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TMI Blog2018 (4) TMI 1793X X X X Extracts X X X X X X X X Extracts X X X X ..... a) that on the request of the defendant no.9 Morepen Laboratories Ltd. (Morepen), the plaintiffs, who are investment companies, vide letter dated 7th February, 2003, pledged 15,00,000 equity shares of defendant no.8 Blue Coast Hotels & Resorts Ltd. (Blue Coast) owned by them in favour of defendant no.7 Morgan Securities and Credits Pvt. Ltd. (Morgan) as security for the financial facility availed of by the defendant no.9 Morepen from the defendant no.7 Morgan; (b) that the defendants no.1 to 4 companies, though distinct legal entities, have a discernible inter-relationship with each other, with the pivotal control in the hands of the Directors of defendant no.7 Morgan; (c) that the defendant no.8 Blue Coast is the owner of a prestigious five star hotel in the name and style of ‗Park Hyatt Goa Resort & Spa' at Goa; (d) that defendant no.9 Morepen is the holding company of Dr. Morepen Ltd. which is the owner of popular medicinal brands ‗Burnol' and ‗Lemolate'; (e) that disputes arose between the parties as to the amount remaining unpaid under the aforesaid financial facility and which disputes were referred for adjudication to the Sole Arbitrator ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e and in breach of statutory provisions including Section 176 of the Indian Contract Act, 1872, requiring mandatory prior legal notice preceding such sale and in breach of fiduciary duty of a pledgee to act honestly and fairly; the shares are purported to have been sold at manipulated/artificial price to defendants no.1 to 4; thus the said sales are void and non est. (k) that though the alleged sale is purported to have taken place from 16th December, 2003 to 25th March, 2004 but was concealed from the Executing Court and no prior permission from the Executing Court was taken for the purported sale after the date of filing of Execution Petitions; on the contrary, defendant no.7 Morgan obtained orders from the Executing Court to the effect that the defendant no.8 Blue Coast shall not increase its equity share capital so as to dilute the value of the pledged shares held by the defendant no.7 Morgan as security, demonstrating that the defendant no.7 Morgan itself till then believed that it continued to hold the said shares when it claims to have completed the sale prior thereto; the sale was disclosed for the first time on 14th August, 2005; and, (l) that the aforesaid 15,00,000 s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g with all pending applications, restored. 10. The senior counsel for the plaintiffs, the counsel for defendants no.1 to 4 and the senior counsel for the defendant no.7 Morgan were heard on (a) IA No.13721/2006 of the plaintiffs under Order XXXIX Rules 1 and 2, (b) IA No.14158/2006 of defendant no.7 Morgan and (c) IA No.291/2007 of the defendants no.1 to 4, both under Order XXXIX Rule 4 of the CPC, on 18th November, 2016, 22nd November, 2016, 14th December, 2016, 28th April, 2017 and 9th May, 2017 and orders reserved with liberty to the counsels to also submit in bullet points their respective contentions. 11. The counsels during the hearing, also submitted Convenience Volumes to save the time in rummaging through the voluminous records. 12. During the hearing, i) it was informed that defendant no.8 Blue Coast had approached Securities and Exchange Board of India (SEBI) with a complaint with respect to the sale of 15,00,000 shares aforesaid and of violation of the Takeover Code; ii) that SEBI held in favour of defendant no.8 Blue Coast but the Securities Appellate Tribunal (SAT) in appeal, reversed the order of SEBI and the appeal preferred to the Supreme Court by defendant no.8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ested of the title to shares; ix) it was enquired from the senior counsel for the plaintiffs as to what difference it made, whether the plaintiffs were divested of the title in the shares on 6th / 9th December, 2003 or on 25th March, 2004 inasmuch as unless the plaintiffs had redeemed the pledge within the meaning of Section 177 of the Contract Act till then, the sale would still be valid; x) the senior counsel for the plaintiffs contended that no notice of sale in accordance with Section 176 of the Contract Act was given and the sale of shares was thus bad; xi) it was the contention of the senior counsel for the plaintiffs that till 25th March, 2004, a sum of approximately Rs. 37.5 lacs out of over Rs. 6 crores due had been repaid; and, xii) it was the contention of the senior counsel for the