[2022] 138 taxmann.

com 248 (SC)/[2022] 172 SCL 723 (SC)[12-05-2022]

IBC : Where appellant/pledgee on occurrence of default by corporate debtor had

exercised its rights under 'Pledge Deed' by registering dematerialised shares in its
favour as beneficial owner, while reserving its right to sell shares, same did not have
effect of sale of shares by appellant as pledge had not been discharged or satisfied
either in full or in part and, therefore, appellant was a financial creditor of corporate
debtor

■■■

[2022] 138 taxmann.com 248 (SC)

SUPREME COURT OF INDIA
PTC India Financial Services Ltd.
v.
Venkateswarlu Kari
M.R. SHAH AND SANJIV KHANNA, JJ.
CIVIL APPEAL NO. 5443 OF 2019†
MAY
 12,
2022 

Section 5(8) of the Insolvency and Bankruptcy Code, 2016, read with sections 176 and 177 of
the Indian Contract Act, 1872
- Corporate Insolvency Resolution Process - Financial debt - Loan
borrowed by corporate debtor from appellant-financial creditor was secured under 'Pledge
Deed' of shares owned by MHPL company - Since corporate debtor committed default,
appellant filed section 7 application against corporate debtor - In meantime, corporate debtor
filed application under section 10 for initiating CIRP against itself - As said application was
admitted, appellant was allowed to withdraw its application filed under section 7 with liberty to
file its claim for 'financial debt' - Thereafter, appellant filed its claim before IRP - NCLT rejected
same on ground that appellant had exercised its rights under Pledge Deed while reserving its
right to sell shares and Depository participant had accorded appellant, status of 'beneficial
owner' of pledged shares and, thus, its claim for financial debt could not be taken into
consideration - Said order was upheld by NCLAT - Whether registration of pawn i.e.
dematerialised shares in favour of appellant as 'beneficial owner' did not have effect of sale of
shares by pawnee i.e. appellant, pledge had not been discharged or satisfied either in full or in
part - Held, yes - Whether thus, exercise of right on part of appellant and consequent action on
part of 'depository' recording appellant as 'beneficial owner' was not 'actual sale' - Held, yes -
Whether thus, appellant had rightly made a claim as financial creditor of corporate debtor and,
therefore, impugned order passed by NCLAT upholding order of NCLT was to be set aside -
Held, yes [Paras 12.6, 12.7 and 13.1]
FACTS
 
■   The appellant-PIFSL was registered with the Reserve Bank of India (RBI) as a Non-Banking Finance
Company (NBFC) and classified as an Infrastructure Finance Company (IFC). The principal business of
PIFSL was to invest in power and energy sector projects in India.
■   PIFSL, by way of a bridge loan agreement had advanced a loan of Rs. 125 crores to company NNPIL. As per
clause 3.1.1 of the bridge loan agreement, the loan was required to be secured. In accordance with sub-clause
(6) of clause 3.1.1, R2 Company i.e. MHPL executed a Pledge Deed in favour of PIFSL, thereby, pledging
31,80,678 shares, equivalent to 26 per cent of the shares of NEVPL. NNPIL and NEVPL were subsidiaries of
MHPL.
■   The corporate debtor filed a petition invoking section 10 before the National Company Law Tribunal
initiating the corporate insolvency resolution process. The petition was admitted and RP was appointed.
■   PIFSL issued a notice under the Pledge Deed apprising MHPL on the defaults on the part of corporate debtor
and that if the debt due was not discharged within seven days, PIFSL would exercise the rights in terms of
the Pledge Deed.
■   As the debt remained unpaid, PIFSL wrote to the depository participant invoking its rights in terms of clause
6.1 of the Pledge Deed. Acting on the request, the depository participant had accorded PIFSL the status of
'beneficial owner' of pledged shares of NEVPL.
■   Subsequently, PIFSL wrote to MHPL informing that due to continued defaults in payment on the part of the
corporate debtor, it had exercised the right under clause 6.1, while reserving its right to sell the shares under
clause 6.2 of the Pledge Deed read with section 176 of the Contract Act.
■   Later on PIFSL filed an application before the Adjudicating Authority under section 7 as a financial creditor
to whom Rs. 167 crore was due and payable by the corporate debtor.
■   The NCLT allowed PIFSL to withdraw the application with liberty to file proof of financial claim before the
RP in Form C.
■   MHPL made a claim before the RP, inter alia, stating that PIFSL having been conferred status of 'beneficial
owner', MHPL no longer had any title or right over said shares. Accordingly, MHPL had stepped into the
shoes of PIFSL as a creditor of the corporate debtor to the extent of the value of 31,80,678 shares of NEVPL
now owned by PIFSL.
■   Contrarily, PIFSL submitted Form C with a financial claim of Rs. 167 crore being the amount due and
payable to PIFSL by the corporate debtor. The value of 31,80,678 pledged shares was not accounted for or
reduced.
■   The RP informed that MHPL's claim could not be crystalized as it was not possible to ascertain the value of
31,80,678 shares 'transferred' to PIFSL. Similarly, PIFSL's claim could not be crystalized due to the
settlement in whole/part of its claim and the need to arrive at the valuation at the time of 'transfer' of shares to
PIFSL.
■   PIFSL and MHPL preferred separate applications before the NCLT against the rejections of their claims.
■   By a common order, the NCLT disposed of the applications filed by PIFSL and MHPL, accepting the
MHPL's claim by primarily relying on the Depositories Act and regulation 58 of the SEBI (Depositories and
Participants) Regulations, 1996. The NCLT agreed with MHPL that PIFSL having exercised its right under
the Pledge Deed to 'transfer' 31,80,678 pledged shares, MHPL's shareholding in NEVPL got reduced by
31,80,678 shares. Therefore, MHPL was a financial creditor of the corporate debtor to the extent of the value
of 31,80,678 shares.
■   PIFSL challenged the orders before the NCLAT, but the appeals were dismissed. The NCLAT has held that
PIFSL had exercised its rights under clause 6.1 of the Pledge Deed and consequently, the pledged shares
stood transferred in the name of PIFSL. The fact that PIFSL had not thereafter sold the shares under clause
6.2 of the pledge deed would not matter. As PIFSL had become the 100 per cent owner of the pledged shares,
it could realize its dues in whole or part by sale and transfer of the shares according to the law. Once PIFSL
has exercised right to become the owner of the shares, PIFSL could not take advantage of section 176 of the
Contract Act to 'reclaim' the debt. Section 176 of the Contract Act could not be taken into consideration by
the RP for collating the financial claim of PIFSL under section 18.
■   On appeal to the Supreme Court:
HELD
 
Effect of the Depositories Act, 1996 and the Securities and Exchange Board of India (Depositories and
Participants) Regulations, 1996 on the pledge under the Contract Act, 1872

■   As per the 1996 Regulations, the pledgor/pawnor is not entitled to sell the pledged/pawned securities. The
special rights of the pledgee/pawnee in the pawn remain intact under the Depositories Act and the 1996
Regulations. However, the right to sell dematerialized securities is conferred and given to the 'beneficial
owner', who exercises this right through the participants. Consequently, if a pawnee wants to exercise his
right to sell dematerialized security it is mandatory for the pawnee first to get himself recorded as a
'beneficial owner' in the 'depository's records. Without the said exercise, the pawnee cannot exercise its rights
to sell the pledge and retrieve the monies due by taking recourse to its rights under section 176 of the
Contract Act. Right to sell the pledge after reasonable notice is one of the options, albeit, both under the
common law and under the Contract Act, the pawnee has the choice even after issue of notice for sale while
retaining possession of the pledged goods. Similarly, the pawnor under the Contract Act and the common law
has the right to redeem the pledged goods till 'actual sale'. Sale by the pawnee to self does not defeat the right
of redemption of the pawnor. It may amount to conversion in law. Other provisions of the Contract Act
enumerated in Chapter IX of the Contract Act may well apply. [Para 10.1]
■   The Depositories Act and the 1996 Regulations do not state or impliedly reflect that sale of the pledged
securities by the pawnee to self, which amounts to conversion and does not affect the rights of the pawnor
under section 177, are no longer applicable. Doing so would tantamount to reading and adding words to
section 12 and regulation 58 to defy sections 176 and 177 of the Contract Act. Law of pledge is dynamic and
as observed above must adapt itself in the context of the current commercial environment. While
interpretating the law relating to commercial matters and commerce the Court must consider the real-world
impact and consequences. Therefore, the expression 'actual sale' in section 176 read in the context of the
Depositories Act and the 1996 Regulations have to be given a meaning. The expression 'actual sale' used in
section 177 should be read as 'the sale by the pawnee to a third person made in accordance with the
Depositories Act and applicable by-laws and rules'. It also means and requires compliance with section 176
of the Contract Act. Mere exercise of the right by the pawnee to record himself as the 'beneficial owner',
which is a necessary pre-condition before the pawnee can exercise his right to sell, is not 'actual sale' and
would not affect the rights of the pawnor of redemption under section 177 of the Contract Act. Every transfer
or sale is not 'actual sale' for the purpose of section 177 of the Contract Act. To equate 'sale' with 'actual sale'
would negate the legislative intent. [Para 10.3]
■   Exercise of right on the part of the pawnee and consequent action on the part of the 'depository' recording the
pawnee as the 'beneficial owner' is not 'actual sale'. The pawnor's right to redemption under section 177 of the
Contract Act continues and can be exercised even after the pawnee has been registered and has acquired the
status of 'beneficial owner'. The right of redemption would cease on the 'actual sale', that is, when the
'beneficial owner' sells the dematerialised securities to a third person. Once the 'actual sale' has been affected
by the pawnee, the pawnor forfeits his right under section 177 of the Contract Act to ask for redemption of
the pawned goods. [Para 10.4]
■   Beyond the additional need to comply with sections 10 and 12 of the Depositories Act and regulation 58 of
the 1996 Regulations in specific terms, there is no disharmony between these provisions and sections 176 and
177 of the Contract Act. They can be read harmoniously without nullifying or altering their effect, subject to
the exception in case of sale of listed securities to third parties. They apply independently without hindering
and obstructing their application as the field and subject matter of sections 176 and 177 of the Contract Act
differ from the subject matter and the object of sections 7, 10 and 12 of the Depositories Act and sub-
regulation (8) to regulation 58 of the 1996 Regulations. [Para 10.6]
■   Regulation 58(8) entitles the pawnee to record himself as a 'beneficial owner' in place of the pawnor. This
does not result in an 'actual sale'. The pawnee does not receive any money from such registration which he
 can adjust against the debt due. The pledge creates special rights including the right to sell the pawn to a third
party and adjust the sale proceeds towards the debt in terms of section 176 of the Contract Act. The reasoning
that prior notice under section 176 of the Contract Act would interfere with transparency and certainty in the
securities market and render fatal blow to the Depositories Act and the 1996 Regulations is farfetched as it
fails to notice that the right of the pawnee is to realise money on sale of the security. The objective of the
pledge is not to purchase the security. Purchase by self, is conversion and does not extinguish the pledge or
right of the pawnor to redeem the pledge. Difficulties and disputes regarding price, valuation, right to
redemption etc. could invariably arise. There would also be difficulties in case the dematerialised securities
are not traded as in the present case. If the case pleaded by MHPL is to be accepted, the entire dues of PIFSL
stand paid without in fact a single penny coming to the coffer of PIFSL. Whether or not PIFSL will be able to
find a willing buyer and sell the shares is unknown given the fact that the shares are unlisted and MHPL
continues to be the holding company of NEVPL. [Para 11.6]
■   As per clause 6.1, of pledge deed on receipt of the notice of the occurrence of 'event of default' by the
pledgor/pawnor, the pledgee/pawnee has the right to have the pledged shares transferred in its name or its
nominees. Under clause 6.2, the pawnee or its nominee may, without further authority and prejudice to their
other rights under the law, but on giving five days' notice to the pawnor, sell or otherwise dispose of any or
all of the pledged shares in such manner and for such consideration as it in its sole discretion deems fit. The
net proceeds of such sale or disposition are then applied in the manner prescribed under clause 11 of the
Pledge Deed. Clause 14.1 clarifies that the Pledge Deed shall terminate only upon the repayment in full of the
outstanding debt to the lender. [Para 12.2]
■   Contract of pledge envisages that PIFSL is entitled to get itself recorded as 'beneficial owner' without
forfeiting its right in terms of clause 6.2 to sell the shares. The contention of MHPL that clauses 6.1 and 6.2
are in the alternative and once PIFSL has exercised option under clause 6.1, the option under clause 6.2 is
closed must be rejected as absolutely untannable. There is no such condition in the two clauses. As noticed
above, PIFSL could not have exercised the right under clause 6.2 unless the pledge shares were registered in
its name as 'beneficial owner'. This step was necessary to enable PIFSL to exercise its right and enforce the
sale of pledge shares. Whether or not it would be successful in selling the pledge shares is unknown and
uncertain even today. The amount of money that would be received is also unknown and uncertain [Para
12.3]
■   Clauses 6.1 and 6.2, therefore, draw a clear distinction between a mere transfer of the pledged shares in the
name of the pawnee or its nominee as a 'beneficial owner' and the 'actual sale' of the pledged shares. The
right to sell is without prejudice to any other right under the applicable law. Thus, there are two stages before
the pledge can be enforced by a sale. At the first stage, the pawnee must give notice to the pawnor under
clause 6.1 to exercise the rights to have the pledge shares transferred in its name or its nominees. This does
not result in the discharge of the debt equal to the value of the shares. The discharge of debt in whole or part
occurs when the pawnee exercises his right to sell the shares after giving five days' notice to the pawnor in
accordance with clause 6.2 and sells the pawn. Upon the actual sale, the pawnee can apply the net proceeds
of the sale or disposition in accordance with clause 11 of the Pledge Deed. [Para 12.4]
■   PIFSL had informed MHPL in terms of clause 6.1 that there has been an occurrence of default, which has
continued and, therefore, they, in exercise of its right under clause 6.1 of the pledge deed, have applied for
transfer of the pledged shares in its name. Consequently, all the rights in the pledged shares, including but not
limited to the right of attending general body meetings, voting rights, and rights to receive dividends and
other distributions, now vests with them as per clause 2.3(A)(ii)(b) of the pledge deed. This intimation to
MHPL is without prejudice to any rights or remedies PIFSL has in terms of the pledge deed or security
documents executed in pursuance of the bridge loan agreement. PIFSL expressly reserved its right to transfer
and sell pawned shares for value providing five days' notice as required under clause 6.2 of the pledge deed
and section 176 of the Contract Act. Therefore it is held that on becoming the 'beneficial owner' in the
records of the 'depository', the pawnee had complied with the procedural requirement of regulation 58(8) to
enforce the right to sell the shares. Thereafter, such a sale should be made according to sections 176 and 177
of the Contract Act. Violation of the said provisions, if made by PIFSL, would have its consequences as per
the law. Pawn has not been sold and there is no violation of the Contract Act or for that matter the
 Depositories Act and the 1996 Regulations. PIFSL has not overlooked its obligations under sections 176 and
177 of the Contract Act by relying upon sub-regulation (8) to regulation 58, which has an entirely different
object and purpose. Recording change in the register of the 'depository', whereby PIFSL as the pawnee has
become the 'beneficial owner', is only to enable the pawnee to sell and transfer the shares in accordance with
the Depositories Act and the 1996 Regulations. The object and purpose of sub-regulation (8) to regulation 58
is not to nullify the obligation of MHPL i.e., the pawnor, and PIFSL i.e., the pawnee, under the Contract Act
but to enable PIFSL to exercise its rights under section 176. It also follows that MHPL is entitled to redeem
the pledge before the sale to a third party is made. [Para 12.6]
■   In view of the aforesaid findings, it has to be held that registration of the pawn, that is the dematerialised
shares, in favour of PIFSL as the 'beneficial owner' does not have the effect of sale of shares by the pawnee.
The pledge has not been discharged or satisfied either in full or in part. PIFSL is not required to account for
any sale proceeds which are to be applied to the debt on the 'actual sale'. The two options available to PIFSL
as the pawnee under section 176 of the Contract Act remain and are not exhausted. [Para 12.7]
Conclusion

