TMI Blog1993 (8) TMI 310X X X X Extracts X X X X X X X X Extracts X X X X ..... r Agro Chemicals Ltd. By reason of certain negotiations a credit period had been given to the said Varinder Agro Chemicals Ltd. to make payment of the price of the goods. Because of this arrangement, the bills of exchange were drawn with 90 days' period of maturity. Varinder Agro Chemicals Ltd. accepted the bills of exchange. These bills of exchange were discounted with the second respondent. For the purposes of enabling the second respondent to discount these bills of exchange, 10 lakh units of the Unit Trust of India were pledged by the petitioners with the second respondent. At the time of the pledge, the 10 lakh units along with blank transfer forms were handed over to the second respondent. The petitioners have averred that the second respondent participated in the transaction only as financier and that they were not engaged in any manner as share, stock or security broker. There is no denial of this position by the second respondent. 2. By their affidavit dated July 7, 1993, the second respondent admits that these 10 lakh units were pledged with them as security for payment of the amounts expended by the second respondent on discounting the three bills of exchange. I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that as such pledgees they could transfer no better title to the third respondent. This raises a legal question as to whether a person who has purchased shares with blank transfer forms, from a person who had no right or authority to sell the shares, derives any right which would enable him to defeat the claim of the real owner. This question has been argued by the parties on the assumption, for the sake of argument, that there is a sale in favour of the third respondent. The question of fact as to whether or not there is a sale is for the present left open to be determined only if the court comes to the conclusion that such a sale would create in favour of the bona fide purchaser, i.e., the third respondent, a right, title or interest which he can enforce even against the true owner. 5. The petitioners and the second respondent are agreed that the 10 lakh units had only been pledged with the second respondent. On behalf of the petitioners it is submitted that all that the third respondent can get is a right as a sub-pledgee. It is submitted that in cases of pledge the only right of a pawnee is to retain the goods pledged or sell the goods pledged after giving reasonable notic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and share and stock brokers . It is submitted that as such share and stock brokers the second respondent were in possession of blank transfer forms along with the units. It is submitted that the third respondents have dealt with the second respondent bona fide and in good faith and without having any knowledge that the second respondents did not have any right to transfer the units. It is submitted that even on this basis, the third respondent get a title, legal and equitable, in these units and are entitled to get their name entered in the register with the Unit Trust of India. 8. In support of their respective cases numerous authorities have been cited. Before these authorities are considered, it would be preferable to set out certain relevant provisions of law. 9. Under sections 2(7) and 2(9) of the Sale of Goods Act the terms goods and mercantile agent have been defined as follows : 2. (7) 'goods' means every kind of movable property other than actionable claims and money ; and includes stock and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be severed before sale or under the contra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , in addition, of any expenses which may have been arisen by reason of his default, 14. Under Section 178 of the Indian Contract Act where a mercantile agent is, with the consent of the owner, in possession of the goods or documents of title to the goods, any pledge made by him, when acting in the ordinary course of a mercantile agent shall be valid as if he were expressly authorised by the owner of the goods to make the payment, provided that the pawnee acts in good faith and has not at the time of the pledge notice that the pawn or has no authority to pledge. 15. Section 179 of the Indian Contract Act provides that where a person pledges goods in which he has only a limited interest, the pledge is valid only to the extent of that interest. 16. Thus, on a plain reading of the provisions set out above, it is clear that so far as the law in India is concerned, shares are movable property. In India shares are goods within the meaning of the Sale of Goods Act. The provisions of the Sale of Goods Act and the Indian Contract Act would apply to a transaction of sale of shares also. Even in respect of transactions of sale of shares the doctrine of nemo dat quid non habet applies, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that even though there may be sub-pledge, once the amounts are repaid the sub-pawnee loses all rights in the property pledged because the title of the sub-pawnee is a precarious title which is dependent on the title of the pawnee. 