plaintiffs that the plaintiffs learnt of the sale only in the year 2005; till then, the defendant no.7 Morgan, in the execution proceedings, by obtaining injunction against defendant no.8 Blue Coast enhancing its share capital, kept the plaintiffs under the belief that the shares were still held by the defendant no.7 Morgan inasmuch as if the shares had been transferred, there would have been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of the Depositories Act, 1996, the regulations made pursuant thereto and the Regulations and Bye-laws of the concerned depository. (viii) Notwithstanding what is stated above, if so permitted by the Bye-laws and Regulations of the concerned depository, the Lender may sell, realize and / or dispose-off the dematerialised Pledged Securities or any of them without having the same first transferred or registered in the name of the Lender. 10. That you shall have Irrevocable right to sell, dispose off or realize the said securities on such terms and for such price as you may think fit and shall apply the net proceed towards satisfaction of the total outstanding against the borrower. If the net sum realized by such a sale should be insufficient to cover the full amount due in respect of the said ICD facility together with interest, over due interest and other charges and expenses as per your claim. We agree to pay you forthwith a delivery of the said amount and any balance due to you on the footing thereof. If the net sum realized by such a sale shall be in excess of the amount due in respect of the said ICD Facility, the excess will be made over by you to us forthwith." (emphas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thout any protest or objection. (ii) It is also agreed by the Borrower and Pledgers that in case they failed to make the payment in terms of this Memorandum of Settlement or the price of equity shares pledged falls below the price mentioned in para 3(iii) above, the Lender shall be at liberty to sell / dispose off the whole or the part of the said shares at its sole discretion as it may deem fit at any point of time at the price available in the market for which the Borrower / Pledgers shall have no objection whatsoever. The proceeds on account of the sale of said shares will be credited accordingly to the Borrower's account and adjusted against the overdue amount. (iii) In case of default the Lender shall have absolute right, title and interest to appropriate the security and sell the security at fetchable market price. However, the Lender undertakes that prior to the default he will keep the security as pledge and will not create any third party right. We, the Pledgers undertake, agree and abide by the terms and conditions of this Memorandum of Settlement and have signed hereof in token of our acceptance of the terms contained in the Memorandum of Settlement hereinabove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of as satisfied; (g) that in the said Execution Petitions, no credit of the amounts realized by the defendant no.7 Morgan from sale of the 15,00,000 shares was given; (h) that the legal question for adjudication is whether the plaintiffs lose right and title in the shares merely on invocation of the pledge or on sale of the shares; if it is held that the plaintiffs lose right / title on invocation of the pledge, no challenge to the sale can be made; (i) that it is however the contention of the plaintiffs that on mere invocation of pledge, the plaintiffs as pledgors did not lose right or title in the shares; this is evident from the shares at the time of first invocation though having been transferred from the Demat Account of the plaintiffs to the Demat Account of defendant no.7 Morgan, having been returned to the Demat Account of the plaintiffs on Memorandum of Statement incorporated in the Arbitral Award being drawn up; (j) that the defendant no.7 Morgan relies upon a notice dated 6th September, 2003 and which is disputed by the plaintiffs and the said question is a subject matter of evidence; (k) that till the filing of the Execution Petition on 9th January, 2004, the defendant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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) After amending its records under sub-regulation (8) the depository shall immediately inform the participants of the pledgor and pledgee of the change who in turn shall make the necessary changes in their records and inform the pledgor and pledgee respectively. (10)(a) If a beneficial owner intends to create a hypothecation on a security owned by him he may do so in accordance with the provisions of sub-regulations (1) to (9). (b) The provisions of sub-regulations (1) to (9) shall mutatis mutandis apply in such cases of hypothecation: Provided that the depository before registering the hypothecate as a beneficial owner shall obtain the prior concurrence of the hypothecator. (11) No transfer of security in respect of which a notice or entry of pledge or hypothecation is in force shall be effected by a participant without the concurrence of the pledgee or the hypothecate, as the case may be."; (c) that under the aforesaid Regulation, the beneficial ownership in the shares changes on invocation and it is only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmine and no injunction shall be granted by any court or other authority in respect of any action taken or to be taken in pursuance of any power conferred by or under this Act." also bar the jurisdiction of the Civil Court; and, (p) that the plaintiffs in the present case are admittedly investment companies of the borrowers viz. defendant no.8 Blue Coast and defendant no.9 Morepen, of the defendant no.7 Morgan. 16. The counsel for the defendants no.1 to 4 informed/argued, (a) that the defendants no.1 to 4 purchased the shares from the market; (b) that the defendant no.8 Blue Coast, while disclosing its shareholding pattern as on 1st January, 2004, disclosed the shares held by the defendant no.5 who sold the same to the defendant no.1 on 9th July, 2004 and the shares held by defendant no.2; (c) the defendant no.8 Blue Coast thus had knowledge as on that date, of the sale of the pledged shares and the plaintiffs who are acting in concert with defendant no.8 Blue Coast thus also had knowledge; (d) that public announcement dated 27th February, 2004 was made by defendant no.8 Blue Coast of defendant no.7 Morgan having become beneficial owner of the shares in accordance with Regulation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... avour of the plaintiffs, particularly as the trial is underway. 18. The counsel for the plaintiffs along with his written submissions has filed copies of following judgments though all of them were not cited at the time of hearing: (i) Neikram Dobay Vs. Bank of Bengal 1891 LR 60; (ii) Ramdeyal Prasad Vs. Sayed Hasan AIR (31) 1944 Patna 135; (iii) The Official Assignee Vs. Madholal Sindhu (1946) 48 BOMLR 828; (iv) Nabha Investment Pvt. Ltd. Vs. Harmishan Dass Lukhmi Dass 1995 (33) DRJ 496; (v) Hulas Kunwar Vs. Allahabad Bank Ltd. AIR 1958 Cal 644; (vi) Balkrishan Gupta Vs. Swadeshi Polytex Ltd. (1985) 2 SCC 167; (vii) Order dated 14th August, 2008 in FAO(OS) No.350/2008 titled Namedi Leasing & Finance Company Ltd. Vs. Tendril Financial Services Pvt. Ltd.; (viii) Hamza Haji Vs. State of Kerala (2006) 7 SCC 416; (ix) Poysha Power Generation Pvt. Ltd. Vs. Doctor Morepen Ltd. 2006 SCC OnLine Del 1665; (x) Dalpat Kumar Vs. Prahlad Singh (1992) 1 SCC 719; (xi) Bina Murlidhar Hemdev Vs. Kanhaiyalal Lokram Hemdev (1999) 5 SCC 222; (xii) Anand Prasad Agarwalla Vs. Tarkeshwar Prasad (2001) 5 SCC 568; (xiii) Hindustan Petroleum Corpn. Ltd. Vs. Sriman Narayan (2002) 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d; thereafter on 24th August, 2017 and 13th December, 2017 again, the witness of the plaintiffs was found to have not appeared and adjournment was sought; it is thus quite evident that the trial of the suit is unlikely to be near conclusion. B. The High Court of Bombay, in JRY Investments Private Limited supra is found to have, held i) that the shares in dematerialized form cannot be pledged in accordance with the provisions of the Contract Act which requires delivery of the goods pledged; ii) it is obvious from the provisions of the Contract Act, that for a valid pledge, there must be a delivery of goods i.e. a physical possession of the goods; it would however be impossible to hold that such goods in a dematerialized form are capable of delivery i.e. by handing over de facto possession; since goods are invisible and intangible, it would be impossible and in any case difficult to fix the fact of time and place of delivery; dematerialized shares cannot be delivered physically nor can physical possession of such dematerialized shares be handed over; iii) provisions have been enacted in the Depositories Act for the purpose of recording accurately the transfers and pledges of shares ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d judgment being on a finding of bona fide purchase and which is not so in the present case; sale of shares in the present case is admittedly through market transactions and the finding of the SAT, being a specialized Tribunal, in this regard and which has attained