STCI Finance Ltd v. Cedar Infonet Pvt Ltd & Ors.

Delhi High Court · 08 May 2018 · 2018:DHC:3002

Rajiv Sahai Endlaw

CS(COMM) No.247/2017

2018:DHC:3002

civil appeal_allowed Significant

AI Summary

The Delhi High Court held that invocation of pledge under SEBI Regulations constitutes transfer of beneficial ownership equivalent to sale under Section 176 of the Contract Act, entitling defendants leave to defend a suit for recovery where the plaintiff did not sell pledged dematerialized shares at prevailing market value.

Full Text

CS(COMM) No.247/2017 HIGH COURT OF DELHI
Date of Decision: 8th May, 2018

CS(COMM) 247/2017 & IA No.10782/2017 (u/O XXXVII R-
3(5) CPC)
STCI FINANCE LTD ..... Plaintiff
Through: Mr. Raj Shekhar Rao with Mr. Abhishek Agarwal, Mr. Abhinav Mukhi & Mr. Sameer Dawar, Advs.

VERSUS

CEDAR INFONET PVT LTD & ORS ..... Defendants
Through: Mr. Ashim Vachher, Mr. Pawash Piyush, Mr. Vaibhav Dabas & Mr. Sumeet, Advs. for
D-1 to 3.
Ms. Ruhi Chopra with Mr. Shashank & Ms. Rukhmini, Advs. for D-4.

CORAM:

HON'BLE MR. JUSTICE RAJIV SAHAI ENDLAW

JUDGMENT

1. Application of the three defendants, viz. i) Cedar Infonet Pvt. Ltd., ii) Lt. Col. Hardeep Singh Bedi (Retd.), and, iii) Maninder Bedi, for leave to defend this suit for recovery of Rs.80,82,38,057.51 with pendente lite and future interest filed under Order XXXVII of the CPC is for consideration.

2. The counsel for the plaintiff and the counsel for the defendants no.1 to 3 were heard on 6th March, 2018 and part order also dictated on that date and further hearing was adjourned to 8th March, 2018. On 2018:DHC:3002 8th March, 2018, the counsels were further heard but the remaining order not dictated as it was remembered that judgment on similar legal issue, in applications for interim relief in CS(OS) No. 2281/2006 titled Tendril Financial Services Pvt. Ltd. & Ors. Vs. Namedi Leasing & Finance Ltd. & Ors. had been reserved for 8th May, 2017.

3. The defendant no.4 HDFC Ltd. is admittedly a proforma defendant and no relief has been claimed against it.

4. The facts, insofar as required to be set out for the purpose of this judgment, considering the course the hearing has taken, are i) that the defendant no.1 had availed financial assistance from the plaintiff and pledged with the plaintiff the shares held by the defendants no.1&2 in Tulip Telecom Ltd; the defendants no.2&3 had also stood as personal guarantors for repayment of the loan / financial assistance availed by the defendant no.1 from the plaintiff; ii) that the shares which were pledged were held by the defendants no.1&2 in dematerialized form and the pledge was created in accordance with the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 and Regulation 58 whereof is as under:

“58. Manner of creating pledge or hypothecation. (1) If a beneficial owner intends to create a pledge on a security owned by him, he shall make an application to the depository through the participant who has his account in respect of such securities.

(2) The participant after satisfaction that the securities are available for pledge shall make a note 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 pledgees. (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 with the 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 plegded 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) 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.” (Emphasis added) iii) that it is not in dispute that the plaintiff, in or about 2011-12 (the dates are disputed), in accordance with Clause (8) of Regulation 58 aforesaid invoked the pledge and the depository viz. the National Securities Depositories Ltd. (NSDL) transferred the said shares from depository participant of the defendants no.1&2 viz. Karvy Stock Broking Limited to the depository participant of the plaintiff viz. HDFC Ltd; and, iv) that the plea of the defendants in their application for leave to defend inter alia is that on the date when the plaintiff invoked the pledge as aforesaid, the market value of the pledged shares was Rs.1,57,13,07,650/- and the amount claimed by the plaintiff in this suit is much less than the value of the shares, pledge qua which was invoked as aforesaid.