19. On behalf of the petitioners, reliance was also placed upon the authority in the case of Official Assignee, Bombay v. Madholal Sindhu , AIR 1947 Bom 217. In this case, it is held by a Division Bench of our court that Section 176 of the Indian Contract Act is a mandatory provision. It is held that the provisions of Section 176 are not subject to a contract to the contrary. It is held that any term in a contract giving an unqualified power of sale to a pledgee would be inconsistent with the provisions of Section 176. In this case, it is held that, even though a pledge fails to redeem, the pledgee cannot sell the goods without notice to the pledgor. It is held that a sale without notice is not a mere irregularity but is void. It is further held that the purchaser, in a sale without notice, would only get the right and interest of the pawnee in the goods. It is held that a pawn or can, without suing the pawnee for damages for conversion, maintain an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on behalf of the third respondent. The Division Bench reversed the judgment of the trial court. The question before the Division Bench and which has been answered by the Division Bench was as follows (at page 339) : How far the act of the registered owner of shares, who hands over the share certificates with transfer forms signed by him in blank to another person, estops him from asserting his title against a third party who has bought the shares from that person ... The Division Bench held as follows (at page 339) : The question may be put in this form. Does a registered owner of shares, by handing over the share certificates and blank transfers signed by him to another person, make a representation to the world that such person is entitled to deal with the shares, so that any honest purchaser from that person obtains a good title to the shares. In my opinion, until the decisions in France v. Clark [1884] 26 Ch 257 and Fox v. Martin [1895] 64 L] Ch 473 are directly overruled, the answer to that question must be in the negative. In this case, if defendant No. 3 could have said that he had purchased the two shares fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd person, even a bona fide purchaser for value without notice, can have would be if the owner is precluded by his conduct from denying the authority to sell or if the case falls within the proviso to Section 27 of the Sale of Goods Act (old Section 108 of the Indian Contract Act). 23. On behalf of the petitioners, reliance was also placed upon the authority in the case of Amritlal v. Bhagwandas , AIR 1939 Bom 435. In this case, certain goods had been entrusted on jangad basis to a broker. The question was whether a sale by the broker would confer on a bona fide purchaser for value a good title. The court held that goods may be delivered by the owner with an intention of sale. However, if goods are delivered on a jangad basis, meaning only to be shown for approval to the customers, then even if the mercantile agent effects a sale, no property or title would pass. This is on the footing that a mercantile agent who receives on jangad acquires no property and, therefore, can pass no property. In this case, it was held that as the goods were not delivered to the broker or agents with authority to sell, even Section 27 would not protect the transaction. This authority is very rele ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th blank transfer forms for purposes of a sale. On these facts the court held that the plaintiff had put forward the broker as his agent in the market to make representations to innocent third parties to the effect that the broker was authorised to transfer the plaintiff's title in the shares and to receive the purchase price. The court held that because of this, the plaintiff could not be heard to say, if innocent third parties acted upon the representations of the broker, that the broker had obtained the shares by cheating him. The court held that even if the broker had cheated the plaintiff, on the plaintiff's handing over transfer forms and the share certificates to the broker, the plaintiff's title both legal and equitable passed to the broker, who could validly transmit that title to the defendants. The court held that the title having passed to a bona fide purchaser for value without notice, the latter was entitled to retain the shares and to get it registered in his name in the books of the company. To be noticed that on facts, the court found that in this case the shares had been given to the broker for sale. It is only by reason of this fact that the court cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e title to get on the register consists in the possession of a certificate together with a transfer signed by the registered holder. This is what Bharucha had. He had the certificates and blank transfers, signed by the registered holders. It would be an upset of all stock exchange transactions if it were suggested that a broker who sold shares by general description did not implement his bargain by supplying the buyer with the certificates and blank transfers, signed by the registered holders of the shares described. Bharucha sold what he had got. He could sell no more. He sold what in England would have been choses-in-action, and he delivered choses-in-action. But in India, by the terms of the Contract Act, these choses-in-action are goods. By the definition of goods as every kind of movable property it is clear that, not only registered shares, but also this class of choses-in-action, are goods. Hence equitable considerations not applicable to goods do not apply to shares in India. So soon, therefore, as Arajania, acting for Bharucha, handed Gora the certificates and transfers, and Gora accepted them and gave the cheque, the goods became ascertained goods, the sale was complet ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers, upon whom alone calls for unpaid capital can be made and to whom only the dividend declared by the company is legally payable. Of course, between the transferor and the transferee, certain equities arise even on the execution and handing over of 'a blank transfer' and among these equities is the right of the transferee to claim the dividend declared and paid to the transferor who is treated as a trustee on behalf of the transferee. 30. In my view, this case is also of no assistance to the third respondent. In this case, there was no dispute between the person whose name stood on the register of the company and the purchaser. The appellants therein were admittedly the purchasers. It is also pertinent to note that the Supreme Court ultimately held that the appellants were not entitled to claim benefit of the tax deducted at source. 