■   For the aforesaid reasons, the present appeal must be allowed and the impugned order passed by the NCLAT
upholding the orders of the NCLT is set aside. It is held that MHPL is not a secured creditor of the corporate
debtor, namely NNPIL, to the extent of the value of the 31,80,678 shares. PIFSL has rightly made a claim as
financial creditor of the corporate debtor without accounting for the value of 31,80,678 shares of NEVPL in
its claim petition. Insolvency proceedings against the corporate debtor, namely NNPIL, will proceed
accordingly. [Para 13.1]
CASE REVIEW
 
JRY Investments (P.) Ltd. v. Deccan Leafine Services Ltd. [2004] 56 SCL 339 (Bom.) (para 11.1) Overruled.
PTC India v. Veenkateswarlu [2019] 108 taxmann.com 173 (NCLAT - New Delhi) (para 13.2) reversed.
CASES REFERRED TO
 
CWT v.
Mahadeo Jalan & Mahabir Prasad Jalan [1973] 3 SCC 157 (para 2.15), Bharat Hari Singhania v. CWT
[1994] 73 Taxman 3/207 ITR 1 (SC) (para 2.15), Md. Sultan v. Firm of Rampratap Kannyalal AIR 1964 AP 201
(para 4.1), Sri Raja Kakarlapudi Venkata Sudarsana Sundara Narasayamma Garu v. Andhra Bank Ltd. AIR
1960 AP 273 (para 4.1), Simla Banking and Industrial Co. Ltd. v. Pritams AIR 1960 Punj 42 (para 4.2), Arjun
Prasad v. Central Bank of India 1954 SCC OnLine Pat 138 (para 4.3), Lallan Prasad v. Rahmat Ali AIR 1967
SC 1322 (para 5.1), Morvi Mercantile Bank Ltd. v. Union of India AIR 1965 SC 1954 (para 5.1), Bank of Bihar v.
State of Bihar [1972] 3 SCC 196 (para 5.3), Maharashtra State Co-operative Bank Ltd. v. Assistant Provident
Fund Commissioner [2009] 10 SCC 123 (para 5.4), Karnataka Pawn Brokers' Association v. State of Karnataka
[1998] 7 SCC 707 (para 5.4), Standard Chartered Bank v. Custodian [2000] 25 SCL 221 (SC) (para 6.1), Seth
Motilal Hirabhai v. Bai Mani 1924 SCC OnLine PC 81 (para 6.2), M.R. Dhawan v. Madan Mohan AIR 1969
Del. 313 (para 6.2), Balkrishan Gupta v. Swadeshi Polytex Ltd. [1985] 2 SCC 167 (para 7.1), F. Nanak Chand
Ramkishan Das of Hodel v. Lal Chand Ganeshi Lal 1958 SCC OnLine Punj 6 (para 7.2), Bank of Maharashtra v.
Racmann Auto (P.) Ltd. AIR 1991 Del 278 (para 7.2), Rani Leasing & Finance Ltd. v. Sanjay Khemani 2015
SCC OnLine Cal 450 (para 7.2), Hulas Kunwar v. Allahabad Bank Ltd. AIR 1958 Cal 644 (para 7.3), Haridas
Mundra v. National and Grind-Lays Bank Ltd. AIR 1963 Cal 132 (para 7.4), Kunja Behari v. Bhargava
Commercial Bank AIR 1918 All 363 (para 7.4), Vimal Chandra Grover v Bank of India [2000] 5 SCC 122 (para
7.5), Official Assignee v. Madholal Sindhu AIR 1947 Bom 217 (para 7.6), Wilson v. Mcintosh [1894] A.C. P. 129
(para 7.8), Corporation of the City of Tornoto v. John Russel [1908] AC 493 (para 7.8), Selwyn v. Grafit 38 Ch.
D.P. 273 (para 7.8), Griffiths v. The Earl of Dudley 9 Q.B.D. P. 357 (para 7.8), Vellayan Chettiar v. Government
of the Province of Madras I.L.R. 1948 Mad. 214 (para 7.8), Raja Chetty v. Jagannadhadas Govindas 1949 II
M.L.J. 694 (para 7.8), Soho Square Syndicate Ltd. v. Poland & Co. [1940] 1 Ch. 638 (para 7.9), Krishna
Bahadur v. Purna Theatre [2004] 8 SCC 229 (para 7.10), Co-operative Hindusthan Bank Ltd. v. Surendra Nath
Dey 1931 SCC OnLine Cal 224 (para 7.10), Park Street Properties (P.) Ltd. v. Dipak Kumar Singh [2016] 9 SCC
268 (para 7.10), Nabha Investment (P.) Ltd. v. Harmishan Dass Lukhmi Dass 1995 SCC OnLine Del 239 (para
7.11), Neikram Dobay v. Bank of Bengal ILR 1892 19 Cal 322 (para 8.1), Ramdeyal Prasad v. Sayed Hasan AIR
1944 Pat 135 (para 8.2), S.L. Ramaswamy Chetty v. M.S.A.P.L. Palaniappa Chettiar 1929 SCC Online Mad. 62
(para 8.3), Dhani Ram and Sons v. Frontier Bank Ltd. AIR 1962 P&H 321 (para 8.4), Reserve Bank of India v.
Peerless General Finance & Investment Co. Ltd. [1987] 1 SCC 424 (para 9.1), Vasudev Ramachandra Shelat v.
Pranlal Jayanand Thakar [1974] 2 SCC 323 (para 9.1), Kannambra Nayar Veetil Valia Ammukutti Neithiar's Son
Kunhunni Elaya Nayar Avargal v. P.N. Krishna Pattar AIR 1943 Mad 74 (para 9.6), JRY Investments (P.) Ltd. v.
Deccan Leafine Services Ltd. [2004] 56 SCL 339 (Bom.) (para 11.1), Pushpanjali Tie Up (P.) Ltd. v. Renudevi
Choudhary 2014 SCC OnLine Bom 3661 (para 11.2), Firm Thakur Das Marakhan Lal v. Mathura Prasad AIR
1958 All. 66 (para 11.2), Donald v. Suckling [1866] L.R. 1 Q.B. 585 (para 11.3), Tendril Financial Services (P.)
Ltd. v. Namedi Leasing & Finance Ltd. 2018 SCC OnLine Del 8142 (para 11.4), GTL Ltd. v. IFCI Ltd. 2011 SCC
OnLine Del 3628 (para 11.7) and Liquid Holdings (P.) Ltd. v. SEBI 2011 SCC Online SAT 40 (para 11.8).
Sidharth Sethi, AOR and Ms. Pallavi Kumar, Adv. for the Appellant. G. Ramakrishna Prasad and John
Mathew, AORs for the Respondent.
JUDGMENT
 
Sanjiv Khanna, J.- The primary legal issue which arises for consideration in this appeal is whether the
Depositories Act, 1996 read with the Regulation 58 of the Securities and Exchange Board of India (Depositories
and Participants) Regulations, 19961 has the legal effect of overwriting the provisions relating to the contracts of
pledge under the Indian Contract Act, 18722 and the common law as applicable in India. To facilitate analysis,
this judgment has been divided into sections as follows:

A.   Factual background of the case

B.   Relevant provisions of the Contract Act
C.   Analysis of case laws under the Contract Act:

(i)   What is pledge and the legal difference between ownership, pledge and mortgage
(ii)   Pawnee has a special and not general right in the pledged property
(iii)   Accretion on pawned goods
(iv)   Notice of sale by pawnor and his right to sale
(v)   Sale of the pledged goods by the pawnee to self

D.   Effect and Purpose of the Depositories Act, 1996 and the Securities and Exchange Board of India
(Depositories and Participants) Regulation, 1996.
E.   Effect of the Depositories Act, 1996 and the Securities and Exchange Board of India (Depositories and
Participants) Regulations, 1996 on the pledge under the Contract Act, 1872
F.   Four decisions
G.   Analysis of facts and application of law of pledge to the facts of this case
H.   Conclusion
A. Factual background of the case

2.1 The appellant - PTC India Financial Services Limited,3 is an existing company under the Companies Act,
2013. It is a wholly-owned subsidiary of PTC India Limited, which in 1999 was promoted by four public sector
undertakings, namely, NTPC Limited, Power Finance Corporation Limited, NHPC Limited, and Power Grid
Corporation of India Limited. PIFSL is registered with the Reserve Bank of India4 as a Non-Banking Finance
Company5 and classified as an Infrastructure Finance Company.6 The principal business of PIFSL is to invest in
power and energy sector projects in India.
2.2 PIFSL, by way of a Bridge Loan Agreement dated 10th March 2014, had advanced a loan of Rs. 125 crores
to NSL Nagapatnam Power and Infratech Limited.7 As per clause 3.1.1 of the Bridge Loan Agreement, the loan
is required to be secured. In accordance with sub-clause (6) of clause 3.1.1, on 10th March 2014 thereof, the
second respondent, Mandava Holdings Private Limited,8 executed a Pledge Deed in favour of PIFSL, thereby,
pledging 31,80,678 shares, equivalent to 26% of the shares of NSL Energy Ventures Private Limited.9 NNPIL
and NEVPL are subsidiaries of MHPL.
2.3 On 17th November 2017, the Corporate Debtor filed a petition invoking section 10 of the Insolvency and
Bankruptcy Code, 201610 before the National Company Law Tribunal, Hyderabad,11 initiating the corporate
insolvency resolution process. The petition was admitted under section 10(4) of the IBC on 18th January 2018.
Mr. Venkateswarlu Kari, respondent No. 1, was appointed as the Interim Resolution Professional.12
2.4 On 28th December 2017, PIFSL issued a notice under the Pledge Deed apprising MHPL on the defaults on
the part of Corporate Debtor and that if the debt due was not discharged within seven days, PIFSL would
exercise the rights in terms of the Pledge Deed.
2.5 On 16th January 2018, as the debt remained unpaid, PIFSL wrote to the Depository Participant invoking its
rights in terms of clause 6.1 of the Pledge Deed. Acting on the request, the Depository Participant has accorded
PIFSL the status of 'beneficial owner' of 31,80,678 pledged shares of NEVPL.
2.6 On 23rd January 2018, PIFSL wrote to MHPL informing that due to continued defaults in payment on the
part of the Corporate Debtor, it had exercised the right under clause 6.1, while reserving its right to sell the shares
under clause 6.2 of the Pledge Deed read with section 176 of the Contract Act.
2.7 On 17th January 2018, PIFSL filed an application before the Adjudicating Authority under section 7 of the
IBC as a financial creditor to whom Rs. 167,29,23,507/- was due and payable by the Corporate Debtor.
2.8 On 30th January 2018, the Adjudicating Authority allowed PIFSL to withdraw the application with liberty to
file proof of financial claim before the IRP in Form C.
2.9 On 6th February 2018, MHPL made a claim before the IRP, inter alia, stating that PIFSL having been
conferred status of 'beneficial owner', MHPL no longer has any title or right over 31,80,678 shares. Accordingly,
MHPL had stepped into the shoes of PIFSL as a creditor of the Corporate Debtor to the extent of the value of
31,80,678 shares of NEVPL now owned by PIFSL.
2.10 Contrarily, on 10th February 2018, PIFSL submitted Form C with a financial claim of Rs. 169,19,17,637/-,
being the amount due and payable to PIFSL by the Corporate Debtor as of 18th January 2018, the date on which
the Adjudicating Authority admitted the section 10 application of the Corporate Debtor. The value of 31,80,678
pledged shares was not accounted for or reduced.
2.11 On 19th February 2018, the IRP, by two separate emails, informed that MHPL's claim could not be
crystalized as it was not possible to ascertain the value of 31,80,678 shares 'transferred' to PIFSL. Similarly,
PIFSL's claim cannot be crystalized due to the settlement in whole/part of its claim and the need to arrive at the
valuation at the time of 'transfer' of shares to PIFSL.
2.12 PIFSL and MHPL preferred separate applications before the Adjudicatory Authority against the rejections
of their claims.
2.13 By a common order dated 6th July 2018, the Adjudicating Authority disposed of the applications filed by
PIFSL and MHPL, accepting the MHPL's claim by primarily relying on the Depositories Act and regulation 58
of the 1996 Regulations. The Adjudicating Authority agreed with MHPL that PIFSL having exercised its right
under the Pledge Deed to 'transfer' 31,80,678 pledged shares, MHPL's shareholding in NEVPL got reduced by
31,80,678 shares. Therefore, MHPL is a financial creditor of the Corporate Debtor to the extent of the value of
31,80,678 shares. Further, 16th January 2018, the date on which the pledge was invoked by PIFSL, is the crucial
date for determining the extent to which PIFSL and MHPL are the financial creditors of the Corporate Debtor.
The IRP was directed to appoint an independent valuer to assess the fair market value of 31,80,678 shares of
NEVPL as on 16th January 2018.

