TMI Blog2003 (3) TMI 601X X X X Extracts X X X X X X X X Extracts X X X X ..... plaintiff. The plaintiffs also seek an order and direction to the defendants to transfer the said 6,50,000 shares of ETC Network lying to the credit of the demat account of defendant Nos. 1 to 21 and 35, particularly set out in exhibit F to the plaint to the plaintiff s demat account maintained with defendant No. 22, i.e., the Stock Holding Corporation of India. In the alternative, the plaintiff has prayed for an order and decree in the sum of ₹ 1,95,00,000 as per particulars of claim. 4. The plaintiff is an investment company. Defendant No. 1 is a company which carries on the business of providing finance. The plaintiff claims that defendant Nos. 2 to 21 are companies and individuals who have participated in fraudulently receiving equity shares of ETC Network Ltd., which belong to the plaintiff. The plaintiffs aver that they parted with 6,50,000 shares in favour of defendant No. 1 in order to secure repayment of a loan of ₹ 1,12,50,000 proposed to be taken from defendant No. 1. Eventually, defendant No. 1-company did not give the loan. However, it transferred the shares to other defendants. Today, according to the plaintiffs, defendant No. 18 has 1,00,000 shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther agrees that, he shall not object to such a trading/lending, selling, assigning, refinancing, transferring the rights/obligation of the stock, during the continuance of this agreement. Clause 15 which confers voting rights in respect of the shares on defendant No. 1 during the subsistence of the agreement, reads as follows : 15. The borrower agrees that during the continuance of this agreement, the voting right in respect of the security hereunder given shall exclusively vest on the lender. 5. It is an undisputed fact that the plaintiffs did not write a request letter to defendant No. 1 for loan and therefore defendant No. 1 has not given a loan to the plaintiffs. The shares have been transferred by the plaintiffs to defendant No. 1 as follows : 1,50,000 shares on May 29, 2001; 2,50,000 shares on June 16, 2001; 11,00,000 shares on June 18, 2001. Totalling to 15,00,000 shares. Of the 15,00,000 shares deposited with defendant No. 1, the plaintiffs have taken back about 8,50,000 shares on or about August 24, 2001. 6. Defendant No. 1 has transferred to defendant No. 1,81,00,000 shares on May 29, 2001, in an off-market transaction, i.e., directly and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... response to the plaintiffs application for a loan of ₹ 1,12,50,000 against 15 lakh shares of ETC Networks in the demat form. The letter, at exhibit A to the plaint, stated that the loan would be disbursed to the plaintiffs after confirmation of the transfer of demat shares into the demat account. It was specifically stipulated that under clause 10 of the agreement which was being signed by the plaintiffs, defendant No. 1 would acquire an absolute and unconditional right to transfer and trade on the scrips transferred to them as security without attributing any reason whatsoever. That clause is reproduced again for the sake of convenience. 10. The lender shall be entitled to trade, sell, assign or transfer its rights and obligations under this agreement to any person(s) of the lender s choice, either in whole or in part and in such manner and on such terms as the lender may decide. The borrower further agrees that, he shall not object to such a trading/lending, selling, assigning, refinancing, transferring the rights/obligations of the stock, during the continuance of this agreement. 10. It must be noted that there is no dispute that the agreement continues, i.e., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansfer the pledged goods. This aspect is being considered because at one stage it was argued by learned counsel for the plaintiffs that the transfer by defendant No. 1 of shares in favour of the other defendants is void in the absence of the notice by defendant No. 1 of their intention to sell the shares. Reliance is placed on a decision of the Division Bench of this Court in Official Assignee v. Madholal Sindhu AIR 1947 Bom. 217, in which this court held that section 176 of the Contract Act is mandatory; its provisions are not like other provisions of the Contract Act, subject to the contract to the contrary . Therefore, where the pledgor fails to redeem, the pledgee cannot sell the goods without notice to the pledgor unless it is proved to have been waived by the pledgor. In the view I am taking, it is not necessary to consider whether the view taken by the judgment holds the field since the judgment has been reversed by the Federal Court in Madholal Sindhu v. Official Assignee of Bombay [1949] 51 BLR 906. The same view as of this court has been taken by other High Courts. 14. Mr. Doctor, learned counsel for defendant No. 14, strongly contended that no case whatsoev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ised shares cannot be delivered physically nor can physical possession of such dematerialised shares be handed over. 16. In fact, it appears that the provisions have been enacted in the Depositories Act, 1996, for the purpose of recording accurately the transfers and pledges of shares including those in a dematerialized form. 17. The transaction in such shares are directly governed by the Depositories Act, 1996, which contemplates the existence of a depository, i.e., a company which acts as the depository of such shares. The shares are held by the depository in the name of the beneficial owner of the shares. The depository is entitled to act as a registered owner for the purpose of effecting transfer of ownership of security on behalf of a beneficial owner vide section 10 of the Depositories Act, 1996, which reads as under : Rights of depositories and beneficial owner. -(1) Notwithstanding anything contained in any other law for the time being in force, a depository shall be deemed to be the registered owner for the purposes of effecting transfer of ownership of security on behalf of a beneficial owner. (2) Save as otherwise provided in sub-section (1), the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dgor shall