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IN THE HIGH COURT OF JUDICATURE AT BOMBAY
G.S.Patel, Madhav J Jamdar, JJ.
World Crest Advisors LLP & Ors. – Appellants
Versus
Catalyst Trusteeship Limited & Ors. – Respondents
Interim Application (L) No. 19253 of 2022 In Commercial Appeal (L) No. 19252 of 2022 In Interim Application (L) No. 17730 of 2022 In Commercial Suit (L) No. 29569 of 2021 With Commercial Appeal (L) No. 19252 of 2022 In Interim Application (L) No. 17730 of 2022 In Commercial Suit (L) No. 29569 of 2021
Decided On : 23-06-2022
The Court held that the transfer of pledged shares by Catalyst to YBL was illegal and contrary to the security trustee agreements. Catalyst had unlawfully parted with custody of the pledged security. YBL had no right whatsoever to vote. The balance of convenience did not favour World Crest. No irreparable harm was likely to be caused to the Plaintiff/Applicant.
Fact of the Case:
World Crest Advisors, a Limited Liability Partnership ('World Crest'; 'WCA'), held equity in Defendant No. 3, Dish TV India Limited ('Dish TV'), a media company. The 1st Defendant/1st Respondent is Catalyst Trusteeship Limited ('Catalyst'). In this case, Catalyst is a security trustee and a pledgee of World Crest's shares in Dish TV. Respondent/Defendants Nos. 2 to 9 are borrowers from YBL. Defendants Nos. 4 to 9 and two other companies were and continue to be indebted to YBL. The indebtedness of these parties to YBL between November 2015 and April 2018 was in the amount of approximately Rs. 5270 crores. YBL advanced a loan to Defendants Nos.4 to 9 (and the two other entities; 'the Borrowers'). The repayment of this loan was secured by a pledge of shares held by World Crest in Dish TV. These shares are all in demat form. There are no physical shares. The shares are lodged with one of the depositories, viz., National Securities Depositories Ltd ('NSDL') or the Central Securities Depositories Ltd ('CSDL'). The pledge in question is created in favour of a security trustee, Catalyst. YBL is not a party to the pledge document, although it fits the definition of a 'lender' in the pledge document. The document or contract of pledge specifically permitted Catalyst as the pledgee to transfer the pledged shares to itself. This it could do only if there is an event of default as defined in the pledge deed. There was an event of default. Catalyst transferred the pledged Dish TV shares to itself. It got its name noted as the 'beneficial owner' as required by law (and Regulation 58 of the Securities and Exchange Board of India (Depositories and Participants) Regulations 1996. Catalyst then further transferred the shares to YBL or constituted YBL as its nominee; at any rate, it was YBL that exercised rights arising from those shares. One of the central questions that arises is whether, once Catalyst, as the pledgee, is shown as the beneficial owner of the shares, does Catalyst acquire the fullness of rights in those shares? Can it act for the purposes of, say, the Companies Act as a 'beneficial owner' and exercise voting rights over those shares? Can it further transfer those shares or constitute a nominee? Is this forbidden by the law of pledges as declared by PTC India?
Finding of the Court:
The Court found that the transfer of pledged shares by Catalyst to YBL was illegal and contrary to the security trustee agreements. Catalyst had unlawfully parted with custody of the pledged security. YBL had no right whatsoever to vote. The balance of convenience did not favour World Crest. No irreparable harm was likely to be caused to the Plaintiff/Applicant.
Issues: Whether the transfer of pledged shares by Catalyst to YBL was illegal and contrary to the security trustee agreements. Whether Catalyst had unlawfully parted with custody of the pledged security. Whether YBL had any right to vote. Whether the balance of convenience favoured World Crest. Whether irreparable harm was likely to be caused to the Plaintiff/Applicant.