2.14 PIFSL challenged the orders before the National Company Law Appellate Tribunal, New Delhi,13 but the
appeals were dismissed vide the impugned judgment dated 20th June 2019. The Appellate Authority has held that
PIFSL had exercised its rights under clause 6.1 of the Pledge Deed on 16th January 2018 and consequently, the
pledged shares stood transferred in the name of PIFSL. The fact that PIFSL had not thereafter sold the shares
under clause 6.2 of the pledge deed would not matter. As PIFSL had become the 100% owner of the pledged
shares, it could realize its dues in whole or part by sale and transfer of the shares according to the law. Once
PIFSL has exercised right to become the owner of the shares, PIFSL cannot take advantage of section 176 of the
Contract Act to 'reclaim' the debt. Section 176 of the Contract Act cannot be taken into consideration by the IRP
for collating the financial claim of PIFSL under section 18 of the IBC.
2.15 Other aspects which require to be noted are: (a) as per PIFSL, the principal and interest amount due to them
by the Corporate Debtor as of 23rd December 2021 are Rs. 3,76,13,03,389/-; (b) the shares of NEVPL are
unlisted, and there are no open market transactions, and (c) the value of the pledged shares is disputed. On 13th
August 2018, the IRP has submitted a valuation report of an independent valuer who has valued the pledged
shares at Rs.179 crores as of 16th January 2018. MHPL relies on the 2013 valuation report of Axis Capital and
the annual report of MHPL for the financial year 2012-13. As per the annual report relied on by MHPL, shares of
NEVPL as of 31st March 2013 were valued at Rs.1229.66 crores. Accordingly, MHPL claims that the fair value
of each of the 1,22,33,378 shares of NEVPL (100% of the total equity shares - all held by MHPL) was Rs.
1,005.17p per share. Therefore, the total value of the 31,80,678 pledged shares was equivalent to Rs. 319 crores
at the time of the creation of the pledge. On the other hand, PIFSL claims that the actual value per share of
NEVPL, as calculated on 31st March 2016, is only Rs. 58.97. Thus, the total value of pledged shares comes to
only Rs. 18,75,64,582/-.14
B. Relevant provisions of the Contract Act
3.1 Chapter IX of the Contract Act deals with 'Contracts of Bailment'. Sections 148 to 171 lay down the general
law pertaining to bailments, while sections 172 to 179 delineate specific provisions concerning pledges, which
are a subset of bailments.
3.2 As per section 151, a bailee is bound to take as much care of the goods bailed to him as a man of ordinary
prudence would, under similar circumstances, take of his goods of the same bulk, quality and value as the goods
bailed. Section 152 states that a bailee, in the absence of a special contract, will not be liable for any loss,
destruction, or deterioration of the bailed goods if he acts in conformity with section 151. As per section 153, a
contract for bailment is voidable at the option of the bailor if the bailee does any act with regard to the goods
bailed, inconsistent with the conditions of the bailment. Section 154 lays down that the bailee shall be liable for
damage arising from unauthorized use of the bailed goods. The bailee, with the consent of the bailor, can mix the
goods bailed with his own goods, in which event, the bailor and the bailee will have interest in proportion to their
respective shares in the mixture.15 However, if the bailee, without the bailor's consent, mixes the bailed goods
with his own, and the goods can be separated or divided, the property in the goods remain with the parties
respectively.16 Further, the bailee is bound to bear the expense of separation or division of the goods, as well as
any damage arising from the mixture. Section 157 provides that when the goods are so mixed without the bailor's
consent and cannot be separated, the bailor is liable to be compensated, and the bailee is liable for the loss. Under
section 160, the bailee has to return or deliver, as per the bailor's directions, the goods, without demand, as soon
as the time for which they were bailed has expired or the purpose for which they were bailed has been
accomplished. Section 161 states that if there is a default by the bailee and the goods are not returned, delivered,
or tendered at the proper time, the bailee is responsible to the bailor for any loss, destruction, or deterioration of
the goods from that time. As per section 163, in the absence of any contract to the contrary, the bailee is bound to
deliver to the bailor, or in accordance with his directions, any increase or profit that may accrue from the goods
bailed.
3.3 Section 172 of the Contract Act is reproduced as under:
 "172. 'Pledge', 'pawnor' and 'pawnee' defined.—The bailment of goods as security for payment of a debt or
the performance of the promise, is called a 'pledge'. The bailor is in this case called the 'pawnor'. The bailee
is called 'pawnee'".
As per section 172, creating a valid pledge requires delivery of the possession of goods by the pawnor to the
pawnee by way of security upon the promise of repayment of a debt or the performance of a promise, thereby,
creating an estate that vests with the pawnee.
3.4 Sections 176, 177 and 179 of the Contract Act read thus:
"176. Pawnee's right where pawnor makes default.—If the pawnor makes default in payment of the debt, or
performance; at the stipulated time or 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 the sale are greater than the amount so due, the pawnee shall pay over the surplus to the
pawnor.
** ** **

177. Defaulting pawnor's right to redeem.—If a time is stipulated for the payment of the debt, or
performance of the promise, for which the pledge is made, and the pawnor makes default in payment of the
debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any
subsequent time before the actual sale of them, but he must, in that case, pay, in addition, any expenses
which have arisen from his default.
** ** **

179. Pledge where pawnor has only limited interest.—Where a person pledges goods in which he has only a
limited interest, the pledge is valid to the extent of that interest."
As per section 176, when a pawnor makes a default in payment of debt or performance of a promise, the pawnee
may bring a suit against the pawnor upon such debt or promise and retain the goods pledged as collateral
security, or he may sell the goods pledged upon giving the pawnor reasonable notice of the sale. If the pledged
goods are sold, and 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 amount to the pawnee. If the proceeds of such sale exceed the amount
due, the pawnee will be liable to pay the surplus to the pawnor.
Section 177 gives statutory right to the pawnor, who is at default in payment of the debt or performance of the
promise, to redeem the pledged goods at any time before 'actual sale' by the pawnee. However, in such cases, the
pawnor must pay in addition the expenses that have arisen from his default.
Section 179 states that the limited interest that a pawnor has in the goods can be validly pledged.
Having understood the broad statutory contours of pledge, we would now examine the relevant opinio juris on
the law of pledge. Legal jurisprudence relating to law of pledge is required to be examined in some detail for
determining the issue before us.
C. Analysis of law of pledge and case laws relating to pledge
(i) What is pledge and the legal difference between ownership, pledge and mortgage.
4.1
Md. Sultan v. Firm of Rampratap Kannyalal AIR 1964 AP 201, observes that a contract of pledge should
satisfy the following conditions:

