998) 7 SCC 707.
Civil Appeal No. 5443 of 2019 Page 20 of 86
(iii) Accretion on pawned goods
6.1 In Standard Chartered Bank and Another v. Custodian and
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.
29 (2000) 6 SCC 427.
Civil Appeal No. 5443 of 2019 Page 21 of 86
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 the old shares, the new shares must be returned to
pawnor along with 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.
(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
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.
30 1924 SCC OnLine PC 81.
31 AIR 1969 Del 313.
32 (1985) 2 SCC 167.
Civil Appeal No. 5443 of 2019 Page 22 of 86
7.2 Several High Courts in F. Nanak Chand Ramkishan Das of
Hodel and Others v. Lal Chand and Others,
33 Bank 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 given of the pawnee’s intention to sell in
default of payment by the pawnor within the specified time. This
33 1958 SCC OnLine Punj 6.
34 AIR 1991 Del 278.
35 2015 SCC OnLine Cal 450.
36 AIR 1958 Cal 644.
Civil Appeal No. 5443 of 2019 Page 23 of 86
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.37 refers 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.
37 AIR 1963 Cal 132.
38 AIR 1918 All 363 (2).
Civil Appeal No. 5443 of 2019 Page 24 of 86
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 had agreed to sell a part of the shares to redeem
the debt. In Vimal 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
39 (2000) 5 SCC 122.
Civil Appeal No. 5443 of 2019 Page 25 of 86
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
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, 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.”
40 AIR 1947 Bom 217.
Civil Appeal No. 5443 of 2019 Page 26 of 86
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 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 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 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. 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
Civil Appeal No. 5443 of 2019 Page 27 of 86
there has been a default in the pledge in complying
with is 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.”
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, 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 may sell the pledged goods without
notice to the pledgor. Dwelling on the aspect of the pawnor’s right
of redemption under Section 177, the judge held that the right
remains till the ‘actual sale’ of the pledged goods. The expression
‘actual sale’ in Section 177 must be a sale in conformity with the
provisions of Section 176 which gives the pledgee the right to sell;
Civil Appeal No. 5443 of 2019 Page 28 of 86
and if the sale is not in conformity with those provisions, then the
equity of redemption with the pledgor is not extinguished.
The sale by the pawnee to himself being void does not put
an end to the pledge, but the pawnor is bound by resale(s) duly
effected by the pawnee to the third parties after such abortive
sales to himself.
Chagla J. on the rights of the pawnee held that the Contract
Act provides two rights to the pawnee when the pawnor makes a
default in payment of the debt: (a) bring the suit against the
pawnor for the debt and retain the goods pledged as collateral
security; and (b) sell the goods pledged, which power, however,
can be exercised in terms of Section 176 on giving the pawnor a
reasonable notice for sale.
While upholding that the right of redemption given to the
pawnor vide Section 177 of the Contract Act ends on the sale of
the goods by the pawnee in conformity with the requirements of
Section 176 of the Contract Act and not on unlawful or
unauthorised sales, Chagla J. after extensively referring to the
case law on the subject held that: (1) the pawnor does not
become entitled to the possession of the goods pledged without
tendering the amount due on the pledge; or in other words,
Civil Appeal No. 5443 of 2019 Page 29 of 86
without seeking to redeem the pledge; and (2) that without a
proper tender of the amount due on the pledge, the only right of
the pawnor in respect of the unlawful or unauthorised sale is in tort
for damages actually sustained by him. Therefore, without
tendering the amount, action of trover41 and detinue42 are not
maintainable.
7.7 The decision in Madholal Sindhu (supra) was carried in appeal to
the Federal Court, wherein the court by majority overruled the
decision of the Bombay High Court solely on a factual basis that,
given the assent of sale of shares by the pawnor therein and the
acquiescence thereof by the Official Assignee, the sale was good.
However, it is to be espied that the question of whether the
pawnor could enter into a contract contrary to the provisions of
Section 176 or whether want of notice is a mere irregularity not
affecting the title of the bona fide purchaser for value did not arise
for consideration before the Federal Court.
7.8 These principles interpreting Sections 176 and 177 of the Contract
Act are reiterated and affirmed in Sri Raja Kakarklhpudi Venkata
Sudarsana Sundara Narasayamma Garu (supra). This decision
also examines the waiver of the right to reasonable notice under
41 A common law action to recover the value of personal property that has been wrongfully disposed
of by another person.