5. Per contra, the plea of the plaintiff is that though it had invoked the pledge but the same did not amount to sale of the shares within the meaning of Section 176 of the Contract Act, 1872. Section 176 of the Contract Act, 1872 is as under: ―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 pledge 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.‖ The argument of the counsel for the plaintiff is that since the plaintiff did not realize any money and the defendants also, after 2011-12, several times renewed the financial facility agreements and offered additional security, the said defence is not available to the defendants. It is further contended that though the defendants are pleading the value of the pledged shares on the date of invocation aforesaid to be much more than the amount due from the defendants to the plaintiff but the defendants at no time demanded the excess amount from the plaintiff and have not filed a counter-claim now even.

6. Though the other questions which arise, as to what was the price of the shares on the date of invocation, whether the defendants by their conduct are disentitled from taking the plea as has been taken etc., cannot be decided at the stage of leave to defend and leave to defend will have to be granted to determine the said questions but if the counsel for the plaintiff is correct in his contention that the plaintiff, under Section 176 supra was entitled to, notwithstanding the invocation, continue to hold on to the pledged shares and not required to effect the sale thereof in realization of its dues, all the other questions aforesaid would not arise for determination and leave to defend would be declined to the defendants.

7. I may record that the counsel for the plaintiff has at the outset informed that besides the financial facility subject matter of this suit, meted out by the plaintiff to the defendants, another financial facility was also meted out by the plaintiff to a sister concern of the defendant no.1 and to which financial facility also the defendants no.2&3 had stood guarantors and the claims of the plaintiff under the said transaction were subject matter of an arbitration and which claims of the plaintiff have been declined and objections under Section 34 of the Arbitration & Conciliation Act, 1996 of the plaintiff are pending as OMP No.340/2017 in this Court. Though the option of granting leave to defend and clubbing the hearing of the legal question along with OMP No.340/2017 was open but since the arbitral award does not bind me, the hearing proceeded and after the hearing has been held for considerable time, it is not deemed appropriate to merely grant leave to defend without deciding the legal question.

8. The counsel for the plaintiff has referred to Lallan Prasad Vs. Rahmat Ali AIR 1967 SC 1322 to contend that the plaintiff, as the pawnee, was not entitled to purchase the shares itself and thus the invocation of the pledge under Clause (8) of Regulation 58 supra does not amount to sale. It is yet further contended that else it is not open to the defendants as pawnors to contend that the plaintiff ought to have sold the pledged shares at an appropriate time and fetch the price thereof rather than keeping the shares till the same were left of no value whatsoever.

9. In this context, it is also contended that the plaintiff admittedly did not give any notice to the defendants of invocation and which would have been given had there been a sale within the meaning of Section 176(1) of the Contract Act. It is further contended that the procedure prescribed in Regulation 58 supra envisages notice to the pawnor / pledgor.

10. I enquired from the counsel for the plaintiff, whether not the purpose of the reasonable notice prescribed in Section 176 supra is to merely ensure that optimum price is received on such sale and whether not even if the notice were not to be given, the sale would remain valid subject to the decision whether the price fetched on sale was optimum and if found to be less, set off of the optimum price has to be given to the pawnor.

11. The counsel for the plaintiff responded that it has been held in The Official Assignee of Bombay Vs. Madholal Sindhu ILR 1948 Bom 1 that sale under Section 176, without reasonable notice is valid and the only remedy of the pawnor is to sue the pawnee for damages.

12. Thus the legal question for adjudication is, whether the invocation of the pledge under Clause (8) of Regulation 58 supra is sale of the pledged shares by the plaintiff as pawnor to itself. While the counsel for the plaintiff contends that it is not and therefore the entitlement of the plaintiff to its dues remains, the counsel for the defendants contends that it amounts to a sale and the defendants are entitled to offset from the amounts due to the plaintiff the price prevalent of the shares on the date of invocation aforesaid.

13. The counsel for the plaintiff has contended that the Depositories Act, 1996 and the Regulations supra are not intended to change the law relating to pledge as contained in Section 176 of the Contract Act. It was contended that the law cannot be different for shares in physical form and shares in de-materialized form and the law of pledge cannot be different for shares in fungible form than with respect to any other kind of goods capable of being pledged.