(i)   there should be a bailment of goods as defined in section 148 of the Contract Act, that is, delivery of
goods;
(ii)   the bailment must be by way of security; and
 (iii)   the security must be for payment of debt or performance of a promise.
The decisions in Md. Sultan (supra) and Sri Raja Kakarlapudi Venkata Sudarsana Sundara Narasayamma Garu
v. Andhra Bank Ltd. AIR 1960 AP 273 observe that hypothecation and mortgage of movables, though not
specifically mentioned in the Contract Act, are valid and enforceable in India as the Contract Act is not an
exhaustive law on the subject. Such transactions beyond the statutory framework are given effect to and
interpreted by the courts according to the principles of justice, equity, and good conscience. There is no standard
format and incidents in a contract of pledge can be different. A term mutually agreed by the parties is valid as
long as it is not contrary to or inconsistent with any provision of the Contract Act. In the context of the present
case, the aforesaid principles relating to the law of pledge reflecting flexibility are important in the milieu of a
transitional and commercial environment wherein significant changes have occurred across the capital market
with inter alia advent of institutional investors, regulatory mechanisms, and the new insolvency regime, albeit
the fundamentals of the law of pledge, except when permitted or required to be eschewed, should be applied.
This is the principle of interpretation which we have applied to answer the conundrum.
4.2 These two decisions highlight distinction between a pledge, which creates an estate or a right that vests with
the pawnee, and a wider and general right of an owner; as well as mortgage or hypothecation.17 An owner has:
(a) right of possession; (b) right of enjoyment; and (c) the right of disposition. A pawnee does not have the right
of ownership, but has limited right to retain possession till debt is paid or promise is performed. A pawnee's right
of disposition is limited to disposition of the pledge rights only, and the right to sell after reasonable notice. Even
when the pawnor makes default in payment of debt or performance of the promise, the pawnor has the right to
redeem the pawn till 'actual sale' of the pawn by the pawnee. However, the pawnor in addition to the debt, must
pay to the pawnee expenses that have arisen because of the default.
4.3 Where money is advanced by way of the loan upon the security of goods, the transaction may take the form
of a mortgage or pledge. The difference between a pledge and a mortgage of movable property is that while
under a pledge there is only a bailment, whereas under a mortgage there is transfer of the right of the property by
way of security. The distinction is aptly brought out in the following passage in Halsbury's Laws of England:18
"A mortgage of personal chattels is essentially different from a pledge or pawn under which money is
advanced upon the security of chattels delivered into the possession of the lender, such delivery of
possession being an essential element of the transaction. A mortgage conveys the whole legal interest in the
chattels; a pledge or pawn conveys only a special property, leaving the general property in the pledger or
pawnor; the pledgee or pawnee never has the absolute ownership of the goods, but has a special property in
them coupled with a power of selling and transferring them to a purchaser on default of payment at the
stipulated time, if any, or at a reasonable time after demand and non-payment if no time for payment is
agreed upon."
Therefore, unlike a pledgee, a mortgagee acquires general rights in the things mortgaged subject to the right of
redemption of a mortgagor. In other words, the legal estate in the goods mortgaged passes on to the mortgagee. In
comparison, a pawnee has only the special right in the goods pledged, namely, the right of possession as security
and in case of default, he can bring a suit against the pawnor as well as sell the goods after giving a reasonable
notice. [Para 20, Sri Raja Kakarklhpudi Venkata Sudarsana Sundara Narasayamma Garu (supra)] Whether a
particular transaction is a mortgage of moveable property or a pledge can only be determined by reference to the
intention of the parties, and other surrounding circumstances. [Arjun Prasad v. Central Bank of India Ltd. 1954
SCC OnLine Pat 138.]
(ii) Pawnee has a special and not general right in the pledged property.
5.1 This Court, in Lallan Prasad v. Rahmat Ali AIR 1967 SC 1322 observes that under the common law, a pledge
is a bailment of personal property as security for payment of debt or engagement. The two essential ingredients
of pledge are (i) the pawn i.e., the property pledged should be actually or constructively delivered to the
pawnee19 [See also Morvi Mercantile Bank Ltd. v. Union of India AIR 1965 SC 1954 and (ii) a pawnee has only
special property in the pledge but the general property therein remains in the pawnor and wholly reverts to him
on discharge of the debt. The right to property vests in the pawnee only as far as is necessary to secure the debt.
A pawn or pledge is an intermediate between a simple lien and a mortgage, which wholly passes the property. A
pawnor has an absolute right to redeem the pledged property upon tendering the amount advanced but that right
would be lost if the pawnee in the meantime has lawfully sold the pledged property. If the pawnee sells, he must
appropriate the proceeds of the sale towards the pawnor's debt, for the sale proceeds are the pawnor's monies to
be so applied and the pawnee must pay the pawnor any surplus after satisfying the debt.
5.2 Accordingly, the judgment refers to section 172, which states that a pledge is a contract for bailment of goods
as security for payment of debt or performance of promise. Section 17320 entitles the pawnee to retain the goods
pledged for the payment of the debt. Section 176, elucidating on the rights of the pawnee, states that in case of
default by the pawnor, the pawnee has: (a) a right to sue upon the debt and to retain the goods as collateral
security, and (b) sell the goods after reasonable notice of the intended sale to the pawnor. Once the pawnee, by
virtue of his right under section 176, sells the goods, the right of the pawnor to redeem them is extinguished. But,
thereupon, the pawnee is bound to apply the sale proceeds towards satisfaction of the debt and pay the surplus, if
any, to the pawnor. So long as the sale does not occur, the pawnor is entitled to redeem the goods on payment of
the debt. Even when the pawnee files a suit for recovery of the debt, though he is entitled to retain the goods, the
pawnee must return the goods on payment. Another significant observation in this judgment is that if the pawnee
sues on the debt denying the pledge, and it is found that he was given possession of the goods pledged and had
retained the same, the pawnor has the right to redeem the pledged goods on payment of the debt. If the pawnee is
not in a position to redeliver the goods, the pawnee cannot benefit from the repayment of the debt and the goods
pledged. Where the value of the pawned goods is less than the debt and the pawnee denies the pledge or is
otherwise not in a position to return the pawned goods, the pawnee has to give credit for the value of the goods
and would be entitled only to recover the balance.
5.3 In Bank of Bihar v. State of Bihar [1972] 3 SCC 196, relying on the distinction between the right of
ownership and the right of the pawnee under a pledge, this Court held that section 173 of the Contract Act
provides that the pawnee may retain the goods pledged only for payment of the debt, performance of the promise
and also for interest on the debt, etc. The pawnee has a special property or interest in the thing pledged while the
general property therein continues in the owner. The special interest exists in the pawnee so that the pawnee can
compel payment of the debt or sell the goods when the right to do so arises. This special interest is distinguished
from mere right of detention that the holder of lien possesses, since the pawnee may assign or pledge his special
property or interest in the goods. Relying on Halsbury's Law of England, 3rd Edition, Vol. 29, page 222, it is
observed that on the bankruptcy of the pawnor, the pawnee is a secured creditor with respect to the things
pledged before the date of receiving the order and without notice of a prior available act of bankruptcy.
5.4 In Maharashtra State Co-operative Bank Ltd. v. Assistant Provident Fund Commissioner [2009] 10 SCC 123,
a three Judges' Bench of this Court agreed with the ratio in Bank of Bihar (supra) and Lallan Prasad (supra) and
proceeded to hold that in a contract of pledge, the property pledged should be actually or constructively delivered
to the pawnee. The pawnee has only a 'special property' in the pledge, but the general property remains with the
pawnor. The special property right in the pawned goods is higher than the mere right of detention of goods but
lesser than the general property right. This means that the pawnee has the right to transfer the general property
rights in the pawned goods if the pledge remains unredeemed. Reference in this regard was made to the decision
of this Court in Karnataka Pawn Brokers' Association v. State of Karnataka [1998] 7 SCC 707,wherein it is
observed that the pawnee has a conditional general property interest in the pledge, subject to the condition that he
can pass on that general property if the pledge is brought to sale in accordance with the law.
(iii) Accretion on pawned goods
6.1 In Standard Chartered Bank v. Custodian [2000] 25 SCL 221, a Division Bench of this Court interpreting
provisions of sections 148, 160 and 172 of the Contract Act held that when the goods are bailed for securing
payment of a debt or performance of a promise, the bailor will get the right for the return of the said goods when
the purpose is accomplished, namely, the debt is returned, or the promise is performed. Referring to section 163
of the Contract Act, it is observed that in the absence of a contract to the contrary, the bailee is bound to deliver
to the bailor, or according to his directions, any increase of profit that may have accrued from the bailed goods.
An example in this section states that if a calf is born to the cow, then the bailee is bound to deliver the calf as
well as the cow to the bailor. In other words, the pledge extends to accretions and additions, and therefore, when
the pawnee returns the pledged goods, the accretions and additions must be returned to the pawnor. It also
follows that the pawnee's right to retain and sell the pledged goods stretches to the right to retain and sell any
increase and accumulations to the pledged goods.
6.2 Accordingly, in Seth Motilal Hirabhai v. Bai Mani 1924 SCC OnLine PC 81, where the shares were already
pledged, it is held that when fresh shares were issued taking the call money from the yearly dividend payable on
the old shares, the new shares must be returned to pawnor along with the old shares. Similarly, the Delhi High
Court in M.R. Dhawan v. Madan Mohan AIR 1969 Del 313, has held that any accretion in the shape of
dividends, bonuses or right shares issued in respect of the pledged shares, in the absence of any contract to the
contrary, is the special property of the pawnee as a security for the debt.
(iv) Notice of sale by pawnor and the pawnee's right to sue for recovery and sell the pawned goods
7.1 Relying upon Lallan Prasad (supra) and Bank of Bihar (supra), this Court in Balkrishan Gupta v. Swadeshi
Polytex Ltd. [1985] 2 SCC 167 has held that under section 176, if the pawnor makes default in payment of the
debt or performance as promised, and in respect of which the goods were pledged, the pawnee may bring a suit
on the pawnor upon the debt or promise and may retain the goods pledged as collateral security, or the pawnee
may sell the things pledged on giving the pawnor reasonable notice of sale.
7.2 Several High Courts in F. Nanak Chand Ramkishan Das of Hodel v. Lal Chand Ganeshi Lal 1958 SCC
OnLine Punj 6, Bank of Maharashtra v. Racmann Auto (P) Ltd. AIR 1991 Del 278 and Rani Leasing & Finance
Ltd. v. Sanjay Khemani 2015 SCC OnLine Cal 450 have held that while the pawnee has a right to sell the goods
after giving notice to the pawnor, he is not bound to sell at any particular time. The power of sale conferred on
the pawnee is expressly for his benefit, and it is his sole discretion to exercise the power of sale or otherwise. If
the pawnee does not exercise that discretion, no blame can be put on him. Even where the value of the goods
deteriorates due to time, no relief can be granted to the pawnor against the pawnee as the pawnor is legally bound
to clear the debt and obtain possession of the pawned goods.
7.3 A Division Bench of the Calcutta High Court in Hulas Kunwar v. Allahabad Bank Ltd. AIR 1958 Cal 644 has
held that law does not require that the pawnee arrange for a sale beforehand and then give notice to the pawnor as
to the date, time and place of sale. Notice under section 176 has to be given of the pawnee's intention to sell in
default of payment by the pawnor within the specified time. This notice does not require specification of the date,
time and place of sale.
7.4 The Calcutta High Court in Haridas Mundra v. National and Grind-Lays Bank Ltd. AIR 1963 Cal 132 refers
to two earlier decisions in the cases of Hulas Kunwar (supra) and Kunja Behari Lal v. Bhargava Commercial
Bank AIR 1918 All 363 (2) where the courts have held that the notice under section 176 is required before the
sale to show the pawnee's intention to sell the good in order to give the pawnor reasonable information to redeem
the pawned goods. Further, the reasonableness of notice may vary from case to case. The right to retain the pawn
and the right to sell is alternative and not concurrent. When the pawnor retains, he does not sell, but when he
sells, he does not retain the pledged goods. However, the pawnee can sue on the debt or the promise concurrently
with his right to retain the pawn or sell it. Even the sale of the pawn does not destroy the pawnee's right as the
pawn is a collateral security, and the pawnor remains liable on the original promise to pay the balance due. The
right to sell the pawned goods is necessary to make the security effectual for discharging the pawnor's obligation.
It continues despite the institution of a suit for recovery of the dues.
7.5 In Vimal Chandra Grover v Bank of India [2000] 5 SCC 122, specific reference was made to the decisions on
the law of pledge that the pawnee is under no compulsion to sell the pawned goods on the request of the pawnor
as a means of discharging the debt. The reason is that section 176 grants an option to the pawnee to either retain
or sell the pawned goods for recovery of the debt. In the former case, the pawnee can also file the suit to recover
debt while holding the goods. However, giving of reasonable notice to the pawnor for sale is required, but even
when reasonable notice for sale has been given, the pawnee is not bound to sell the goods after the expiration of
the period mentioned in the notice. At the same time, before the pledged goods are put to sale, the pawnor is
entitled to redeem the pawned goods. The pawnor has the right to redeem them after discharging the debt.
However, the court did not consider it necessary to go into legal niceties in view of the facts of the case as the
bank, as a pawnee, on the request of the borrower-pawnor had agreed to sell a part of the shares to redeem the
debt. In Vimal Chandra (supra), the Court held that the bank as the pawnee was liable for negligence as it did not
sell the pledged goods, after having agreed to do so. This failure amounted to negligence in service under the
Consumer Protection Act, 1986.
7.6 At this stage we must refer to two detailed judgments of the Bombay High Court and the Delhi High Court
and the observations of the Andhra Pradesh High Court in Sri Raja Kakarklhpudi Venkata Sudarsana Sundara
Narasayamma Garu (supra). In Official Assignee v. Madholal Sindhu AIR 1947 Bom 217, the judgment of the
Bombay High Court authored by Chief Justice Leonard Stone referred to the Commentaries on the Law of
Bailments, Eighth Edition, by Mr. Justice Story, wherein it is observed on page 262:
"Another right resulting, by the common law, from the contract of pledge is the right to sell the pledge,
where there has been a default in the pledge in complying with his engagement, but a sale before default
would be a conversion. Such a right does not divest the general property of the pawner but still leave in him
(as we shall presently see) a right of redemption."
The following passage at page 263 was quoted:
"The common law of England, existing in the time of Glanville, seems to have required a judicial process to
justify the sale, or at least to destroy the right of redemption. But the law as at present established leaves an
election to the pawnee. He may file a bill in equity against the pawner for foreclosure of sale and sale; or, he
may proceed to sell ex mero motu, upon giving notice of his intention to the pledger."
In this case, the judgment of Chief justice Leonard Stone also referred to section 1 of the Contract Act, which
reads,
"1. Short title.—This Act may be called the Indian Contract Act, 1872.
Extent, Commencement.—It extends to the whole of India except the State of Jammu and Kashmir; and it
shall come into force on the first day of September, 1872.
Saving.—Nothing herein contained shall affect the provisions of any Statute, Act or Regulation not hereby
expressly repealed, nor any usage or custom of trade, nor any incident of any contract, not inconsistent with
the provisions of this Act."
to hold that the instrument of pledge therein, giving unqualified power of sale, being inconsistent with section
176, was not valid, and the express provision of section 176 shall prevail. The notice must be given in all pledge
cases, even when the instrument of pledge contains an unconditional power of sale. Another important
observation made in this judgment is that the pawnor's right to redeem remains until the 'lawful sale'.
Chief Justice Stone's judgment is also relevant for another reason. He has referred to, with approval, Mr. Justice
Story's commentaries on the Law of Bailments, Eight Edition, which at page 262 draws distinction between
(actual) sale and conversion by the pawnee in the following passage:
"Another right resulting, by the common law, from the contract of pledge is the right to sell the pledge,
where there has been a default in the pledge in complying with is engagement, but a sale before default
would be a conversion. Such a right does not divest the general property of the pawner but still leave in him
(as we shall presently see) a right of redemption."
Chagla J., in his concurring opinion, referring to section 176, held that when the pawnor makes a default in the
payment of the debt, the pawnee may sell the pawned goods on giving the pawnor reasonable notice of sale. He
agreed that the requirement of giving the pawnor reasonable notice of sale is mandatory and it is not open to the
parties to contract themselves out of this section. Section 176 of the Contract Act, unlike some of the sections of
the Contract Act, does not specifically provide that the contractual terms can override the provision by using the
expression "in the absence of the contract to the contrary" or "subject to special contract to the contrary". The
notice, that is to be given for the intended sale by the pawnee, is a special protection that the statute has given to
the pawnor, and the parties cannot agree that the pawnee may sell the pledged goods without notice to the
pledgor. Dwelling on the aspect of the pawnor's right of redemption under section 177, the judge held that the
right remains till the 'actual sale' of the pledged goods. The expression 'actual sale' in section 177 must be a sale
in conformity with the provisions of section 176 which gives the pledgee the right to sell; and if the sale is not in
conformity with those provisions, then the equity of redemption with the pledgor is not extinguished.
The sale by the pawnee to himself being void does not put an end to the pledge, but the pawnor is bound by
resale(s) duly effected by the pawnee to the third parties after such abortive sales to himself.
Chagla J. on the rights of the pawnee held that the Contract Act provides two rights to the pawnee when the
pawnor makes a default in payment of the debt: (a) bring the suit against the pawnor for the debt and retain the
goods pledged as collateral security; and (b) sell the goods pledged, which power, however, can be exercised in
terms of section 176 on giving the pawnor a reasonable notice for sale.
While upholding that the right of redemption given to the pawnor vide section 177 of the Contract Act ends on
the sale of the goods by the pawnee in conformity with the requirements of section 176 of the Contract Act and
not on unlawful or unauthorised sales, Chagla J. after extensively referring to the case law on the subject held
that: (1) the pawnor does not become entitled to the possession of the goods pledged without tendering the
amount due on the pledge; or in other words, without seeking to redeem the pledge; and (2) that without a proper
tender of the amount due on the pledge, the only right of the pawnor in respect of the unlawful or unauthorised
sale is in tort for damages actually sustained by him. Therefore, without tendering the amount, action of trover21
and detinue22 are not maintainable.
7.7 The decision in Madholal Sindhu (supra) was carried in appeal to the Federal Court, wherein the court by
majority overruled the decision of the Bombay High Court solely on a factual basis that, given the assent of sale
of shares by the pawnor therein and the acquiescence thereof by the Official Assignee, the sale was good.
However, it is to be espied that the question of whether the pawnor could enter into a contract contrary to the
provisions of section 176 or whether want of notice is a mere irregularity not affecting the title of the bona fide
purchaser for value did not arise for consideration before the Federal Court.
7.8 These principles interpreting sections 176 and 177 of the Contract Act are reiterated and affirmed in Sri Raja
Kakarklhpudi Venkata Sudarsana Sundara Narasayamma Garu (supra). This decision also examines the waiver
of the right to reasonable notice under section 176 of the Contract Act. Reference was made to the rule of waiver
as stated in Maxwell on Interpretation of Statutes23 in the following words:
"Every-one has a right to waive and to agree to waive the advantage of a law or rule made solely for the
benefit and protection of the individual in his private capacity, which may be exercised with without
infringing any public right of public policy".

After referring to foreign24 and Indian authorities25 on waiver, Sri Raja Kakarklhpudi Venkata Sudarsana
Sundara Narasayamma Garu (supra) categorically observes that in terms of section 176, its requirements are
mandatory and that, even if there is a term in the contract of a pledge to waive notice, still, the pledgee is not
relieved of his obligation to give notice before the sale.
7.9 Of particular importance is the reference in Sri Raja Kakarklhpudi Venkata Sudarsana Sundara
Narasayamma Garu (supra) to the following observations of Farelli J. in Soho Square Syndicate Ltd. v Poland &
Co. 1940-1 Ch 638 at P.C 43.
"If it be right to say that a mortgagee, by merely getting the consent of the mortgagor, can avoid
the......necessity of applying to the Court. a large part of the protection which this Act was intended to
provide would virtually disappear. People in the position of such persons as I have mentioned might easily
be persuaded to give a consent without really knowing what exactly was involved in such consent, and an
opportunity of expressing their reasons for their inability to pay, whatever they may he, and of stating their
difficulties, which is now afforded to them by the necessity of an application to the court would be entirely
removed. Moreover, difficult questions might also arise whether the consent had in fact been obtained, or
whether it was a consent which was binding, and similar questions.''
Where the Contract Act prescribes a particular term that is binding, the statutory mandate must be followed by
the parties. Neither party can contract out of it. Otherwise, the legislative command that the statute imposes
would be violated with immunity by merely incorporating waiver as a contractual term, depriving the frailer
party of the benefit of the legal protection. A condition prescribed to protect and benefit the public cannot be
dispensed with when it lays down a rule of public policy.
7.10 Section 6326 of the Contract Act governs the domain of waiver. It is a general principle of law that everyone
has a right to waive the advantage of a law or rule made solely for the benefit and protection of the individual in
his private capacity.27 However, such a waiver cannot infringe any public right or public policy. In Krishna
Bahadur v. Purna Theatre [2004] 8 SCC 229 , this Court observed that,
"10. A right can be waived by the party for whose benefit certain requirements or conditions had been
provided for by a statute subject to the condition that no public interest is involved therein. Whenever waiver
is pleaded it is for the party pleading the same to show that an agreement waiving the right in consideration
of some compromise came into being. Statutory right, however, may also be waived by his conduct."
In Halsbury's Laws of England,28 it is stated thus:
"As a general rule, any person can enter into a binding contract to waive the benefits conferred upon him by
an Act of Parliament, or, as it is said, can contract himself out of the Act, unless it can be shown that such an
agreement is in the circumstances of the particular case contrary to public policy. Statutory conditions may,
however, be imposed in such terms that they cannot be waived by agreement, and, in certain circumstances,
the legislature has expressly provided that any such agreement shall be void."
However, there is a difference between statutory provisions meant for the benefit of a person and statutory
provisions which mandate contracts to be in a specific manner. One cannot waive the statutory obligations where
the statute restraints explicitly or mandates parties to contract in a particular manner. Formalities and
requirements for making contracts have generally been held to be mandatory.29 Where a statute prescribes that a
contract shall be in a specific form or shall or shall not contain certain terms, the statutory form must be
followed.30 In reference to pledge, waiver by contract and statutorily mandated terms, the High Court of Calcutta
in Co-Operative Hindusthan Bank, Ltd. v. Surendranath De, 1931 SCC OnLine Cal 224.observed:
"Section 176 of the Contract Act, unlike some other sections, e.g., sections 163, 171 and 174, does not
contain a saving clause in respect of special contracts contrary to its express terms. The section gives the
pawnee the right to sell only as an alternative to the right to have his remedy by suit. Besides, section 177
gives the pawner a right to redeem even after the stipulated time for payment and before the sale. In our
opinion, in view of the wording of section 176 as compared with the wordings of the other sections of the
Act, to which we have referred, and also, in view of the right which section 177 gives to the pawner, and, in
order that the provision of that section may not be made nugatory, the proper interpretation to put on section
176 is to hold that, notwithstanding any contract to the contrary, notice has to be given."
Even when the general law provides liberty to contract, the parties cannot contract contrary to express provisions
of law. In Park Street Properties (P.) Ltd. v. Dipak Kumar Singh [2016] 9 SCC 268, in reference to section 106 of
the Transfer of Property Act, 1882, this Court held:
"While the agreement dated 7-8-2006 can be admitted in evidence and even relied upon by the parties to
prove the factum of the tenancy, the terms of the same cannot be used to derogate from the statutory
provision of section 106 of the Act, which creates a fiction of tenancy in the absence of a registered
instrument creating the same. If the argument advanced on behalf of the respondents is taken to its logical
conclusion, this lease can never be terminated, save in cases of breach by the tenant. Accepting this
argument would mean that in a situation where the tenant does not default on rent payment for three
consecutive months, or does not commit a breach of the terms of the lease, it is not open to the lessor to
terminate the lease even after giving a notice. This interpretation of clause 6 of the agreement cannot be
permitted as the same is wholly contrary to the express provisions of the law. The phrase "contract to the
contrary" in section 106 of the Act cannot be read to mean that the parties are free to contract out of the
express provisions of the law, thereby defeating its very intent."
7.11 In Nabha Investment (P.) Ltd. v. Harmishan Dass Lukhmi Dass 1995 SCC OnLine Del 239, a decision of
Delhi High Court, reference is made to the decision in Sri Raja Kakarklhpudi Venkata Sudarsana Sundara
Narasayamma Garu (supra) wherein the High Court of Andhra Pradesh had agreed with the opinion expressed
by Chagla J. in Madholal Sindhu (supra), that in cases of unauthorized sale by the pawnee, the pawnor could
seek to file a suit for redemption by depositing the money, treating the sale as if it had never taken place, or
where the suit of redemption is not filed, to ask for damages on the ground of conversion. However, the decision
in Nabha Investment (supra) disagreed with the view taken in these two judgments that the pawnor cannot file
the suit for redemption of the pledge unless preceded by tender or accompanied by pledged money. Nevertheless,
the judgment agrees with other principles of law laid down by Chagla J. that section 176 is mandatory observing
that the applicability and sweep of section 176 is not eclipsed or curtailed by the phrase "in the absence of the
contract to the contrary". In other words, the parties cannot contract out of section 176. The need for notice to the
pawnor of the intended sale by the pawnee is the special protection given to the pawnor, and the parties cannot
override the special protection by agreement. Further, the right to redeem can be exercised up to the actual sale of
the goods pledged, i.e., the sale referred to in section 177 in conformity with section 176. The judgment in Nabha
Investment (supra) elucidates:
'22.8 Here I may utilize this opportunity for extracting other principles of law laid down by Chagla, J. in his
illuminating judgment which are based on several authorities. They are:—