31. On behalf of the respondents, reliance was also placed upon the case of Kanhaiyalal Jhanwar v. Pandit Shirali and Co . AIR1953Cal526 . In this case, the plaintiffs were seeking to enforce their rights over certain shares as pawnees. The contesting defendant in that suit was claiming a prior charge over the shares. The question of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h law, as has been pointed out by all the standard taxt books on the subject and as also recognised by the leading cases on the point, a share in a company is considered a chose in action, which according to the terminology used by the Transfer of Property Act, can be described as an actionable claim. Unlike that position in England, under Section 28 of the Indian Companies Act, 1913, and the provisions of the Indian Companies Act, 1956, the shares or interest in a company are movable property, transferable in the manner provided by the articles of the company. Under the old Indian Contract Act sections which were in existence prior to the enactment of the Indian Sale of Goods Act, shares were goods and under Section 2(7) of the Indian Sale of Goods Act, 1930, stocks and shares are included in the definition of goods. Thus, by virtue of the Indian Sale of Goods Act, Section 2(7), though stocks and shares may not be goods, they are included in the enlarged definition of the word goods ; and the sale of shares and stocks would be governed by the provisions of the Indian Sale of Goods Act, 1930, by virtue of this inclusive definition in the Indian Sale of Goods Act. We may also ment ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transferor divests himself of all rights as the owner of the shares and the transferee, at least in the eye of equity, becomes the owner of those shares. The court also held that it would be an upset of all stock exchange transactions if it was suggested that a broker who sold shares by general description did not implement his bargain by supplying the buyer with certificates and blank transfers signed by the registered holders of the shares. These observations have been strongly relied upon. In my view, this case is also of no assistance to the third respondent. It does not deal with the question under consideration. The observations made above are in the context of blank transfer forms and shares being handed over with intention to sell and/or create a right in favour of the transferee, by the owner or a person authorised to do so. The question of the claim of the owner against a purchaser from a person without any title did not arise and was not considered. 34. On behalf of the third respondent reliance was also placed upon the authority in Bengal Silk Mitts Co. Ltd., In re [1942] 12 Comp Cas 206 (Cal); AIR 1942 Cal 461. In this case, the question was whether an instrument o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by delivery with blank transfer forms signed by the registered holders. On evidence, it was established that the purchasers could not have found out if there were any defects in the title to the shares. On this evidence, the court concluded that even though shares are goods, that did not preclude them from being negotiable according to custom and practice of the stock exchange. In this case, the court noted that generally no person can pass a better title to another than he himself possesses. The court noted that Section 27 of the Sale of Goods Act was an exception to this rule. The court then observed that the principle of bona fide purchaser for value without notice acquiring a good title although the person conveying the same had no title had further been extended and recognised on the ground of mercantile convenience. The court was, however, careful to clarify that the question as to whether the bona fide purchaser for value without notice acquired a good title or not and/or whether the owner was estopped or not were questions which would have to be decided on the facts of each case. In this case, the court held that the owner had a duty to the transferee and the public at lar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out the security of commercial transactions and about confidence in commercial transactions being destroyed. As the learned judge himself has rightly noted the law always was and still remains that no person can pass a better title than he himself has. Without meaning any disrespect to the learned judge, to me it appears that the learned judge seems to have been unduly agitated by the fact that shares with blank transfer forms may pass from hand to hand and that the purchasers would have no way of knowing whether the person from whom they were purchasing had any title or not. But, with great respect to the learned judge, one fact seems to have been lost sight of, i.e., that in cases of most movables, which are regularly sold and purchased in shops or even on roadsides, e.g., pens, books, watches, etc. (the list could run on endlessly), there would be no way that the purchaser could find out whether the person from whom he was purchasing had a title or not. In all these cases also, the goods would be sold by mere payment and delivery. In all such cases the possession of the goods would be the only indicia of ownership. If that were to be the guiding principle then in most cases of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rasad v. Central Bank of India , AIR1956Pat32 , wherein on the facts it is held that the transaction in question in that suit was not a pledge but a mortgage of movables. Based on the observations in this case it was submitted that the court must hold that the act of deposit of shares along with blank transfer forms necessarily amounts to creation of a mortgage. It is submitted