within fifteen days of the receipt of the application create and record the pledge and send an intimation of the same to the participants of the pledgor and the pledgee. (4) On receipt of the intimation under sub-regulation (3) the participants of both the pledgor and the pledgee shall inform the pledgor and the pledgee respectively of the entry of creation of the pledge. (5) If the depository does not create the pledge, it shall send along with the reasons an intimation to the participants of the pledgor and the pledgee. (6) The entry of pledge made under sub-regulation (3) may be cancelled by the depository if the pledgor or the pledgee makes an application to the depository through its participant : Provided that no entry of pledge shall be cancelled by the depository without prior concurrence of the pledgee. (7) The Depository on the cancellation of the entry of pledge shall inform the participant of the pledgor. (8) Subject to the provisions of the pledged document, the pledgee may invoke the pledge and on such invocation, the depository shall register the pledgee as beneficial owner of such securities and amend its records accordingly. (9) Af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... they could have done so in the manner provided by regulation 58, i.e., by making an application to the depository through defendant No. 2 depository participant, whereupon the depository participant would have made a note that the securities are available in the pledge in accordance with regulation 58(2). The important thing is that the security would have been accepted by the depository as a pledgor and the record would have shown the plaintiffs as the pledgor, and defendant No. 1 as pledgee. This has an important bearing on the question whether the plaintiffs intended to convey title in the shares in favour of defendant No. 1, or merely intended to create a pledge. In view of the fact that the plaintiffs did not follow the procedure provided by regulations for creating pledge, I am of the view prima facie , that the plaintiffs had not intended to create a pledge but intended to transfer and that in any case has been the effect. In any case, in fact they did not create a pledge, but transferred the shares. 24. The question whether there was a transfer or not, in favour of defendant No. 1 has a bearing in the present case on the purchase by the other defendants from defenda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 5 who purchased shares from defendant No. 1 could not get any title in the shares. There are certain exception to the rules that no person can pass a better title to another than he himself possesses. The law acknowledges cases when a person having no title to the property may acquire and pass good title to a bona fide purchaser for a value without any knowledge or by virtue of any defect in the title of the person conveying the same. The Calcutta High Court has set out these classes of cases in Smt. Sumitra Debi Jalan v. Satya Narayan Prahladka AIR 1965 Cal. 355, wherein the Calcutta High Court observed as follows : 47. In this case it has been clearly established on evidence that title to shares such as the shares in suit, passes from hand to hand freely by delivery with blank transfer deeds duly signed by the registered holders. There is evidence also that the purchasers could not have found out if there were any defect in title to these shares at the time of purchase and, thus, in my opinion these shares are negotiable according to the law merchant, custom and/or practice of the Calcutta Stock Exchange. No doubt under the Sale of Goods Act shares are goods but that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... loan and in any case the correspondence between the plaintiffs and the defendants does not contain a whisper that defendant No. 1 has committed a fraud. Even in the case of fraud, the Supreme Court has made the following observations in regard to the status of innocent purchasers in Central National Bank Ltd. v. United Industrial Bank Ltd. AIR 1954 SC 181. In paragraph 10, the Supreme Court observed as under : If an innocent purchaser or pledgee obtains goods from the person in possession thereof, whose possessory right is defeasible on the ground of fraud but had not actually been defeated at the time when the transaction took place, there is no reason why the rights of such innocent purchaser or pledgee should not be protected. The right in the possessor or bailee in such circumstances is determinable no doubt but so long as it is not determined it is sufficient to enable him to create title in favour of an innocent transferee for value without notice. This proposition is well recognised in English law and seems to us to be well founded on principle. In Cahn v. Pockett s Bristol Channel Steam Packet Co. [1899] 1 QB 643 (CA) at page 659(A) Collins L.J. made the followi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tself not tenable in that it seeks a decree in respect of 6,50,000 shares of ETC Networks Ltd. lying to the credit of the demat accounts of defendant Nos. 1 to 21 and 35 maintained with defendant Nos. 22 to 33 and 34. This argument is based on Order XX, rule 10 of the Code of Civil Procedure. It is submitted by learned counsel that there cannot be any decree and much less a prayer clause for interim relief in respect of particular shares held in demat accounts in view of the fact that the shares are held in a fungible form in accordance with section 9 of the Depositories Act, 1996. The submission in brief is that when securities are held in a fungible form they lose their individual identity as particular shares and becomes completely replaceable with one another like money or even claim of money. Having regard to the fact that the plaintiffs have also made an alternative prayer for a decree in the sum of ₹ 1,95,00,000 in respect of the shares, it is not necessary to go into this aspect of the issue at this stage. 34. Thus, in view of the finding aforesaid, I find no merit, in the notice of motion, which is hereby dismissed. In the circumstances of the case, there shall ..... X X X X Extracts X X X X X X X X Extracts X X X X
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