(i)   The provisions of section 176 Contract Act are mandatory. The applicability and sweep of
section 176 unlike several other provisions on the same subject is not eclipsed by the phrase-
"in the absence of a contract to the contrary." The notice that is to be given to the pledgor of
the intended sale by the pledgee is a special protection which statute has given to the pledgor
and parties cannot agree that in the case of any pledge, the pledgee may sale the pledged
articles without notice to the pledgor (para 55).
(ii)   If a sale is held of the shares under authority of the pledgor then it could convey to the
purchaser full title in the shares; sale under section 27 of Sale of Goods Act title conveyed to
the purchaser would not be a title better than that of the seller. (Para 56).
(iii)   Notice under section 176 of Contract Act must be given before the power of sale can be
exercised. If the notice is essential, the purchaser, however innocent cannot acquire a title
better than his vendor has (Para 56).
(iv)   Right to redeem under section 177 can be exercised right upto time the actual sale of the
goods pledged takes place. The actual sale referred to in section 177 must be a sale in
conformity with the provisions of section 176 which gives the pledgee the right to sale; and if
the sale is not in confirmity with those provisions, then the equity of redemption in the
pledgor is not extinguished (para 57).
(v)   The pledgor has a right to call upon the pledgee to redeem the shares or payment of the debt.
If the pledgee has transferred the shares, he is entitled to call upon the transferee for the same
because the transferee does not acquire anything more than the right, title and interest of the
pledgee which is to retain the goods as a pledge till the debt is paid off. If the pledgor may not
be in a position to redeem, he may contend himself with merely suing the pledgee for
conversation if any damage has resulted by reason of the goods being sold without proper
notice (para 59).
(vi)   There is no analogy between section 69(3) of T.P. Act and section 176 Contract Act; there is a
marked contrast between the two. Former protects the innocent purchaser, the latter does not
do so. In the absence of any provision in section 176 of the Contract Act in favour of the
innocent purchaser, to import such protection from the provisions of another statute is with
respect wholly fallacious and unjustifiable. It is always dangerous to draw analogy between
one statute and another;
22.9 Vide para 64 Chagla, J. did not agree with the following statement of law contained in Coote on
Mortgages (Volume-II, 9th Edition page 1472):—
"The pledgee has on default a right to sell the pledge if the payment is to be made on a certain day;
otherwise not; but a sale before default would be a conversion; yet the sale, whether wrongful or not, passes
the title to the vendee as against the pledgor."
 22.10 Chagla, J. has expressed his approval and agreement with the following statement of law in Story's
Law of Bailments, (8th Edition, page 272):—
"A pledgee of stock has no legal right to sell the same without notice to the pledgor and such sale passes no
title as against the pledgor, even to a bona fide party".
22.11 The abovesaid principles deducible from the opinion recorded by Chagla, J. with which I find myself
in full agreement lend strength to the plaintiff's case….'

7.12 The view of the Delhi High Court in Nabha Investment (supra) expressing limited divergence31 from the
ratio in Madholal Sindhu (supra) and Sri Raja Kakarklhpudi Venkata Sudarsana Sundara Narasayamma Garu
(supra) does not appeal to us. The reason given by the Delhi High Court that there is no provision in any statute
or principle of law to hold that the pawnor has only two remedies, as elucidated by Chagla, J. in Madholal
Sindhu (supra), is not correct. Section 177, which gives right of redemption to the pawnor till 'actual sale', itself
postulates not only payment of the debt due but also expenses of the pawnee which have arisen from the
pawnor's default. The instances noted subsequently when the pawned property is not available are well covered
and can be taken care under clause (2)32 of the opinion expressed by Chagla, J. in Madholal Sindhu (supra).33
7.13 Section 176 of the Contract Act requires that the pawnee may sell the thing pledged on giving the pawnor
reasonable notice of the sale. It does not prescribe any fixed form of notice or specify any fixed period of notice.
The object and purpose of giving notice is to make the pawnor know about the pawnee's intent to sell the pawn
and give him an opportunity to exercise his statutory right of redemption, which as per section 177 can be
exercised till the date of 'actual sale'. Whether or not a notice was given and the period of notice was reasonable
would depend upon the facts of the case. In view of the above discussion, the pawnor can communicate his
willingness and desire to the pawnee that the pledged goods may be sold. In case any such request is made, a
pawnee may well act upon the request without violating section 176 of the Contract Act. However, a pawnee,
unless he also agrees, cannot be compelled by the pawnor to sell the pledged goods.
(v) Sale of the pledged goods by the pawnee to self
8.1 Dictum in the above judgments and section 177 of the Contract Act, which confers on the defaulting pawnor
the right to redeem the pledged goods till 'actual sale', does not support pawnee's sale to self. Sale to self would
in terms of the judgment in Madholal Sindhu's case (supra) is a case of conversion and not 'actual sale', and
therefore, would not affect the pawnor's right to redemption under section 177 of the Contract Act. Judgment of
the Calcutta High Court in Haridas Mundra (supra) also states this rule. Earlier, the Privy Council in Neikram
Dobay v. Bank of Bengal ILR (1892) 19 Cal 322, observed that the sale of goods by the bank as the pawnee to
itself is unauthorized but did not entitle the pawnor to have the goods back. The pawnor would be required to pay
back the debt for which the goods were pledged as security to redeem the goods. If the loan remains unpaid after
the demand, the pawnee is entitled to sell the goods and credit the proceeds towards the outstanding debt. After
the goods are sold to a third party, the pledge ends. The pawnee in such cases would be liable if he fails to credit
the loan account with the proceeds on the sale of the pawned goods. The pawnee may also be liable, subject to
the contract, for damages for converting the goods for his use.
8.2 Several other High Courts have similarly opined and we agree that the Contract Act does not conceive of sale
of the pawn to self and consequently, the pawnor's right to redemption in terms of section 177 of the Contract Act
survives till 'actual sale'. In Ramdeyal Prasad v. Sayed Hasan AIR 1944 Pat 135, the Patna High Court has held
that the sale by the pawnee to himself of the securities pledged is void; it does not put an end to the contract of
the pledge to entitle the pawnor to recover the goods without payment of the amount thereby secured, nor does it
entitle the pawnor to damages. The pawnor is bound by the resale duly effected by the pawnee to third persons.
However, where the pawnee has erroneously represented to the pawnor before such resales that the securities
have been sold and, therefore, no longer available for redemption, the pawnee becomes liable for the value as
conversion.
8.3 A Division Bench of the Madras High Court in S.L. Ramaswamy Chetty v. M.S.A.P.L. Palaniappa Chettiar
1929 SCC OnLine Mad 62, relying upon the decision of the Privy Council in Neikram Dobey (supra), opined
that where the pawnee has the power to sell in default, takes over upon himself the property pledged without the
authority of the pawnor by crediting its value in the account with him, this act, though an unauthorized
conversion would not put an end to the contract of pledge.34
8.4 There is one solitary judgment of the single judge of the Punjab and Haryana High Court in Dhani Ram and
Sons v. Frontier Bank Ltd. AIR 1962 P&H 321., which holds that the sale of the pawned goods by the pawnee to
himself is not void, and the pawnee was held to be the legal owner of the pledged shares. This decision proceeds
with the incorrect understanding of the ratio in Neikram Dobay (supra), and thus, we deem it appropriate to
overrule this ratio in Dhani Ram and Sons (supra).
D. Effect and Purpose of the Depositories Act, 1996 and the Securities and Exchange Board of India
(Depositories and Participants) Regulation 1996.
9.1 Interpretation of statutes must depend on the text and the context. To resolve a debate when two views are
evident, it is best to interpret the provision when we know why the statute is enacted. If a statute is looked at, in
the context of its enactment, with the glasses of the statute-maker provided by such context, its scheme, the
sections, clauses, phrases and words may take colour and appear different than when the statute is looked at
without the glasses provided by the context. [Reserve Bank of India v. Peerless General Finance & Investment
Co. Ltd. [1987]1 SCC 424, para 33] This principle may equally apply when we examine interplay between two
statutes. The provisions of the Contract Act, which is substantive and general law relating to contracts, and the
Depositories Act, which is a primarily a law relating securities, must be interpreted harmoniously. This does not
mean that any provision of one enactment could nullify the provisions of the other. This end can be best achieved
by examining the objects and the subject matter of the Depositories Act vis-a-vis the Contract Act, which will
clarify their separable spheres of operation to avoid any conflict or overlap between them. It means that the two
statutes shall be read together consistently and harmoniously to complement each other so far as it is reasonably
possible to do so, and where such conciliation is not possible to clarify the legal position by application of
principles of interpretation applicable to such situations. [Vasudev Ramachandra Shelat v. Pranlal Jayanand
Thakar [1974] 2 SCC 323, para 66]
9.2 Thus, we begin by referring to the object and purpose behind the enactment of the Depositories Act and
which would underpin our interpretation of the 1996 Regulations. Introduction to the Depositories Act refers to
one of the major drawbacks of the then Indian securities market, which was paper-based. Consequently, there
was a lack of assurance and certainty in the transfer of securities due to risks in the form of 'bad delivery',
forgery, theft etc. As a result, the investors suffered and were deprived of liquidity in securities and the grievance
redressal was intractable. In turn, the capital market also felt pain due to lack of confidence and consequently, the
growth was cramped. To pave the way for smooth, fast and constancy in the transfer of securities and to promote
and deal with an increase in trading of stocks and shares in a transparent manner, there was a need for regulating
the methodology of trading of securities.
9.3 The Depositories Act is enacted to lay down a process and rules for the dematerialization of securities by
converting them into electronic data stored in the computers of 'the depository'.35 The Depositories Act
establishes the depository eco-system and introduces the concepts of a 'registered owner'36 and 'beneficial
owner'.37 Every owner of a physical share has to enter into an agreement with 'the depository' for availing its
services. The physical certificate of security is cancelled. All securities held by 'the depository' are in a fungible
form. 'The depository' becomes the 'registered owner' in respect of the security, whereas the person who
surrenders the physical shares is recorded as 'the beneficial owner'. 'The depository', as the registered owner, does
not have any voting right or any other right in respect of the securities held by it. 'The beneficial owner' shall be
solely entitled to all rights, benefits, and liabilities attached to the securities held by 'the depository'. In terms of
section 11, every depository is mandated to maintain a register and index of 'beneficial owners' in the manner
provided in sections 150, 151 and 152 of the Companies Act, 1956. As per section 738 of the Depositories Act,
every 'depository', on receipt of intimation from a participant, is required to transfer the security in the
transferee's name. Further, on registration of transfer of security in the transferee's name, the transferee is
registered as the 'beneficial owner'.
9.4 Power and right to transfer ownership of a dematerialised security vests with the 'beneficial owner', same as
in the case of buying and selling physical securities. The difference lies in the delivery process in case of sale,
and receipt in case of purchase, which is affected by the depository on instructions from the participant. Every
person recorded as the 'beneficial owner' to transact and deal in securities must act through a participant who is
an agent of the depository. Section 1039 states that notwithstanding any other law for the time being in force, 'the
depository' shall be deemed as the 'registered owner' and is entitled to affect the transfer of ownership of the
security on behalf of 'the beneficial owner'. No person, including the pawnee, can transfer the pawn held in
dematerialised form without being registered as a 'beneficial owner'.
9.5 Section 12 of the Depositories Act permits pledge and hypothecation of securities held by a depository and
reads:
"12. Pledge or hypothecation of securities held in a depository:

(1)   Subject to such regulations and bye-laws, as may be made on 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)   Every beneficial owner shall give intimation of such pledge or hypothecation to the depository
and such depository shall thereupon make entries in its records accordingly.
(3)   Any entry in the records of a depository under sub-section (2) shall be evidence of a pledge or
hypothecation."
In terms of sub-section (1) of section 12, a 'beneficial owner' can create a pledge or hypothecation regarding the
security owned by him through 'the depository', subject to prior approval of 'the depository'. Section 12 or for that
matter the Depositories Act does not define pledge or hypothecation, and thereby accepts and adapts their
meaning as known in the commercial sense to people in the trade. This means that the Depositories Act
recognises the principles relating to pledge prescribed by the Contract Act and the common law. Depositories Act
states that such a pledge or hypothecation should be made in accordance with the regulations and by-laws made
under the Depositories Act. A 'beneficial owner' as the pawnor is required to intimate such pledge or
hypothecation to the depository, which thereupon makes entries in its records. This entry, made by 'the
depository', is evidence of pledge or hypothecation.
9.6 Prior to the Depositories Act, physical shares and securities were pledged and such transactions have resulted
in several decisions of the Supreme Court and the High Courts. In most cases, the pledge of shares was
accompanied by blank transfer deeds, and consequent dispute as to the correct nature of the transaction as was
the case in Sri Raja Kakarklhpudi Venkata Sudarsana Sundara Narasayamma Garu (supra), Mohd. Sultan
(supra) and even in Madholal Sindhu (supra). In Sri Raja Kakarklhpudi Venkata Sudarsana Sundara
Narasayamma Garu (supra), the Andhra Pradesh High Court, after referring to Madholal Sindhu (supra), agreed
with the view expressed in Kannambra Nayar Veetil Valia Ammukutti Neithiar's Son Kunhunni Elaya Nayar
Avargal v. P.N. Krishna Pattar AIR 1943 Mad 74 that such transactions because of execution of the blank
transfer deeds should not be treated as mortgages. A pledge of shares can be accompanied by execution of blank
transfer deeds, which was a convenient mode of exercising the right to sell when the pawnee is entitled to do so.
In absence of blank transfer deeds, the pawnee must take recourse to the court when he wishes to enforce the
securities.
9.7 Clearly, section 12 of the Depositories Act is not ex-facie inconsistent with pawnee and pawnor's contractual
rights and obligations under the Contract Act and the common law. On the other hand, the Depositories Act
expressly concedes that the securities held by the depository can be pledged and hypothecated by the 'beneficial
owner'. It simplifies the process by bringing transparency and certainty. It checks and curtails possibilities of
disputes as the pledge must be registered with the 'depository.'
9.8 Undoubtedly, the Depositories Act distinguishes between the 'registered owner' and the 'beneficial owner',
i.e., the de facto owner, but this does not in any manner contradict or lay down a rule which is contrary to the
provisions of sections 176 and 177 of the Contract Act. These sections, given the objective and purpose behind
them, would still apply to any pledge deed and do not get diluted or overridden by the provisions or requirements
of the Depositories Act. Section 10, a non obstante provision, which prevails over existing enactments by law,
treats the 'depository' as the 'registered owner' and the shareholder/holder as a 'beneficial owner'. It does not
undermine or rewrite the provisions of the law of pledge and mutual obligations and rights of the pawnee and
pawnor. This aspect has been elaborated in some detail subsequently in this judgement.