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14. The counsel for the plaintiff also referred to Section 28 of the Depositories Act which provides that the provisions thereof shall be in addition to and not in derogation of any other law for the time being in force relating to the holding and transfer of securities and on the basis thereof contended that the provisions of the Contract Act relating to pledges, including of shares, and the judgements pronounced thereon would be applicable to pledge of shares in dematerialized form also. Attention was also invited to Section 31 titled ‗Repeal and Saving‘ of the Depositories Act and it was contended that had the intention of the Legislature while enacting the Depositories Act been to repeal Section 176 of the Contract Act which generally lays down the law relating to bailments and pledges, it would have been provided so under the said Section 31.

15. The counsel for the plaintiff also drew attention to Clauses 3.[1] and 3.[2] of the Share Pledge Agreement, at pages 133 to 155 of Volume II of Part II(A) file, as under: ―3.[1] On the occurrence of an Event of Default, the Lender shall be entitled, at its sole discretion: 3.1.[1] to invoke the pledge on the Collateral and / or transfer or register in its name or in the name of any of its nominees or any other person, as it shall deem fit, all or any of the Collateral at the cost of the Pledgors; 3.1.[2] to take all such actions including vote on all or any part of the Collateral (whether or not transferred in the name of the Lender, its nominee or any other person) and otherwise act with respect thereto as though it were the owner thereof; and 3.1.[3] to sell the Collateral (or any part thereof) in exercise of the power conferred under Section 3.[5] hereof (Power of Sale), without the intervention of the court and without any consent of or further notice to the Pledgor at public or private sale or on any securities exchange for cash, upon credit or for future delivery or transfer or procure registration in the name of the Lender, or any of its nominees at the cost of the Pledgors, as the Lender may deem commercially reasonable and apply the proceeds thereof towards payment of the Obligations, provided that the Lender shall not be obliged to make anysaleofanyCollateralifitdetermines not to do so. 3.[2] Consequence of Invocation: 3.2.[1] Irrespective of anything contained in this Agreement, on invocation of pledge, the shares comprised in the Collateral will not become and will not be deemed to have become the property of the Lender, even though transferred or credited to the account of the Lender with the Depository. The Lender will not be required to acquire any such shares in their own individual account or on account of any funds or client accounts that are managed by the Lender. 3.2.[2] The economic risk attached to the said shares comprised in the Collateral (including due to variations in market price) will continue to be to the account of the Pledgors until such time as they are actually sold to a third person. 3.2.[3] Any appreciation and / or depreciation in the price of the said shares between the time of invocation and the sale of such shares will continue to be to the account of the Pledgors.‖ (Emphasis added)

16. It was argued that invocation of pledge by the plaintiff and the resultant transfer of shares from the account of the depository participant of the defendants no. 1 and 2 to the account of the depository participant of the plaintiff did not result in sale by the plaintiff of the shares in satisfaction of the financial assistance rendered by the plaintiff to the defendant no. 1 and in accordance with the Agreement aforesaid between the parties, the economic risk attached to the shares including due to variations in market price continued to be on account of defendants no. 1 and 2 and since the shares continue to be held by the plaintiff and are incapable of fetching any price today, the plaintiff is entitled to recover the amount due from the defendants. Reliance in this regard was also placed on plethora of documents of the date after the invocation of the pledge as aforesaid by the plaintiff and wherein the defendants admitted their liability to the plaintiff. It was argued that the parties also thus, at the contemporaneous time, understood the contract and the law as is argued by the plaintiff today.

17. Per contra, the counsel for the defendants has referred to Section 10 of the Depositories Act which is as under:

“10. 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.‖

and has contended that sub-Section (1) thereof commences with a nonobstante clause and which inter alia means that insofar as the law relating to plege with respect to shares is concerned, the same is codified in the Depositories Act and the Regulations framed thereunder and anything to the contrary contained in the Contract Act or in any other law would be of no avail. Reliance in this regard was placed on JRY Investments Pvt. Ltd. Vs. Deccan Leafine Services Ltd. 2003 SCC OnLine Bom 1134.