Ratio Decidendi: The Court held that the transfer of pledged shares by Catalyst to YBL was illegal and contrary to the security trustee agreements. Catalyst had unlawfully parted with custody of the pledged security. YBL had no right whatsoever to vote. The balance of convenience did not favour World Crest. No irreparable harm was likely to be caused to the Plaintiff/Applicant. The Court relied on the following principles: * A pledgee cannot sell the pledged property to itself. * A pledgee has only 'special property in the pledge' but the general property remains with the pledgor. * A pledgee can validly pass full tile in the pledged goods, i.e. plenary ownership and general property rights to a third party on sale. * The pledgee cannot validly acquire these rights by a sale to itself. * Until that sale to a third party happens or takes place the pledgor has a right to redeem and this redemption means that the pledgor gets back the entirety of the general property rights in the pledged goods.
Final Decision: The Court dismissed the appeal and held that the impugned order was justified in the facts and circumstances of the case.
JUDGMENT
GS Patel J. - The original Plaintiff is in appeal against an order of 17th June 2022 of a learned Single Judge of this Court, AK Menon J, declining, in his discretion, to grant ad-interim relief in the Plaintiff's Interim Application (L) No. 17730 of 2022. The impugned order is a speaking order (notwithstanding that the Plaintiff assails it for insufficiency of reasons). Menon J's exercise of discretion in refusing relief is important in view of the decision of the Supreme Court in Wander Limited And Another v Antox India Private Limited., 1990 (Supp) SCC 727 In paragraph 14, the Supreme Court said:
''14. The appeals before the Division Bench were against the exercise of discretion by the Single Judge. In such appeals, the Appellate Court will not interfere with the exercise of discretion of the court of first instance and substitute its own discretion except where the discretion has been shown to have been exercised arbitrarily, or capriciously or perversely or where the court had ignored the settled principles of law regulating grant or refusal of interlocutory injunctions. An appeal against exercise of discretion is said to be an appeal on principle. Appellate Court will not reassess the material and seek to reach a conclusion different from the one reached by the court below if the one reached by the court was reasonably possible on the material. The appellate court would normally not be justified in interfering with the exercise of discretion under appeal solely on the ground that if it had considered the matter at the trial stage it would have come to a contrary conclusion. If the discretion has been exercised by the Trial Court reasonably and in a judicial manner the fact that the appellate court would have taken a different view may not justify interference with the trial court's exercise of discretion. After referring to these principles Gajendragadkar, J. in Printers (Mysore) Private Ltd. v. Pothan Joseph: (SCR 721) :
'... These principles are well established, but as has been observed by Viscount Simon in Charles Osention & Co. v. Johnston '...the law as to the reversal by a court of appeal of an order made by a judge below in the exercise of his discretion is well established, and any difficulty that arises is due only to the application of well settled principles in an individual case.''
The appellate judgment does not seem to defer to this principle.''
2. (Emphasis added)
3. Wander v Antox was reaffirmed by the Supreme Court in Mohd Mehtab Khan v Khushnuma Ibrahim Khan, (2013) 9 SCC 221. That was a case where a Division Bench of this Court granted interim relief in an appeal against an order of the learned Single Judge. In paragraph 20, the Supreme Court said:
20. In a situation where the learned trial court on a consideration of the respective cases of the parties and the documents laid before it was of the view that the entitlement of the plaintiffs to an order of interim mandatory injunction was in serious doubt, the appellate court could not have interfered with the exercise of discretion by the learned trial Judge unless such exercise was found to be palpably incorrect or untenable. The reasons that weighed with the learned trial Judge, as already noticed, according to us, do not indicate that the view taken is not a possible view. The appellate court, therefore, should not have substituted its views in the matter merely on the ground that in its opinion the facts of the case call for a different conclusion. Such an exercise is not the correct parameter for exercise of jurisdiction while hearing an appeal against a discretionary order. While we must not be understood to have said that the appellate court was wrong in its conclusions what is sought to be emphasised is that as long as the view of the trial court was a possible view the appellate court should not have interfered with the same following the virtually settled principles of law in this regard as laid down by this Court in Wander Ltd. v. Antox I
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