9.9 Under section 25 of the Depositories Act, the Securities and Exchange Board of India40 has been vested with
the power to make Regulations to carry out the purpose of the Depositories Act. Clause (d) to sub-section (2) to
section 25 states that the regulations may provide for the manner of creating a pledge or hypothecation in respect
of a security owned by a 'beneficial owner' under sub-section (1) to section 12 of the Depositories Act.
9.10 In exercise of this power, the Board notified the 1996 Regulations. The relevant portion of regulation 58
reads as under:
"58.
** ** **

(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 pledge 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."
A reading of regulation 58 would show that a 'beneficial owner' is entitled to create a pledge on security owned
by him. To do so, he must apply to the 'depository' through the participant who has his account in respect of the
securities. Sub-regulation (2) requires the participant to accord its satisfaction that the securities are available for
pledge and make a note in this regard in its records. The note is to be forwarded to the 'depository'. In terms of
sub-regulation (3), the 'depository' is required to within fifteen days create and record a pledge and send an
intimation to the participants of the pledgor/pawnor and the pledgee/pawnee. The participants of the pawnor and
pawnee are required to inform the pawnor and the pawnee as to the entry of creation of the pledge. If the
'depository' does not create the pledge, intimation of the reasons has to be given to the participants of the pawnor
and the pawnee. The 'depository' can cancel the pledge if the pawnee applies to the depository through its
participants. The pawnor can also apply through its participant to the 'depository' for cancelling the pledge. In
this case, the entry can be cancelled by the 'depository' with the prior concurrence of the pawnee. On cancellation
of the pledge entry, the 'depository' is to inform the participant of the pawnor.
9.11 Sub-regulation (8) to regulation 58 uses the expression "subject to the provisions of the pledge document"
with a specific purpose and objective. In other words, sub-regulation (8) to regulation 58 does not seek to curtail
or restrict, but on the other hand respects party autonomy and freedom to decide the terms of the pledge,
including the event of default that would entitle the pawnee to invoke the pledge and sell the pawn. The sub-
regulation does not expressly nullify any provision of the Contract Act. However, the stipulation that the pawnee
may invoke the pledge, and on such invocation, the pawnee is to be recorded as the 'beneficial owner' of the
pledged securities is mandatory. A pledge document cannot stipulate to the contrary, and any contravening
contractual stipulation would not be binding. The records maintained by the 'depository' are to be amended on the
pawnee invoking the pledge and thereupon, the 'depository' shall register the pawnee as the 'beneficial owner' of
the securities. Consequent to the change and in terms of sub-regulation (9) to Regulation 58, the 'depository' is to
inform the participants of the pawnor and pawnee, with a direction that they shall make necessary changes in
their records and that the participants shall inform the pawnor and pawnee, respectively.
9.12 Thus, the non obstante part of sub-regulation (8) to regulation 58 serves a limited objective and purpose: the
pawnee must record itself as a 'beneficial owner' before he proceeds to sell the pledged securities. Without the
pawnee being accorded the status of a 'beneficial owner', a pawnee cannot proceed to sell the pledged
dematerialized securities. A contractual term cannot overwrite the requirement of sections 7 and 10 of the
Depositories Act, which is reflected in sub-regulation (8) to regulation 58 as pe which the pawnee must be
recorded as the 'beneficial owner' before the pledged dematerialized securities are sold. Section 38(1)(e) of the
Depositories Act requires the 'depository' to maintain, inter alia, records of all approvals, notices, entries and
cancellations of pledge and hypothecation, as the case may be. This mandate of sub-regulation (8) to regulation
58 will apply whenever the pledged/pawned goods are dematerialized securities. To reiterate, this requirement of
sub-regulation (8) to regulation 58 does not circumscribe or limit the contractual rights and obligations agreed
upon between the parties on the agreed terms, including the pawnee's right to sell the pawned goods. While the
contractual terms are fundamental and determine the rights and obligations inter se the parties including when the
pawnee would be entitled to get his name substituted as a 'beneficial owner' under the 1996 Regulations,
however, the contractual terms are not permitted to override the Contract Act as explained above in so far as it
regulates the rights and obligations of the pawnee and pawnor, and the requirement of compliance with
regulation 58(8). It is absolutely necessary that the pawnee must be accorded status of 'beneficial owner' to
enable him to exercise his right to sell the pledged dematerialized securities. The object is to ensure compliance
with the procedure prescribed for the sale of dematerialised securities and not to interfere with the freedom to
contract as long as they comply with the Contract Act and other laws. Further, if the terms of the pledge
document violate regulation 58(8), the pledge is not rendered void or illegal, albeit enforcement of the pledge viz.
the dematerialised securities will be rendered unattainable unless steps are taken to act in accordance with the
procedure prescribed by the 1996 Regulations. The pawnee would be entitled to sue the pawnor for recovery of
money, breach of contract and may even apply for injunction/restrain on sale of dematerialised securities.
However, third-party rights on transfer of the dematerialized securities, unless injuncted by a prior court order,
would not be affected as long as the transfers are in terms of the Depositories Act and the 1996 Regulations.
E. Effect of the Depositories Act, 1996 and the Securities and Exchange Board of India (Depositories and
Participants) Regulations, 1996 on the pledge under the Contract Act, 1872
10.1 As per the 1996 Regulations, the pledgor/pawnor is not entitled to sell the pledged/pawned securities. The
special rights of the pledgee/pawnee in the pawn remain intact under the Depositories Act and the 1996
Regulation. However, the right to sell dematerialized securities is conferred and given to the 'beneficial owner',
who exercises this right through the participants. Consequently, if a pawnee wants to exercise his right to sell
dematerialized security it is mandatory for the pawnee first to get himself recorded as a 'beneficial owner' in the
'depository's records. Without the said exercise, the pawnee cannot exercise its rights to sell the pledge and
retrieve the monies due by taking recourse to its rights under section 176 of the Contract Act. Right to sell the
pledge after reasonable notice is one of the options, albeit, both under the common law and under the Contract
Act, the pawnee has the choice even after issue of notice for sale to sue for the debt due while retaining
possession of the pledged goods. Similarly, the pawnor under the Contract Act and the common law has the right
to redeem the pledged goods till 'actual sale'. Sale by the pawnee to self does not defeat the right of redemption
of the pawnor. It may amount to conversion in law. Other provisions of the Contract Act enumerated in Chapter
IX may well apply.
10.2 The Depositories Act (except for section 10 which has been examined by us in some detail in re its
application (supra)) and the 1996 Regulations do not expressly state that their provisions prevail over the
Contract Act or any other law in force. On the other hand, section 28 states that "the provisions of this Act shall
be in addition to and not in derogation of any other law for the time force relating to the holding and transfer of
securities." Thus, the Depositories Act is in addition to other laws relating to the holding and transfer of
securities. Our reasoning does not mean that compliance with section 12 and regulation 58 is not compulsory or
mandatory. Violations of the statute may lead to penalties and even criminal action when permitted and
warranted. Nevertheless, given the nature and requirements under section 12 or regulation 58, do not by
implication or due to conflict over-write and undo the legislative mandate of sections 176 and 177 of the Contract
Act. We do not read any legislative intent in the Depositories Act and the 1996 Regulations to change the law of
pledge requiring issue of reasonable notice; or as allowing sale to self, or abolishing the right of the pawnor to
redeem the pledged goods till 'actual sale'. Sections 176 and 177 are not obliterated, in so far as they would
equally apply to pawned dematerialised securities as they apply to other pawned goods.
10.3 The Depositories Act and the 1996 Regulations do not state or impliedly reflect that sale of the pledged
securities by the pawnee to self, which amounts to conversion and does not affect the rights of the pawnor under
section 177, are no longer applicable. Doing so would tantamount to reading and adding words to section 12 and
regulation 58 to defy sections 176 and 177 of the Contract Act. Law of pledge is dynamic and as observed above
must adapt itself in the context of the current commercial environment, albeit we would avoid palpable conflict
that would arise in view of the enactment of the Depositories Act and the 1996 Regulations, or else the operation
of law in practice would lead to compliance difficulties and complications. While interpretating the law relating
to commercial matters and commerce the court must consider the real-world impact and consequences.
Therefore, the expression 'actual sale' in section 176 read in the context of the Depositories Act and the 1996
Regulations have to be given a meaning. The expression 'actual sale' used in section 177 in our opinion should be
read as 'the sale by the pawnee to a third person made in accordance with the Depositories Act and applicable by-
laws and rules'. It also means and requires compliance with section 176 of the Contract Act. Mere exercise of the
right by the pawnee to record himself as the 'beneficial owner', which is a necessary precondition before the
pawnee can exercise his right to sell, is not 'actual sale' and would not affect the rights of the pawnor of
redemption under section 177 of the Contract Act. Every transfer or sale is not 'actual sale' for the purpose of
section 177 of the Contract Act. To equate 'sale' with 'actual sale' would negate the legislative intent.
10.4 In Madholal Sindhu (supra) and several other decisions, the expression 'actual sale' in section 177 of the
Contract Act has been interpreted to mean lawful sale to a third person and not conversion or unlawful sale
contrary to section 176 of the Contract Act. According to us, exercise of right on the part of the pawnee and
consequent action on the part of the 'depository' recording the pawnee as the 'beneficial owner' is not 'actual sale'.
The pawnor's right to redemption under section 177 of the Contract Act continues and can be exercised even after
the pawnee has been registered and has acquired the status of 'beneficial owner'. The right of redemption would
cease on the 'actual sale', that is, when the 'beneficial owner' sells the dematerialised securities to a third person.
Once the 'actual sale' has been affected by the pawnee, the pawnor forfeits his right under section 177 of the
Contract Act to ask for redemption of the pawned goods.
10.5 We, however, accept that the Depositories Act, by-laws and rules relating to sale of dematerialised securities
would be gravely undermined in case the pawnor is entitled to redeem the dematerialised shares from the third
party on the ground that reasonable notice, as postulated under section 176 of the Contract Act, was not given to
the pawnor. To this extent, we would accept that there is a conflict between the Depositories Act and the
interpretation given in Madholal Sindhu (supra), which has been followed in other cases, including the judgment
of the Delhi High Court in Nabha Investment (supra). If this principle is applied to dematerialised securities that
have been transferred to the third parties in accordance with the provisions of the Depositories Act, by-laws and
rules, it would materially impact certitude in the transaction in listed dematerialised securities which would
become vulnerable to challenge even when the arm's length purchasers are innocent third-party buyers for
valuable considerations. Open market operations would be affected. To this extent, therefore, we do hold that the
dictum in Madholal Sindhu (supra) and Nabha Investment (supra), that the pawnor has a right to redemption
against third parties when the pawnee does not give reasonable notice under section 176 of the Contract Act,
would not apply to listed dematerialised securities which are sold by the pawnee in accordance with the
provisions of the Depositories Act, by-laws and rules. In fact, the stipulations in section 12 of the Depositories
Act and regulation 58 of the 1996 Regulations have in built provisions in terms of which the pawnor and the
pawnee are informed about the change of status with the pawnee making a request and being accorded a status of
the 'beneficial owner'. The pawnee cannot make the sale of dematerialised securities without being registered as a
'beneficial owner', which is a step that a pawnee must take before he proceeds to sell the pledged dematerialised
securities.
10.6 Beyond the additional need to comply with sections 10 and 12 of the Depositories Act and regulation 58 of
the 1996 Regulations in specific terms, we do not see any disharmony between these provisions and sections 176
and 177 of the Contract Act. They can be read harmoniously without nullifying or altering their effect, subject to
the exception in case of sale of listed securities to third parties in terms of paragraph 10.5 (supra). They apply
independently without hindering and obstructing their application as the field and subject matter of sections 176
and 177 of the Contract Act differ from the subject matter and the object of sections 7, 10 and 12 of the
Depositories Act and sub-regulation (8) to regulation 58 of the 1996 Regulations.
F. Four decisions
11.1 The case of the Bombay High Court relied upon by the MHPL in JRY Investments (P.) Ltd. v. Deccan
Leafine Services Ltd. [2004] 56 SCL 339 is distinguishable as it dealt with a different factual matrix. In the said
case, there was a transfer of shares and not a pledge, a factum specifically noticed and held in terms of the
finding recorded in paragraphs 16 to 20 of the said judgment.41 However, certain observations are made
concerning the Contract Act and the procedure prescribed for pledging the shares by the Depositories Act. The
Court observed that the provisions of the Depositories Act are for accurately recording the transfer and pledging
of shares held in dematerialized form. The Depositories Act contemplates the existence of a 'depository' that
holds the shares in the name of the 'beneficial owner'. The 'depository' acts as a 'registered owner' of the shares
for effecting the transfer of ownership security on behalf of the 'beneficial owner' in terms of section 10 of the
Depositories Act. Section 10 is a non obstante clause for the purpose of effecting the transfer of ownership of
security on behalf of the 'beneficial owner'. Accordingly, the transfer of shares must be done in accordance with
the provisions of the Depositories Act, which means that a person recorded as a 'beneficial owner' alone can
exercise the power of transfer. Thereafter, regulation 58 is quoted. It is observed that the Depositories Act and the
Regulations contain a whole and self-contained procedure for creating a pledge. This statement and the statement
that the pledge of dematerialized securities would require compliance and creation in accordance with the
provisions of the Depositories Act, are substantially correct, but have to be read and understood in terms our
findings and opinion recorded above. However, we overrule this decision of the Bombay High Court to the extent
it holds that dematerialised securities cannot be made subject matter of a pledge under the Contract Act as it is
not possible to transfer physical possession. We have referred to the case law, including earlier judgments of this
Court, in Lallan Prasad (supra) and Maharashtra State Co-operative Bank Ltd. (supra), which hold that delivery
of possession of goods for pledge can be actual or constructive. In the case before the Bombay High Court, there
was no pledge in terms of regulation 58. On the other hand, the shares were transferred and held by the transferee
as a 'beneficial owner' upon transfer. The final outcome, therefore, would remain undisturbed in spite of our
finding.
11.2 In Pushpanjali Tie Up (P.) Ltd. v. Renudevi Choudhary 2014 SCC OnLine Bom 3661, a Division Bench of
the Bombay High Court had expressed reservation on the finding in JRY Investments Private Limited (supra)
that the goods in dematerialised form cannot be pledged.42 The said finding in JRY Investments (P.) Ltd. (supra)
as held above is contrary to the view expressed by this Court in Morvi Merchantile Bank Ltd. (supra) and Bank of
Bihar (supra). It would also be contrary to the principle that the Contract Act is not an exhaustive law on pledge
and mortgage of movables. In Pushpanjali Tie Up (P.) Ltd. (supra), the deed of pledge had permitted the lender
to use the pawn as a collateral for his margin with the third party, which right had been exercised by the pawnee.
In this background, the Court rejected the claim of the pawnor for the redemption of the pawn as the pawnee had
transferred the rights in respect of the pawned shares by depositing them as margin with the third party. The view
expressed was that the said transaction by the pawnee could not be ignored; otherwise, it would render the
arrangement agreed upon as meaningless and devoid of commercial sense. This judgment also refers to an earlier
decision of the Allahabad High Court in Firm Thakur Das Marakhan Lal v. Mathura Prasad AIR 1958 All. 66,
which was a case in which the three ornaments had been sub-pledged. The debt payable having been
extinguished by virtue of a debt redemption act, the pawnor had sued for recovery of the ornaments on the
ground that the sub-pledges did not bind him. In this context, the Allahabad High Court had observed that section
179 of the Contract Act clarifies that if a person has a limited interest in the goods and pledges them, the pledge
is valid to the extent of that interest only. Reliance was placed on Judge Story's book on 'Bailments', which
records as under:
"The pawnee may by the common law deliver over the pawn to a stranger for safe custody without
consideration; or he may sell or assign all his interest in the pawn; or he may convey the same interest
conditionally by way of pawn, to another person without in either case destroying or invalidating his
security. But if the pawnee should undertake to pledge the property (not being negotiable securities) for a
debt beyond his own, or to make a transfer thereof as if he were the actual owner, it is clear that in such case
he would be guilty of a breach of trust, and his creditor would acquire no title beyond 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."
Significantly, regarding the Depositories Act and the 1996 Regulations, this judgment rightly observes that
dematerialised shares must comply with the said pledge requirements to enable the pawnee to exercise the right
to sell. A third party would be entitled to and justified in presuming that there is no pledge unless the procedure
prescribed under the Depositories Act is followed. To this extent, the Depositories Act has introduced a new
regime. The legislative intent is to provide an inode of putting the third parties concerned to express notice of the
pledge. Subject to the pledgor's rights, only a party with express notice of the pledge created by the 'beneficial
owner', following the manner prescribed for the creation of a pledge, deals with the securities at his own risk.
This safeguards innocent third parties who would otherwise have no means of being aware of the pledge in case
of dematerialised shares. The provisions of the Depositories Act, and in particular section 12 thereof, and the
1996 Regulations, and in particular regulation 58, are salutary as they introduced transparency and certainty in
the securities market. There is no other discernible reason for the legislature to have provided for a particular
manner alone for creating a pledge of shares in a dematerialised form. More significant for our purpose are the
observations, with which we again agree, that the prescription in the Depositories Act and the 1996 Regulations
are for the manner in which creation and transfer of the dematerialised shares can be achieved. It is to regulate
the creation and transfer of dematerialised securities, including how the pledge can be transferred to a third party.
The Contract Act does not stipulate that a pledge can be created only in a particular manner. The Depositories
Act prescribes how the dematerialised securities can be pledged. The provisions of the Depositories Act and the
1996 Regulations are not in derogation of the Contract Act but in addition to it. In this regard, reference is made
to section 28 of the Depositories Act, which we have referred to earlier. Therefore, the object of the Depositories
Act is not to rewrite the provisions of the Contract Act but to regulate the creation and transfer of dematerialised
securities. Regulation 38(1)(e)43 requires a depository to maintain, inter alia, records of all approvals, notices
and entries, and cancellation of pledge or hypothecation, as the case may be.
11.3 We have already referred to the judgment of the Allahabad High Court in Firm Thakur Das Marakhan Lal
(supra) and the view expressed by Justice Story on the Law of Bailment. On the identical issue, there is another
decision, which was noticed by Chagla, J. in Madholal Sindhu (supra), in the case of Donald v. Suckling [1866]
L.R. 1 Q.B. 585, wherein 'A' had deposited debentures with 'B' as security for payment of a bill endorsed by 'A'
and discounted by 'B'. Before the maturity of the bill, 'B' deposited the debentures with 'C' to be kept by him as a
security until the repayment of the loan from 'C' to 'B' for an amount larger than the bill. The bill was
dishonoured and while it was still unpaid, 'A' brought detinue action against 'C' for debentures. The Court held
that the repledge by 'B' to 'C' did not put an end to the contract of pledge between 'A' and 'B', and that 'A' could
not maintain detinue action without having paid or tendered the amount of the bill. One of the Judges in the
judgment had observed:
"and I think that, although he (pledgee) cannot confer upon any third person a better title or a greater interest
than he possesses, yet, if nevertheless he does pledge the goods to a third person for a greater interest than he
possesses, such an act does not annihilate the contract of pledge between himself and the pawnor; but that
the transaction is simply inoperative as against the original pawnor, who upon tender of the sum secured
immediately becomes entitled to the possession of the goods, and can recover in an action for any special
damage which he may have sustained by reason of the act of the pawnee in repledging the goods."
 ** ** **