18. It was further contended: (i) that the plaintiff is mixing up the Agreement subject matter of the present suit, and the Agreement between the plaintiff and Sukhmani Technologies Pvt. Ltd.; the defendants, along with their application for leave to defend have filed a copy of the Agreement, subject matter of the other financial facility granted by the plaintiff to sister concern namely Sukhmani Technologies Pvt. Ltd., of defendant no.1 and at pages 133 to 155 of Volume II of Part II(A) file filed copy of the said agreement; (ii) that the counsel for the plaintiff has drawn attention to Clauses 3.1.[1] and 3.1.[2] of the Agreement with Sukhmani Technologies Pvt. Ltd.; (iii) the agreement subject matter of this suit is different and is at pages 50 to 73 of Part-III file and does not contain any clauses as reported above; (iv) that the defendants, in para 18 of the affidavit of the defendant no. 2 accompanying the application for leave to defend, have given particulars of invocation by the plaintiff of pledge qua 1,41,59,000 shares out of total 2,77,75,000 shares, commencing from 24th November, 2011 till 3rd October, 2012; the plaintiff, by 9th February, 2012 had invoked the pledge of shares of the value of Rs. 1,05,17,92,500; till that date, the Agreement with Sukhmani Technologies Pvt. Ltd. did not even exist; (v) that there is no Share Pledge Agreement with respect to the transaction subject matter of the present suit; (vi) that the dicta in JRY Investments Pvt. Ltd supra has been approved of by the Division Bench of the Bombay High Court in Pushpanjali Tie Up Pvt. Ltd. Vs. Renudevi Choudhary AIR 2015 Bom 1; and, (vii) that the plaintiff did not even give any intimation to the defendants of the invocation or of the transfer of shares to the account of its depository participant and the defendants were unaware thereof.

19. The counsel for the defendants also referred to SICPA India Pvt. Ltd. Vs. Brushman (India) Ltd. MANU/DE/2424/2013, where on similar facts, a petition for winding up was dismissed relegating the parties to recovery proceedings on the same aspect. It is thus argued that on same parity, leave to defend should also be granted.

20. The counsels, on enquiry stated that there was no other judgment till then dealing with the issue.

21. It was however informed that National Consumer Disputes Redressal Commission (NCDRC) and Securities Appellate Tribunal (SAT) have dealt with the question in Deepali Sharma Vs. Federal Bank Ltd. 2015 LawSuit (CO) 2024 and Liquid Holdings Pvt. Ltd. Vs. Securities & Exchange Board of India MANU/SB/0017/2011.

22. The counsel for the plaintiff fairly stated that the view taken by both the Tribunals tends to be against the proposition canvassed by him. It was also stated that the decision of the NCDRC is pending consideration in the Supreme Court.

23. I have since pronounced judgment in Tendril Financial Services Pvt. Ltd supra reported as 2018 SCC Online Del 8142, on the applications for interim relief therein and have held:- ―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 including those in a dematerialized form; iv) the transactions in such shares are directly governed by the Depositories Act which contemplates the existence of a depository; 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 which begins with a non-obstante clause and therefore ownership and transfer of shares governed by the Act must be in accordance with the provisions of the Depositories Act; v) Section 12 of the Depositories Act provides for pledge or hypothecation of the security and Section 20 thereof renders anyone who acts in contravention of the Act or any regulations or bye-laws, punishable with imprisonment; vi) SEBI in exercise of the powers under Section 25 of the Depositories Act has made the Regulations aforesaid which require the depository to maintain records of all approvals, notices, entries and cancellation of pledge; vii) the Depositories Act and the Regulations aforesaid contain a whole and self-contained procedure for the creation of pledges; viii) in any case, since it is not possible to physically deliver demated shares and therefore pledge them in accordance with the Contract Act, it must be held that a pledge of such shares can only be validly created in accordance with the provisions of the Depositories Act; ix) though in the facts of the case, pledge was not created by the plaintiff in the suit and the title in the shares was conveyed to the defendant no.1 in the suit but even if it were to be assumed that the plaintiff did not convey title in the shares to defendant no.1, still, it could not be said that the other defendants who purchased the shares from the defendant no.1 would not get any title in the share; and, x) the shares stood in the name of defendant no.1 as beneficial owner and the circumstances of the shares standing in the name of defendant No.1 as beneficial owner of the shares in the records of the depository participant was clearly attributable to the plaintiff and the plaintiff was estopped from asserting its title against bona fide purchasers for value without notice of any defect in the title.

