PTC INDIA FINANCIAL SERVICES LIMITED versus VENKATESWARLU KARI AND ANOTHER

[2022] 9 S.C.R. 1063

PTC INDIA FINANCIAL SERVICES LIMITED

VENKATESWARLU KARI AND ANOTHER

(Civil Appeal No. 5443 of 2019)

MAY 12, 2022

[M. R. SHAH AND SANJIV KHANNA, JJ.]

Contract Act, 1872 – Depositories Act, 1996 – Securities andExchange Board of India (Depositories and Participants)Regulations, 1996 - Whether the Depositories Act, 1996 read withthe Regulation 58 of the Securities and Exchange Board of India(Depositories and Participants) Regulations, 19961 has the legaleffect of overwriting the provisions relating to the contracts of pledgeunder the Indian Contract Act, 1872 and the common law asapplicable in India – Held: The Depositories Act prescribes howthe dematerialised securities can be pledged – The provisions ofthe Depositories Act and the 1996 Regulations are not in derogationof the Contract Act but in addition to it – In this regard, reference ismade to Section 28 of the Depositories Act – Therefore, the objectof the Depositories Act is not to rewrite the provisions of the ContractAct but to regulate the creation and transfer of dematerialisedsecurities – Regulation 38(1)(e) requires depository to maintain,inter alia, records of all approvals, notices and entries, andcancellation of pledge or hypothecation, as the case may be.

Contract Act, 1872 – ss. 148-171, 172-179 – Bailment andPledge – Legal Distinction – In the cases of bailment, the goods arebailed for specific purpose and once the purpose is accomplishedthe bailee is bound to deliver the possession of the goods back tothe bailor or to dispose off the goods as per the bailor’s direction –Unlike bailment, in pledge there is the delivery of possession of thegoods by the pawnor to the pawnee by way of security upon thepromise of repayment of debt or the performance of promise,thereby creating an estate that vests with the pawnee – Pledge ispreceded by bailment

Words and Phrases – “Pledge”, “Mortgage” – MovableProperty – Legal Distinction – mortgage conveys the whole legalinterest in the chattel, while pledge conveys only special property

DEF

Aleaving the general property in the pledger, and the pledgee neverhas absolute ownership of property – Further unlike pledgee, amortgagee acquires general right in the things mortgaged subjectto the right of redemption of the mortgagor – Compared to thepledge, pawnee has only special right in the goods pledged,namely the right of possession as security and in case of default, heBcan bring suit against the pawnor as well as sell the goods aftergiving reasonable notice.

Contract Act, 1872 – Accretion of the Pawned Goods – Dutyof the the Pawnee towards such accretion – The pledge extends toaccretions and additions, and therefore, when the pawnee returnsCthe pledged goods, the accretions and additions must be returnedto the pawnor – Further it also follows that the pawnee’s right toretain and sell the pledged goods stretches to the right to retain andsell any increase and accumulations to the pledged goods.

Contract Act, 1872 – s. 176, 177 – Pawnee’s duty to giveDnotice of intended sale of pawned goods – Extent - Section 176 ofthe Contract Act, unlike some of the sections of the Contract Act,does not specifically provide that the contractual terms can overridethe provision by using the expression “in the absence of the contractto the contrary” or “subject to special contract to the contrary” –EThe notice, that is to be given for the intended sale by the pawnee,is special protection that the statute has given to the pawnor, andthe parties cannot agree that the pawnee may sell the pledged goodswithout notice to the pledgor – Further, the mere tendering of noticeto the pawnor does not binds pawnee to put the intended sale to theeffect and he is not bound to sell even after tendering of such noticeF– If the notice is served, the pawnor may redeem the goods as per s.177 before the ‘actual sale’ by the pawnee.Contract Act, 1872 – s. 63, 176 – Whether Parties to PledgeAgreement can waive the requirement of Notice As contemplated bys. 176 – Settled Legal position – S. 63 of the Contract Act governsGthe domain of waiver and it is general principle of law thateveryone has right to waive the advantage of law or rule madesolely for the benefit and protection of the individual in his privatecapacity however, such waiver cannot infringe any public rightor public policy – But the requirement of ‘notice’ u/s 176 is aHmandatory requirement and special protection given to the pawnor

– S. 176 is not eclipsed or curtailed by the phrase “in the absenceof the contract to the contrary” and therefore the parties cannotcontract out of Section 176 – Further the need for notice to thepawnor of the intended sale by the pawnee is the special protectiongiven to the pawnor, and the parties cannot override the specialprotection by agreement.

Contract Act, 1872 – Whether Pawnee can Sell GoodsPledged to ‘Himself’ – Settled Legal Position – It is settled legalposition that pawnee cannot sell goods to himself, and if he doesso then such transfer could not be said to be ‘sale’ but a‘conversion’ and hence could not interpreted as ‘sale’ in terms of s.176.

Interpretation of Statutes – Rules of Interpretation when twoor more than two statutes apply – To resolve debate when twoviews are evident, it is best to interpret the provision when we knowwhy the statute is enacted – If statute is looked at, in the contextof its enactment, with the glasses of the statute-maker provided bysuch context, its scheme, the sections, clauses, phrases and wordsmay take colour and appear different than when the statute is lookedat without the glasses provided by the context and this principlemay equally apply when we examine interplay between two statutes– Two statutes shall be read together consistently and harmoniouslyto complement each other so far as it is reasonably possible to doso, and where such conciliation is not possible to clarify the legalposition by application of principles of interpretation applicable tosuch situations.

Depositories Act, 1996 – s.2(1)(a), 2(1)(j) – Words andPhrases – “Registered Owner’’, ‘Beneficial Owner’ - LegislativeIntent and Purpose - The Depositories Act is enacted to lay down aprocess and rules for the dematerialization of securities byconverting them into electronic data stored in the computers of ‘thedepository’ and hence by the aforesaid enactment, the legislaturesought to get away with physical security – Further the DepositoriesAct establishes the depository eco-system and introduces the conceptsof ‘registered owner’ and ‘beneficial owner’ – The depository’becomes the ‘registered owner’ in respect of the security, whereasthe person who surrenders the physical shares is recorded as ‘thebeneficial owner’ – Further the beneficial owner’ shall be solely

Aentitled to all rights, benefits, and liabilities attached to the securitiesheld by ‘the depository’. And therefore Power and right to transferownership of dematerialised security vests with the ‘beneficialowner’ same as in the case of buying and selling physical securities.

Contract Act, 1872 – s. 176, 177 – Depositories Act, 1996 –Bs.12 25, 28 – Securities and Exchange Board of India (Depositoriesand Participants) Regulation 1996 – Regulation 58 – Interplay ofThe Statutes - In terms of sub-section (1) of Section 12, ‘beneficialowner’ can create pledge or hypothecation regarding the securityowned by him through ‘the depository’, subject to prior approvalof ‘the depository’ but the aforesaid provision nowhere defines theCterm ‘pledge’ – Section 25 of the Depositories Act, the Securitiesand Exchange Board of India has been vested with the power tomake Regulations to carry out the purpose of the Depositories Act– As per s. 25(2)(d) the regulations may provide for the manner ofcreating pledge or hypothecation in respect of security ownedDby ‘beneficial owner’ under sub-section (1) to Section 12 of theDepositories Act – Further as per Regulation 58 beneficial ownermay create pledge on security owned by him and for this purpose,in cases of Pledge, the pawnee, to exercise the right under s. 12 r/w Regulation 58, shall, by virtue of Regulation 58(8), get himselfrecorded as ‘beneficial owner’ before he proceeds to sell the pledgedEsecurities – The Acts and the Regulations are not inconsistent butare subject to harmonious construction in order to attain theobjective sought to be achieved more so when s. 28 itself providesthat “the provisions of this Act shall be in addition to and not inderogation of any other law for the time force relating to the holdingFand transfer of securities’’ – Further Sections 176 and 177 are notobliterated, in so far as they would equally apply to pawneddematerialised securities as they apply to other pawned goods –Further the requirement of pawnee to get himself registered as‘beneficial owner’ in in terms of the Act and Regulation, is not anactual sale and would not affect the right of the pawnor ofGredemption u/s 177 of the Contract Act more so because the pawneeis not getting anything paid against the debt due.

Allowing the appeal, the Court

HELD: 1. The two essential ingredients of pledge are (i)Hthe pawn i.e., the property pledged should be actually or

constructively delivered to the pawnee and (ii) pawnee has onlyspecial property in the pledge but the general property thereinremains in the pawnor and wholly reverts to him on discharge ofthe debt. The right to property vests in the pawnee only as far asis necessary to secure the debt. pawn or pledge is anintermediate between simple lien and mortgage, which whollypasses the property. pawnor has an absolute right to redeemthe pledged property upon tendering the amount advanced butthat right would be lost if the pawnee in the meantime has lawfullysold the pledged property. If the pawnee sells, he must appropriatethe proceeds of the sale towards the pawnor’s debt, for the saleproceeds are the pawnor’s monies to be so applied and the pawneemust pay the pawnor any surplus after satisfying the debt. [Para5.1][1085-E-F]

2. The pledge extends to accretions and additions, andtherefore, when the pawnee returns the pledged goods, theaccretions and additions must be returned to the pawnor. It alsofollows that the pawnee’s right to retain and sell the pledgedgoods stretches to the right to retain and sell any increase andaccumulations to the pledged goods. [Para 6.1][1088-F-G]

3. Section 176 of the Contract Act, unlike some of thesections of the Contract Act, does not specifically provide thatthe contractual terms can override the provision by using theexpression “in the absence of the contract to the contrary” or“subject to special contract to the contrary”. The notice, that isto be given for the intended sale by the pawnee, is specialprotection that the statute has given to the pawnor, and the partiescannot agree that the pawnee may sell the pledged goods withoutnotice to the pledgor. Dwelling on the aspect of the pawnor’sright of redemption under Section 177, the judge held that theright remains till the ‘actual sale’ of the pledged goods. Theexpression ‘actual sale’ in Section 177 must be sale in conformitywith the provisions of Section 176 which gives the pledgee theright to sell; and if the sale is not in conformity with thoseprovisions, then the equity of redemption with the pledgor is notextinguished. The sale by the pawnee to himself being void doesnot put an end to the pledge, but the pawnor is bound by resale(s)

Aduly effected by the pawnee to the third parties after such abortivesales to himself. [Para 7.6][1092-F-H; 1093-A-B]

4. Where the Contract Act prescribes particular term thatis binding, the statutory mandate must be followed by the parties.Neither party can contract out of it. Otherwise, the legislativeBcommand that the statute imposes would be violated withimmunity by merely incorporating waiver as contractual term,depriving the frailer party of the benefit of the legal protection. Acondition prescribed to protect and benefit the public cannot bedispensed with when it lays down rule of public policy. Section63 of the Contract Act governs the domain of waiver. It is generalCprinciple of law that everyone has right to waive the advantageof law or rule made solely for the benefit and protection of theindividual in his private capacity. However, such waiver cannotinfringe any public right or public policy. [Para 7.9, 7.10][1095-A-C]

5. The parties cannot contract out of Section 176. The needfor notice to the pawnor of the intended sale by the pawnee is thespecial protection given to the pawnor, and the parties cannotoverride the special protection by agreement. Further, the rightto redeem can be exercised up to the actual sale of the goodsEpledged, i.e., the sale referred to in Section 177 in conformitywith Section 176. [Para 7.11][1097-F-G]

6. Section 176 of the Contract Act requires that the pawneemay sell the thing pledged on giving the pawnor reasonable noticeof the sale. It does not prescribe any fixed form of notice or specifyFany fixed period of notice. The object and purpose of giving noticeis to make the pawnor know about the pawnee’s intent to sell thepawn and give him an opportunity to exercise his statutory rightof redemption, which as per Section 177 can be exercised till thedate of ‘actual sale’. Whether or not notice was given and theperiod of notice was reasonable would depend upon the facts ofGthe case. In view of the above discussion, the pawnor cancommunicate his willingness and desire to the pawnee that thepledged goods may be sold. In case any such request is made, apawnee may well act upon the request without violating Section176 of the Contract Act. However, pawnee, unless he also agrees,H

cannot be compelled by the pawnor to sell the pledged goods.[Para 7.13][1100-B-D]

7. To resolve debate when two views are evident, it isbest to interpret the provision when we know why the statute isenacted. If statute is looked at, in the context of its enactment,with the glasses of the statute-maker provided by such context,its scheme, the sections, clauses, phrases and words may takecolour and appear different than when the statute is looked atwithout the glasses provided by the context. This principle mayequally apply when we examine interplay between two statutes.The provisions of the Contract Act, which is substantive andgeneral law relating to contracts, and the Depositories Act, whichis primarily law relating securities, must be interpretedharmoniously. This does not mean that any provision of oneenactment could nullify the provisions of the other. This end canbe best achieved by examining the objects and the subject matterof the Depositories Act vis-a-vis the Contract Act, which willclarify their separable spheres of operation to avoid any conflictor overlap between them. It means that the two statutes shall beread together consistently and harmoniously to complement eachother so far as it is reasonably possible to do so, and where suchconciliation is not possible to clarify the legal position byapplication of principles of interpretation applicable to suchsituations. [Para 9.1][1102-C-F]

8. The Depositories Act is enacted to lay down processand rules for the dematerialization of securities by convertingthem into electronic data stored in the computers of ‘thedepository’. The Depositories Act establishes the depository eco-system and introduces the concepts of ‘registered owner’ and‘beneficial owner’. Every owner of physical share has to enterinto an agreement with ‘the depository’ for availing its services.The physical certificate of security is cancelled. All securitiesheld by ‘the depository’ are in fungible form. ‘The depository’becomes the ‘registered owner’ in respect of the security, whereasthe 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

Asecurities held by it. ‘The beneficial owner’ shall be solely entitledto all rights, benefits, and liabilities attached to the securitiesheld by ‘the depository’. In terms of Section 11, every depositoryis mandated to maintain register and index of ‘beneficial owners’in the manner provided in Sections 150, 151 and 152 of theCompanies Act, 1956. As per Section 7 69 of the DepositoriesBAct, every ‘depository’, on receipt of intimation from participant,is required to transfer the security in the transferee’s name.Further, on registration of transfer of security in the transferee’sname, the transferee is registered as the ‘beneficial owner’.[Para9.3][1103-C-F]C9. Power and right to transfer ownership of dematerialisedsecurity vests with the ‘beneficial owner’, same as in the case ofbuying and selling physical securities. The difference lies in thedelivery process in case of sale, and receipt in case of purchase,which is affected by the depository on instructions from theDparticipant. Every person recorded as the ‘beneficial owner’ totransact and deal in securities must act through participant whois an agent of the depository. Section 10 70 states thatnotwithstanding any other law for the time being in force, ‘thedepository’ shall be deemed as the ‘registered owner’ and isentitled to affect the transfer of ownership of the security on behalfEof ‘the beneficial owner’. No person, including the pawnee, cantransfer the pawn held in dematerialised form without beingregistered as ‘beneficial owner’. [Para 9.4][1104-B-D]10. In terms of sub-section (1) of Section 12, ‘beneficialowner’ can create pledge or hypothecation regarding theFsecurity owned by him through ‘the depository’, subject to priorapproval of ‘the depository’. Section 12 or for that matter theDepositories Act does not define pledge or hypothecation, andthereby accepts and adapts their meaning as known in thecommercial sense to people in the trade. This means that theGDepositories Act recognises the principles relating to pledgeprescribed by the Contract Act and the common law. DepositoriesAct states that such pledge or hypothecation should be made inaccordance with the regulations and by-laws made under theDepositories Act. ‘beneficial owner’ as the pawnor is required

to intimate such pledge or hypothecation to the depository, whichthereupon makes entries in its records. This entry, made by ‘thedepository’, is evidence of pledge or hypothecation. [Para9.5][1105-A-C]

11. Undoubtedly, the Depositories Act distinguishesbetween the ‘registered owner’ and the ‘beneficial owner’, i.e.,the de facto owner, but this does not in any manner contradict orlay down rule which is contrary to the provisions of Sections176 and 177 of the Contract Act. These sections, given theobjective and purpose behind them, would still apply to any pledgedeed and do not get diluted or overridden by the provisions orrequirements of the Depositories Act. Section 10, non obstanteprovision, which prevails over existing enactments by law, treatsthe ‘depository’ as the ‘registered owner’ and the shareholder/holder as ‘beneficial owner’. It does not undermine or rewritethe provisions of the law of pledge and mutual obligations andrights of the pawnee and pawnor. [Para 9.8][1106-B-C]