42 A common law action for recovery of personal chattel wrongfully detained or of its value.
Civil Appeal No. 5443 of 2019 Page 30 of 86
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 (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
43 (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. Jagannadhadas Govindas, 1949 II M.L.J. P. 694.
46 1940-1 Ch 638 at p. C43
Civil Appeal No. 5443 of 2019 Page 31 of 86
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.''
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
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 renuntiare juri pro se introducto i.e., Any one may waive or renounce the benefit of a
principle or rule of law that exists only for his protection.
Civil Appeal No. 5443 of 2019 Page 32 of 86
Krishna Bahadur v. Purna 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 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
49 (2004) 8 SCC 229.
50 Vol. 8, Third Edn., para 248 at p. 143.
51 G.P. Singh, Principles of Statutory Interpretation, 14th Edition, Lexis Nexis (2016) at page 462.
Civil Appeal No. 5443 of 2019 Page 33 of 86
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.”
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:
“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 the same. If the argument
advanced on behalf of the respondents is taken to its
52 Craies on Statute Law by S.G.G. Edgar, 7th Edition, Sweet & Maxwell Limited (1971) at page 255.
53 1931 SCC OnLine Cal 224.
54 (2016) 9 SCC 268.
Civil Appeal No. 5443 of 2019 Page 34 of 86
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.”
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 (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
55 1995 SCC OnLine Del 239.
Civil Appeal No. 5443 of 2019 Page 35 of 86
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 (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:—
(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).
Civil Appeal No. 5443 of 2019 Page 36 of 86
(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 confirmity 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).
(vi) There is no analogy between Section 69(3) of
T.P. Act and Section 176 Contract Act; there is a
marked contrast between the two. Former
protects the innocent purchaser, the latter does
not do so. In the absence of any provision in
Section 176 of the Contract Act in favour of the
innocent purchaser, to import such protection
from the provisions of another statute is with
respect wholly fallacious and unjustifiable. It is
always dangerous to draw analogy between one
statute and another;
22.9 Vide para 64 Chagla, J. did not agree with the
following statement of law contained in Coote on
Mortgages (Volume-II, 9th Edition page 1472):—
Civil Appeal No. 5443 of 2019 Page 37 of 86
“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.
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 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….”
7.12 The view of the Delhi High Court in Nabha Investment (supra)
expressing limited divergence56 from 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 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 pawnee which
have arisen from the pawnor’s default. The instances noted
subsequently when the pawned property is not available are well
56 See paragraphs 22.7, 23 and 24 of the judgment in Nabha Investment.
Civil Appeal No. 5443 of 2019 Page 38 of 86
covered and can be taken care under clause (2)57 of the opinion
expressed by Chagla, J. in Madholal Sindhu (supra).58
7.13 Section 176 of the Contract Act requires that the pawnee may sell
the thing pledged on giving the pawnor reasonable notice of the
sale. It does not prescribe any fixed form of notice or specify any
fixed period of notice. The object and purpose of giving notice is to
make the pawnor know about the pawnee’s intent to sell the pawn
and give him an opportunity to exercise his statutory right of
redemption, which as per Section 177 can be exercised till the
date of ‘actual sale’. Whether or not a notice was given and the
period of notice was reasonable would depend upon the facts of
the case. In view of the above discussion, the pawnor can
communicate his willingness and desire to the pawnee that the
pledged goods may be sold. In case any such request is made, a
pawnee may well act upon the request without violating Section
176 of the Contract Act. However, a pawnee, unless he also
57 (2) that without a proper tender of the amount due on the pledge, the only right of the pawnor in
respect of the unlawful or unauthorised sale is in tort for damages actually sustained by him.
58 The reliance placed on the Madras High Court decision in S.L. Ramasamy Chetty (supra) would
not help as the decision is in conformity with the view expressed by Chagla, J. that the pawnor does
not become entitled to redemption of the goods pledged without tendering the amount due on the
pledge. The Madras High Court in S.L. Ramasamy Chetty (supra) did not hold that the pawnor is
entitled to redemption of the pledged goods without payment of the debt due and the additional
amount. The Court would be entitled to ask the pawnor to deposit the ‘admitted amount’ at the initial
stage itself if the pawnee is ready and willing to deliver the property pledged. The position would be
different where the pawnee declares in advance his inability to return the pledged property, in which
case the pawnor’s claim cannot be defeated through a useless ceremony of tender. Section 51 of the
Contract Act relating to reciprocal promises was relied upon.