that as mortgagees, the second respondent, had a right to sell. It is submitted that the third respondent, have thus got a good title, legal and equitable, which they can enforce even against the true owners, i.e., the petitioners. I am unable to accept this submission. Undoubtedly there can be a mortgage of movables. However, whether there is a pledge or a mortgage is a question of fact. In this case, between the parties to the transaction, it is an admitted position that the plaintiffs had only pledged the shares in favour of the second respondent. Even if this question was to be decided on evidence, it is only the petitioners and second respondent who could lead any evidence on this point. Both of them admit that there was only a pledge. The third respondent does not claim to have any knowledge of the ori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany would lodge the same with the company. It is urged that in such circumstances, so far as the transactions in shares are concerned, it would be impossible for innocent third parties to find out whether or not the brokers were in possession of the blank transfer forms along with the shares with authority to sell or not. It is urged that in such cases, if a contrary view is taken, the entire share trade would be affected. 40. In support of this, reliance is placed upon the case of Rama Rao v. Dasarathy Rao, AIR 1955 Mys 43, wherein it is held that the delivery of share certificates with the transfers executed in blank, passes not the property in the shares but a title, legal and equitable, which enables the holder to vest himself with the shares without the risk of his right being defeated by the registered owner or any other person deriving title from the registered owner. In this case the facts were that the broker had obtained the shares conditionally, i.e., on the condition that they would be sold within one week or returned. The broker sold the shares but failed to pay the real owner. On the facts, it was found that the owners had delivered to the broker the shares with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ther they were left conditionally. Thus, the broker must be in possession with an authority to sell. In such cases, even if the conditions are not fulfilled or the authority is exceeded, the proviso to Section 27 of the Sale of Goods Act would come into play and the bona fide purchaser for value would get a good title. To hold otherwise would be to create a new law which the Legislature in its wisdom has thought fit not to enact. To hold otherwise, even in respect of transactions in shares, would be set at naught the provisions relating to bailment and pledges as set out in the Indian Contract Act. If in such cases, the Legislature wanted a bona fide purchaser for value to be protected then in the provisions pertaining to bailment and pledge, such a condition would have been laid down. Knowing full well that there would be bailment and pledges of shares the Legislature has purposely chosen not to make any exception. The Division Bench in Abdul Karim's case, AIR 1926 Bom 338, cited above has also noted this. In the absence of such provision, even in respect of shares/units, it would have to be held that the provisions of sections 172 to 179 of the Indian Contract Act apply. Even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is would be the legal effect. If that be so, then, in my view, there is no reason why in respect of shares there should be any difference. Further, in my view, if such principles are applied to all cases where shares are left with blank transfer forms including pledges, i.e., a strict duty is cast on owners of shares, it would seriously hamper the raising of finances by a party. It is well known that monies are raised by pledging shares. Whilst it is not necessary that blank transfer forms be deposited for purposes of creating a pledge, most financial institutions insist on the share certificates with blank transfer forms being deposited. If this ratio is to be applied to bailment and pledges then, in my opinion, it would be regrettable, it would knock the bottom out of the principles of trust and confidence in commercial transactions whereunder the shares and blank transfers are deposited for raising finances. In my view the above submission is much ado about nothing. 44. In the view that I have taken the petitioners will be entitled to the entire ten lakhs units. However, before final orders are passed one further aspect needs to be decided. Undoubtedly, the petitioner is enti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he period of the loan, i.e., after June 21, 1992. In my view, Mr. Joshi is right. The petitioners must pay interest. 46. I am informed that six lakh units are still lying with the Central Bureau of Investigation. The petitioner to give notice to the Central Bureau of Investigation. Appropriate orders, including orders in respect of the four lakh units in possession of the third respondent, and about payment of interest and at what rate will be passed on the next occasion after hearing the Central Bureau of Investigation. It may only be mentioned that the court has already indicated that interest is payable and the rate at which it is payable. On that basis parties are asked to work out the figures. 47. In the view that I have taken there will be no need to decide the question whether or not there is a sale of the four lakh units in favour of the third respondent. In the view that I have taken the third respondent will only step into the shoes of the second respondent so far as the four lakh units are concerned. The petitioners are, therefore, entitled to redeem the four lakh units even in the hands of the third respondent. In the view that I have taken the remedy of the third ..... X X X X Extracts X X X X X X X X Extracts X X X X
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