12. reading of Regulation 58 would show that ‘beneficialowner’ is entitled to create pledge on security owned by him.To do so, he must apply to the ‘depository’ through the participantwho has his account in respect of the securities. Sub-regulation(2) requires the participant to accord its satisfaction that thesecurities are available for pledge and make note in this regardin its records. The note is to be forwarded to the ‘depository’. Interms of sub-regulation (3), the ‘depository’ is required to withinfifteen days create and record pledge and send an intimation tothe participants of the pledgor/pawnor and the pledgee/pawnee.The participants of the pawnor and pawnee are required to informthe pawnor and the pawnee as to the entry of creation of thepledge. If the ‘depository’ does not create the pledge, intimationof the reasons has to be given to the participants of the pawnorand the pawnee. The ‘depository’ can cancel the pledge if thepawnee applies to the depository through its participants. Thepawnor can also apply through its participant to the ‘depository’for cancelling the pledge. In this case, the entry can be cancelledby the ‘depository’ with the prior concurrence of the pawnee. Oncancellation of the pledge entry, the ‘depository’ is to inform theparticipant of the pawnor. [Para 9.10][1107-E-H; 1108-A]

A13. Sub-regulation (8) to Regulation 58 uses the expression“subject to the provisions of the pledge document” with specificpurpose and objective. In other words, sub-regulation (8) toRegulation 58 does not seek to curtail or restrict, but on theother hand respects party autonomy and freedom to decide theterms of the pledge, including the event of default that wouldBentitle the pawnee to invoke the pledge and sell the pawn. Thesub-regulation does not expressly nullify any provision of theContract Act. However, the stipulation that the pawnee may invokethe pledge, and on such invocation, the pawnee is to be recordedas the ‘beneficial owner’ of the pledged securities is mandatory.CA pledge document cannot stipulate to the contrary, and anycontravening contractual stipulation would not be binding. Therecords maintained by the ‘depository’ are to be amended on thepawnee invoking the pledge and thereupon, the ‘depository’ shallregister the pawnee as the ‘beneficial owner’ of the securities.Consequent to the change and in terms of sub-regulation (9) toDRegulation 58, the ‘depository’ is to inform the participants ofthe pawnor and pawnee, with direction that they shall makenecessary changes in their records and that the participants shallinform the pawnor and pawnee, respectively. Thus, the non-obstante part of sub-regulation (8) to Regulation 58 serves aElimited objective and purpose: the pawnee must record itself asa ‘beneficial owner’ before he proceeds to sell the pledgedsecurities. Without the pawnee being accorded the status of a‘beneficial owner’, pawnee cannot proceed to sell the pledgeddematerialized securities. contractual term cannot overwritethe requirement of Sections 7 and 10 of the Depositories Act,Fwhich is reflected in sub-regulation (8) to Regulation 58 as pewhich the pawnee must be recorded as the ‘beneficial owner’before the pledged dematerialized securities are sold. Section38(1)(e) of the Depositories Act requires the ‘depository’ tomaintain, inter alia, records of all approvals, notices, entries andGcancellations of pledge and hypothecation, as the case may be.This mandate of sub-regulation (8) to Regulation 58 will applywhenever the pledged/pawned goods are dematerializedsecurities. [Para 9.11, 9.12][1108-B-H]

14. The expression ‘actual sale’ used in Section 177 shouldHbe read as ‘the sale by the pawnee to third person made in

accordance with the Depositories Act and applicable by-laws andrules’. It also means and requires compliance with Section 176of the Contract Act. Mere exercise of the right by the pawnee torecord himself as the ‘beneficial owner’, which is necessaryprecondition before the pawnee can exercise his right to sell, isnot ‘actual sale’ and would not affect the rights of the pawnor ofredemption under Section 177 of the Contract Act. Every transferor sale is not ‘actual sale’ for the purpose of Section 177 of theContract Act. To equate ‘sale’ with ‘actual sale’ would negate thelegislative intent. [Para 10.3][1111-B-D]Commissioner of Wealth Tax v. Mahadeo Jalan andMahabir Prasad Jalan and Others Etc. (1973) 3 SCC157 : [1973 ] 2 SCR 215; Bharat Hari Singhania andOthers v. Commissioner of Wealth Tax (Central) andOthers 1994 Supp. (3) SCC 46 : [1994] 1 SCR 1033;Md. Sultan and Others v. Firm of RampratapKannayalal, Hyderabad, by its partners AIR 1964 AP201; Sri Raja Kakarklhpudi Venkata SudarsanaSundara Narasayamma Garu (died) and others v. TheAndhra Bank Ltd. Vijayawada and others AIR 1960AP 273; Simla Banking and Industrial Co., Ltd., Simla(In Liquidation) v. Pritams AIR 1960 Punj 42; ArjunPrasad and others v. Central Bank of India, Ltd. 1954SCC OnLine Pat 138; Lallan Prasad v. Rahmat Ali andAnother AIR 1967 SC 1322 : [1967] 2 SCR 233; MorviMercantile Bank Ltd. v. Union of India, AIR 1965 SC1954 : [1965] 3 SCR 254; Bank of Bihar v. The Stateof Bihar and Others (1972) 3 SCC 196 : [1971 Suppl.SCR 299; Maharashtra State Cooperative Bank Limitedv. Assistant Provident Fund Commissioner and Others(2009) 10 SCC 123 : [2009] 15 SCR 1; KarnatakaPawnbrokers’ Association and Others v. State ofKarnataka and Others (1998) 7 SCC 707 : [1998] 2Suppl. SCR 461; Standard Chartered Bank and Anotherv. Custodian and Another (2000) 6 SCC 427 : [2000] 3SCR 81; Seth Motilal Hirabhai and Ors. v. Bai Mani1924 SCC OnLine PC 81; M.R. Dhawan v. MadanMohan and Others AIR 1969 Del 313; Balkrishan

Gupta and Others v. Swadeshi Polytex Ltd. and Another(1985) 2 SCC 167 : [1985] 2 SCR 854; F. Nanak ChandRamkishan Das of Hodel and Others v. Lal Chand andOthers 1958 SCC OnLine Punj 6; Bank of Maharashtrav. M/s. Racmann Auto (P) Ltd. AIR 1991 Del 278; RaniLeasing & Finance Ltd. v. Sanjay Khemani 2015 SCCOnLine Cal 450; Hulas Kunwar v. Allahabad Bank Ltd.AIR 1958 Cal 644; Haridas Mundra v. National andGrind-Lays Bank Ltd. AIR 1963 Cal 132; Kunj BehariLal v. The Bhargava Commercial Bank, Jubbulpore AIR1918 All 363; Vimal Chandra Grover v Bank of India(2000) 5 SCC 122 : [2000] 3 SCR 587; The OfficialAssignee of Bombay v. Madholal Sindhu and OthersAIR 1947 Bom 217; 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 Dudley9, Q.B.D. P. 357; Vellayan Chettiar v. Government ofthe Province of Madras I.L.R. 1948 Mad. p. 214; RajaChetty v. Jagannadhadas Govindas 1949 II M.L.J. P.694; Soho Square Syndicate Ltd. v Poland & Co. 1940-1 Ch 638 at p. C43; Krishna Bahadur v. Purna Theatreand Others (2004) 8 SCC 229 : [2004] 3 Suppl. SCR833; The Co-Operative Hindusthan Bank, Ltd. v.Surendranath De 1931 SCC OnLine Cal 224; ParkStreet Properties Private Limited v. Dipak Kumar Singhand Another (2016) 9 SCC 268; Nabha Investment Pvt.Ltd. v. Harmishan Dass Lukhmi Dass 1995 SCCOnLine Del 239; Neikram Dobay v. Bank of BengalILR (1892) 19 Cal 322; Ramdeyal Prasad v. SayedHasan AIR 1944 Pat 135; S.L. Ramaswamy Chetty andAnother v. M.S.A.P.L. Palaniappa Chettiar 1929 SCCOnLine Mad 62; Dhani Ram and Sons v. The FrontierBank Ltd. and Another AIR 1962 P&H 321; ReserveBank of India v. Peerless General Finance andInvestment Co. Ltd. and Others (1987) 1 SCC 424 :[1987] 2 SCR 1; Vasudev Ramachandra Shelat v.Pranlal Jayanand Thakkar and Others (1974) 2 SCC323 : [1975] 1 SCR 534; Kannambra Nayar Veetil Valia

PTC INDIA FINANCIAL SERVICES LTD. v. VENKATESWARLU KARI ANDANOTHER

Ammukutti Neithiar’s Son Kunhunni Elaya NayarAvargal (Deceased) and Another v. P.N. Krishna Pattarand Two Others AIR 1943 Mad 74; Pushpanjali TieUp Pvt. Ltd. v. Renudevi Choudhary and Others 2014SCC OnLine Bom 3661; Firm Thakur Das MarakhanLal v. Mathura Prasad and Others AIR 1958 All. 66;Donald v. Suckling (1866) L.R. 1 Q.B. 585; GTL Limitedv. IFCI Ltd. & Ors. 2011 SCC OnLine Del 3628; LiquidHoldings Private Limited v. The Securities ExchangeBoard of India (2011) SCC Online SAT 40 – referredto.

JRY Investments Private Limited v. Deccan LeafineServices Ltd. and Others (2004) 121 Comp Cas 12 –partly overruled.

Tendril Financial Services Pvt. Ltd. & Ors. v. NamediLeasing & Finance Ltd. and Ors. 2018 SCC OnLineDel 8142 – disapproved.

Hailsham Edn., (2nd Edn.), para 330, page 226 ofVolume XXIII

P3 (1953), 10th Edition, Sweet & Maxwell, page 368

CIVIL APPELLATE JURISDICTION : Civil Appeal No.5443Bof 2019.

From the Judgment and Order dated 20.06.2019 of the NationalCompany Law Appellate Tribunal, New Delhi in Company Appeal (AT)(Insolvency) No.450 of 2018.

Maninder Singh, Sr. Adv., Sidharth Sethi, Ms. Pallavi Kumar, Advs.Cfor the Appellant.

Sajan Poovayya, Sr. Adv., G. Ramakrishna Prasad, Byrapaneni,Suyodhan, Ms. Filza Moonis, K. Trinath, Pratibhanu S. K., John Mathew,Karthik S. D., Advs. for the Respondents.

The Judgment of the Court was delivered byD

SANJIV KHANNA, J.

The primary legal issue which arises for consideration in this appealis whether the Depositories Act, 1996 read with the Regulation 58 of theSecurities and Exchange Board of India (Depositories and Participants)ERegulations, 1996[1 ]has the legal effect of overwriting the provisionsrelating to the contracts of pledge under the Indian Contract Act, 1872[2]and the common law as applicable in India. To facilitate analysis, thisjudgment has been divided into sections as follows:

A.Factual background of the case

B.Relevant provisions of the Contract Act

C.Analysis of case laws under the Contract Act:

(i)What is pledge and the legal difference betweenownership, pledge and mortgage

(ii)Pawnee has special and not general right inthe pledged property

(iii)Accretion on pawned goods

1 For short, ‘1996 Regulations’.

2 For short, ‘Contract Act’.H

(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 theSecurities and Exchange Board of India (Depositories andParticipants) Regulation 1996

E.Effect of the Depositories Act, 1996 and the Securities andExchange 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 thefacts of this case

H.Conclusion

A. Factual background of the case

2.1 The appellant – PTC India Financial Services Limited,[3] is anexisting company under the Companies Act, 2013. It is wholly-ownedsubsidiary of PTC India Limited, which in 1999 was promoted by fourpublic sector undertakings, namely, NTPC Limited, Power FinanceCorporation Limited, NHPC Limited, and Power Grid Corporation ofIndia Limited. PIFSL is registered with the Reserve Bank of India[4] as aNon-Banking Finance Company[5]and classified as an InfrastructureFinance Company.[6 ]The principal business of PIFSL is to invest in powerand energy sector projects in India.

2.2 PIFSL, by way of Bridge Loan Agreement dated 10[th] March2014, had advanced loan of Rs. 125 crores to NSL Nagapatnam Powerand Infratech Limited.[7]As per Clause 3.1.1 of the Bridge LoanAgreement, the loan is required to be secured. In accordance with sub-clause (6) of Clause 3.1.1, on 10[th] March 2014 thereof, the secondrespondent, Mandava Holdings Private Limited,[8] executed Pledge Deedin favour of PIFSL, thereby, pledging 31,80,678 shares, equivalent to26% of the shares of NSL Energy Ventures Private Limited.[9 ]NNPILand NEVPL are subsidiaries of MHPL.

3 Hereinafter referred to as “PIFSL”.

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”.

DEF

A2.3 On17[th] November 2017,the Corporate Debtor filed petitioninvoking Section 10 of the Insolvency and Bankruptcy Code, 2016[10]before the National Company Law Tribunal, Hyderabad,[11 ]initiating thecorporate insolvency resolution process. The petition was admitted underSection 10(4) of the IBC on 18[th] January 2018. Mr. Venkateswarlu Kari,respondent No.1, was appointed as the Interim Resolution Professional.[12]B

2.4 On 28[th] December 2017, PIFSL issued notice under thePledge Deed apprising MHPL on the default son the part of CorporateDebtor 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 16[th] January 2018, as the debt remained unpaid, PIFSLwrote to the Depository Participant invoking its rights in terms of Clause6.1 of the Pledge Deed. Acting on the request, the Depository Participanthas accorded PIFSL the status of ‘beneficial owner’ of 31,80,678 pledgedshares of NEVPL.

2.6 On 23[rd] January 2018,PIFSL wrote to MHPL informing thatdue 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 tosell the shares under Clause 6.2 of the Pledge Deed read with Section176 of the Contract Act.

E2.7 On 17[th] January 2018, PIFSL filed an application before theAdjudicating Authority under Section 7 of the IBC as financial creditorto whom Rs.167,29,23,507/- was due and payable by the CorporateDebtor.

2.8 On 30[th] January 2018, the Adjudicating Authority allowed PIFSLFto withdraw the application with liberty to file proof of financial claimbefore the IRP in Form C.

2.9 On 6[th ]February 2018, MHPL made claim before the IRP,inter alia, stating that PIFSL having been conferred status of ‘beneficialowner’, MHPL no longer has any title or right over 31,80,678 shares.Accordingly, MHPL had stepped into the shoes of PIFSL as creditorGof the Corporate Debtor to the extent of the value of 31,80,678 shares ofNEVPL now owned by PIFSL.

10 For short, ‘IBC’.

11 Hereinafter referred to as “Adjudicating Authority”.

12 Hereinafter referred to as “IRP”.H

2.10 Contrarily, on 10th February 2018, PIFSL submitted Form Cwith financial claimof Rs.169,19,17,637/-, being the amount due andpayable to PIFSL by the Corporate Debtor as of 18[th] January 2018, thedate on which the Adjudicating Authority admitted the Section 10application of the Corporate Debtor. The value of 31,80,678 pledgedshares was not accounted for or reduced.

2.11 On 19[th] February 2018, the IRP, by two separate emails,informed that MHPL’s claim could not be crystalized as it was not possibleto ascertain the value of 31,80,678 shares ‘transferred’ to PIFSL.Similarly, PIFSL’s claim cannot be crystalized due to the settlement inwhole/part of its claim and the need to arrive at the valuation at the timeof ‘transfer’ of shares to PIFSL.

2.12 PIFSL and MHPL preferred separate applications beforethe Adjudicatory Authority against the rejections of their claims.

2.13 By common order dated 6[th]July 2018, the AdjudicatingAuthority disposed of the applications filed by PIFSL and MHPL,accepting the MHPL’s claim by primarily relying on the DepositoriesAct and Regulation 58 of the 1996 Regulations. The Adjudicating Authorityagreed with MHPL that PIFSL having exercised its right under the PledgeDeed to‘transfer’31,80,678 pledged shares, MHPL’s shareholding inNEVPL got reduced by 31,80,678 shares. Therefore, MHPL is financialcreditor of the Corporate Debtor to the extent of the value of 31,80,678shares. Further,16[th] January 2018, the date on which the pledge wasinvoked by PIFSL, is the crucial date for determining the extent to whichPIFSL and MHPL are the financial creditors of the Corporate Debtor.The IRP was directed to appoint an independent valuer to assess thefair market value of 31,80,678 shares of NEVPL as on 16[th] January2018.