C. No merit is found in the contention of the senior counsel for the plaintiffs of aforesaid 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 provisions; if a pledge could be created in any other manner, there was no reason for the legislature to have provided for a particular manner alone for creating a pledge of shares in a dematerialized form; c) the Contract Act does not prescribe the manner in which a pledge is to be created; it does not stipulate 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; thus even if owing to Section 28 of the Depositories Act, it were to be held that the provisions of the Contract Act are not excluded, provision in the Depositories Act and the Regulations thereunder of the manner of creation of pledge in dematerialized shares is not in derogation of the provisions of the Contract Act but in addition thereto; d) even assuming that Section 176 of the Contract Act applies to pledges created under the Depositories Act and the pledgee fails to exercise its right in accordance with the provisions of Section 176 of the Contract Act, it would make no difference as far as the purchaser of the dematerialized shares from the pledgee is concerned; and, e) if injunctions are granted in such cases, it would adversely affect the functioning and sentiments of the securities market – it would derail the entire system of maintaining the margin by utilizing securities.

D. I have no reason to take a view different from that taken by the High Court of Bombay in JRY Investments Private Limited supra and in Pushpanjali Tie Up Pvt. Ltd. supra and respectfully concur with the same and am for the same reasons unable to find the plaintiffs entitled to any interim relief as they have enjoyed for the last 12 years.

E. I may however add, that a notice under Section 176 of

Contract Act is in derogation of Regulation 58 supra. While Section 176 entitles the pledgee/pawnee to, on default by the pledgor/pawnor, sell the thing pledged, ―on giving the pawnor reasonable notice of the sale‖, Regulation 58(8) entitles the pledgee to, ―subject to the provisions of the pledge document‖, ―invoke the pledge‖ and mandates the depository to ―on such invocation‖ i.e. by the pledgee, ―register the pledgee as beneficial owner of such securities‖ i.e. the securities pledged and further mandates the depository to ―amend its records accordingly‖. There is no place for a prior notice under Section 176, in the scheme of Regulation 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 thing i.e. transfer title and possession thereof to purchaser, Regulation 58 entitles the pledgee to, on default on pledgor, invoke the pledge by intimating to the depository and mandates the depository to in its records record the pledgee in place of the pledgor as the beneficial owner of pledged shares, thereby transferring title as beneficial owner, from the pledgor to pledgee. The only condition imposed on invocation of pledge by the pledgee, under Regulation 58 (8) is of the same being required to be ―subject to the provisions of the pledge documents‖ i.e. of creation of pledge in the manner provided in Regulation 58(1) to 58(6) - of which the participant of the pledgee and the depository have been made aware and with which they are thereby required to comply with. It is not the case of plaintiffs that there was any condition of prior notice in the pledge documents. Though it is not the plea that the Letters of Pledge and Arbitral Award were intimated to the participant or the depository but even they do not provide for prior notice. On the contrary, they provide otherwise. The distinction drawn in the Letters of Pledge aforequoted between invocation of pledge, whereupon the beneficial ownership in pledged shares, under Regulation 58, was to stand transferred from that of pledgor to that of pledgee, and sale of said shares by pledgee, to realize its dues, is only for the purpose of determining the amount which was to be offset from the debt to secure which the pledge was made. However such agreement cannot be interpreted as the pledgor continuing to have title in the shares. The only title in dematerialised shares, under the Depositories Act, is as beneficial owner in the records of the participant and the depository and which beneficial ownership changes on invocation of pledge in terms of Regulation 58. Even otherwise, a plea of a pledgor, of the pledgee, though after notice under Section 176, having sold the pledged thing for less than optimum price cannot be a ground for invalidating the sale. The mere fact that the parties, in terms of Arbitral Award reversed the earlier invocation also cannot change the said position. Such agreement is also not found to be inconsistent with Regulation 58. The quantum of consideration does not affect the transfer of title as beneficial owner.

