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TMI Blog2014 (6) TMI 1065X X X X Extracts X X X X X X X X Extracts X X X X ..... ve their stock trading accounts with respondent No. 3. Respondent No. 4 is the Central Depositories Securities Limited. Respondent No. 5 is the National Securities Depositories Limited. Respondent Nos. 4 and 5 are depositories. 4. The case briefly is this. Under two loan agreements, respondent Nos. 1 and 2 advanced a sum of Rs. 5 crores to the appellant. In both agreements, the suit shares were pledged by the appellant in favour of respondent Nos. 1 and 2 as security for repayment of the loans. By clause 12 of each of the loan agreements the appellant conferred the following right upon respondent Nos. 1 and 2 i.e.: "The Lender will keep the rights to utilize the provided securities/shares, which can be used as collateral for his own margin purpose." Respondent Nos. 1 and 2 accordingly, placed the pledged shares with respondent No. 3 as margin in respect of their transactions with respondent No. 3. The 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. The appellant further claims that respondent No. 3 also has no right, title or interest in respect of the said shares. The appellant, accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rder and injunction restraining respondent Nos. 1, 2 and 3 from selling, transferring and/or alienating the balance share lying in their various DP accounts including in the pool account of respondent No. 3. By an amendment, the appellant also sought an order directing respondent Nos. 1, 2 and 3 to transfer into its account, the balance shares lying in the DP accounts of respondent Nos. 1 and 2 as well as in the account of respondent No. 3, including the pool account of respondent No. 3 which were handed over as collateral security by the appellant to respondent Nos. 1 and 2 under the said agreements and an order restraining respondent No. 3 from selling/transferring, alienating, adjusting any of the balance of the said shares lying in the DP accounts of respondent Nos. 1 and 2 as well as the accounts of respondent No. 3, including the pool account of respondent No. 3. 6(A). A loan agreement dated 8th March, 2013, was entered into between respondent No. 1 and the appellant under which respondent No. 1 agreed to grant the appellant, a loan of Rs. 3 crores on the terms and conditions contained therein. Clauses 1, 2, 3, 4, 5, 7 and 12 of the agreement read as under: &nb ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ll, dispose of or otherwise deal with the said securities on such terms and price that the lender may think fit and apply the net proceeds towards satisfaction of the Loan amount outstanding the Borrower along with interest, charges etc. ... 12. The Lender will keep the rights to utilize the provided securities/shares, which can be used as collateral for his own margin purpose. (emphasis supplied) Schedule A mentioned in clause 5 above referred to 3,15,000 equity shares of Flexituff International Limited as the "Nos. of shares pledged/transferred". (B) On 8th March, 2013, the appellant transferred 3,15,000 shares of Flexituff into the demat account of respondent No. 1. (C) Under cover of a letter dated 8th March, 2013, the appellant forwarded to respondent No. 1, documents by way of additional security viz. receipt for the loan amount, demand promissory note, post dated cheques for interest and principal, an undertaking letter for the post dated cheques, the original loan agreement, resolutions of the Board and KYC documents. 7(A) On 19th March, 2013, an identical loan agreement was entered into between the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... espite this grievance, the appellant did not adopt any proceedings or take any steps to protect and enforce its rights and interests in respect of the said shares. 10(A)(i). During the week ending 21st September, 2013, a further 40231 shares of Flexituff were sold by respondent Nos. 1 and 2 from their DP accounts of an aggregate value of Rs. 88,50,000/-. (B)(i). The appellant's case is that on 15th and 28th October, 2013, meetings took place between respondent Nos. 1 and 2 and itself whereat the appellant objected to the sale and requested respondent Nos. 1 and 2 to return the excess shares. Respondent Nos. 1 and 2, however, returned only 13600 shares and 27100 shares on 15th October, 2013 and 28th October, 2013, respectively. Once again, the plaintiff contends that at the said meeting the said Akshay Seksaria was present. (C). The appellant also alleges that at the meeting held on 28th October, 2013, it came to know that till that date, a further about 42000 shares of Flexituff had been sold by respondent Nos. 1 and 2 for an aggregate sum of Rs. 90,00,000/-. (D). It is important to note that despite the above grievances for the second time at the meeting ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y then i.e. on 29th October, 2013 itself, the shares had been transferred from the demat account of respondent Nos. 1 and 2 to the margin account of respondent No. 3. (B) By an order passed on 29th October, 2013, the learned single Judge stood over the matter to 30th October, 2013, at 3:00 p.m. and in the meantime, granted an ad-interim order in terms of prayer clauses (a) and (b). By this order respondent Nos. 1, 2 and 3 were restrained from transferring the balance shares lying in the various DP accounts of respondent Nos. 1 and 2 which were handed over to them as collateral security under the said loan agreements and respondent Nos. 4 and 5 were restrained from transferring the said balance shares. The appellant contends