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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
S.J. VAZIFDAR & B.P. COLABAWALLA, JJ.
Pushpanjali Tie Up Pvt. Ltd. – Appellant
Versus
Renudevi Choudhary – Respondents
Appeal (LODG) No. 92 of 2014 in Notice of Motion (LODG) No. 2150 of 2013 in Suit No. 131 of 2014
Decided on : 12.6.2014
Pledge - Loan Agreements and Pledge of Shares - Indian Contract Act, 1872, Depositories Act, 1996, Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 - The loan agreements created a pledge of the shares referred to therein. The provisions of the Depositories Act, 1996 and in particular, section 12 thereof are mandatory and enacted with a view to giving notice of a pledge to third parties. The alleged pledge, therefore, cannot affect the rights of respondent No.3 who is a third party without notice of the pledge, rendering the pledge invalid qua the third party. The provisions of the Depositories Act and in particular section 12 thereof and the Regulations in particular Regulation 58 are salutary as they introduce transparency and certainty in the securities market. 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, for and on behalf of the owner of the shares with his knowledge and consent. The appellant failed to create the pledge in accordance with the provisions of the Depositories Act. Such a party cannot take advantage of its own wrong. If it is permitted to do so, it would enable the parties to defraud and even otherwise prejudice the interests of genuine, innocent third parties.
Fact of the Case:
The appellant entered into loan agreements with respondent Nos.1 and 2, pledging shares as security. Despite repaying the loans, respondent Nos.1 and 2 did not return the shares. The appellant filed a suit seeking the return of the shares and compensation for shares sold in excess of the claim of respondent Nos.1 and 2. The appellant also sought interim reliefs to prevent the sale of the shares by respondent Nos.1 and 2 and respondent No.3.
Finding of the Court:
The appeal against respondent Nos.1 and 2 is allowed by the appointment of a Court Receiver of the shares in their possession. The appeal against respondent No.3 is dismissed. The appellant is not entitled to interim reliefs.
Issues: The court considered whether the loan agreements created a valid pledge of the shares, and whether the appellant was entitled to interim reliefs to prevent the sale of the shares by respondent Nos.1 and 2 and respondent No.3.
Ratio Decidendi: The loan agreements created a pledge of the shares referred to therein. The provisions of the Depositories Act, 1996 and in particular, section 12 thereof are mandatory and enacted with a view to giving notice of a pledge to third parties. The alleged pledge, therefore, cannot affect the rights of respondent No.3 who is a third party without notice of the pledge, rendering the pledge invalid qua the third party. 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, for and on behalf of the owner of the shares with his knowledge and consent. The appellant failed to create the pledge in accordance with the provisions of the Depositories Act. Such a party cannot take advantage of its own wrong. If it is permitted to do so, it would enable the parties to defraud and even otherwise prejudice the interests of genuine, innocent third parties.
Final Decision: The appeal against respondent Nos.1 and 2 is allowed by the appointment of a Court Receiver of the shares in their possession. The appeal against respondent No.3 is dismissed. The appellant is not entitled to interim reliefs.
S.J. VAZIFDAR, J.
1. Admit. The appeal is, with the consent of the parties, heard finally.
2. This is an appeal against the order of the learned single Judge dismissing the appellant's Notice of Motion for interim reliefs.
3. The parties are arrayed as they were in the suit - the appellant is the plaintiff and respondent Nos.1 to 5 are defendant Nos.1 to 5. Respondent No.2 is the daughter of respondent No.1. Respondent No.3 is C.D. Equisearch Pvt. Ltd., a stock broker. Respondent Nos.1 and 2 have 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.1and 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, accordingly, contends that respondent Nos.1 and 2 as well as respondent No.3 have wrongly appropriated and retained the said shares. The appellant, therefore, inter-alia, claims a return of the said shares remaining in the possession of respondent Nos.1 to 3 and compensation for the shares sold in excess of the claim of respondent Nos.1 and 2 against the appellant.
(B) The appeal against respondent Nos.1 and 2 is allowed by the appointment of a Court Receiver of the shares in their possession.
(C) We have, however, dismissed the appeal so far as respondent No.3 is concerned on two grounds. Firstly, by clause 12 of the loan agreements, the appellant permitted respondent Nos.1 and 2 to use the shares as margin with respondent No.3. Respondent Nos.1 and 2 have not repaid the amounts due by them to respondent No.3. Clause 12 did not limit the authority conferred upon respondent Nos.1 and 2 to place the shares as margin. It is not open, therefore, to extinguish the security created in favour of respondent No.3 by way of margin merely because the appellant has paid its dues to respondent Nos.1 and 2. Secondly, the pledge was admittedly not created in accordance with the provisions of the Depositories Act, 1996 and in particular, section 12 thereof. We have held that the provisions of section 12 are mandatory and enacted with a view to giving notice of a pledge to third parties. The alleged pledge, therefore, cannot affect the rights of respondent No.3 who is a third party without notice of the pledge, rending the pledge invalid qua the third party.
5. The appellant/plaintiff filed the suit for (i) an order directing respondent Nos.1 and 2 to pay it a sum of Rs.50,30,000/- received by them over and above the amount outstanding under loan agreements dated 8th March, 2013 and 19th March, 2013 being the shares sold in excess of the amount payable by the appellant to respondent Nos.1 and 2; (ii) an order directing respondent Nos.1 and 2 to transfer into its DP account, the balance shares lying in the various accounts of respondent Nos.1 and 2 which were handed over as collateral security in pursuance of the said agreements; (iii) an order directing respondent Nos.1 and 2 to return the additional documents of security in respect of the loans granted by respondent Nos.1 and 2 to the appellant und
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