Another Judge had observed:

"In detinue the plaintiff's claim is based upon his right to have the chattel itself delivered to him; and if there
still remain in Simpson, or in the defendant as his assignee, any interest in the goods, or any right of
detention inconsistent with this right in the plaintiff, the plaintiff must fail in detinue, though he may be
entitled to maintain an action of tort against Simpson or the defendant for the damage, if any, sustained by
him in consequence of their unauthorized dealing with the debentures."
We should not be seen as commenting upon the merits of the decision in Pushpanjali Tie Up (P.) Ltd. (supra), as
one of the findings recorded therein was that the pawnor had permitted the pawnee to repledge the pawn for a
higher amount. The aspect, whether this can be permitted and allowed, and whether the interpretation of the
relevant clause of the document of pledge in Pushpanjali Tie Up (P.) Ltd. (supra) is correct, are not examined by
us and are left open.
11.4 Our attention was also drawn to a Single Judge Bench judgment of the Delhi High Court in Tendril
Financial Services (P.) Ltd. v. Namedi Leasing & Finance Ltd. 2018 SCC OnLine Del 8142, which supports the
MHPL's case. However, a careful reading of the judgment would show that it was passed in peculiar facts therein
as there was an ad interim order which had remained in force for twelve years, consequent to which the pawnee
was unable to sell the shares. We agree that normally a court would not grant interim injunction on the prayer of
the pawnor alleging non-compliance of section 176 of the Contract Act. The object and purpose requiring the
pawnee to issue notice to the pawnor before selling the pawn is to give an opportunity to the pawnor to redeem
the pledged goods before the 'actual sale'. The requirement of issue of reasonable notice under section 176 would
be satisfied once the pawnor is made aware and has knowledge of the pawnee's desire/intent to sell. Continuation
of interim orders predicated on the ground of lack of reasonable notice under section 176 would not be a
justification when the pawnee in his written statement clarifies and takes a clear position. The written statement
itself can be treated as reasonable notice. We have made these observations as we have come across cases where
such injunctions have been granted and confirmed even after the pawnee has entered appearance.44
11.5 On other aspects the judgment has placed reliance on JRY Investments (P.) Ltd. (supra) and made certain
observations regarding section 176 and regulation 58 to hold that a notice under section 176 would be in
derogation of regulation 58 by giving the following reasoning:
"21. I have considered the controversy and for the reasons following, am of the view that the plaintiffs are
not entitled to the continuation of the ad interim order which has remained in force 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 dematerialized
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 dematerialized 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."
11.6 In view of the discussion in the preceding paragraphs, we do not agree with the reasoning in the aforesaid
sub-paragraphs and consequent ratio decidendi in Tendril Financial Services (supra). We do not find any
derogation or conflict between section 176 of the Contract Act and sub-regulations (8) and (9) of regulation 58.
Regulation 58(8) entitles the pawnee to record himself as a 'beneficial owner' in place of the pawnor. This does
not result in an 'actual sale'. The pawnee does not receive any money from such registration which he can adjust
against the debt due. The pledge creates special rights including the right to sell the pawn to a third party and
adjust the sale proceeds towards the debt in terms of section 176 of the Contract Act. The reasoning that prior
notice under section 176 of the Contract Act would interfere with transparency and certainty in the securities
market and render fatal blow to the Depositories Act and the 1996 Regulations is farfetched as it fails to notice
that the right of the pawnee is to realise money on sale of the security. The objective of the pledge is not to
purchase the security. Purchase by self, as held above, is conversion and does not extinguish the pledge or right
of the pawnor to redeem the pledge. Equally, it may be a disincentive for both the pawnor and the pawnee in
many cases, if we accept this interpretation and ratio, which would inhibit them from entering into a transaction
creating a pledge. Difficulties and disputes regarding price, valuation, right to redemption etc. could invariably
arise. There would also be difficulties in case the dematerialised securities are not traded as in the present case. If
the case pleaded by MHPL is to be accepted, the entire dues of PIFSL stand paid without in fact a single penny
coming to the coffer of PIFSL. Whether or not PIFSL will be able to find a willing buyer and sell the shares is
unknown given the fact that the shares are unlisted and MHPL continues to be the holding company of NEVPL.
The effect of the ratio in Tendril Financial Services (supra) is to enact an entirely new jurisprudence on the law
of pledge, annulling and re-writing the well-established law of pledge, which gives two options to the pawnee
when pawnor is in default, just because the pawnee exercises his right to be recorded as the 'beneficial owner' to
exercise his right to sell. Sale to self, if accepted as the norm, would be unlawful and amounts to conversion, is
applicable in case of dematerialised securities.
11.7 In fact, in the subsequent paragraphs, the learned Single Judge in Tendril Financial Services (supra) does
examine the position if section 176 were to apply and had not been complied with. It is rightly observed that due
to the pendency of the suit, the requirement of giving sufficient notice might not be relevant. The decision in
Tendril Financial Services (supra) also notices another decision of the Single Judge Bench of the Delhi High
Court in GTL Ltd. v. IFCI Ltd. 2011 SCC OnLine Del 3628 which takes a contrary view and holds that
compliance with section 176 is required to be made in respect of pledged dematerialized securities. In GTL Ltd.
(supra) temporary injunction was granted. We have briefly commented that injunction should not be normally
granted in such cases.45 clause (c) to sub-section (3) to section 3846 of the Specific Relief Act, 1963 states that
perpetual injunction may be granted when the defendant invades the plaintiff's right to or enjoyment of the
property where the invasion is such that the compensation in money would not afford adequate relief. Sub-
section (2) to section 3847 states that when any obligation arises from a contract, the court shall be guided by the
rules and provisions contained in Chapter II.48 section 10,49 as it stood before its substitution by Act 18 of 2018,
vide clause (ii) of Explanation, had stated that until and unless contrary is proved, the court shall presume that the
breach of a contract to transfer movable property can be relieved except in cases: (a) where the property is not an
ordinary article of commerce, of special value or interest to the plaintiff, or consists of goods which are not easily
obtainable in the market; and under clause (b) where the property is held by the defendant as the agent or trustee
of the plaintiff.50 As per new section 1051 with effect from 1st January 2018, specific performance of a contract
can be enforced subject to provisions contained in sub-section (2) to section 11,52 section 1453 and section 16.54
clause (c) to section 16 states that specific performance of a contract cannot be enforced in favour of a person
who fails to prove that he has performed or has always been ready and willing to perform the essential terms of
the contract which are to be performed by him, other than the terms the performance of which has been prevented
or waived by the defendant. Explanation which applies to clause (c) states where a contract involves payment of
money, it is not essential that the plaintiff should actually tender to the defendant or deposit in court any money
except when so directed by the court. However, the plaintiff must prove performance of, or readiness and
willingness to perform, the contract as per its true construction. These aspects must be kept in mind by the court
while examining the question of grant of injunction, albeit the fundamental principles relating to law of pledge
being the special law should be applied as the plaintiff has to establish a prima facie case, balance of convenience
and irreparable harm. These aspects on most occasions would be fact and situation specific.
11.8 Our attention was drawn to the decision of the Securities Appellate Tribunal, Mumbai, in the case of Liquid
Holdings (P.) Ltd. v. SEBI [2011] SCC Online SAT 40. In this case, on exercising his rights, the pawnee was
registered as a 'beneficial owner', but pursuant to a settlement, the pawnor was re-recorded as the 'beneficial
owner'. The Board had claimed and succeeded in establishing that there was a transfer of the dematerialised
securities resulting in violation of regulations 7 and 11(1) of the Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations, 1997. This decision, we may note, primarily
deals with the takeover regulations and in the passing refers to and interprets regulation 58 of the 1996
Regulations. The judgment is in the context of the takeover regulations and the legal violation thereof and on the
issue whether change in 'beneficial ownership' would trigger the takeover regulations. The provisions of the
Contract Act and the law of pledge have not been noted and examined. The appeal preferred was dismissed by a
non-reasoned order. This decision, therefore, would not help us decide the issue in controversy. We, however, do
observe that in view of our findings and reasoning, the Board may re-examine the 1996 Regulations as well as
the takeover regulations to avoid discord or ambiguity resulting in instability or confusion. Clarity is necessary.
The takeover regulations may have its own impact and in a given case, may be a detriment and a negative factor
for the creditor who wants to secure himself by a deed of pledge. The pertinent question is, should takeover
regulations apply when the pawnee exercises his right to be recorded as a 'beneficial owner', while reserving his
right to sell the pledge. There would be tax and accounting implications which may be detrimental and shackle
financial market and deals. It may inhibit financial institutions from accepting dematerialized securities as a
pawn. A holistic review of the impact of pledge viz. dematerialized securities, registration of the pawnee as the
'beneficial owner' without the pawnee enforcing the right to sell the pledge goods is required and necessary for
the smooth functioning of the securities market and free flow of transactions without hindrance and to avoid
uncertainty in fiscal matters.
G. Analysis of facts and application of law of pledge to the facts of this case
12.1 The relevant Clauses of the Pledge Deed dated 10th March, 2014 are reproduced as under:
"6.1 Registration in the Name of the Bridge Loan Lender:
The pledgor agrees that, upon the receipt of a notice of occurrence of Event of Default issued by the Bridge
Loan Lender, the Bridge Loan Lender shall have the right to have the Pledged Shared transferred in its name
 or its nominees."
6.2 Enforceability and Sale:
Upon occurrence of an Event of Default, the Bridge Loan Lender or its nominee may without further
authority and without prejudice to their other rights under applicable law but after giving notice to the
Pledgor 5 (five) days' notice (which period of notice the Pledgor agree is reasonable notice) sell or otherwise
dispose off all or any part of the Pledged Shares in such manner and for such consideration as the Bridge
Loan Lender may in its sole judgment deem fit (whether by private sale or otherwise) and apply the net
proceeds of any such sale or disposition in accordance with section 11 thereof."
12.2 As per clause 6.1, on receipt of the notice of the occurrence of 'event of default' by the pledgor/pawnor, the
pledgee/pawnee has the right to have the pledged shares transferred in its name or its nominees. Under clause
6.2, the pawnee or its nominee may, without further authority and prejudice to their other rights under the law,
but on giving five days' notice to the pawnor, sell or otherwise dispose of any or all of the pledged shares in such
manner and for such consideration as it in its sole discretion deems fit. The net proceeds of such sale or
disposition are then applied in the manner prescribed under clause 11 of the Pledge Deed.55 clause 14.156
clarifies that the Pledge Deed shall terminate only upon the repayment in full of the outstanding debt to the
lender.
12.3 In the context of the present case, the contract of pledge envisages that PIFSL is entitled to get itself
recorded as 'beneficial owner' without forfeiting its right in terms of clause 6.2 to sell the shares. The contention
of MHPL that Clauses 6.1 and 6.2 are in the alternative and once PIFSL has exercised option under clause 6.1,
the option under clause 6.2 is closed must be rejected as absolutely untannable. We do not find any such
condition in the two clauses. As noticed above, PIFSL could not have exercised the right under clause 6.2 unless
the pledge shares were registered in its name as 'beneficial owner'. This step was necessary to enable PIFSL to
exercise its right and enforce the sale of pledge shares. Whether or not it would be successful in selling the
pledge shares is unknown and uncertain even today. The amount of money that would be received is also
unknown and uncertain.
12.4 Clauses 6.1 and 6.2, therefore, draw a clear distinction between a mere transfer of the pledged shares in the
name of the pawnee or its nominee as a 'beneficial owner' and the 'actual sale' of the pledged shares. The right to
sell is without prejudice to any other right under the applicable law. Thus, there are two stages before the pledge
can be enforced by a sale. At the first stage, the pawnee must give notice to the pawnor under clause 6.1 to
exercise the rights to have the pledge shares transferred in its name or its nominees. This does not result in the
discharge of the debt equal to the value of the shares. The discharge of debt in whole or part occurs when the
pawnee exercises his right to sell the shares after giving five days' notice to the pawnor in accordance with clause
6.2 and sells the pawn. Upon the actual sale, the pawnee can apply the net proceeds of the sale or disposition in
accordance with clause 11 of the Pledge Deed.
12.5 As discussed above, clause 6.1 permits PIFSL to get itself recorded as a 'beneficial owner' of the shares
pledged, a mandate and a requirement to enable PIFSL as a pawnee to sell the shares pledged. Clause 6.2 is for
the sale of the said shares, and in this regard, we must refer to sub-clauses (k) and (m) of clause 5.1 of the Pledge
Deed, which read thus:
"5.1 The Pledgor's Undertakings:
The Pledgor assures, undertakes and agrees with the Bridge Loan Lender that throughout the continuance of
the pledge created pursuant to this Pledge Deed and until the repayment of the Amounts Outstanding in full
under the Transaction Documents, the Pledgor:-
** ** **