2.14 PIFSL challenged the orders before the National CompanyLaw Appellate Tribunal, New Delhi,[13] but the appeals were dismissedvide the impugned judgment dated 20[th]June 2019. The Appellate Authorityhas held that PIFSL had exercised its rights under Clause 6.1 of thePledge Deed on 16[th] January 2018 and consequently, the pledged sharesstood transferred in the name of PIFSL. The fact that PIFSL had notthereafter sold the shares under Clause 6.2 of the pledge deed wouldnot matter. As PIFSL had become the 100% owner of the pledged shares,

13Hereinafter referred to as ‘Appellate Authority’.

DEF

Ait could realize its dues in whole or part by sale and transfer of theshares according to the law. Once PIFSL has exercised right to becomethe owner of the shares, PIFSL cannot take advantage of Section 176ofthe Contract Act to ‘reclaim’ the debt. Section 176 of the Contract Actcannot be taken into consideration by the IRP for collating the financialclaim of PIFSL under Section 18 of the IBC.B

2.15 Other aspects which require to be noted are: (a) as per PIFSL,the principal and interest amount due to them by the Corporate Debtoras of 23[rd] December 2021 are Rs.3,76,13,03,389/-; (b) the shares ofNEVPL are unlisted, and there are no open market transactions, and (c)the value of the pledged shares is disputed. On 13[th] August 2018, theCIRP has submitted valuation report of an independent valuer who hasvalued the pledged shares at Rs.179 crores as of 16[th] January 2018.MHPL relies on the 2013 valuation report of Axis Capital and the annualreport of MHPL for the financial year 2012-13. As per the annual reportrelied on by MHPL, shares of NEVPL as of 31[st] March 2013 wereDvalued at Rs.1229.66 crores. Accordingly, MHPL claims that the fairvalue of each of the 1,22,33,378 shares of NEVPL (100% of the totalequity shares – all held by MHPL) was Rs.1,005.17p per share.Therefore, the total value of the 31,80,678 pledged shares was equivalentto Rs. 319 crores at the time of the creation of the pledge. On the otherhand, PIFSL claims that the actual value per share of NEVPL, asEcalculated on31[st] March 2016,is only Rs.58.97. Thus, the total value ofpledged 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 ofFBailment’. Sections 148 to 171 lay down the general law pertaining tobailments, while Sections 172 to 179 delineate specific provisionsconcerning pledges, which are subset of bailments.

3.2 As per Section 151,a bailee is bound to take as much care ofthe goods bailed to him as man of ordinary prudence would, underGsimilar circumstances, take of his goods of the same bulk, quality andvalue as the goods bailed. Section 152 states that bailee, in the absenceof special contract, will not be liable for any loss, destruction, or

14 There are different recognised and established methods for valuation of unlistedsecurities – See, (i)Commissioner of Wealth Tax v. Mahadeo Jalan and Mahabir PrasadJalan and Others Etc., (1973) 3 SCC 157; and (ii) Bharat Hari Singhania and Others v.HCommissioner of Wealth Tax (Central) and Others, 1994 Supp. (3) SCC 46.

deterioration of the bailed goods if he acts in conformity with Section151. As per Section 153, contract for bailment is voidable at the optionof the bailor if the bailee does any act with regard to the goods bailed,inconsistent with the conditions of the bailment. Section 154 lays downthat the bailee shall be liable for damage arising from unauthorized useof the bailed goods. The bailee, with the consent of the bailor, can mixthe goods bailed with his own goods, in which event, the bailor and thebailee will have interest in proportion to their respective shares in themixture.[15] However, if the bailee, without the bailor’s consent, mixes thebailed 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 thegoods, as well as any damage arising from the mixture. Section 157provides that when the goods are so mixed without the bailor’s consentand cannot be separated, the bailor is liable to be compensated, and thebailee is liable for the loss. Under Section 160, the bailee has to return ordeliver, as per the bailor’s directions, the goods, without demand, assoon as the time for which they were bailed has expired or the purposefor which they were bailed has been accomplished. Section 161 statesthat if there is default by the bailee and the goods are not returned,delivered, or tendered at the proper time, the bailee is responsible to thebailor for any loss, destruction, or deterioration of the goods from thattime. 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 hisdirections, 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 bailmentof goods as security for payment of debt or the performance ofthe promise, is called ‘pledge’. The bailor is in this case calledthe ‘pawnor’. The bailee is called ‘pawnee’”.

As per Section 172, creating valid pledge requires delivery ofthe possession of goods by the pawnor to the pawnee by way of securityupon the promise of repayment of debt or the performance of promise,thereby, creating an estate that vests with the pawnee.

3.4 Sections 176, 177 and 179 of the Contract Act read thus:

15 Section 155, Contract Act.

16 Section 156, Contract Act.

“176. Pawnee’s right where pawnor makes default.— If thepawnor makes default in payment of the debt, or performance; atthe stipulated time or the promise, in respect of which the goodswere pledged, the pawnee may bring suit against the pawnorupon the debt or promise, and retain the goods pledged as acollateral security; or he may sell the thing pledged, on giving thepawnor 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 time isstipulated for the payment of the debt, or performance of thepromise, for which the pledge is made, and the pawnor makesdefault in payment of the debt or performance of the promise atthe stipulated time, he may redeem the goods pledged at anysubsequent time before the actual sale of them, but he must, inthat case, pay, in addition, any expenses which have arisen fromhis default.”

xx xx xx

179. Pledge where pawnor has only limited interest.–Wherea person pledges goods in which he has only limited interest, theEpledge is valid to the extent of that interest.”

As per Section 176, when pawnor makes default in paymentof debt or performance of promise, the pawnee may bring suit againstthe pawnor upon such debt or promise and retain the goods pledged ascollateral security, or he may sell the goods pledged upon giving theFpawnor reasonable notice of the sale. If the pledged goods are sold, andthe proceeds of such sale are less than the amount due in respect of thedebt or promise, the pawnor is still liable to pay the balance amount tothe pawnee. If the proceeds of such sale exceed the amount due, thepawnee will be liable to pay the surplus to the pawnor.

Section 177 gives statutory right to the pawnor, who is at defaultin payment of the debt or performance of the promise, to redeem thepledged goods at any time before ‘actual sale’ by the pawnee. However,in such cases, the pawnor must pay in addition the expenses that havearisen from his default.

Section 179 states that the limited interest that pawnor has inthe goods can be validly pledged.

Having understood the broad statutory contours of pledge, wewould now examine the relevant opinio juris on the law of pledge.Legal jurisprudence relating to law of pledge is required to be examinedin 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 betweenownership, pledge and mortgage.

4.1 Md. Sultan and Others v. Firm of Rampratap Kannayalal,Hyderabad, by its partners[17] observes that contract of pledge shouldsatisfy the following conditions:

(i)there should be bailment of goods as defined in Section148 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 performanceof promise.

The decisions in Md. Sultan (supra) and Sri Raja KakarklhpudiVenkata Sudarsana Sundara Narasayamma Garu (died) and othersv. The Andhra Bank Ltd. Vijayawada and others[18] observe thathypothecation and mortgage of movables, though not specificallymentioned in the Contract Act, are valid and enforceable in India as theContract Act is not an exhaustive law on the subject. Such transactionsbeyond the statutory framework are given effect to and interpreted bythe courts according to the principles of justice, equity, and goodconscience.There is no standard format and incidents in contract ofpledge can be different. term mutually agreed by the parties is valid aslong as it is not contrary to or inconsistent with any provision of theContract Act. In the context of the present case, the aforesaid principlesrelating to the law of pledge reflecting flexibility are important in themilieu of transitional and commercial environment wherein significantchanges have occurred across the capital market with inter alia adventof institutional investors, regulatory mechanisms, and the new insolvencyregime, albeit the fundamentals of the law of pledge, except when17 AIR 1964 AP 201.18AIR 1960 AP 273.

Apermitted or required to be eschewed, should be applied. This is theprinciple of interpretation which we have applied to answer theconundrum.

4.2 These two decisions highlight distinction between pledge,which creates an estate or right that vests with the pawnee, and aBwider and general right of an owner; as well as mortgage orhypothecation.[19]An owner has: (a) right of possession; (b) right ofenjoyment; and (c) the right of disposition. pawnee does not have theright of ownership, but has limited right to retain possession till debt ispaid or promise is performed. pawnee’s right of disposition is limitedto disposition of the pledge rights only, and the right to sell after reasonableCnotice. Even when the pawnor makes default in payment of debt orperformance of the promise, the pawnor has the right to redeem thepawn till ‘actual sale’ of the pawn by the pawnee. However, the pawnorin addition to the debt, must pay to the pawnee expenses that have arisenbecause of the default.D4.3 Where money is advanced by way of the loan upon the securityof goods, the transaction may take the form of mortgage or pledge.The difference between pledge and mortgage of movable propertyis that while under pledge there is only bailment, whereas under amortgage there is transfer of the right of the property by way of security.EThe distinction is aptly brought out in the following passage in Halsbury’sLaws of England:[20]

“A mortgage of personal chattels is essentially different from apledge or pawn under which money is advanced upon the security19 In the context of the present case, we need not examine the difference between pledgeand hypothecation. It is sufficient to note that in hypothecation possession does notFtransfer and remains with the debtor. Hypothecation has been defined as right whicha creditor has over thing belonging to another, and which consists in the power tocause it to be sold in order to be paid his claims out of the proceeds. It is an act ofpledging thing as security for debt or demand without parting with the possession.It follows as consequence that although the property remains in the possession of thedebtor, it cannot be transferred to third party without the express consent or permissionGof the creditor (See, Simla Banking and Industrial Co., Ltd., Simla (InLiquidation)v.Pritams, AIR 1960 Punj 42). In India, Securitisation and Reconstructionof Financial Assets and Enforcement of Security Interest Act, 2002 defines it underSection 2(1)(n) as charge in or upon any movable property, existing or future, createdby borrower in favour of secured creditor without delivery of possession of themovable property to such creditor, as security for financial assistance and includesfloating charge and crystallisation of such charge into fixed charge on movable property.H20Hailsham Edn., (2nd Edn.), para 330, page 226 of Volume XXIII.

of chattels delivered into the possession of the lender, such deliveryof possession being an essential element of the transaction. Amortgage conveys the whole legal interest in the chattels; pledgeor pawn conveys only special property, leaving the generalproperty in the pledger or pawnor; the pledgee or pawnee neverhas the absolute ownership of the goods, but has special propertyin them coupled with power of selling and transferring them to apurchaser on default of payment at the stipulated time, if any, orat reasonable time after demand and non-payment if no time forpayment is agreed upon.”Therefore, unlike pledgee, mortgagee acquires general rightsin the things mortgaged subject to the right of redemption of mortgagor.In other words, the legal estate in the goods mortgaged passes on to themortgagee. In comparison, pawnee has only the special right in thegoods pledged, namely, the right of possession as security and in case ofdefault, he can bring suit against the pawnor as well as sell the goodsafter giving reasonable notice.[21] Whether particular transaction is amortgage of moveable property or pledge can only be determined byreference to the intention of the parties, and other surroundingcircumstances.[22]

(ii)Pawnee has special and not general right in thepledged property.

5.1 This Court, in Lallan Prasad v. Rahmat Ali and Another,[23]observes that under the common law, pledge is bailment of personalproperty as security for payment of debt or engagement. The two essentialingredients of pledge are (i) the pawn i.e., the property pledged shouldbe actually or constructively delivered to the pawnee[24] and (ii) pawnee

21Para 20, Sri Raja Kakarklhpudi Venkata Sudarsana Sundara Narasayamma Garu(supra)

22Arjun Prasad and others v. Central Bank of India, Ltd., 1954 SCC OnLine Pat 138.23AIR 1967 SC 1322.

24See also Morvi Mercantile Bank Ltd. v. Union of India, AIR 1965 SC 1954: “20. InEnglish Law 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 debt orfor discharge of some other obligation upon the express or implied understanding thatthe subject-matter of the pledge is to be restored to the pledger as soon as the debt orother obligation is discharged. It is essential for the creation of pledge that thereshould be delivery of the goods comprised therein. In other words, pledge cannot becreated except by delivery of the possession of the thing pledged, either actual or

Ahas only special property in the pledge but the general property thereinremains in the pawnor and wholly reverts to him on discharge of thedebt. The right to property vests in the pawnee only as far as is necessaryto secure the debt. pawn or pledge is an intermediate between simplelien and mortgage, which wholly passes the property.A pawnor has anabsolute right to redeem the pledged property upon tendering the amountBadvanced but that right would be lost if the pawnee in the meantime haslawfully sold the pledged property. If the pawnee sells, he must appropriatethe proceeds of the sale towards the pawnor’s debt, for the sale proceedsare the pawnor’s monies to be so applied and the pawnee must pay thepawnor any surplus after satisfying the debt.

C5.2 Accordingly, the judgment refers to Section 172, which statesthat pledge is contract for bailment of goods as security for paymentof debt or performance of promise. Section 173[25] entitles the pawnee toretain the goods pledged for the payment of the debt. Section 176,elucidating on the rights of the pawnee, states that in case of default byDthe pawnor, the pawnee has: (a) right to sue upon the debt and toretain the goods as collateral security, and (b) sell the goods after

constructive. It involved bailment. If the pledger had actual goods in his physicalpossession, he could effect the pledge by actual delivery; but in other cases he couldgive possession by some symbolic act, such as handing over the key of the store inwhich they were. If, however, the goods were in the actual physical possession of aEthird person, who held for the bailor so that in law his possession was that of the bailor,this pledge could be effected by change of the character of the possession of the thirdparty, that is by an order to him from the pledgor to hold for the pledgee, the changebeing perfected by the third party attorning to the pledgee, thus acknowledging that hethereupon held for the latter. There was thus change of possession and constructivedelivery: the goods in the hands of the third party came by this process constructivelyin the possession of the pledgee. But where goods were represented by documents theFtransfer of the documents did not change the possession of the goods, save for oneexception, unless the custodian (carrier, warehouseman or such) was notified of thetransfer and agreed to hold in future as bailee for the pledgee. The one exception was thecase of bills of lading, the transfer of which by the law merchant operated as transferof the possession of, as well as the property in, the goods. This exception has beenexplained on the ground that the goods being at sea the master could not be notified; theGtrue explanation was perhaps that it was rule of the law merchant, developed in orderto facilitate mercantile transactions, whereas the process of pledging goods on land wasregulated by the narrower rule of the common law.” The quotation reflects flexibility.25 173. Pawnee’s right of retainer.—The pawnee may retain the goods pledged, not onlyfor payment of the debt or the performance of the promise, but for the interest of thedebt, and all necessary expenses incurred by him in respect of the possession or for thepreservation of the goods pledged.H

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 thepawnor to redeem them is extinguished. But, thereupon, the pawnee isbound to apply the sale proceeds towards satisfaction of the debt andpay 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. Evenwhen the pawnee files suit for recovery of the debt, though he isentitled to retain the goods, the pawnee must return the goods on payment.Another significant observation in this judgment is that if the pawneesues on the debt denying the pledge, and it is found that he was givenpossession of the goods pledged and had retained the same, the pawnorhas the right to redeem the pledged goods on payment of the debt. If thepawnee is not in position to redeliver the goods, the pawnee cannotbenefit from the repayment of the debt and the goods pledged. Wherethe value of the pawned goods is less than the debt and the pawneedenies the pledge or is otherwise not in position to return the pawnedgoods, the pawnee has to give credit for the value of the goods andwould be entitled only to recover the balance.5.3 In Bank of Biharv. The State of Bihar and Others,[26] relyingon the distinction between the right of ownership and the right of thepawnee under pledge, this Court held that Section 173 of the ContractAct provides that the pawnee may retain the goods pledged only forpayment of the debt, performance of the promise and also for intereston the debt, etc. The pawnee has special property or interest in thething pledged while the general property therein continues in the owner.The special interest exists in the pawnee so that the pawnee can compelpayment of the debt or sell the goods when the right to do so arises. Thisspecial interest is distinguished from mere right of detention that theholder of lien possesses, since the pawnee may assign or pledge hisspecial property or interest in the goods. Relying on Halsbury’s Law ofEngland, 3[rd] Edition, Vol. 29, page 222, it is observed that on the bankruptcyof the pawnor, the pawnee is secured creditor with respect to thethings pledged before the date of receiving the order and without noticeof prior available act of bankruptcy.

5.4 In Maharashtra State Cooperative Bank Limited v.Assistant Provident Fund Commissioner and Others,[27] three Judges’

26(1972) 3 SCC 196.27 (2009) 10 SCC 123.