that by its several e-mails sent on 29th October, 2013, it forwarded copies of the ad-interim order to respondent No. 3 and also provided respondent No. 3, a soft-copy of the Notice of Motion and the affidavit in support thereof. An e-mail was also sent to one Jayesh Vora an executive of respondent No. 3. (C) The learned single Judge passed an ad-interim order on 30th October, 2013. The learned Judge permitted the appellant to amend the plaint and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deal with the said shares on such terms and conditions as they thought fit and to apply the net proceeds towards satisfaction of the outstanding amounts under the loan agreements does not make any difference. Clause 7 conferred a right upon respondent Nos. 1 and 2 to enforce the securities for repayment of the outstanding amounts under the loan agreements. Clause 7 does not constitute a sale of the shares by the appellant to respondent Nos. 1 and 2. 17. Mr. Chinoy submitted that the appellant having repaid the loan is entitled to the return of the shares pledged under the loan agreements. He submitted that respondent No. 3 is also bound to return the said shares as it acquired no right in respect thereof. 18. That the said shares were not sold by virtue of the loan agreements does not, however, affect the rights of respondent No. 3. Firstly, respondent No. 3 was not a party to the loan agreements. Nor was it aware of the same. Respondent No. 3 was not bound by the terms and conditions thereof. Even assuming respondent No. 3 was aware of the loan agreements, it would make no difference. It may well make its case stronger. Clause 12 of the loan agreements expressly permitted the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld, in fact, enable parties such as the appellant and respondent Nos. 1 and 2 to deceive third parties. Take a simple illustration. Parties could enter into loan agreements under which the borrower furnishes security to the lender to secure the repayment of amounts allegedly advanced and also permits the lender to use the security as margin. The lender would then, in turn, furnish the said securities as margin to a third party in respect of its transactions with the third party. The borrower could then contend that it has repaid the amounts to the lender and demand the return of securities now lying with the third party as margin even though the lender has defaulted in its transactions with the third party. By this simple devise, the third party would be prejudiced, be exposed to a fraud. We hasten to add that even if the transaction is not fraudulent, the borrower could not, in such circumstances, demand return of the securities as it permitted the third party to alter its position to its detriment by virtue of permitting the lender unconditionally to create rights in respect of the security in favour of a third party. Such a view would make no commercial sense whatsoever. In thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that held by the pawnee. Whatever doubt may be indulged in, in the case of a mere factor, it has been decided in the case of a strict pledge, that if the pledgee transfers the same to his own creditor the latter may hold the pledge until the debt of the original owner is discharged. If, therefore, Manni Ram sub-pledged to the appellant the ornaments which the plaintiff had pledged to him, Manni Ram having only a limited interest in them the pledge was valid only to the extent of the interest which Manni Ram himself possessed in the ornament. In other words, Manni Ram could not give to the appellant rights superior to those of his own. The only right he had in the ornaments was to retain them as security for the satisfaction of the loan which he had himself advanced. If this right of his came to an end on the satisfaction of his debt, the appellant could not claim a higher right simply because he had advanced a larger amount to Manni Ram on the security of the ornaments. Once, therefore, the debt of Manni Ram was satisfied the plaintiff who was the original pawner became entitled to get back the or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o hold them on his behalf. 172. 'Pledge', 'pawnor' and 'pawnee' defined. -- The bailment of goods as security for payment of a debt or performance of a promise is called 'pledge'. The bailor is in this case called the 'pawnor'. The bailee is called 'pawnee'." ... 176. Pawnee's right where pawnor makes default.--If the pawnor makes default in payment of the debt, or performance, at the stipulated time, of the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale. If the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor. ... 178. Pledge by mercantile agent.- Where a mercantile agent is, with the consent of the o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 depository as a registered owner shall not have any voting rights or any other rights in respect of securities held by it. (3) The beneficial owner shall be entitled to all the rights and benefits and be subjected to all the liabilities in respect of his securities held by a depository. ... 12. Pledge or hypothecation of securities held in a depository.- (1) Subject to such regulations and bye-laws, as may be made in this behalf, a beneficial owner may with the previous approval of the depository create a pledge or hypothecation in respect of a security owned by him through a depository. (2) E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e in its records of the notice of pledge and forward the application to the depository. (3) The depository after confirmation from the pledgee that the securities are available for pledge with the pledgor 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. 