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2022 (6) TMI 1188 - HC - Companies LawTransfer of pledge shares - right of pledgee - whether Catalyst can transfer these shares to its name but only for the limited purpose of holding them safely until they are redeemed, sold (after notice to World Crest) or for the purposes of Catalyst’s recovery suit? - Sections 176 and 177 of the Contract Act - HELD THAT:- When there is a default by the pledgor, i.e., the pledgor does not fulfil his promise to pay the debt, the pledgee has the right (but not an obligation) to sue on the date and to continue retention of the pledged goods as a collateral security and also the right to sell the goods but after reasonable notice of the proposed sale to the pledgor. Once sold, the pledgor’s right of redemption is extinguished and forever lost. Until the sale actually occurs, the pledgor is entitled to his right of redemption, again on payment of debt. What happens when a pledgee brings suit for recovery of the debt? Although the pledgee is entitled to retain the goods, he must return them on payment of the debt (and expenses). The Supreme Court in PTC INDIA FINANCIAL SERVICES LIMITED VERSUS VENKATESWARLU KARI AND ANOTHER [2022 (5) TMI 813 - SUPREME COURT] also reaffirmed that a pledgee has only “special property in the pledge” but the general property remains with the pledgor. It is said to be a right in the pledged goods higher than the mere right of detention but less than the general property right. This is explained: the pledgee has a right to transfer the general property rights in the pledged items, i.e., to pass title, so long as the pledge is not redeemed. This is also said to be a ‘conditional general property interest’. i.e. subject to the condition that the general property can be passed to a third party if the pledged goods are brought to sale. This means that a pledgee can validly pass full tile in the pledged goods, i.e. plenary ownership and general property rights to a third party on sale. The pledgee cannot validly acquire these rights by a sale to itself. Until that sale to a third party happens or takes place the pledgor has a right to redeem and this redemption means that the pledgor gets back the entirety of the general property rights in the pledged goods. The right of ownership of a demat security (share) vests in what is known as the “beneficial owner”. Every person or entity who or which is recorded as a ‘beneficial owner’ can transact and deal in securities but must do so through a DP. Section 12 of the Depositories Act permits the pledge and hypothecation of securities held in a depository. In PTC India, This Section was held not to be inconsistent with the Contract Act. We believe, on a careful consideration that Mr Khambata is correct on two very broad issues. First, whether on this presentation on behalf of World Crest, it can be said that it has made out so overwhelming a prima facie case that an order in its favour had to be made in the impugned order; and since it was not, whether we must do so. As the learned single Judge said there are contentious issues. There is the historical background. We are being asked to infer that the recording of Catalyst’s name under Regulation 58(8) as the beneficial owner results in it having some severely curtailed rights as a beneficial owner - Second, we are being asked to presume that the conferment of voting rights in Clause 2.1(b) amounts or equates to ‘the general property’ in the shares, and the contract or pledge document could not so provide. We are shown no clear interdiction, but are being asked to read it into PTC India and the law relating to pledges. Clause 2.1 says that it preserves all rights under Section 176. Therefore, the parties knew exactly what they were about when they entered into the contract. PTC India restates long-standing law on pledges; it does not re-write it. An interesting thought experiment might be to consider the situation as its stood before the era of the dematerialization at a time of physical securities when they were accompanied with blank transfer forms. If there was a power of such transfer, Mr Khambata argues, and it was effected surely it could not be suggested that the transferee would be rendered such an emasculated member of the company. Appeal dismissed.
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