ABench of this Court agreed with the ratio in Bank of Bihar (supra) andLallan Prasad (supra) and proceeded to hold that in contract of pledge,the property pledged should be actually or constructively delivered tothe pawnee. The pawnee has only ‘special property’ in the pledge, butthe general property remains with the pawnor. The special property rightin the pawned goods is higher than the mere right of detention of goodsBbut lesser than the general property right. This means that the pawneehas the right to transfer the general property rights in the pawned goodsif the pledge remains unredeemed. Reference in this regard was madeto the decision of this Court in Karnataka Pawnbrokers’ Associationand Othersv. State of Karnataka and Others,[28 ]wherein it is observedCthat the pawnee has conditional general property interest in the pledge,subject to the condition that he can pass on that general property if thepledge is brought to sale in accordance with the law.

(iii) Accretion on pawned goods

6.1 In Standard Chartered Bankand Anotherv. CustodianandDAnother,[29] Division Bench of this Court interpreting provisions ofSections 148, 160 and 172 of the Contract Act held that when the goodsare bailed for securing payment of debt or performance of promise,the bailor will get the right for the return of the said goods when thepurpose is accomplished, namely, the debt is returned, or the promise isEperformed. Referring to Section 163 of the Contract Act, it is observedthat in the absence of contract to the contrary, the bailee is bound todeliver to the bailor, or according to his directions, any increase of profitthat may have accrued from the bailed goods. An example in this Sectionstates that if calf is born to the cow, then the bailee is bound to deliverthe calf as well as the cow to the bailor. In other words, the pledgeFextends to accretions and additions, and therefore, when the pawneereturns the pledged goods, the accretions and additions must be returnedto the pawnor. It also follows that the pawnee’s right to retain and sellthe pledged goods stretches to the right to retain and sell any increaseand accumulations to the pledged goods.

G6.2 Accordingly, in Seth Motilal Hirabhai and Ors. v. Bai Mani,[30]where the shares were already pledged, it is held that when fresh shareswere issued taking the call money from the yearly dividend payable on

28 (1998) 7 SCC 707.29(2000) 6 SCC 427.H30 1924 SCC OnLine PC 81.

the old shares, the new shares must be returned to pawnor along withthe old shares. Similarly, the Delhi High Court in M.R. Dhawan v. MadanMohan and Others,[31] has held that any accretion in the shape ofdividends, bonuses or right shares issued in respect of the pledged shares,in the absence of any contract to the contrary, is the special property ofthe pawnee as security for the debt.

(iv)Notice of sale by pawnor and the pawnee’s right tosue 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. SwadeshiPolytex Ltd. and Another[32] has held that under Section 176, if the pawnormakes default in payment of the debt or performance as promised, andin respect of which the goods were pledged, the pawnee may bring asuit on the pawnor upon the debt or promise and may retain the goodspledged as collateral security, or the pawnee may sell the things pledgedon giving the pawnor reasonable notice of sale.

7.2 Several High Courts in F. Nanak Chand Ramkishan Das ofHodel and Others v. Lal Chand and Others,[33]Bank of Maharashtrav. M/s. Racmann Auto (P) Ltd.[34]and Rani Leasing & Finance Ltd.v. Sanjay Khemani[35]have held that while the pawnee has right to sellthe goods after giving notice to the pawnor, he is not bound to sell at anyparticular time. The power of sale conferred on the pawnee is expresslyfor his benefit, and it is his sole discretion to exercise the power of saleor otherwise. If the pawnee does not exercise that discretion, no blamecan be put on him. Even where the value of the goods deteriorates dueto time, no relief can be granted to the pawnor against the pawnee asthe pawnor is legally bound to clear the debt and obtain possession ofthe pawned goods.

7.3 Division Bench of the Calcutta High Court in Hulas Kunwarv. Allahabad Bank Ltd.[36 ]has held that law does not require that thepawnee arrange for sale beforehand and then give notice to the pawnoras to the date, time and place of sale. Notice under Section 176 has to be

31AIR 1969 Del 313.32 (1985) 2 SCC 167.331958 SCC OnLinePunj 6.34AIR 1991 Del 278.352015 SCC OnLine Cal 450.36 AIR 1958 Cal 644.

Agiven of the pawnee’s intention to sell in default of payment by the pawnorwithin the specified time. This notice does not require specification ofthe date, time and place of sale.

7.4 The Calcutta High Court in Haridas Mundra v. Nationaland Grind-Lays Bank Ltd.[37]refers to two earlier decisions in the casesBof Hulas Kunwar (supra) and Kunj Behari Lal v. The BhargavaCommercial Bank, Jubbulpore[38]where the courts have held that thenotice under Section 176 is required before the sale to show the pawnee’sintention to sell the good in order to give the pawnor reasonableinformation to redeem the pawned goods. Further, the reasonablenessof notice may vary from case to case. The right to retain the pawn andCthe right to sell is alternative and not concurrent. When the pawnorretains, he does not sell, but when he sells, he does not retain the pledgedgoods. However, the pawnee can sue on the debt or the promiseconcurrently with his right to retain the pawn or sell it. Even the sale ofthe pawn does not destroy the pawnee’s right as the pawn is collateralDsecurity, and the pawnor remains liable on the original promise to paythe balance due. The right to sell the pawned goods is necessary tomake the security effectual for discharging the pawnor’s obligation. Itcontinues despite the institution of suit for recovery of the dues.7.5 In Vimal Chandra Grover v Bank of India,[39] specificEreference was made to the decisions on the law of pledge that the pawneeis under no compulsion to sell the pawned goods on the request of thepawnor as means of discharging the debt. The reason is that Section176 grants an option to the pawnee to either retain or sell the pawnedgoods for recovery of the debt. In the former case, the pawnee can alsofile the suit to recover debt while holding the goods. However, giving ofFreasonable notice to the pawnor for sale is required, but even whenreasonable notice for sale has been given, the pawnee is not bound tosell 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 pawnoris entitled to redeem the pawned goods. The pawnor has the right toGredeem them after discharging the debt. However, the court did notconsider it necessary to go into legal niceties in view of the facts of thecase as the bank, as pawnee, on the request of the borrower-pawnor

37AIR 1963 Cal 132.38AIR 1918 All 363 (2).H39 (2000) 5 SCC 122.

had agreed to sell part of the shares to redeem the debt. In VimalChandra (supra), the Court held that the bank as the pawnee was liablefor negligence as it did not sell the pledged goods, after having agreed todo so. This failure amounted to negligence in service under the ConsumerProtection Act, 1986.

7.6 At this stage we must refer to two detailed judgments of theBombay High Court and the Delhi High Court and the observations ofthe Andhra Pradesh High Court in Sri Raja Kakarklhpudi VenkataSudarsana Sundara Narasayamma Garu (supra).In The OfficialAssignee of Bombay v. Madholal Sindhu and Others,[40] the judgmentof the Bombay High Court authored by Chief Justice Leonard Stonereferred 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 ofpledge is the right to sell the pledge, where there has been defaultin the pledge in complying with his engagement, but sale beforedefault would be conversion. Such right does not divest thegeneral property of the pawner but still leave in him (as we shallpresently see) 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 judicial process to justify the sale, or atleast to destroy the right of redemption. But the law as at presentestablished leaves an election to the pawnee. He may file bill inequity against the pawner for foreclosure of sale and sale; or, hemay proceed to sell ex mero motu, upon giving notice of hisintention to the pledger.”

In this case, the judgment of Chief justice Leonard Stone alsoreferred 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 Indiaexcept the State of Jammu and Kashmir; and it shall come intoforce on the first day of September, 1872.

Saving—Nothing herein contained shall affect the provisions ofany Statute, Act or Regulation not hereby expressly repealed, nor

Aany 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 unqualifiedpower of sale, being inconsistent with Section 176, was not valid, andthe express provision of Section 176 shall prevail. The notice must beBgiven in all pledge cases, even when the instrument of pledge containsan unconditional power of sale. Another important observation made inthis judgment is that the pawnor’s right to redeem remains until the ‘lawfulsale’.

Chief Justice Stone’s judgment is also relevant for another reason.CHe has referred to, with approval, Mr. Justice Story’s commentaries onthe Law of Bailments, Eight Edition, which at page 262 draws distinctionbetween (actual) sale and conversion by the pawnee in the followingpassage:

“Another right resulting, by the common law, from the contract ofDpledge is the right to sell the pledge, where there has been defaultin the pledge in complying with is engagement, but salebeforedefault would be conversion. Such right does not divestthe general property of the pawner but still leave in him(as weshall presently see) right of redemption.”

Chagla J., in his concurring opinion, referring to Section 176, heldEthat when the pawnor makes default in the payment of the debt, thepawnee may sell the pawned goods on giving the pawnor reasonablenotice of sale. He agreed that the requirement of giving the pawnorreasonable notice of sale is mandatory and it is not open to the parties tocontract themselves out of this section. Section 176 of the Contract Act,Funlike some of the sections of the Contract Act, does not specificallyprovide that the contractual terms can override the provision by usingthe expression “in the absence of the contract to the contrary” or “subjectto special contract to the contrary”. The notice, that is to be given forthe intended sale by the pawnee, is special protection that the statutehas given to the pawnor, and the parties cannot agree that the pawneeGmay sell the pledged goods without notice to the pledgor. Dwelling onthe aspect of the pawnor’s right of redemption under Section 177, thejudge held that the right remains till the ‘actual sale’ of the pledged goods.The expression ‘actual sale’ in Section 177 must be sale in conformitywith the provisions of Section 176 which gives the pledgee the right toH

sell; and if the sale is not in conformity with those provisions, then theequity of redemption with the pledgor is not extinguished.

The sale by the pawnee to himself being void does not put an endto the pledge, but the pawnor is bound by resale(s) duly effected by thepawnee to the third parties after such abortive sales to himself.

Chagla J. on the rights of the pawnee held that the Contract Actprovides two rights to the pawnee when the pawnor makes default inpayment of the debt: (a) bring the suit against the pawnor for the debtand retain the goods pledged as collateral security; and (b) sell the goodspledged, which power, however, can be exercised in terms of Section176 on giving the pawnor reasonable notice for sale.

While upholding that the right of redemption given to the pawnorvide Section 177 of the Contract Act ends on the sale of the goods bythe pawneein conformity with the requirements of Section 176 of theContract Act and not on unlawful or unauthorised sales, Chagla J. afterextensively referring to the case law on the subject held that: (1) thepawnor does not become entitled to the possession of the goods pledgedwithout tendering the amount due on the pledge; or in other words, withoutseeking to redeem the pledge; and (2) that without proper tender ofthe amount due on the pledge, the only right of the pawnor in respect ofthe unlawful or unauthorised sale is in tort for damages actually sustainedby him. Therefore, without tendering the amount, action of trover[41] anddetinue[42] are not maintainable.

7.7 The decision in Madholal Sindhu (supra) was carried inappeal to the Federal Court, wherein the court by majority overruled thedecision of the Bombay High Court solely on factual basis that, giventhe assent of sale of shares by the pawnor therein and the acquiescencethereof by the Official Assignee, the sale was good. However, it is to beespied that the question of whether the pawnor could enter into contractcontrary to the provisions of Section 176 or whether want of notice is amere irregularity not affecting the title of the bona fide purchaser forvalue did not arise for consideration before the Federal Court.7.8 These principles interpreting Sections 176 and 177 of theContract Act are reiterated and affirmed in Sri Raja KakarklhpudiVenkata Sudarsana Sundara Narasayamma Garu (supra). This

41A common law action to recover the value of personal property that has been wrongfullydisposed of by another person.

42 common law action for recovery of personal chattel wrongfully detained or of itsvalue.

Adecision also examines the waiver of the right to reasonable notice underSection 176 of the Contract Act. Reference was made to the rule ofwaiver as stated in Maxwell on Interpretation of Statutes[43] in the followingwords:

“Every-one has right to waive and to agree to waive theBadvantage of law or rule made solely for the benefit and protectionof the individual in his private capacity, which may be exercisedwith without infringing any public right of public policy”.After referring to foreign[44] and Indian authorities[45] on waiver, SriRaja Kakarklhpudi Venkata Sudarsana Sundara NarasayammaGaru (supra) categorically observes that in terms of Section 176, itsCrequirements are mandatory and that, even if there is term in the contractof pledge to waive notice, still, the pledgee is not relieved of his obligationto give notice before the sale.

7.9 Of particular importance is the reference in Sri RajaKakarklhpudi Venkata Sudarsana Sundara Narasayamma GaruD(supra) to the following observations of Farelli J. in Soho SquareSyndicate Ltd. v Poland & Co.:[46]

“If it be right to say that mortgagee, by merely getting the consentof the mortgagor, can avoid the ..... necessity of applying to theCourt. large part of the protection which this Act was intendedEto provide would virtually disappear. People in the position of suchpersons as I have mentioned might easily be persuaded to give aconsent without really knowing what exactly was involved in suchconsent, and an opportunity of expressing their reasons for theirinability to pay, whatever they may he, and of stating theirdifficulties, which is now afforded to them by the necessity of anFapplication to the court would be entirely removed. Moreover,difficult questions might also arise whether the consent had infact been obtained, or whether it was consent which was binding,and similar questions.’’

G43(1953), 10th Edition, Sweet & Maxwell, page 368.44Wilson v. Mcintosh, 1894 A.C. P. 129.; Corporation of the City of Tornoto v. JohnRussel, 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.

45Vellayan Chettiar v. Government of the Province of Madras, I.L.R. 1948 Mad. p. 214;Raja Chetty v. JagannadhadasGovindas, 1949 II M.L.J. P. 694.46 1940-1 Ch 638 at p. C43H

Where the Contract Act prescribes particular term that is binding,the statutory mandate must be followed by the parties. Neither partycan contract out of it. Otherwise, the legislative command that the statuteimposes would be violated with immunity by merely incorporating waiveras contractual term, depriving the frailer party of the benefit of thelegal protection. condition prescribed to protect and benefit the publiccannot be dispensed with when it lays down rule of public policy.

7.10 Section 63[47] of the Contract Act governs the domain ofwaiver. It is general principle of law that everyone has right to waivethe advantage of law or rule made solely for the benefit and protectionof the individual in his private capacity.[48] However, such waiver cannotinfringe any public right or public policy. In Krishna Bahadur v.PurnaTheatre and Others,[49] this Court observed that,

“10. right can be waived by the party for whose benefit certainrequirements or conditions had been provided for by statutesubject to the condition that no public interest is involved therein.Whenever waiver is pleaded it is for the party pleading the sameto show that an agreement waiving the right in consideration ofsome compromise came into being. Statutory right, however, mayalso be waived by his conduct.”

In Halsbury’s Laws of England,[50] it is stated thus:

“As general rule, any person can enter into binding contract towaive the benefits conferred upon him by an Act of Parliament,or, as it is said, can contract himself out of the Act, unless it canbe shown that such an agreement is in the circumstances of theparticular case contrary to public policy. Statutory conditions may,however, be imposed in such terms that they cannot be waived byagreement, and, in certain circumstances, the legislature hasexpressly provided that any such agreement shall be void.”

However, there is difference between statutory provisions meantfor the benefit of person and statutory provisions which mandate

47 63. Promise may dispense with or remit performance of promisee.— Every promiseemay dispense with or remit, wholly or in part, the performance of the promisee madeto him, or may extend the time for such performance, or may accept instead of it anysatisfaction which he thinks fit.

48Cuilibet licet renuntiarejuri pro se introductoi.e., Any one may waive or renounce thebenefit of principle or rule of law that exists only for his protection.

49 (2004) 8 SCC 229.

50 Vol. 8, Third Edn., para 248 at p. 143.

Acontracts to be in specific manner. One cannot waive the statutoryobligations where the statute restraints explicitly or mandates parties tocontract in particular manner.Formalities and requirements for makingcontracts have generally been held to be mandatory.[51 ]Where statuteprescribes that contract shall be in specific form or shall or shall notcontain certain terms, the statutory form must be followed.[52] In referenceBto pledge, waiver by contract and statutorily mandated terms, the HighCourt 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 saving clause inCrespect of special contracts contrary to its express terms. Thesection gives the pawnee the right to sell only as an alternative tothe right to have his remedy by suit. Besides, section 177 givesthe pawner right to redeem even after the stipulated time forpayment and before the sale. In our opinion, in view of the wordingDof section 176 as compared with the wordings of the other sectionsof the Act, to which we have referred, and also, in view of theright which section 177 gives to the pawner, and, in order that theprovision of that section may not be made nugatory, the properinterpretation to put on section 176 is to hold that, notwithstandingany contract to the contrary, notice has to be given.”E

Even when the general law provides liberty to contract, the partiescannot contract contrary to express provisions of law. In Park StreetProperties Private Limited v. Dipak Kumar Singh and Another,[54] inreference to Section 106 of the Transfer of Property Act, 1882, thisCourt held:F

“While the agreement dated 7-8-2006 can be admitted in evidenceand even relied upon by the parties to prove the factum of thetenancy, the terms of the same cannot be used to derogate fromthe statutory provision of Section 106 of the Act, which creates afiction of tenancy in the absence of registered instrument creating

51G.P. Singh, Principles of Statutory Interpretation, 14th Edition, Lexis Nexis (2016) atpage 462.