25. The learned single Judge followed the judgment of another learned single Judge (S.A. Bobde, J. as His Lordship then was) in the case of Jry Investments Private Limited v. Deccan Leafine Services Ltd. & Anr. (2004) 121 Comp. Cases (Bom.). There is no dispute that the judgment supports the respondents case. Mr. Chinoy, howev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of the Depositories Act, 1996. It was contended that the procedure prescribed for pledging shares by the Depositories Act had not been complied with. The learned Judge upon construing the provisions of the Depositories Act held: 15. It must be remembered that the shares in question are demated shares, i.e. shares in the dematerialised form. In other words, the shares are not in the physical form of share certificates bearing a certificate number but are shares which are stored with or deposited as shares of the company in the dematerialised form without individual identity. They are in a fungible form. It is, therefore, clear that such shares cannot be pledged in accordance with the provisions of the Indian Contract Act, 1872, which requires delivery of the goods pledged.... 16. It would, however, be impossible to hold that such goods in a dematerialised form are capable of delivery that is by handing over de facto possession. Since such goods are invisible and intangible it would be impossible and in any case difficult to fix the fact of time and place of delivery. Even if it is possible according to some protocol, it does not seem t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pose of this judgment, we refrain from expressing any opinion regarding the finding of the leaned single Judge in paragraph 16 that it is impossible to hold that the goods in dematerialized form are capable of delivery that is by handing over de-facto possession. We will presume that it is possible to do so. We are, however, entirely in agreement with the learned Judge that the transfer of shares governed by the Depositories Act must be in accordance with the provisions of that Act and that the pledge of the shares can only be validly created in accordance with the provisions of that Act. We would however, like to add to the reasons furnished by the learned Judge. 26. A party is entitled to assume and proceed on the basis that a pledge, if any, would be created in the manner prescribed by the Depositories Act, 1996, and the Regulations made thereunder. In other words, if the shares have not been pledged in the manner prescribed by the Depositories Act and the regulations thereunder, a party would be entitled to and justified in presuming that there is no pledge and that the person dealing with the shares does so on his own behalf as the owner of the said shares or, in any event, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 31. Mr. Chinoy submitted that the sale and appropriation of the shares by the respondents was contrary to section 176 of the Contract Act as no notice of sale was given to the appellant. The sales, he submitted, are, therefore, void. 32. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndent Nos. 1 and 2 to replace the Flexituff shares with other approved shares. Respondent Nos. 1 and 2 agreed to replace the Flexituff shares or to sell the same in a phased manner before 31st October, 2013. They, however, failed to do so till 27th October, 2013. On 28th October, 2013 and 29th October, 2013, respondent No. 1 sold meagre quantities of Flexituff shares in the market. Respondent No. 3, contends that it therefore, had no option but to protect itself by exercising its rights by selling 42695 shares in the account of respondent No. 1. Respondent No. 3 was forced to sell the Flexituff shares for had respondent No. 3 not done so, with effect from 1st November, 2013, there would have been a huge margin shortfall and possible huge naked debit cash of eventual squaring up of the open position in the accounts of respondent Nos. 1 and 2 forcing respondent No. 3 to pay NSE itself. Respondent No. 3 would also have been liable to pay penalties to the NSE for short margin as per SEBI guidelines. Respondent No. 3 was, therefore, entitled to sell the margin shares pledged with it. 34. The appellant is not entitled to interim orders even on the facts of this case. We mentioned earlie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... against respondent Nos. 1 and 2 must succeed. 37. In the circumstances, the appeal is disposed of by the following order: (i) The appeal against respondent No. 3 is dismissed. (ii) The appeal against respondent Nos. 1 and 2 is disposed of by appointing the Court Receiver of this Court as Receiver of the said shares or any accretions thereto in the possession of respondent Nos. 1 and 2. Liberty to the parties to apply to the trial court in the event of there being a fluctuation or a likelihood of a fluctuation in the price of the said shares. Till the Court Receiver takes possession of the shares, respondent Nos. 1 and 2 are restrained from disposing of, alienating, encumbering and/or creating any third party rights and/or interest in any manner whatsoever in the said shares or any accretions thereto. Mr. Daver, the learned counsel appearing on behalf of the appellant seeks a stay of this order, insofar as it concerns respondent No. 3, for a period of eight weeks. He states that the value of the shares is twice the amount of the third respondent's claim against respondent Nos. 1 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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