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 were to be held to be required to be given, is for the benefit of the pledgor and has no element of public law or public interest. A provision, even in law, for personal benefit, if not in public interest, can always be waived by that person. The plaintiffs, in the Letters of Pledge and in the Arbitral Award, are found to have waived such notice.

K. I am thus unable to interpret Section 176 of the Contract Act as entitling the plaintiffs to seek restraint against dealing with shares or return of the shares, as the plaintiffs have sought in this suit, even if the notice under Section 176 of the Contract Act was held to be required to be given and having not been given.

N. The counsel for the plaintiffs, in written submissions, has relied upon Neikram Dobay supra and Ramdeyal Prasad supra to contend that sale to oneself is void.

O. However in Neikram Dobay supra also, after holding the sale by the pledgee to himself to be bad, it was held that liability of such a pledgee would also be for damages only; similarly, in Ramdeyal Prasad supra, it was held that such an Act of the pledgee does not put an end to the pledge so as to entitle the pledgor to recover the pledged goods without payment of the amount thereby secured and the pledgor is bound by the re-sales duly effected by the pledgee to third persons.

P. Reference in this context may also be made of Dhani Ram &

Sons Vs. The Frontier Bank Ltd. ILR [XV-(1)] 1961 Punj 79. It was held, relying on Neikram Dobay supra, that the sale of the pledged things by the pledgee to itself, though unauthorised, cannot be said to be void. Finding it to be not the pledgor‘s case that the value credited to its account is below the market value, it was held that no interim injunction could be granted. Similarly in the present case there is no whisper of the prevalent price on date of sale or of damage if any caused to plaintiffs.‖

24. Regulation 58(8) supra of course is ―subject to the provisions of the pledged document…‖. Though on a reading of Clauses 3.1.[1] and 3.1.[2] reproduced above it appeared that the same will prevail and it being not in dispute that the plaintiff has not sold the shares and its debt remains, can now sue therefor, but it was pointed out that the agreement to which attention was drawn, was not of the suit transaction. The counsel for plaintiff attempted to show that the Agreement subject matter of suit transaction though different, means the same but is not in as many words. It is perhaps for this reason only, that the counsel for the plaintiff also drew attention to the other agreement.

25. I am at this stage unable to distinguish on facts, the present case from Tendril Financial Services Pvt. Ltd. supra. Once the liability of defendant no.1 is disputed at this stage, the liability of defendants no.2 and 3 also cannot be said to be without any plausible defence. It has thus but to be held that the defence of the defendants, that the plaintiff as pledgee/pawnee, on invocation of pledge and on transfer of the pledged shares from the account of the depository participant of the defendants to the account of the depository participant of the plaintiff was entitled to sell the shares at the then prevalent value thereof and to appropriate the sale proceeds in satisfaction of the amounts due to it from the defendants, is such which within the meaning of IDBI Trusteeship Services Ltd. Vs. Hubtown Ltd. 2017 (1) SCC 568 entitles the defendants to leave to defend. Opportunity has to be given to the defendants to prove that the plaintiff, in spite of having invoked the pledge and being entitled to sell the pledged shares to satisfy the debt owed by the defendants, having not done so, is not entitled to recover the debt or the entire debt. The same constitutes a substantial defence, which if proved is likely to succeed and the defendants are thus entitled to unconditional leave to defend.

26. Accordingly, IA No. 10782/2017 of the defendants for leave to defend is allowed and the defendants are granted leave to defend.

27. IA No. 10782/2017 is disposed of.

28. I may however state that the aforesaid will not disentitle the plaintiff from, after the completion of pleadings, admission / denial of documents and other preliminaries, contending that no trial is necessary or applying under Order XIIIA of the CPC as applicable to commercial suits and the observations aforesaid are only for the purposes of consideration of leave to defend and will not bind the parties at future stage of the suit.

29. The defendants to file written statement within prescribed time.

30. Replication within four weeks thereafter.

31. The parties to file affidavits of admission/denial of each other‘s documents before the next date of hearing.

32. List for framing of issues, if any, on 27th September, 2018.

RAJIV SAHAI ENDLAW, J. MAY 08, 2018 ‗gsr‘/SRwt..

STCI Finance Ltd v. Cedar Infonet Pvt Ltd & Ors.

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