52Craies on Statute Law by S.G.G. Edgar, 7th Edition, Sweet & Maxwell Limited (1971)at page 255.

531931 SCC OnLine Cal 224.H54 (2016) 9 SCC 268.

the same. If the argument advanced on behalf of the respondentsis taken to its logical conclusion, this lease can never be terminated,save in cases of breach by the tenant. Accepting this argumentwould mean that in situation where the tenant does not defaulton rent payment for three consecutive months, or does not commita breach of the terms of the lease, it is not open to the lessor toterminate the lease even after giving notice. This interpretationof Clause 6 of the agreement cannot be permitted as the same iswholly contrary to the express provisions of the law. The phrase“contract to the contrary” in Section 106 of the Act cannot beread to mean that the parties are free to contract out of the expressprovisions of the law, thereby defeating its very intent.”

7.11 In Nabha Investment Pvt. Ltd. v. Harmishan Dass LukhmiDass,[55 ]a decision of Delhi High Court, reference is made to the decisionin Sri Raja Kakarklhpudi Venkata Sudarsana SundaraNarasayamma Garu (supra) wherein the High Court of Andhra Pradeshhad agreed with the opinion expressed by Chagla J. in Madholal Sindhu(supra), that in cases of unauthorized sale by the pawnee, the pawnorcould seek to file suit for redemption by depositing the money, treatingthe sale as if it had never taken place, or where the suit of redemption isnot filed, to ask for damages on the ground of conversion. However, thedecision in Nabha Investment (supra) disagreed with the view taken inthese two judgments that the pawnor cannot file the suit for redemptionof the pledge unless preceded by tender or accompanied by pledgedmoney. Nevertheless, the judgment agrees with other principles of lawlaid down by Chagla J. that Section 176 is mandatory observing that theapplicability and sweep of Section 176 is not eclipsed or curtailed by thephrase “in the absence of the contract to the contrary”. In other words,the parties cannot contract out of Section 176. The need for notice tothe pawnor of the intended sale by the pawnee is the special protectiongiven to the pawnor, and the parties cannot override the special protectionby agreement. Further, the right to redeem can be exercised up to theactual sale of the goods pledged, i.e., the sale referred to in Section 177in conformity with Section 176. The judgment in Nabha Investment(supra) elucidates:

“22.8. Here I may utilize this opportunity for extracting otherprinciples of law laid down by Chagla, J. in his illuminating judgment

A(i)The provisions of Section 176 Contract Act are mandatory.The applicability and sweep of Section 176 unlike severalother provisions on the same subject is not eclipsed by thephrase-”in the absence of contract to the contrary.” Thenotice that is to be given to the pledgor of the intended saleby the pledgee is special protection which statute hasBgiven to the pledgor and parties cannot agree that in thecase of any pledge, the pledgee may sale the pledged articleswithout notice to the pledgor (para 55).

(ii)If sale is held of the shares under authority of the pledgorthen it could convey to the purchaser full title in the shares;sale under Section 27 of Sale of Goods Act title conveyedto the purchaser would not be title better than that of theseller. (Para 56).

(iii)Notice under Section 176 of Contract Act must be givenbefore the power of sale can be exercised. If the notice isDessential, the purchaser, however innocent cannot acquirea title better than his vendor has (Para 56).

(iv)Right to redeem under Section 177 can be exercised rightupto time the actual sale of the goods pledged takes place.The actual sale referred to in Section 177 must be sale inEconformity with the provisions of Section 176 which givesthe pledgee the right to sale; and if the sale is not inconformity with those provisions, then the equity ofredemption in the pledgor is not extinguished (para 57).

(v)The pledgor has right to call upon the pledgee to redeemFthe shares or payment of the debt. If the pledgee hastransferred the shares, he is entitled to call upon thetransferee for the same because the transferee does notacquire anything more than the right, title and interest ofthe pledgee which is to retain the goods as pledge till theGdebt is paid off. If the pledgor may not be in position toredeem, he may contend himself with merely suing thepledgee for conversation if any damage has resulted byreason of the goods being sold without proper notice (para59).

(vi)There is no analogy between Section 69(3) of T.P. Act andSection 176 Contract Act; there is marked contrastbetween the two. Former protects the innocent purchaser,the latter does not do so. In the absence of any provision inSection 176 of the Contract Act in favour of the innocentpurchaser, to import such protection from the provisions ofanother statute is with respect wholly fallacious andunjustifiable. It is always dangerous to draw analogybetween one statute and another;

22.9Vide para 64 Chagla, J. did not agree with the followingstatement of law contained in Coote on Mortgages (Volume-II,9th Edition page 1472):—

“The pledgee has on default right to sell the pledge if thepayment is to be made on certain day; otherwise not; but asale before default would be conversion; yet the sale, whetherwrongful or not, passes the title to the vendee as against thepledgor.

22.10 Chagla, J. has expressed his approval and agreement withthe following statement of law in Story’s Law of Bailments, (8thEdition, page 272):—

“A pledgee of stock has no legal right to sell the same withoutnotice to the pledgor and such sale passes no title as againstthe pledgor, even to bonafide party”.

22.11 The abovesaid principles deducible from the opinion recordedby Chagla, J. with which I find myself in full agreement lendstrength to the plaintiff’s case….”

7.12 The view of the Delhi High Court in Nabha Investment(supra) expressing limited divergence[56]from the ratio in Madholal Sindhu(supra) and Sri Raja Kakarklhpudi Venkata Sudarsana SundaraNarasayamma Garu (supra) does not appeal to us. The reason givenby the Delhi High Court that there is no provision in any statute or principleof law to hold that the pawnor has only two remedies, as elucidated byChagla, J. in Madholal Sindhu (supra), is not correct. Section 177,which gives right of redemption to the pawnor till ‘actual sale’, itselfpostulates not only payment of the debt due but also expenses of the

56 See paragraphs 22.7, 23 and 24 of the judgment in Nabha Investment.

Apawnee which have arisen from the pawnor’s default. The instancesnoted subsequently when the pawned property is not available are wellcovered and can be taken care under clause (2)[57] of the opinion expressedby Chagla, J. in Madholal Sindhu (supra).[58]

7.13 Section 176 of the Contract Act requires that the pawneeBmay sell the thing pledged on giving the pawnor reasonable notice of thesale. It does not prescribe any fixed form of notice or specify any fixedperiod of notice. The object and purpose of giving notice is to make thepawnor know about the pawnee’s intent to sell the pawn and give himanopportunity to exercise his statutory right of redemption, which as perSection 177 can be exercised till the date of ‘actual sale’. Whether orCnot notice was given and the period of notice was reasonable woulddepend upon the facts of the case. In view of the above discussion, thepawnor can communicate his willingness and desire to the pawnee thatthe pledged goods may be sold. In case any such request is made, apawnee may well act upon the request without violating Section 176 ofDthe Contract Act. However, pawnee, unless he also agrees, cannot becompelled 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 ContractAct, which confers on the defaulting pawnor the right to redeem theEpledged good still ‘actual sale’, does not support pawnee’s sale to self.Saleto self would in terms of the judgment in Madholal Sindhu’s case (supra)is case of conversion and not ‘actual sale’, and therefore, would notaffect the pawnor’s right to redemption under Section 177 of the Contract

57 (2) that without proper tender of the amount due on the pledge, the only right of theFpawnor in respect of the unlawful or unauthorised sale is in tort for damages actuallysustained 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 byChagla, J. that the pawnor does not become entitled to redemption of the goods pledgedwithout 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 theGpledged goods without payment of the debt due and the additional amount. The Courtwould be entitled to ask the pawnor to deposit the ‘admitted amount’ at the initial stageitself if the pawnee is ready and willing to deliver the property pledged. The positionwould be different where the pawnee declares in advance his inability to return thepledged property, in which case the pawnor’s claim cannot be defeated through auseless ceremony of tender. Section 51 of the Contract Act relating to reciprocal promisesHwas relied upon.

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 thepawnee to itself is unauthorized but did not entitle the pawnor to havethe goods back. The pawnor would be required to pay back the debt forwhich the goods were pledged as security to redeem the goods. If theloan remains unpaid after the demand, the pawnee is entitled to sell thegoods and credit the proceeds towards the outstanding debt. After thegoods are sold to third party, the pledge ends. The pawnee in suchcases would be liable if he fails to credit the loan account with theproceeds on the sale of the pawned goods. The pawnee may also beliable, subject to the contract, for damages for converting the goods forhis use.8.2 Several other High Courts have similarly opined and weagreethat the Contract Act does not conceive of sale of the pawn to self andconsequently, the pawnor’s right to redemption in terms of Section 177of the Contract Act survives till ‘actual sale’ .In Ramdeyal Prasad v.Sayed Hasan,[60] the Patna High Court has held that the sale by thepawnee to himself of the securities pledged is void; it does not put anend to the contract of the pledge to entitle the pawnor to recover thegoods without payment of the amount thereby secured, nor does it entitlethe pawnor to damages. The pawnor is bound by the resale duly effected

by the pawnee to third persons. However, where the pawnee haserroneously represented to the pawnor before such resales that thesecurities have been sold and, therefore, no longer available forredemption, the pawnee becomes liable for the value as conversion.

8.3 ADivision Bench of the Madras High Court inS.L.RamaswamyChetty and Another v. M.S.A.P.L. Palaniappa Chettiar,[61] relying uponthe decision of the Privy Council in Neikram Dobey (supra),opined thatwhere the pawnee has the power to sell in default, takes over uponhimself the property pledged without the authority of the pawnor bycrediting its value in the account with him, this act, though an unauthorizedconversion would not put an end to the contract of pledge.[62]

59 ILR (1892) 19 Cal 322.

60AIR 1944 Pat 135.

611929 SCC OnLine Mad 62.

62 This decision also holds that the pawnor would be entitled to redeem withoutpayment. This proposition is contrary to several decisions including decision of thePrivy Council in NeikramDobey(supra).

A8.4 There is one solitary judgment of the single judge of the Punjaband Haryana High Court in Dhani Ram and Sons v. The FrontierBank Ltd. and Another,[63] which holds that the sale of the pawnedgoods by the pawnee to himself is not void, and the pawnee was held tobe the legal owner of the pledged shares. This decision proceeds withthe incorrect understanding of the ratio in Neikram Dobay (supra), andBthus, we deem it appropriate to overrule this ratio in Dhani Ram andSons(supra).

D.Effect and Purpose of the Depositories Act, 1996 andthe Securities and Exchange Board of India(Depositories and Participants) Regulation 1996.

9.1 Interpretation of statutes must depend on the text and thecontext. To resolve debate when two views are evident, it is best tointerpret the provision when we know why the statute is enacted. If astatute is looked at, in the context of its enactment, with the glasses ofthe statute-maker provided by such context, its scheme, the sections,Dclauses, phrases and words may take colour and appear different thanwhen the statute is looked at without the glasses provided by the context.[64]This principle may equally apply when we examine interplay betweentwo statutes. The provisions of the Contract Act, which is substantiveand general law relating to contracts, and the Depositories Act, which isa primarily law relating securities, must be interpreted harmoniously.EThis does not mean that any provision of one enactment could nullify theprovisions of the other. This end can be best achieved by examining theobjects and the subject matter of the Depositories Act vis-a-vis theContract Act, which will clarify their separable spheres of operation toavoid any conflict or overlap between them.It means that the two statutesFshall be read together consistently and harmoniously to complement eachother so far as it is reasonably possible to do so, and where suchconciliation is not possible to clarify the legal position by application ofprinciples of interpretation applicable to such situations.[65]

9.2 Thus, we begin by referring to the object and purpose behindthe enactment of the Depositories Act and which would underpin ourGinterpretation of the 1996 Regulations. Introduction to the Depositories

63 AIR 1962 P&H 321.64Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. andOthers, (1987) 1 SCC 424, para 33.

65Vasudev Ramachandra Shelat v. PranlalJayanand Thakkar and Others, (1974) 2SCC 323, para 5.H

Act refers to one of the major drawbacks of the then Indian securitiesmarket, which was paper-based. Consequently, there was lack ofassurance and certainty inthe transfer of securities dueto risks in theform of ‘bad delivery’, forgery, theft etc. As result, the investors sufferedand were deprived of liquidity in securities and the grievance redressalwas intractable. In turn, the capital market also felt pain due to lack ofconfidence and consequently, the growth was cramped. To pave theway for smooth, fast and constancy in the transfer of securities and topromote and deal with an increase in trading of stocks and shares in atransparent manner, there was need for regulating the methodology oftrading of securities.

9.3 The Depositories Act is enacted to lay down process andrules for the dematerialization of securities by converting them intoelectronic data stored in the computers of ‘the depository’.[66 ]TheDepositories Act establishes the depository eco-system and introducesthe concepts of ‘registered owner’[67]and ‘beneficial owner’.[68] Everyowner of physical share has to enter into an agreement with ‘thedepository’ for availing its services. The physical certificate of securityis cancelled. All securities held by ‘the depository’ are in 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, doesnot have any voting right or any other right in respect of the securitiesheld 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 registerand index of ‘beneficial owners’ in the manner provided in Sections 150,151 and 152 of the Companies Act,1956. As per Section 7[69] of the

66 Section 2(1)(e): “depository” means company formed and registered under theCompanies Act, 1956 (1 of 1956) and which has been granted certificate of registrationunder sub-section (1-A) of Section 12 of the Securities and Exchange Board of IndiaAct, 1992 (15 of 1992).

67 Section 2(1)(j): “registered owner” means depository whose name is entered assuch in the register of the issuer;

68 Section 2(1)(a): “beneficial owner” means person whose name is recorded as suchwith depository;

69 7. Registration of transfer of securities with depository:

(1) Every depository shall, on receipt of intimation from participant, register the

transfer of security in the name of the transferee.

(2) If beneficial owner or transferee of any security seeks to have custody of suchsecurity, the depository shall inform the issuer accordingly.

ADepositories Act, every ‘depository’, on receipt of intimation from aparticipant, 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 dematerialisedBsecurity vests with the ‘beneficial owner’, same as in the case of buyingand selling physical securities. The difference lies in the delivery processin case of sale, and receipt in case of purchase, which is affected by thedepository on instructions from the participant. Every person recordedas the ‘beneficial owner’ to transact and deal in securities must actthrough participant who is an agent of the depository. Section 10[70]Cstates that notwithstanding any other law for the time being in force,‘the depository’ shall be deemed as the ‘registered owner’ and is entitledto affect the transfer of ownership of the security on behalf of ‘thebeneficial owner’.No person, including the pawnee, can transfer thepawn held in dematerialised form without being registered as ‘beneficialDowner’.

9.5 Section 12 of the Depositories Act permits pledge andhypothecation of securities held by depository and reads:

“12. Pledge or hypothecation of securities held in adepository:E(1) Subject to such regulations and bye-laws, as may be made onthis behalf, beneficial owner may with the previous approval ofthe depository create pledge or hypothecation in respect of asecurity owned by him through depository.

(2) Every beneficial owner shall give intimation of such pledge orFhypothecation to the depository and such depository shall thereuponmake entries in its records accordingly.

(3) Any entry in the records of depository under sub-section (2)shall be evidence of pledge or hypothecation.”

G70 10. Rights of depositories and beneficial owner:(1) Notwithstanding anything contained in any other law for the time being in force, adepository shall be deemed to be the registered owner for the purposes of effectingtransfer of ownership of security on behalf of beneficial owner.

(2) Save as otherwise provided in sub-section (1), the depository as registered ownershall 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 subjectedHto all the liabilities in respect of his securities held by depository.