finality, would bind the parties. What was held by a Single Judge of the Bombay High Court in JRY Investments Private Limited supra qua the pledge of dematerialized shares being not possible under the provisions of the Contract Act and being governed solely by the Depositories Act and the Regulations made thereunder was concurred with by the Division Bench of the same High Court in Pushpanjali Tie Up Pvt. Ltd. supra. The Division Bench further added that a) a party is entitled to assume and proceed on the basis that the pledge, if any, would be created in the manner prescribed by the Depositories Act and the Regulations made thereunder; b) the provisions of the Depositories Act, particularly Section 12, and the Regulations, particularly 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 provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 58(8). On the contrary, Regulation 58(9) requires the depository to, after so amending its records under Regulation 58(8), inform the participants of the pledgor and the pledgee of the same and mandates the said participants to inform the pledgor and the pledgee. Thus, (a) while Section 176 provides for a notice to pledgor prior to effecting sale, Regulation 58 provides for notice post invocation and on which invocation beneficial ownership of pledged shares changes from that of the pledgor to that of the pledgee and which is equivalent to sale under Section 176. To hold that a prior notice under Section 176 of Contract Act is also required in the case of pledge of dematerialised shares would interfere with transparency and certainty in the securities market, rendering fatal blow to the Depositories Act and Regulations and the object of enactment thereof. F. The distinction sought to be drawn by the senior counsel for the plaintiffs between "invocation" and "sale" is also not in consonance with Regulation 58. I may notice that there is no such distinction in Contract Act either. While Section 176 of Contract Act entitles pledgee to, on default of pledgor, sell the pledged thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the plaintiffs also, after the first invocation by defendant no.7 Morgan, there were disputes between the parties which were subject matter of arbitration resulting in an Arbitral Award and which under the Arbitration & Conciliation Act, 1996 has the force of a decree. Under the said Arbitral Award, having the force of decree, the defendant no.7 Morgan was entitled to sell the shares, without any notice and the plaintiffs had agreed not to raise disputes. The invocation/sale of pledged shares thereafter is in terms of Arbitral Award having force of decree and the pleas as sought to be taken are not available to the plaintiffs. H. Supreme Court in Vimal Chandra Grover Vs. Bank of India (2000) 5 SCC 122, did not accept the defence of Sections 172 - 177 of the Contract Act in the context of a claim under the Consumer Protection Act, 1986 and further reasoned that the Bank as pledgee in that case having agreed to the request of pledgor for sale of pledged shares, could not take the plea of being entitled under Section 176 of the Contract Act to retain the pledged shares and sue for recovery of its dues. I. There is another aspect. Provision of notice under Section 176, even if ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dged shares even if the pawnor had sued for redemption. This judgment however is of prior to the Depositories Act and does not relate to demateralised shares. Though this judgment is found to have been followed, after the coming into force of Depositories Act, in GTL Limited Vs. IFCI Ltd. 182 (2011) DLT 696, but without considering the Depositories Act. The same thus do not bind me. M. I may also notice that even if the sale of pledged shares in the present case, by defendant no.7 Morgan, ultimately to defendants no.1 to 4, were to be bad for non service of notice under Section 176, the same would still vest in defendants no.1 to 4, rights as a pledgee, which the defendant no.7 Morgan admittedly had/has and it cannot thus be said that it was/is not possible for plaintiffs to also sue for redemption of pledged shares, if not from defendant no.7 Morgan, from defendants no.1 to 4. The plaintiffs have not done so. The plaintiffs as pledgors cannot on the one hand restrain the defendant no.7 Morgan and defendants no.1 to 4 as assignees from defendant no.7 Morgan, from dealing with pledged shares and at the same time neither redeem nor offer to redeem the pledged shares, thereby defeat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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