Civil Appeal No. 5443 of 2019 Page 39 of 86
agrees, cannot be compelled by the pawnor to sell the pledged
goods.
(v) Sale of the pledged goods by the pawnee to self
8.1 Dictum in the above judgments and Section 177 of the Contract
Act, which confers on the defaulting pawnor the right to redeem
the pledged goods till ‘actual sale’, does not support pawnee’s
sale to self. Sale to self would in terms of the judgment in
Madholal Sindhu’s case (supra) is a case of conversion and not
‘actual sale’, and therefore, would not affect the pawnor’s right to
redemption under Section 177 of the Contract Act. Judgment of
the Calcutta High Court in Haridas Mundra (supra) 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
59 ILR (1892) 19 Cal 322.
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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 we agree 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. 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 A Division Bench of the Madras High Court in S.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,
60 AIR 1944 Pat 135.
61 1929 SCC OnLine Mad 62.
Civil Appeal No. 5443 of 2019 Page 41 of 86
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
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 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.
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
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 Neikram Dobey
(supra).
63 AIR 1962 P&H 321.
Civil Appeal No. 5443 of 2019 Page 42 of 86
scheme, the sections, 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. 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
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. Pranlal Jayanand Thakkar and Others, (1974) 2 SCC 323, para
5.
Civil Appeal No. 5443 of 2019 Page 43 of 86
interpretation of the 1996 Regulations. Introduction to the
Depositories Act refers to one of the major drawbacks of the then
Indian securities market, which was paper-based. Consequently,
there was a lack of assurance and certainty in the transfer of
securities due to risks in the form of ‘bad delivery’, forgery, theft
etc. As a result, the investors suffered and were deprived of
liquidity in securities and the grievance redressal was intractable.
In turn, the capital market also felt pain due to lack of confidence
and consequently, the growth was cramped. To pave the way for
smooth, fast and constancy in the transfer of securities and to
promote and deal with an increase in trading of stocks and shares
in a transparent manner, there was a need for regulating the
methodology of trading of securities.
9.3 The Depositories Act is enacted to lay down a process and rules
for the dematerialization of securities by converting them into
electronic data stored in the computers of ‘the depository’.66 The
Depositories Act establishes the depository eco-system and
introduces the concepts of a ‘registered owner’67 and ‘beneficial
owner’.68 Every owner of a physical share has to enter into an
66 Section 2(1)(e): “depository” means a company formed and registered under the Companies Act,
1956 (1 of 1956) and which has been granted a certificate of registration under sub-section (1-A) of
Section 12 of the Securities and Exchange Board of India Act, 1992 (15 of 1992).
67 Section 2(1)(j): “registered owner” means a depository whose name is entered as such in the
register of the issuer;
68 Section 2(1)(a): “beneficial owner” means a person whose name is recorded as such with a
depository;
Civil Appeal No. 5443 of 2019 Page 44 of 86
agreement with ‘the depository’ for availing its services. The
physical certificate of security is cancelled. All securities held by
‘the depository’ are in a fungible form. ‘The depository’ becomes
the ‘registered owner’ in respect of the security, whereas the
person who surrenders the physical shares is recorded as ‘the
beneficial owner’. ‘The depository’, as the registered owner, does
not have any voting right or any other right in respect of the
securities held by it. ‘The beneficial owner’ shall be solely entitled
to all rights, benefits, and liabilities attached to the securities held
by ‘the depository’. In terms of Section 11, every depository is
mandated to maintain a register and index of ‘beneficial owners’ in
the manner provided in Sections 150, 151 and 152 of the
Companies Act, 1956. As per Section 769 of the 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 security
vests with the ‘beneficial owner’, same as in the case of buying
and selling physical securities. The difference lies in the delivery
69 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.
Civil Appeal No. 5443 of 2019 Page 45 of 86
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 states that notwithstanding any other
law for the time being in force, ‘the depository’ shall be deemed as
the ‘registered owner’ and is entitled to affect the transfer of
ownership of the security on behalf of ‘the beneficial owner’. No
person, including the pawnee, can transfer the pawn held in
dematerialised form without being registered as a ‘beneficial
owner’.