In terms of sub-section (1) of Section 12, ‘beneficial owner’can create pledge or hypothecation regarding the security owned byhim through ‘the depository’, subject to prior approval of ‘the depository’.Section 12 or for that matter the Depositories Act does not define pledgeor hypothecation, and thereby accepts and adapts their meaning as knownin the commercial sense to people in the trade.This means that theDepositories Act recognises the principles relating to pledge prescribedby the Contract Act and the common law. Depositories Act states thatsuch pledge or hypothecation should be made in accordance with theregulations and by-laws made under the Depositories Act. ‘beneficialowner’ as the pawnor is required to intimate such pledge or hypothecationto the depository, which thereupon makes entries in its records. Thisentry, made by ‘the depository’, is evidence of pledge or hypothecation.9.6 Prior to the Depositories Act, physical shares and securitieswere pledged and such transactions have resulted in several decisionsof the Supreme Court and the High Courts. In most cases, the pledge ofshares was accompanied by blank transfer deeds, and consequent disputeas to the correct nature of the transaction as was the case in Sri RajaKakarklhpudi Venkata Sudarsana Sundara Narasayamma Garu(supra),Mohd. Sultan and Ors.(supra)and even in Madholal Sindhu(supra). In Sri Raja Kakarklhpudi Venkata Sudarsana SundaraNarasayamma Garu(supra),the Andhra Pradesh High Court, afterreferring to Madholal Sindhu (supra),agreed with the view expressedin Kannambra Nayar Veetil Valia Ammukutti Neithiar’s SonKunhunni Elaya Nayar Avargal (Deceased) and Another v. P.N.Krishna Pattar and Two Others[71 ]that such transactions because ofexecution of the blank transfer deeds should not be treated as mortgages.A pledge of shares can be accompanied by execution of blank transferdeeds, which was convenient mode of exercising the right to sell whenthe pawnee is entitled to do so. In absence of blank transfer deeds, thepawnee must take recourse to the court when he wishes to enforce thesecurities.

9.7 Clearly, Section 12 of the Depositories Act is not ex-facieinconsistent with pawnee and pawnor’s contractual rights and obligationsunder the Contract Actand the common law. On the other hand, theDepositories Act expressly concedes that the securities held by thedepository can be pledged and hypothecated by the ‘beneficial owner’.

AIt simplifies the process by bringing transparency and certainty. It checksand curtails possibilities of disputes as the pledge must be registeredwith the ‘depository.’

9.8 Undoubtedly, the Depositories Act distinguishes between the‘registered owner’ and the ‘beneficial owner’, i.e., the defacto owner,Bbut this does not in any manner contradict or lay down rule which iscontrary to the provisions of Sections 176 and 177 of the Contract Act.These sections, given the objective and purpose behind them, would stillapply to any pledge deed and do notget diluted or overridden by theprovisions or requirements of the Depositories Act. Section 10, nonobstante provision, which prevails over existing enactments by law, treatsCthe ‘depository’ as the ‘registered owner’ and the shareholder/holder asa ‘beneficial owner’. It does not undermine or rewrite the provisions ofthe law of pledge and mutual obligations and rights of the pawnee andpawnor. This aspect has been elaborated in some detail subsequently inthis judgement.

D9.9 Under Section 25 of the Depositories Act, the Securities andExchange Board of India[72] has been vested with the power to makeRegulations to carry out the purpose of the Depositories Act. Clause (d)to sub-section (2) to Section 25 states that the regulations may providefor the manner of creating pledge or hypothecation in respect of asecurity owned by ‘beneficial owner’ under sub-section (1) to SectionE12 of the Depositories Act.9.10 In exercise of this power, the Board notified the 1996Regulations. The relevant portion of Regulation 58 reads as under:

xx xx xx

F(2) The participant after satisfaction that the securities are availablefor pledge shall make note in its records of the notice of pledgeand forward the application to the depository.

(3) The depository after confirmation from the pledgee that thesecurities are available for pledge with the pledgor shall withinGfifteen days of the receipt of the application create and record thepledge and send an intimation of the same to the participants ofthe pledgor and the pledgees.

(4) On receipt of the intimation under sub-regulation (3) theparticipants of both the pledgor and the pledgee shall inform the

H72 Hereinafter referred to as “Board”.

pledgor and the pledgee respectively of the entry of creation ofthe pledge.

(5) If the depository does not create the pledge, it shall send alongwith the reasons an intimation to the participants of the pledgorand the pledgee.

(6) The entry of pledge made under sub-regulation (3) may becancelled by the depository if the pledgor or the pledgee makesan application to the depository through its participant:

Provided that no entry of pledge shall be cancelled by the depositorywith the prior concurrence of the pledgee.

(7) The depository on the cancellation of the entry of pledge shallinform the participant of the pledgor.

(8) Subject to the provisions of the pledge document, the pledgeemay invoke the pledge and on such invocation, the depositoryshall register the pledgee as beneficial owner of such securitiesand amend its records accordingly.

(9) After amending its records under sub-regulation (8) thedepository shall immediately inform the participants of the pledgorand pledgee of the change who in turn shall make the necessarychanges in their records and inform the pledgor and pledgeerespectively.”

reading of Regulation 58 would show that ‘beneficial owner’is entitled to create pledge on security owned by him. To do so, hemust apply to the ‘depository’ through the participant who has his accountin respect of the securities. Sub-regulation (2) requires the participant toaccord its satisfaction that the securities are available for pledge andmake note in this regard in its records. The note is to be forwarded tothe ‘depository’. In terms of sub-regulation (3), the ‘depository’ is requiredto within fifteen days create and record pledge and send an intimationto the participants of the pledgor/pawnor and the pledgee/pawnee. Theparticipants of the pawnor and pawnee are required to inform the pawnorand the pawnee as to the entry of creation of the pledge. If the‘depository’ does not create the pledge, intimation of the reasons has tobe given to the participants of the pawnor and the pawnee. The‘depository’ can cancel the pledge if the pawnee applies to the depositorythrough its participants. The pawnor can also apply through its participant

Ato the ‘depository’ for cancelling the pledge. In this case, the entry canbe cancelled by the ‘depository’ with the prior concurrence of thepawnee. On cancellation of the pledge entry, the ‘depository’ is to informthe participant of the pawnor.

9.11 Sub-regulation (8) to Regulation 58 uses theBexpression”subject to the provisions of the pledge document” with aspecific purpose and objective. In other words,sub-regulation (8) toRegulation 58 does not seek to curtail or restrict, but on the other handrespects party autonomyand freedom to decide the terms of the pledge,including the event of default that would entitle the pawnee to invoke thepledge and sell the pawn. The sub-regulation does not expressly nullifyCany provision of the Contract Act. However, the stipulation that thepawnee may invoke the pledge, and on such invocation, the pawnee is tobe recorded as the ‘beneficial owner’ of the pledged securities ismandatory. pledge document cannot stipulate to the contrary, and anycontravening contractual stipulation would not be binding. The recordsDmaintained by the ‘depository’ are to be amended on the pawnee invokingthe pledge and thereupon, the ‘depository’ shall register the pawnee asthe ‘beneficial owner’ of the securities.Consequent to the change and interms of sub-regulation (9) to Regulation 58, the ‘depository’ is to informthe participants of the pawnor and pawnee, with direction that theyshall make necessary changes in their records and that the participantsEshall inform the pawnor and pawnee, respectively.9.12 Thus, the non-obstante part of sub-regulation (8) to Regulation58 serves limited objective and purpose: the pawnee must record itselfas ‘beneficial owner’ before he proceeds to sell the pledged securities.Without the pawnee being accorded the status of ‘beneficial owner’, aFpawnee cannot proceed to sell the pledged dematerialized securities. Acontractual term cannot overwrite the requirement of Sections 7 and 10of the Depositories Act, which is reflected in sub-regulation (8) toRegulation 58as pe which the pawnee must be recorded as the ‘beneficialowner’ before the pledged dematerialized securities are sold.GSection38(1)(e) of the Depositories Act requires the ‘depository’ tomaintain, inter alia, records of all approvals, notices, entries andcancellations of pledge and hypothecation, as the case may be. Thismandate of sub-regulation (8) to Regulation 58 will apply whenever thepledged/pawned goods are dematerialized securities.To reiterate, thisrequirement of sub-regulation (8) to Regulation 58 does not circumscribeH

or limit the contractual rights and obligations agreed upon between theparties on the agreed terms, including the pawnee’s right to sell thepawned goods. While the contractual terms are fundamental anddetermine the rights and obligations inter se the parties including whenthe pawnee would be entitled to get his name substituted as ‘beneficialowner’ under the 1996 Regulations, however, the contractual terms arenot permitted to override the Contract Act as explained above in so faras it regulates the rights and obligations of the pawnee and pawnor, andthe requirement of compliance with Regulation 58(8). It is absolutelynecessary that the pawnee must be accorded status of ‘beneficial owner’to enable him to exercise his right to sell the pledged dematerializedsecurities. The object is to ensure compliance with the procedureprescribed for the sale of dematerialised securities and not to interferewith the freedom to contract as long as they comply with the ContractAct and other laws. Further, if the terms of the pledge document violateRegulation 58(8), the pledge is not rendered void or illegal, albeitenforcement of the pledge viz. the dematerialised securities will berendered unattainable unless steps are taken to act in accordance withthe procedure prescribed by the 1996 Regulations. The pawnee wouldbe entitled to sue the pawnor for recovery of money, breach of contractand may even apply for injunction/restrain on sale of dematerialisedsecurities. However, third-party rights on transfer of the dematerializedsecurities, unless injuncted by prior court order, would not be affectedas long as the transfers are in terms of the Depositories Act and the1996 Regulations.

E. Effect of the Depositories Act, 1996 and the Securitiesand Exchange Board of India (Depositories andParticipants) Regulation,1996 on the pledge under theContract Act, 1872

10.1 As per the 1996 Regulations, the pledgor/pawnor is not entitledto sell the pledged/pawned securities. The special rights of the pledgee/pawnee in the pawn remain intact under the Depositories Act and the1996 Regulation. However, the right to sell dematerialized securities isconferred and given to the ‘beneficial owner’, who exercises this rightthrough the participants. Consequently, if pawnee wants to exercisehis right to sell dematerialized security it is mandatory for the pawneefirst to get himself recorded as ‘beneficial owner’ in the ‘depository’’srecords. Without the said exercise, the pawnee cannot exercise its rights

ABC

Ato sell the pledge and retrieve the monies dueby taking recourse to itsrights under Section 176 of the Contract Act. Right to sell the pledgeafter reasonable notice is one of the options, albeit, both under thecommon law and under the Contract Act, the pawnee has the choiceeven after issue of notice for sale to sue for the debt due while retainingpossession of the pledged goods. Similarly, the pawnor under the ContractBAct 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 ofredemption of the pawnor. It may amount to conversion in law. Otherprovisions of the Contract Act enumerated in Chapter IX may well apply.

10.2 The Depositories Act (except for Section 10 which has beenCexamined by us in some detail in re its application (supra)) and the 1996Regulations do not expressly state that their provisions prevail over theContract Act or any other law in force. On the other hand, Section 28states that “the provisions of this Act shall be in addition to and not inderogation of any other law for the time force relating to the holding andDtransfer of securities.” Thus, the Depositories Act is in addition to otherlaws relating to the holding and transfer of securities. Our reasoningdoes not mean that compliance with Section 12 and Regulation 58 is notcompulsory or mandatory. Violations of the statute may lead to penaltiesand even criminal action when permitted and warranted. Nevertheless,given the nature and requirements under Section 12 or Regulation 58,doEnot by implication or due to conflict over-write and undo the legislativemandate of Sections 176 and 177 of the Contract Act. We do not readany legislative intent in the Depositories Act and the 1996 Regulations tochange the law of pledge requiring issue of reasonable notice; or asallowing sale to self, or abolishing the right of the pawnor to redeem theFpledged goods till ‘actual sale’. Sections 176 and 177 are not obliterated,in so far as they would equally apply to pawned dematerialised securitiesas they apply to other pawned goods.

10.3 The Depositories Act and the 1996 Regulations do not stateor impliedly reflect that sale of the pledged securities by the pawnee toGself, which amounts to conversion and does not affect the rights of thepawnor under Section 177, are no longer applicable. Doing so wouldtantamount to reading and adding words to Section 12 and Regulation 58to defy Sections 176 and 177 of the Contract Act. Law of pledge isdynamic and as observed above must adapt itself in the context of thecurrent commercial environment, albeit we would avoid palpable conflictH

that would arise in view of the enactment of the Depositories Act andthe 1996 Regulations, or else the operation of law in practice would leadto compliance difficulties and complications. While interpretating the lawrelating to commercial matters and commerce the court must considerthe real-world impact and consequences. Therefore, the expression‘actual sale’ in Section176 read in the context of the Depositories Actand the 1996 Regulations have to be given meaning. The expression‘actual sale’ used in Section 177 in our opinion should be read as‘thesale by the pawnee to third person made in accordance with theDepositories Act and applicable by-laws and rules’. It also means andrequires compliance with Section 176 of the Contract Act. Mere exerciseof the right by the pawnee to record himself as the ‘beneficial owner’,which is necessary precondition before the pawnee can exercise hisright to sell, is not ‘actual sale’ and would not affect the rights of thepawnor of redemption under Section 177 of the Contract Act. Everytransfer or sale is not ‘actual sale’ for the purpose of Section 177 of theContract Act. To equate ‘sale’ with ‘actual sale’ would negate thelegislative intent.10.4 In Madholal Sindhu (supra) and several other decisions,the expression ‘actual sale’ in Section 177 of the Contract Act has beeninterpreted to mean lawful sale to third person and not conversion orunlawful sale contrary to Section 176 of the Contract Act. According tous, exercise of right on the part of the pawnee and consequent action onthe part of the ‘depository’ recording the pawnee as the ‘beneficial owner’is not ‘actual sale’. The pawnor’s right to redemption under Section 177of the Contract Act continues and can be exercised even after the pawneehas been registered and has acquired the status of ‘beneficial owner’.The right of redemption would cease on the ‘actual sale’, that is, whenthe ‘beneficial owner’ sells the dematerialised securities to third person.Once the ‘actual sale’ has been affected by the pawnee, the pawnorforfeits his right under Section 177 of the Contract Act to ask forredemption of the pawned goods.

10.5 We, however, accept that the Depositories Act, by-laws andrules relating to sale of dematerialised securities would be gravelyundermined in case the pawnor is entitled to redeem the dematerialisedshares from the third party on the ground that reasonable notice, aspostulated under Section 176 of the Contract Act, was not given to thepawnor. To this extent, we would accept that there is conflict between

Athe Depositories Act and the interpretation given in Madholal Sindhu(supra), which has been followed in other cases, including the judgmentof the Delhi High Court in Nabha Investment (supra). If this principleis applied to dematerialised securities that have been transferred to thethird parties in accordance with the provisions of the Depositories Act,by-laws and rules, it would materially impact certitude in the transactionBin listed dematerialised securities which would become vulnerable tochallenge even when the arm’s length purchasers are innocent third-partybuyers for valuable considerations. Open market operations wouldbe affected. To this extent, therefore, we do hold that the dictum inMadholal Sindhu (supra) and Nabha Investment (supra), that theCpawnor has right to redemption against third parties when the pawneedoes not give reasonable notice under Section 176 of the Contract Act,would not apply to listed dematerialised securities which are sold by thepawnee in accordance with the provisions of the Depositories Act, by-laws and rules. In fact, the stipulations in Section 12 of the DepositoriesAct and Regulation 58 of the 1996 Regulations have in built provisions inDterms of which the pawnor and the pawnee are informed about thechange of status with the pawnee making request and being accordeda status of the ‘beneficial owner’. The pawnee cannot make the sale ofdematerialised securities without being registered as ‘beneficial owner’,which is step that pawnee must take before he proceeds to sell theEpledged dematerialised securities.

10.6 Beyond the additional need to comply with Sections 10 and12 of the Depositories Act and Regulation 58 of the 1996 Regulations inspecific terms, we do not see any disharmony between these provisionsand Sections 176 and 177 of the Contract Act. They can be readFharmoniously without nullifying or altering their effect, subject to theexception in case of sale of listed securities to third parties in terms ofparagraph 10.5 (supra). They apply independently without hindering andobstructing their application as the field and subject matter of Sections176 and 177 of the Contract Act differ from the subject matter and theobjectof Sections 7, 10 and 12 of the Depositories Act and sub-regulationG(8) to Regulation 58 of the 1996 Regulations.

