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2014 (6) TMI 1065 - HC - Indian LawsValidity of pledge - appellant's case is that despite having repaid the loans to respondent Nos. 1 and 2, respondent Nos. 1 and 2 have not returned the shares - pledge created in accordance with the provisions of the Depositories Act, 1996 or not - whether the alleged pledge can affect the rights of respondent No. 3 who is a third party without notice of the pledge, rending the pledge invalid qua the third party? - HELD THAT:- The intention of the Legislature was obviously to ensure that third parties have notice of a pledge. The value of notice of a pledge of securities is too obvious to warrant any discussion. It safeguards innocent third parties who would otherwise have no means of being aware of a pledge especially of dematerialized shares. The provisions of the Depositories Act and in particular section 12 thereof and the Regulations in particular Regulation 58 are salutary as they introduce transparency and certainty in the securities market. There is no other discernible reason for the Legislature having introduced these provisions. If a pledge could be created in any manner, there was no reason for the Legislature to have provided for a particular manner alone for creating a pledge of shares in a dematerialized form. The Indian Contract Act does not prescribe the manner in which a pledge is to be created. It does not stipulate that a pledge can be created only in a particular manner. The Depositories Act, however, prescribes the manner in which a pledge must be created. Even assuming that the beneficial owner is entitled to create a pledge in a manner otherwise than as required by the Depositories Act, he must, however, in any event, also create the pledge in the manner prescribed by the Depositories Act. If he fails to do so, he deprives a third party of the benefit of notice of a pledge rendering the pledge invalid qua third parties. Such a provision is not in derogation of the provisions of the Indian Contract Act but in addition thereto. Section 176 of the Contract Act deals with the right of a pawnee upon the default in the payment of the debt or performance of the promise. Thus, even assuming that section 176 of the Contract Act applies to pledges created under the Depositories Act, 1996, and that respondent Nos. 1 and 2 failed to exercise their rights as pawnees in accordance with the provisions of section 176 of the Contract Act, it would make no difference as far as respondent No. 3 is concerned for two reasons. Firstly, the appellant failed to create the pledge in accordance with the provisions of the Depositories Act. Such a party cannot take advantage of it's own wrong - Respondent No. 3 was not bound to give any notice to the appellant of its proposed sale of the shares kept with it as margin by respondent Nos. 1 and 2. The appellant itself stated that on 29th June, 2013 respondent Nos. 1 and 2 sold 78,000 shares of Flexituff for an aggregate amount of Rs. 1.76 crores, which was objected to by the appellant at the meeting held on 29th June, 2013. The appellant further stated that at the meeting it had requested respondent Nos. 1 and 2 to return the balance shares but that respondent Nos. 1 and 2 failed to do so. Despite the same, the appellant did not adopt any proceedings or take any steps to protect or enforce its rights and interests in respect of the said shares. Thereafter in September, 2013 a further 40231 shares of Flexituff was sold by respondent Nos. 1 and 2. The appellant stated that the meetings were held on 15th October, 2013 and 28th October, 2013 with respondent Nos. 1 and 2 whereat it once again objected to the sale and requested respondent Nos. 1 and 2 to return the excess shares. The suit was filed on 29th October, 2013. Thus even after the meeting of 15th October, 2013, the appellant waited for another fortnight before adopting the proceedings. In matters such as these especially in the facts and circumstances of this case, where the rights of third parties are involved and can be affected by any delay, the proceedings ought to have been adopted immediately. As noted earlier, on 28th and 29th October, 2013 the transfer of the balance shares have already taken place - If injunctions are granted in such cases, it would adversely affect the functioning and sentiment of the securities market. It would derail the entire system of maintaining the margin by utilizing securities. It would require the persons to deposit cash or some other equivalent security. This is on account of the uncertainty that would be created regarding the value of the securities deposited/furnished as margin. Appeal dismissed.
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