9.5 Section 12 of the Depositories Act permits pledge and
hypothecation of securities held by a depository and reads:
“12. Pledge or hypothecation of securities held in a
depository:
(1) Subject to such regulations and bye-laws, as may
be made on this behalf, a beneficial owner may with
the previous approval of the depository create a
pledge or hypothecation in respect of a security owned
by him through a depository.
(2) Every beneficial owner shall give intimation of such
pledge or hypothecation to the depository and such
70 10. Rights of depositories and beneficial owner:
(1) Notwithstanding anything contained in any other law for the time being in force, a depository shall
be deemed to be the registered owner for the purposes of effecting transfer of ownership of security
on behalf of a beneficial owner.
(2) Save as otherwise provided in sub-section (1), the depository as a registered owner shall not
have any voting rights or any other rights in respect of securities held by it.
(3) The beneficial owner shall be entitled to all the rights and benefits and be subjected to all the
liabilities in respect of his securities held by a depository.
Civil Appeal No. 5443 of 2019 Page 46 of 86
depository shall thereupon make entries in its records
accordingly.
(3) Any entry in the records of a depository under subsection (2) shall be evidence of a pledge or
hypothecation.”
In terms of sub-section (1) of Section 12, a ‘beneficial owner’
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 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 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
Civil Appeal No. 5443 of 2019 Page 47 of 86
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 Act and the common law. On the
other hand, the Depositories Act expressly concedes that the
71 AIR 1943 Mad 74.
Civil Appeal No. 5443 of 2019 Page 48 of 86
securities held by the depository can be pledged and
hypothecated by the ‘beneficial owner’. It simplifies the process by
bringing transparency and certainty. It checks and curtails
possibilities of disputes as the pledge must be registered with the
‘depository.’
9.8 Undoubtedly, the Depositories Act distinguishes between the
‘registered owner’ and the ‘beneficial owner’, i.e., the de facto
owner, but this does not in any manner contradict or lay down a
rule which is contrary to the provisions of Sections 176 and 177 of
the Contract Act. These sections, given the objective and purpose
behind them, would still apply to any pledge deed and do not get
diluted or overridden by the provisions or requirements of the
Depositories Act. Section 10, a non obstante provision, which
prevails over existing enactments by law, treats the ‘depository’ as
the ‘registered owner’ and the shareholder/holder as a ‘beneficial
owner’. It does not undermine or rewrite the provisions of the law
of pledge and mutual obligations and rights of the pawnee and
pawnor. This aspect has been elaborated in some detail
subsequently in this judgement.
9.9 Under Section 25 of the Depositories Act, the Securities and
Exchange Board of India72 has been vested with the power to
72 Hereinafter referred to as “Board”.
Civil Appeal No. 5443 of 2019 Page 49 of 86
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 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
(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 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 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:
Civil Appeal No. 5443 of 2019 Page 50 of 86
Provided that no entry of pledge shall be cancelled by
the depository with the prior concurrence of the
pledgee.