F. Four decisions

11.1 The case of the Bombay High Court relied upon by the MHPLin JRY Investments Private Limited v. Deccan Leafine Services Ltd.

and Others[73] is distinguishable as it dealt with different factual matrix.In the said case, there was transfer of shares and not pledge, afactum specifically noticed and held in terms of the finding recorded inparagraphs 16 to 20 of the said judgment.[74] However, certain observationsare made concerning the Contract Act and the procedure prescribed forpledging the shares by the Depositories Act. The Court observed thatthe provisions of the Depositories Act are for accurately recording thetransfer and pledging of shares held in dematerialized form. TheDepositories Act contemplates the existence of ‘depository’ that holdsthe shares in the name of the ‘beneficial owner’. The ‘depository’ actsas ‘registered owner’ of the shares for effecting the transfer ofownership security on behalf of the ‘beneficial owner’ in terms of Section10 of the Depositories Act. Section 10 is non-obstante clause for thepurpose of effecting the transfer of ownership of security on behalf ofthe ‘beneficial owner’. Accordingly, the transfer of shares must be donein accordance with the provisions of the Depositories Act, which meansthat person recorded as ‘beneficial owner’ alone can exercise thepower of transfer. Thereafter, Regulation 58 is quoted. It is observedthat the Depositories Act and the Regulations contain whole and self-contained procedure for creating pledge. This statement and thestatement that the pledge of dematerialized securities would requirecompliance and creation in accordance with the provisions of theDepositories Act, are substantially correct, but have to be read andunderstood in terms our findings and opinion recorded above. However,we overrule this decision of the Bombay High Court to the extent itholds that dematerialised securities cannot be made subject matter of apledge under the Contract Act as it is not possible to transfer physicalpossession. We have referred to the case law, including earlier judgmentsof this Court, in Lallan Prasad (supra) and Maharashtra State Co-operative Bank Limited (supra), which hold that delivery of possessionof goods for pledge can be actual or constructive.In the case before theBombay High Court, there was no pledge in terms of Regulation 58. On

73 (2004) 121 Comp Cas 12.

74 “20. It does not appear that the transfer of shares in the present case can be taken tobe pledge in law. Therefore, there can be no question of applicability of Section 176of the Contract Act which requires the pledgee to give notice to the pledgor of hisintention to transfer the pledged goods. This aspect is being considered because at onestage it was argued by learned counsel for the plaintiffs that the transfer by defendantNo. 1 of shares in favour of the other defendants is void in the absence of the notice bydefendant No. 1 of their intention to sell the shares.”

DEF

Athe other hand, the shares were transferred and held by the transfereeas ‘beneficial owner’ upon transfer. The final outcome, therefore, wouldremain undisturbed in spite of our finding.

11.2 In Pushpanjali Tie Up Pvt. Ltd. v. Renudevi Choudharyand Others,[75] Division Bench of the Bombay High Court had expressedBreservation on the finding in JRY Investments Private Limited(supra)that the goods in dematerialised form cannot be pledged.[76] Thesaid finding in JRY Investments Private Limited (supra) as held aboveis contrary to the view expressed by this Court in Morvi MerchantileBank Limited (supra)and Bank of Bihar (supra). It would also becontrary to the principle that the Contract Act is not an exhaustive lawCon pledge and mortgage of movables. In Pushpanjali Tie Up Pvt. Ltd.(supra), the deed of pledge had permitted the lender to use the pawn asa collateral for his margin with the third party, which right had beenexercised by the pawnee. In this background, the Court rejected theclaim of the pawnor for the redemption of the pawn as the pawnee hadDtransferred the rights in respect of the pawned shares by depositingthem as margin with the third party. The view expressed was that thesaid transaction by the pawnee could not be ignored; otherwise, it wouldrender the arrangement agreed upon as meaningless and devoid ofcommercial sense. This judgment also refers to an earlier decision ofthe Allahabad High Court in Firm Thakur Das MarakhanELal v. Mathura Prasad and Others,[77] which was case in which thethree ornaments had been sub-pledged. The debt payable having beenextinguished by virtue of debt redemption act, the pawnor had sued forrecovery of the ornaments on the ground that the sub-pledges did notbind him. In this context, the Allahabad High Court had observed thatFSection 179 of the Contract Act clarifies that if person has limitedinterest in the goods and pledges them, the pledge is valid to the extentof 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 aGstranger for safe custody without consideration; or he may sell or75 2014 SCC OnLine Bom 3661.

76 “25. ……….. For the purpose of this judgment, we refrain from expressing anyopinion regarding the finding of the leaned single Judge in paragraph 16 that it isimpossible to hold that the goods in dematerialized form are capable of delivery that isby handing over de-facto possession. We will presume that it is possible to do so…….”77 AIR 1958 All. 66.H

assign all his interest in the pawn; or he may convey the sameinterest conditionally by way of pawn, to another person withoutin either case destroying or invalidating his security. But if thepawnee should undertake to pledge the property (not beingnegotiable securities) for debt beyond his own, or to make atransfer thereof as if he were the actual owner, it is clear that insuch case he would be guilty of breach of trust, and his creditorwould acquire no title beyond that held by the pawnee.

Whatever doubt may be indulged in, in the case of mere factor,it has been decided in the case of strict pledge, that if the pledgeetransfers the same to his own creditor the latter may hold thepledge until the debt of the original owner is discharged.”

Significantly, regarding the Depositories Act and the 1996Regulations, this judgment rightly observes that dematerialised sharesmust comply with the said pledge requirements to enable the pawnee toexercise the right to sell. third party would be entitled to and justifiedin presuming that there is no pledge unless the procedure prescribedunder the Depositories Act is followed. To this extent, the DepositoriesAct has introduced new regime. The legislative intent is to provide aninode of putting the third parties concerned to express notice of thepledge. Subject to the pledgor’s rights, only party with express noticeof the pledge created by the ‘beneficial owner’, following the mannerprescribed for the creation of pledge, deals with the securities at hisown risk. This safeguards innocent third parties who would otherwisehave no means of being aware of the pledge in case of dematerialisedshares. The provisions of the Depositories Act, and in particular Section12 thereof, and the 1996 Regulations, and in particular Regulation 58,are salutary as they introduced transparency and certainty in the securitiesmarket. There is no other discernible reason for the legislature to haveprovided for particular manner alone for creating pledge of shares ina dematerialised form. More significant for our purpose are theobservations, with which we again agree, that the prescription in theDepositories Act and the 1996 Regulations are for the manner in whichcreation and transfer of the dematerialised shares can be achieved. It isto regulate the creation and transfer of dematerialised securities, includinghow the pledge can be transferred to third party. The Contract Actdoes not stipulate that pledge can be created only in particular manner.The Depositories Act prescribes how the dematerialised securities can

Abe pledged. The provisions of the Depositories Act and the 1996Regulations 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 theDepositories Act is not to rewrite the provisions of the Contract Act butto regulate the creation and transfer of dematerialised securities.BRegulation 38(1)(e)[78] requires depository to maintain, inter alia, recordsof all approvals, notices and entries, and cancellation of pledge orhypothecation, as the case may be.

11.3 We have already referred to the judgment of the AllahabadHigh Court in Firm Thakur Das Marakhan Lal (supra) and the viewCexpressed by Justice Story on the Law of Bailment. On the identicalissue, there is another decision, which was noticed by Chagla, J. inMadholal Sindhu (supra), in the case of Donald v. Suckling,[79 ]wherein‘A’ had deposited debentures with ‘B’ as security for payment of billendorsed by ‘A’ and discounted by ‘B’. Before the maturity of the bill,D‘B’ deposited the debentures with ‘C’ to be kept by him as securityuntil the repayment of the loan from ‘C’ to ‘B’ for an amount larger thanthe bill. The bill was dishonoured and while it was still unpaid, ‘A’ broughtdetinue action against ‘C’ for debentures. The Court held that therepledge 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 havingE7838. Records to be maintained. (1) Every depository shall maintain the followingrecords 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) register and an index of beneficial owners;

(cc) details of the holding of the securities of beneficial owners as at the end of each day;F(d) records of instructions received from and sent to participants, issuers, issuers’agents and beneficial owners;

(e) records of approval, notice, entry and cancellation of pledge or hypothecation, asthe case may be;

(f) details of participants;

(g) details of securities declared to be eligible for dematerialisation in the depository;andG(h) such other records as may be specified by the Board for carrying on the activities asa depository.(2) Every depository shall intimate the Board the place where the records and documentsare maintained.

(3) Subject to the provisions of any other law the depository shall preserve records anddocuments for minimum period of five years.H79 (1866) L.R. 1 Q.B. 585.

paid or tendered the amount of the bill. One of the Judges in the judgmenthad observed:

“and I think that, although he (pledgee) cannot confer upon anythird person better title or greater interest than he possesses,yet, if nevertheless he does pledge the goods to third person fora greater interest than he possesses, such an act does not annihilatethe contract of pledge between himself and the pawnor; but thatthe transaction is simply inoperative as against the original pawnor,who upon tender of the sum secured immediately becomes entitledto the possession of the goods, and can recover in an action forany special damage which he may have sustained by reason ofthe 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 thechattel itself delivered to him; and if there still remain in Simpson,or in the defendant as his assignee, any interest in the goods, orany right of detention inconsistent with this right in the plaintiff,the plaintiff must fail in detinue, though he may be entitled tomaintain an action of tort against Simpson or the defendant forthe damage, if any, sustained by him in consequence of theirunauthorized dealing with the debentures.”

We should not be seen as commenting upon the merits of thedecision in Pushpanjali Tie Up Pvt. Ltd. (supra), as one of the findingsrecorded therein was that the pawnor had permitted the pawnee torepledge the pawn for higher amount. The aspect, whether this can bepermitted and allowed, and whether the interpretation of the relevantclause of the document of pledge in Pushpanjali Tie Up Pvt. Ltd. (supra)is correct, are not examined by us and are left open.

11.4 Our attention was also drawn to Single Judge Benchjudgment of the Delhi High Court in Tendril Financial Services Pvt.Ltd. & Ors. v. Namedi Leasing& Finance Ltd. and Ors.,[80] whichsupports the MHPL’s case. However, careful reading of the judgmentwould show that it was passed in peculiar facts therein as there was anad interim order which had remained in force for twelve years,consequent to which the pawnee was unable to sell the shares. We

802018 SCC OnLine Del 8142

Aagree that normally court would not grant interim injunction on theprayer of the pawnor alleging non-compliance of Section 176 of theContract Act. The object and purpose requiring the pawnee to issuenotice to the pawnor before selling the pawn is to give an opportunity tothe pawnor to redeem the pledged goods before the ‘actual sale’. Therequirement of issue of reasonable notice under Section 176 would beBsatisfied once the pawnor is made aware and has knowledge of thepawnee’s desire/intent to sell. Continuation of interim orders predicatedon the ground of lack of reasonable notice under Section 176 would notbe justification when the pawnee in his written statement clarifies andtakes clear position. The written statement itself can be treated asCreasonable notice. We have made these observations as we have comeacross cases where such injunctions have been granted and confirmedeven after the pawnee has entered appearance.[81]

11.5 On other aspects the judgment has placed reliance on JRYInvestments Private Limited (supra) and made certain observationsDregarding Section 176 and Regulation 58 to hold that notice underSection 176 would be in derogation of Regulation 58 by giving thefollowing reasoning:

“21. I have considered the controversy and for the reasonsfollowing, am of the view that the plaintiffs are not entitled to theEcontinuation of the ad interim order which has remained in forcefor the last 12 years:

xx xx xx

E. I may however add, that notice under Section 176 of ContractAct is in derogation of Regulation 58 supra. While Section 176Fentitles the pledgee/pawnee to, on default by the pledgor/pawnor,sell the thing pledged, “on giving the pawnor reasonable notice ofthe sale”, Regulation 58(8) entitles the pledgee to, “subject to theprovisions of the pledge document”, “invoke the pledge” andmandates the depository to “on such invocation” i.e. by the pledgee,“register the pledgee as beneficial owner of such securities” i.e.Gthe securities pledged and further mandates the depository to“amend its records accordingly”. There is no place for priornotice under Section 176, in the scheme of Regulation 58(8). On

81 However, cases praying for an injunction on the plea that the full/part amount of debthas been paid or the event of default etc. has not occurred would have to be examinedHon their facts. See, infra para 11.7.

the contrary, Regulation 58(9) requires the depository to, after soamending its records under Regulation 58(8), inform theparticipants of the pledgor and the pledgee of the same andmandates the said participants to inform the pledgor and thepledgee. Thus, (a) while Section 176 provides for notice to pledgorprior to effecting sale, Regulation 58 provides for notice postinvocation and on which invocation beneficial ownership of pledgedshares changes from that of the pledgor to that of the pledgee andwhich is equivalent to sale under Section 176. To hold that priornotice under Section 176 of Contract Act is also required in thecase of pledge of dematerialized shares would interfere withtransparency and certainty in the securities market, rendering fatalblow to the Depositories Act and Regulations and the object ofenactment thereof.F. The distinction sought to be drawn by the senior counsel for theplaintiffs between “invocation” and “sale” is also not in consonancewith Regulation 58. I may notice that there is no such distinctionin Contract Act either. While Section 176 of Contract Act entitlespledgee to, on default of pledgor, sell the pledged thing i.e. transfertitle and possession thereof to purchaser, Regulation 58 entitlesthe pledgee to, on default on pledgor, invoke the pledge by intimatingto the depository and mandates the depository to in its recordsrecord the pledgee in place of the pledgor as the beneficial ownerof pledged shares, thereby transferring title as beneficial owner,from the pledgor to pledgee. The only condition imposed oninvocation of pledge by the pledgee, under Regulation 58 (8) is ofthe same being required to be “subject to the provisions of thepledge documents” i.e. of creation of pledge in the mannerprovided in Regulation 58(1) to 58(6)-of which the participant ofthe pledgee and the depository have been made aware and withwhich they are thereby required to comply with. It is not the caseof plaintiffs that there was any condition of prior notice in thepledge documents. Though it is not the plea that the Letters ofPledge and Arbitral Award were intimated to the participant orthe depository but even they do not provide for prior notice. Onthe contrary, they provide otherwise. The distinction drawn in theLetters of Pledge aforequoted between invocation of pledge,whereupon the beneficial ownership in pledged shares, underRegulation 58, was to stand transferred from that of pledgor tothat of pledgee, and sale of said shares by pledgee, to realize itsdues, is only for the purpose of determining the amount which

Awas to be offset from the debt to secure which the pledge wasmade. However such agreement cannot be interpreted as thepledgor continuing to have title in the shares. The only title indematerialized shares, under the Depositories Act, is as beneficialowner in the records of the participant and the depository andwhich beneficial ownership changes on invocation of pledge inBterms of Regulation 58. Even otherwise, plea of pledgor, ofthe pledgee, though after notice under Section 176, having soldthe pledged thing for less than optimum price cannot be groundfor invalidating the sale. The mere fact that the parties, in termsof Arbitral Award reversed the earlier invocation also cannotchange the said position. Such agreement is also not found to beCinconsistent with Regulation 58. The quantum of considerationdoes not affect the transfer of title as beneficial owner.”

11.6 In view of the discussion in the preceding paragraphs, we donot agree with the reasoning in the aforesaid sub-paragraphs andconsequent ratio decidendi in Tendril Financial Services (supra). WeDdo not find any derogation or conflict between Section 176 of the ContractAct and sub-regulations (8) and (9) of Regulation 58. Regulation 58(8)entitles the pawnee to record himself as ‘beneficial owner’ in place ofthe pawnor. This does not result in an ‘actual sale’. The pawnee doesnot receive any money from such registration which he can adjust againstthe debt due. The pledge creates special rights including the right to sellEthe pawn to third party and adjust the sale proceeds towards the debtin terms of Section 176 of the Contract Act. The reasoning that priornotice under Section 176 of the Contract Act would interfere withtransparency and certainty in the securities market and render fatal blowto the Depositories Act and the 1996 Regulations is farfetched as it failsto notice that the right of the pawnee is to realise money on sale of theFsecurity. The objective of the pledge is not to purchase the security.Purchase by self, as held above, is conversion and does not extinguishthe pledge or right of the pawnor to redeem the pledge. Equally, it maybe disincentive for both the pawnor and the pawnee in many cases, ifwe accept this interpretation and ratio, which would inhibit them fromentering into transaction creating pledge. Difficulties and disputesGregarding price, valuation, right to redemption etc. could invariably arise.There would also be difficulties in case the dematerialised securities arenot traded as in the present case. If the case pleaded by MHPL is to beaccepted, the entire dues of PIFSL stand paid without in fact singlepenny coming to the coffer of PIFSL. Whether or not PIFSL will beHable to find willing buyer and sell the shares is unknown given the fact

that the shares are unlisted and MHPL continues to be the holdingcompany of NEVPL. The effect of the ratio in Tendril FinancialServices (supra) is to enact an entirely new jurisprudence on the law ofpledge, annulling and re-writing the well-established law of pledge, whichgives two options to the pawnee when pawnor is in default, just becausethe pawnee exercises his right to be recorded as the ‘beneficial owner’to exercise his right to sell. Sale to self, if accepted as the norm, wouldbe unlawful and amounts to conversion, is applicable in case ofdematerialised securities.

11.7 In fact, in the subsequent paragraphs, the learned Single Judgein Tendril Financial Services (supra) does examine the position ifSection 176 were to apply and had not been complied with. It is rightlyobserved that due to the pendency of the suit, the requirement of givingsufficient notice might not be relevant. The decision in Tendril FinancialServices (supra) also notices another decision of the Single Judge Benchof the Delhi High Court in GTL Limited v. IFCI Ltd. &Ors.[82]whichtakes contrary view and holds that compliance with Section 176 isrequired to be made in respect of pledged dematerialized securities. InGTL Limited (supra) temporary injunction was granted. We have brieflycommented that injunction should not be normally granted in such cases.[83]Clause (c) to sub-section (3) to Section 38[84 ]of the Specific Relief Act,1963 states that perpetual injunction may be granted when the defendantinvades the plaintiff’s right to or enjoyment of the property where theinvasion is such that the compensation in money would not afford adequaterelief. Sub-section (2) to Section 38[85] states that when any obligationarises from contract, the court shall be guided by the rules and provisionscontained in Chapter II.[86] Section 10,[87] as it stood before its substitution

822011 SCC OnLine Del 3628.83Supra para 11.4.

84Section 38. Perpetual injunctions when granted:

(3) When the defendant invades or threatens to invade the plaintiff’s right to, orenjoyment of, property the court may grant perpetual injunction in the followingcases, namely:—

(c) where the invasion is such that compensation in money would not afford adequaterelief;

85 Section 38(2): When any such obligation arises from contract, the court shall beguided 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 contractmay, in the discretion of the court, be enforced—

Aby Act 18 of 2018, vide clause (ii) of Explanation, had stated that untiland unless contrary is proved, the court shall presume that the breach ofa contract to transfer movable property can be relieved except in cases:(a) where the property is not an ordinary article of commerce, of specialvalue or interest to the plaintiff, or consists of goods which are not easilyobtainable in the market; and under clause (b) where the property isBheld by the defendant as the agent or trustee of the plaintiff.[88]As pernew Section 10[89] with effect from 1[st] January 2018, specific performanceof contract can be enforced subject to provisions contained in sub-section (2) to Section 11,[90] Section 14[91] and Section 16.[92] Clause (c) to

(a) when there exists no standard for ascertaining actual damage caused by the non-Cperformance 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 contract to transfer immovable property cannot beadequately relieved by compensation in money; and

(ii) that the breach of contract to transfer movable property can be so relievedDexcept in the following cases:—

(a) where the property is not an ordinary article of commerce, or is ofspecial value or interest to the plaintiff, or consists of goods which are noteasily obtainable in the market; (b) where the property is held by thedefendant as the agent or trustee of the plaintiff.

88 pawnee is trustee but has special right to sell the pawned property after givingreasonable notice of sale to the pawnor.E89 Section 10. Specific performance in respect of contracts.—The specific performanceof 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 trustsenforceable.

91 Section 14. Contracts not specifically enforceable.

92 Section 16. Personal bars to relief: Specific performance of contract cannot beFenforced in favour of 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, thecontract that on his part remains to be performed, or acts in fraud of the contract, orwilfully acts at variance with, or in subversion of, the relation intended to be establishedby the contract; or

(c) who fails to provethat he has performed or has always been ready and willing toGperform the essential terms of the contract which are to be performed by him, otherthan terms the performance of which has been prevented or waived by the defendant.Explanation.—For the purposes of clause (c),—

(i) where contract involves the payment of money, it is not essential for theplaintiff to actually tender to the defendant or to deposit in court anymoney except when so directed by the court;

(ii) the plaintiff must prove aver performance of, or readiness and willingnessHto perform, the contract according to its true construction.

Section 16 states that specific performance of contract cannot beenforced in favour of person who fails to prove that he has performedor has always been ready and willing to perform the essential terms ofthe contract which are to be performed by him, other than the terms theperformance of which has been prevented or waived by the defendant.Explanation which applies to clause (c) states where contract involvespayment of money, it is not essential that the plaintiff should actuallytender to the defendant or deposit in court any money except when sodirected by the court. However, the plaintiff must prove performanceof, or readiness and willingness to perform, the contract as per its trueconstruction. These aspects must be kept in mind by the court whileexamining the question of grant of injunction, albeit the fundamentalprinciples relating to law of pledge being the special law should be appliedas the plaintiff has to establisha prima facie case, balance of convenienceand irreparable harm. These aspects on most occasions would be factand situation specific.

11.8 Our attention was drawn to the decision of the SecuritiesAppellate Tribunal, Mumbai, in the case of Liquid Holdings PrivateLimited v. The Securities Exchange Board of India.[93 ]In this case,on exercising his rights, the pawnee was registered as ‘beneficialowner’, but pursuant to settlement, the pawnor was re-recorded asthe ‘beneficial owner’. The Board had claimed and succeeded inestablishing that there was transfer of the dematerialised securitiesresulting in violation of Regulation 7 and 11(1) of the Securities andExchange Board of India (Substantial Acquisition of Shares andTakeovers) Regulations, 1997. This decision, we may note, primarilydeals with the takeover regulations and in the passing refers toandinterprets Regulation 58 of the 1996 Regulations. The judgment is in thecontext of the takeover regulations and the legal violation thereof and onthe issue whether change in ‘beneficial ownership’ would trigger thetakeover regulations. The provisions of the Contract Act and the law ofpledge have not been noted and examined. The appeal preferred wasdismissed by non-reasoned order. This decision, therefore, would nothelp us decide the issue in controversy. We, however, do observe that inview of our findings and reasoning, the Board may re-examine the 1996Regulations as well as the takeover regulations to avoid discord orambiguity resulting in instability or confusion. Clarity is necessary. Thetakeover regulations may have its own impact and in given case, may93 (2011) SCC Online SAT 40.

Abe detriment and negative factor for the creditor who wants to securehimself by deed of pledge. The pertinent question is, should takeoverregulations apply when the pawnee exercises his right to be recorded asa ‘beneficial owner’, while reserving his right to sell the pledge. Therewould be tax and accounting implications which may be detrimental andshackle financial market and deals. It may inhibit financial institutionsBfrom accepting dematerialized securities as pawn. holistic reviewof the impact of pledge viz. dematerialized securities, registration of thepawnee as the ‘beneficial owner’ without the pawnee enforcing theright to sell the pledge goods is required and necessary for the smoothfunctioning of the securities market and free flow of transactions withoutChindrance and to avoid uncertainty in fiscal matters.

G. Analysis of facts and application of law of pledge to thefacts of this case

12.1 The relevant Clauses of the Pledge Deed dated 10[th] March,2014are reproduced as under:D

“6.1 Registration in the Name of the Bridge Loan Lender:

The pledgor agrees that, upon the receipt of notice of occurrenceof Event of Default issued by the Bridge Loan Lender, the BridgeLoan Lender shall have the right to have the Pledged Sharedtransferred in its name or its nominees.”E

6.2 Enforceability and Sale:

Upon occurrence of an Event of Default, the Bridge Loan Lenderor its nominee may without further authority and without prejudiceto their other rights under applicable law but after giving notice toFthe Pledgor 5 (five) days’ notice (which period of notice the Pledgoragree is reasonable notice) sell or otherwise dispose off all or anypart of the Pledged Shares in such manner and for suchconsideration as the Bridge Loan Lender may in its sole judgmentdeem fit (whether by private sale or otherwise) and apply the netproceeds of any such sale or disposition in accordance with sectionG11 thereof.”

12.2 As per Clause 6.1, on receipt of the notice of the occurrenceof ‘event of default’ by the pledgor/pawnor, the pledgee/pawnee has theright to have the pledged shares transferred in its name or its nominees.Under Clause 6.2, the pawnee or its nominee may, without furtherH

authority and prejudice to their other rights under the law, but on givingfive days’ notice to the pawnor, sell or otherwise dispose of any or all ofthe pledged shares in such manner and for such consideration as it in itssole discretion deems fit. The net proceeds of such sale or dispositionare then applied in the manner prescribed under Clause 11 of the PledgeDeed.[94 ]Clause 14.1[95 ]clarifies that the Pledge Deed shall terminate onlyupon the repayment in full of the outstanding debt to the lender.

12.3 In the context of the present case, the contract of pledgeenvisages 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. Thecontention of MHPL that Clauses 6.1 and 6.2 are in the alternative andonce PIFSL has exercised option under Clause 6.1, the option underClause 6.2 is closed must be rejected as absolutely untannable. We donot find any such condition in the two clauses. As noticed above, PIFSLcould not have exercised the right under Clause 6.2 unless the pledgeshares were registered in its name as ‘beneficial owner’. This step wasnecessary to enable PIFSL to exercise its right and enforce the sale ofpledge shares. Whether or not it would be successful in selling the pledgeshares is unknown and uncertain even today. The amount of money thatwould be received is also unknown and uncertain.

12.4 Clauses 6.1 and 6.2, therefore, draw clear distinctionbetween mere transfer of the pledged shares in the name of the pawneeor its nominee as ‘beneficial owner’ and the ‘actual sale’ of the pledgedshares. The right to sell is without prejudice to any other right under the

94 11. APPROPRIATIONS OF PAYMENTS:

All monies, sums, distributions, and monetary accretions received or recovered by theBridge Loan Lender under or pursuant to this Deed of Pledge shall be applied, andappropriated in accordance with the Transaction Documents. Any surplus of suchmonies following payment of the Amounts Outstanding in full, held by the Bridge LoanLender shall until such surplus amounts are paid to the Pledgor, be held in trust for thebenefit of the Pledgor.

95 14. RELEASE AND TERMINATION:

14.1 This Deed of Pledge shall terminate upon the repayment in full of the AmountsOutstanding or upon sale, transfer or other disposition of all the Pledged Shares inaccordance with the terms of this Deed of Pledge.

14.2 Upon termination of this Deed of Pledge, following the repayment in full of theAmounts 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 andintimate the Pledgor of such release, other than such of the Pledged Shares that mayhave been sold or disposed off (sic.).

Aapplicable law. Thus, there are two stages before the pledge can beenforced by sale. At the first stage, the pawnee must give notice to thepawnor under Clause 6.1 to exercise the rights to have the pledge sharestransferred in its name or its nominees. This does not result in the dischargeof the debt equal to the value of the shares. The discharge of debt inwhole or partoccurs when the pawnee exercises his right to sell theBshares after giving five days’ notice to the pawnor in accordance withClause 6.2 and sells the pawn. Upon the actual sale, the pawnee canapply the net proceeds of the sale or disposition in accordance withClause 11 of the Pledge Deed.

12.5 As discussed above, Clause 6.1 permits PIFSL to get itselfCrecorded as ‘beneficial owner’ of the shares pledged, mandate anda requirement to enable PIFSL as pawnee to sell the shares pledged.Clause 6.2 is for the sale of the said shares, and in this regard, we mustrefer to sub-clauses (k) and (m) of Clause 5.1 of the Pledge Deed,which read thus:D“5.1 The Pledgor’s Undertakings:

The Pledgor assures, undertakes and agrees with the Bridge LoanLender that throughout the continuance of the pledge createdpursuant to this Pledge Deed and until the repayment of theAmounts Outstanding in full under the Transaction Documents,Ethe Pledgor:-

xx xx xx

(k) hereby irrevocably waives any right it may have under theDepositories Act, the Depositories Regulations or any otherapplicable law to the extent the same is inconsistent with theFundertakings as aforesaid and the pledge of the Pledged Sharespursuant to this Pledge Deed;

xx xx xx

(m) remain the sole beneficial owner at all times of the PledgedShares except on sale by the Bridge Loan Lender of the PledgedGShares.”

As per Clause 5.1(m), the pawnor agrees that throughout thecontinuance of the pledge created pursuant to the pledge deed and untilthe repayment of the amount outstanding in full under the transactiondocument, that is, the Bridge Loan Agreement, the pawnor shall remainH

the beneficial owner of the shares pledged at all times, except on thesale made by the pawnee as the bridge loan lender. Further, vide Clause5.1(k), the pawnor has irrevocably waived any right it may have underthe Depositories Act, the 1996 Regulations, or any other applicable lawto the extent it is inconsistent with the provisions of the Pledge Deed.Clause 5.1(k) would only apply if the Depositories Act, the 1996Regulations, or any other law permits the parties to contract out of theregulations by mutual agreement. It is settled position of law and asdiscussed above, contract cannot be inconsistent with the provisionsof any existing law, including regulations, unless the said law permits theparties to enter into contract inconsistent with the provision.12.6 PIFSL by the letter dated 23[rd] January 2018 had informedMHPL in terms of Clause 6.1 that there has been an occurrence ofdefault, which has continued and, therefore, they, on 16[th] January 2018,in exercise of its right under Clause 6.1 of the pledge deed, have appliedfor transfer of the pledged shares in its name. Consequently, all therights in the pledged shares, including but not limited to the right ofattending general body meetings, voting rights, and rights to receivedividends and other distributions, now vests with them as per Clause2.3(A)(ii)(b)[96 ] of the pledge deed. This intimation to MHPL is withoutprejudice to any rights or remedies PIFSL has in terms of the pledgedeed or security documents executed in pursuance of the bridge loanagreement. PIFSL expressly reserved its right to transfer and sell pawnedshares for value providing five days’ notice as required under Clause 6.2of 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 theprocedural requirement of Regulation 58(8) to enforce the right to sellthe shares. Thereafter, such sale should be made according to Sections176 and 177 of the Contract Act. Violation of the said provisions, ifmade by PIFSL, would have its consequences as per the law. Pawn has

96 2.3. Voting rights and dividends

(A) So long as no event of default or potential event of default has occurred andis continuing, subject to the provisions of the Transaction Documents:(ii) the Pledgor shall be entitled to receive and retain any and all dividends andother distributions paid in respect of the Pledged Shares only with prior writtenapproval of Bridge Loan Lender, provided, however, that any and all:(b) dividends and other distributions paid or payable in cash in respect of or incon‘nection with any liquidation or dissolution or in connection with reductionof capital;

Anot been sold and there is no violation of the Contract Act or for thatmatter the Depositories Act and the 1996 Regulations. PIFSL has notoverlooked its obligations under Sections 176 and 177 of the ContractAct by relying upon sub-regulation (8) to Regulation 58, which has anentirely different object and purpose. Recording change in the registerof the ‘depository’, whereby PIFSL as the pawnee has become theB‘beneficial owner’, is only to enable the pawnee to sell and transfer theshares in accordance with the Depositories Act and the 1996 Regulations.The object and purpose of sub-regulation (8) to Regulation 58 is not tonullify the obligation of MHPL i.e., the pawnor, and PIFSL i.e., thepawnee, under the Contract Act but to enable PIFSL to exercise itsCrights under Section 176. It also follows that MHPL is entitled to redeemthe pledge before the sale to third party is made.

12.7 In view of the aforesaid findings, it has to be held thatregistration of the pawn, that is the dematerialised shares, in favour ofPIFSL as the ‘beneficial owner’ does not have the effect of sale ofDshares by the pawnee. The pledge has not been discharged or satisfiedeither in full or in part. PIFSL is not required to account for any saleproceeds which are to be applied to the debt on the ‘actual sale’. Thetwo options available to PIFSL as the pawnee under Section 176 of theContract Act remain and are not exhausted.

EH. Conclusion

13.1 For the aforesaid reasons, the present appeal must be allowedand the impugned order passed by the Appellate Authority dated 20[th]June2019 upholding the orders of the Adjudicating Authority dated 6[th] July2018 and the emails of the IRP dated 19[th] February 2018 are set aside.FIt is held that MHPL is not secured creditor of the Corporate Debtor,namely NNPIL, to the extent of the value of the 31,80,678 shares. PIFSLhas rightly made claim as financial creditor of the Corporate Debtorwithout accounting for the value of 31,80,678 shares of NEVPL in itsclaim petition. Insolvency proceedings against the Corporate Debtor,namely NNPIL, will proceed accordingly.G

13.2 The appeal is allowed in the aforesaid terms without anyorder as to costs.

Ankit Gyan

(Assisted by : Mahendra Yadav, LCRA)H

Appeal allowed.