(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
Civil Appeal No. 5443 of 2019 Page 51 of 86
the reasons has to be given to the participants of the pawnor and
the pawnee. The ‘depository’ can cancel the pledge if the pawnee
applies to the depository through its participants. The pawnor can
also apply through its participant to the ‘depository’ for 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 autonomy and 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
Civil Appeal No. 5443 of 2019 Page 52 of 86
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 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 58 as pe which the
pawnee must be recorded as the ‘beneficial owner’ before the
pledged dematerialized securities are sold. Section 38(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,
Civil Appeal No. 5443 of 2019 Page 53 of 86
this requirement of sub-regulation (8) to Regulation 58 does not
circumscribe or limit the contractual rights and obligations agreed
upon between the parties on the agreed terms, including the
pawnee’s right to sell the pawned goods. While the contractual
terms are fundamental and determine the rights and obligations
inter se the parties including when the pawnee would be entitled
to get his name substituted as a ‘beneficial owner’ under the 1996
Regulations, however, the contractual terms are not permitted to
override the Contract Act as explained above in so far as it
regulates the rights and obligations of the pawnee and pawnor,
and the requirement of compliance with Regulation 58(8). It is
absolutely necessary that the pawnee must be accorded status of
‘beneficial owner’ to enable him to exercise his right to sell the
pledged dematerialized securities. The object is to ensure
compliance with the procedure prescribed for the sale of
dematerialised securities and not to interfere with the freedom to
contract as long as they comply with the Contract Act and other
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
Civil Appeal No. 5443 of 2019 Page 54 of 86
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 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 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 to sell the pledge and retrieve the monies due by 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,
Civil Appeal No. 5443 of 2019 Page 55 of 86
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 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
Civil Appeal No. 5443 of 2019 Page 56 of 86
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 that would arise in view of the
enactment of the Depositories Act and 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
Civil Appeal No. 5443 of 2019 Page 57 of 86
‘actual sale’ in Section 176 read in the context of the Depositories
Act 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’, 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
Civil Appeal No. 5443 of 2019 Page 58 of 86
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 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
Civil Appeal No. 5443 of 2019 Page 59 of 86
length purchasers are innocent third-party buyers 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,
Civil Appeal No. 5443 of 2019 Page 60 of 86
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 object of
Sections 7, 10 and 12 of the Depositories Act and sub-regulation
(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. and Others73 is distinguishable as it dealt with a different
factual matrix. 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 the provisions of the
Depositories Act are for accurately recording the transfer and
pledging of shares held in dematerialized form. The Depositories
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.”
Civil Appeal No. 5443 of 2019 Page 61 of 86
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 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 selfcontained 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
Civil Appeal No. 5443 of 2019 Page 62 of 86
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 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
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…….”
Civil Appeal No. 5443 of 2019 Page 63 of 86
the pawnee. In this background, the Court rejected the claim of the
pawnor for the redemption of the pawn as the pawnee had
transferred the rights in respect of the pawned shares by
depositing them as margin with the third party. The view
expressed was that the said transaction by the pawnee could not
be ignored; otherwise, it would render the arrangement agreed
upon as meaningless and devoid of commercial sense. This
judgment also refers to an earlier decision of the Allahabad High
Court in Firm Thakur Das Marakhan Lal v. Mathura Prasad and
Others,
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
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 stranger for safe custody without
consideration; or he may sell or assign all his interest
in the pawn; or he may convey the same interest
conditionally by way of pawn, to another person
without in either case destroying or invalidating his
security. But if the pawnee should undertake to pledge
77 AIR 1958 All. 66.
Civil Appeal No. 5443 of 2019 Page 64 of 86
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.”
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
Civil Appeal No. 5443 of 2019 Page 65 of 86
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
be pledged. The provisions of the Depositories Act and the 1996
Regulations are not in derogation of the Contract Act but in
addition to it. In this regard, reference is made to Section 28 of the
Depositories Act, which we have referred to earlier. Therefore, the
object of the Depositories Act is not to rewrite the provisions of the
Contract Act but to regulate the creation and transfer of
dematerialised securities. Regulation 38(1)(e)78 requires a
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;
(d) records of instructions received from and sent to participants, issuers, issuers’ agents and
beneficial owners;
Civil Appeal No. 5443 of 2019 Page 66 of 86
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
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, ‘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
(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
(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 (1866) L.R. 1 Q.B. 585.
Civil Appeal No. 5443 of 2019 Page 67 of 86
having 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.
xx xx xx
Another Judge had observed:
“In detinue the plaintiff's claim is based upon his right
to have the chattel itself delivered to him; and if there
still remain in Simpson, or in the defendant as his
assignee, any interest in the goods, or any right of
detention inconsistent with this right in the plaintiff, the
plaintiff must fail in detinue, though he may be entitled
to maintain an action of tort against Simpson or the
defendant for the damage, if any, sustained by him in
consequence of their unauthorized dealing with the
debentures.”
We should not be seen as commenting upon the merits of
the decision in Pushpanjali Tie Up Pvt. Ltd. (supra), as one of
the findings recorded therein was that the pawnor had permitted
the 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
Civil Appeal No. 5443 of 2019 Page 68 of 86
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 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
80 2018 SCC OnLine Del 8142
Civil Appeal No. 5443 of 2019 Page 69 of 86
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 entitles the pledgee/pawnee to, on
default by the pledgor/pawnor, sell the thing pledged,
“on giving the pawnor reasonable notice of the sale”,
Regulation 58(8) entitles the pledgee to, “subject to
the provisions of the pledge document”, “invoke the
pledge” and mandates the depository to “on such
invocation” i.e. by the pledgee, “register the pledgee
as beneficial owner of such securities” i.e. the
securities pledged and further mandates the
depository to “amend its records accordingly”. There is
no place for a prior notice under Section 176, in the
scheme of Regulation 58(8). On the contrary,
Regulation 58(9) requires the depository to, after so
amending its records under Regulation 58(8), inform
the participants of the pledgor and the pledgee of the
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 on their facts. See,
infra para 11.7.
Civil Appeal No. 5443 of 2019 Page 70 of 86
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 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
Civil Appeal No. 5443 of 2019 Page 71 of 86
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 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
Civil Appeal No. 5443 of 2019 Page 72 of 86
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 that the shares are
unlisted and MHPL continues to be the holding company of
NEVPL. The effect of the ratio in Tendril Financial Services
(supra) is to enact an entirely new jurisprudence on the law of
pledge, annulling and re-writing the well-established law of pledge,
which gives two options to the pawnee when pawnor is in default,
just because the pawnee exercises his right to be recorded as the
Civil Appeal No. 5443 of 2019 Page 73 of 86
‘beneficial owner’ to exercise his right to sell. Sale to self, if
accepted as the norm, would be unlawful and amounts to
conversion, is applicable in case of dematerialised securities.
11.7 In fact, in the subsequent paragraphs, the learned Single Judge in
Tendril Financial Services (supra) does examine the position if
Section 176 were to apply and had not been complied with. It is
rightly observed that due to the pendency of the suit, the
requirement of giving sufficient notice might not be relevant. The
decision in Tendril Financial Services (supra) also notices
another decision of the Single Judge Bench of the Delhi High
Court in GTL Limited v. IFCI Ltd. & Ors.82
 which takes a contrary
view and holds that compliance with Section 176 is required to be
made in respect of pledged dematerialized securities. In GTL
Limited (supra) temporary injunction was granted. We have briefly
commented that injunction should not be normally granted in such
cases.83 Clause (c) to sub-section (3) to Section 3884 of the
82 2011 SCC OnLine Del 3628.
83 Supra para 11.4.
84 Section 38. Perpetual injunctions when granted:
(3) When the defendant invades or threatens to invade the plaintiff's right to, or enjoyment of,
property the court may grant a perpetual injunction in the following cases, namely:—
(c) where the invasion is such that compensation in money would not afford adequate relief;
Civil Appeal No. 5443 of 2019 Page 74 of 86
Specific Relief Act, 1963 states that perpetual injunction may be
granted when the defendant invades the plaintiff’s right to or
enjoyment of the property where the invasion is such that the
compensation in money would not afford adequate relief. Subsection (2) to Section 3885 states that when any obligation arises
from a contract, the court shall be guided by the rules and
provisions contained in Chapter II.86 Section 10,87 as it stood
before its substitution by Act 18 of 2018, vide clause (ii) of
Explanation, had stated that until and unless contrary is proved,
the court shall presume that the breach of a contract to transfer
movable property can be relieved except in cases: (a) where the
property is not an ordinary article of commerce, of special value or
interest to the plaintiff, or consists of goods which are not easily
obtainable in the market; and under clause (b) where the property
85 Section 38(2): When any such obligation arises from contract, the court shall be guided by the
rules and provisions contained in Chapter II.
86 Chapter II: Specific Performance of Contract
87 Section 10. Cases in which specific performance of contract enforceable.—
Except as otherwise provided in this Chapter, the specific performance of any contract may, in the
discretion of the court, be enforced—
(a) when there exists no standard for ascertaining actual damage caused by the non-performance of
the act agreed to be done; or
(b) when the act agreed to be done is such that compensation in money for its non-performance
would not afford adequate relief.
Explanation.—Unless and until the contrary is proved, the court shall presume—
(i) that the breach of a contract to transfer immovable property cannot be adequately
relieved by compensation in money; and
(ii) that the breach of a contract to transfer movable property can be so relieved except in
the following cases:—
(a) where the property is not an ordinary article of commerce, or is of special value or
interest to the plaintiff, or consists of goods which are not easily obtainable in the market;
(b) where the property is held by the defendant as the agent or trustee of the plaintiff.
Civil Appeal No. 5443 of 2019 Page 75 of 86
is held by the defendant as the agent or trustee of the plaintiff. 88 As
per new Section 1089 with effect from 1st January 2018, specific
performance of a contract can be enforced subject to provisions
contained in sub-section (2) to Section 11,90 Section 1491 and
Section 16.92 Clause (c) to 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
88 A pawnee is a trustee but has a special right to sell the pawned property after giving reasonable
notice of sale to the pawnor.
89 Section 10. Specific performance in respect of contracts.—The specific performance of a contract
shall be enforced by the court subject to the provisions contained in sub-section (2) of Section 11,
Section 14 and Section 16.
90 Section 11. Cases in which specific performance of contracts connected with trusts enforceable.
91 Section 14. Contracts not specifically enforceable.
92 Section 16. Personal bars to relief: Specific performance of a contract cannot be enforced in
favour of a person—
(a) who has obtained substituted performance of contract under Section 20; or
(b) who has become incapable of performing, or violates any essential term of, the contract that on
his part remains to be performed, or acts in fraud of the contract, or wilfully acts at variance with, or in
subversion of, the relation intended to be established by the contract; or
(c) who fails to prove that he has performed or has always been ready and willing to perform the
essential terms of the contract which are to be performed by him, other than terms the performance
of which has been prevented or waived by the defendant.
Explanation.—For the purposes of clause (c),—
(i) where a contract involves the payment of money, it is not essential for the plaintiff to
actually tender to the defendant or to deposit in court any money except when so
directed by the court;
(ii) the plaintiff must prove aver performance of, or readiness and willingness to perform, the
contract according to its true construction.
Civil Appeal No. 5443 of 2019 Page 76 of 86
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 establish a 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 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
93 (2011) SCC Online SAT 40.
Civil Appeal No. 5443 of 2019 Page 77 of 86
decision, we may note, primarily deals with the takeover
regulations and in the passing refers to and 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 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
Civil Appeal No. 5443 of 2019 Page 78 of 86
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, 2014
are reproduced as under:
“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 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 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 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
Civil Appeal No. 5443 of 2019 Page 79 of 86
nominees. Under Clause 6.2, the pawnee or its nominee may,
without further 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 Clause 6.2 is closed must be rejected as
94 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.).
Civil Appeal No. 5443 of 2019 Page 80 of 86
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 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 part occurs 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
Civil Appeal No. 5443 of 2019 Page 81 of 86
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:
“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, 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 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 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
Civil Appeal No. 5443 of 2019 Page 82 of 86
under the transaction document, that is, the Bridge Loan
Agreement, the pawnor shall remain the beneficial owner of the
shares pledged at all times, except on the sale made by the
pawnee as the bridge loan lender. Further, vide Clause 5.1(k), the
pawnor has irrevocably waived any right it may have under the
Depositories Act, the 1996 Regulations, or any other applicable
law to the extent it is inconsistent with the provisions of the
Pledge Deed. Clause 5.1(k) would only apply if the Depositories
Act, the 1996 Regulations, or any other law permits the parties to
contract out of the regulations by mutual agreement. It is a settled
position of law and as discussed above, a contract cannot be
inconsistent with the provisions of any existing law, including
regulations, unless the said law permits the parties to enter into a
contract inconsistent with the provision.
12.6 PIFSL by the letter dated 23rd January 2018 had informed MHPL in
terms of Clause 6.1 that there has been an 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
Civil Appeal No. 5443 of 2019 Page 83 of 86
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
not been sold and there is no violation of the Contract Act or for
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:
(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;
Civil Appeal No. 5443 of 2019 Page 84 of 86
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 ‘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.
Civil Appeal No. 5443 of 2019 Page 85 of 86
H. Conclusion
13.1 For the aforesaid reasons, the present appeal must be allowed
and the impugned order passed by the Appellate Authority dated
20th June 2019 upholding the orders of the Adjudicating Authority
dated 6th July 2018 and the emails of the IRP dated 19th February
2018 are set aside. 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.
13.2 The appeal is allowed in the aforesaid terms without any order as
to costs.
......................................J.
(M.R. SHAH)
......................................J.
(SANJIV KHANNA)
NEW DELHI;
MAY 12, 2022.
Civil Appeal No. 5443 of 2019 Page 86 of 86

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