(k) hereby irrevocably waives any right it may have under the Depositories Act, the Depositories
Regulations or any other applicable law to the extent the same is inconsistent with the undertakings as
aforesaid and the pledge of the Pledged Shares pursuant to this Pledge Deed;
** ** **
 (m) remain the sole beneficial owner at all times of the Pledged Shares except on a sale by the Bridge Loan
Lender of the Pledged Shares."
As per clause 5.1(m), the pawnor agrees that throughout the continuance of the pledge created pursuant to the
pledge deed and until the repayment of the amount outstanding in full under the transaction document, that is, the
Bridge Loan Agreement, the pawnor shall remain the beneficial owner of the shares pledged at all times, except
on the sale made by the pawnee as the bridge loan lender. Further, vide clause 5.1(k), the pawnor has irrevocably
waived any right it may have under the Depositories Act, the 1996 Regulations, or any other applicable law to
the extent it is inconsistent with the provisions of the Pledge Deed. Clause 5.1(k) would only apply if the
Depositories Act, the 1996 Regulations, or any other law permits the parties to contract out of the regulations by
mutual agreement. It is a settled position of law and as discussed above, a contract cannot be inconsistent with
the provisions of any existing law, including regulations, unless the said law permits the parties to enter into a
contract inconsistent with the provision.
12.6 PIFSL by the letter dated 23rd January 2018 had informed MHPL in terms of clause 6.1 that there has been
an occurrence of default, which has continued and, therefore, they, on 16th January 2018, in exercise of its right
under clause 6.1 of the pledge deed, have applied for transfer of the pledged shares in its name. Consequently, all
the rights in the pledged shares, including but not limited to the right of attending general body meetings, voting
rights, and rights to receive dividends and other distributions, now vests with them as per clause 2.3(A)(ii)(b)57
of the pledge deed. This intimation to MHPL is without prejudice to any rights or remedies PIFSL has in terms of
the pledge deed or security documents executed in pursuance of the bridge loan agreement. PIFSL expressly
reserved its right to transfer and sell pawned shares for value providing five days' notice as required under clause
6.2 of the pledge deed and section 176 of the Contract Act. We would, without hesitation, therefore hold that on
becoming the 'beneficial owner' in the records of the 'depository', the pawnee had complied with the procedural
requirement of regulation 58(8) to enforce the right to sell the shares. Thereafter, such a sale should be made
according to sections 176 and 177 of the Contract Act. Violation of the said provisions, if made by PIFSL, would
have its consequences as per the law. Pawn has not been sold and there is no violation of the Contract Act or for
that matter the Depositories Act and the 1996 Regulations. PIFSL has not overlooked its obligations under
sections 176 and 177 of the Contract Act by relying upon sub-regulation (8) to regulation 58, which has an
entirely different object and purpose. Recording change in the register of the 'depository', whereby PIFSL as the
pawnee has become the 'beneficial owner', is only to enable the pawnee to sell and transfer the shares in
accordance with the Depositories Act and the 1996 Regulations. The object and purpose of sub-regulation (8) to
regulation 58 is not to nullify the obligation of MHPL i.e., the pawnor, and PIFSL i.e., the pawnee, under the
Contract Act but to enable PIFSL to exercise its rights under section 176. It also follows that MHPL is entitled to
redeem the pledge before the sale to a third party is made.
12.7 In view of the aforesaid findings, it has to be held that registration of the pawn, that is the dematerialised
shares, in favour of PIFSL as the 'beneficial owner' does not have the effect of sale of shares by the pawnee. The
pledge has not been discharged or satisfied either in full or in part. PIFSL is not required to account for any sale
proceeds which are to be applied to the debt on the 'actual sale'. The two options available to PIFSL as the
pawnee under section 176 of the Contract Act remain and are not exhausted.
H. Conclusion
13.1 For the aforesaid reasons, the present appeal must be allowed and the impugned order passed by the
Appellate Authority dated 20th June 2019 upholding the orders of the Adjudicating Authority dated 6th July
2018 and the emails of the IRP dated 19th February 2018 are set aside. It is held that MHPL is not a secured
creditor of the Corporate Debtor, namely NNPIL, to the extent of the value of the 31,80,678 shares. PIFSL has
rightly made a claim as financial creditor of the Corporate Debtor without accounting for the value of 31,80,678
shares of NEVPL in its claim petition. Insolvency proceedings against the Corporate Debtor, namely NNPIL,
will proceed accordingly.
13.2 The appeal is allowed in the aforesaid terms without any order as to costs.
RUCHI
† Arising out of order passed by NCLAT - New Delhi in PTC India v. Veenkateswarlu [2019] 108
taxmann.com 173.
1. For short, '1996 Regulations'.
2. For short, 'Contract Act'.
3. Hereinafter referred to as "PIFSL".
4. Hereinafter referred to as "RBI".
5. Hereinafter referred to as "NBFC".
6. Hereinafter referred to as "IFC".
7. Hereinafter referred to as "NNPIL" or "Corporate Debtor".
8. Hereinafter referred to as "MHPL".
9. Hereinafter referred to as "NEVPL".
10. For short, 'IBC'.
11. Hereinafter referred to as "Adjudicating Authority".
12. Hereinafter referred to as "IRP".
13. Hereinafter referred to as 'Appellate Authority'.
14. There are different recognised and established methods for valuation of unlisted securities - See, (i) CWT
v. Mahadeo Jalan & Mahabir Prasad Jalan [1973] 3 SCC 157; and (ii) Bharat Hari Singhania v. CWT
[1994] 73 Taxman 3/207 ITR 1.
15. Section 155, Contract Act.
16. Section 156, Contract Act.
17. In the context of the present case, we need not examine the difference between pledge and hypothecation.
It is sufficient to note that in hypothecation possession does not transfer and remains with the debtor.
Hypothecation has been defined as a right which a creditor has over a thing belonging to another, and
which consists in the power to cause it to be sold in order to be paid his claims out of the proceeds. It is
an act of pledging a thing as security for a debt or demand without parting with the possession. It follows
as a consequence that although the property remains in the possession of the debtor, it cannot be
transferred to a third party without the express consent or permission of the creditor (See, Simla Banking
and Industrial Co. Ltd. v. Pritams AIR 1960 Punj 42). In India, Securitisation and Reconstruction of
Financial Assets and Enforcement of Security Interest Act, 2002 defines it under section 2(1)(n) as a
charge in or upon any movable property, existing or future, created by a borrower in favour of a secured
creditor without delivery of possession of the movable property to such creditor, as a security for
financial assistance and includes floating charge and crystallisation of such charge into fixed charge on
movable property.
18. Hailsham Edn., (2nd Edn.), para 330, page 226 of Volume XXIII.
19. "20. In English Law a pledge arises when goods are delivered by one person called the 'pledgor' to
another person called the 'pledge' to be held as security for the payment of a debt or for discharge of
some other obligation upon the express or implied understanding that the subject-matter of the pledge is
to be restored to the pledger as soon as the debt or other obligation is discharged. It is essential for the
creation of a pledge that there should be a delivery of the goods comprised therein. In other words, a
pledge cannot be created except by delivery of the possession of the thing pledged, either actual or
constructive. It involved a bailment. If the pledger had actual goods in his physical possession, he could
effect the pledge by actual delivery; but in other cases he could give possession by some symbolic act,
such as handing over the key of the store in which they were. If, however, the goods were in the actual
physical possession of a third person, who held for the bailor so that in law his possession was that of the
bailor, this pledge could be effected by a change of the character of the possession of the third party, that
is by an order to him from the pledgor to hold for the pledgee, the change being perfected by the third
party attorning to the pledgee, thus acknowledging that he thereupon held for the latter. There was thus a
change of possession and a constructive delivery: the goods in the hands of the third party came by this
process constructively in the possession of the pledgee. But where goods were represented by documents
the transfer of the documents did not change the possession of the goods, save for one exception, unless
the custodian (carrier, warehouseman or such) was notified of the transfer and agreed to hold in future as
bailee for the pledgee. The one exception was the case of bills of lading, the transfer of which by the law
merchant operated as a transfer of the possession of, as well as the property in, the goods. This exception
 has been explained on the ground that the goods being at sea the master could not be notified; the true
explanation was perhaps that it was a rule of the law merchant, developed in order to facilitate mercantile
transactions, whereas the process of pledging goods on land was regulated by the narrower rule of the
common law." The quotation reflects flexibility.
20. 173. Pawnee's right of retainer.—The pawnee may retain the goods pledged, not only for a payment of
the debt or the performance of the promise, but for the interest of the debt, and all necessary expenses
incurred by him in respect of the possession or for the preservation of the goods pledged.
21. A common law action to recover the value of personal property that has been wrongfully disposed of by
another person.
22. A common law action for recovery of personal chattel wrongfully detained or of its value.
23. (1953), 10th Edition, Sweet & Maxwell, page 368.
24.
Wilson v. Mcintosh, [1894] A.C. P. 129.; Corporation of the City of Tornoto v. John Russel, D. Jones &
Smiths Reports, 1908 Ac. 493; Selwyn v. Grafit, 38 Ch. D.P. 273; Griffiths v. The Earl of Dudley, 9,
Q.B.D. P. 357.
25.
Vellayan Chettiar v. Government of the Province of Madras, I.L.R. 1948 Mad. p. 214; Raja Chetty v.
Jagannadhadas Govindas, 1949 II M.L.J. P. 694.
26. Promise may dispense with or remit performance of promisee.— Every promisee may dispense with or
remit, wholly or in part, the performance of the promisee made to him, or may extend the time for such
performance, or may accept instead of it any satisfaction which he thinks fit.
27. Cuilibet licet renuntiare juri pro se introducto i.e., Any one may waive or renounce the benefit of a
principle or rule of law that exists only for his protection.
28. Vol. 8, Third Edn., para 248 at p. 143.
29. G.P. Singh, Principles of Statutory Interpretation, 14th Edition, Lexis Nexis (2016) at page 462.
30. Craies on Statute Law by S.G.G. Edgar, 7th Edition, Sweet & Maxwell Limited (1971) at page 255.
31. See paragraphs 22.7, 23 and 24 of the judgment in Nabha Investment.
32. (2) that without a proper tender of the amount due on the pledge, the only right of the pawnor in respect
of the unlawful or unauthorised sale is in tort for damages actually sustained by him.
33. The reliance placed on the Madras High Court decision in S.L. Ramasamy Chetty (supra) would not help
as the decision is in conformity with the view expressed by Chagla, J. that the pawnor does not become
entitled to redemption of the goods pledged without tendering the amount due on the pledge. The Madras
High Court in S.L. Ramasamy Chetty (supra) did not hold that the pawnor is entitled to redemption of the
pledged goods without payment of the debt due and the additional amount. The Court would be entitled
to ask the pawnor to deposit the 'admitted amount' at the initial stage itself if the pawnee is ready and
willing to deliver the property pledged. The position would be different where the pawnee declares in
advance his inability to return the pledged property, in which case the pawnor's claim cannot be defeated
through a useless ceremony of tender. Section 51 of the Contract Act relating to reciprocal promises was
relied upon.
34. This decision also holds that the pawnor would be entitled to redeem without payment. This proposition
is contrary to several decisions including decision of the Privy Council in Neikram Dobey (supra).
35. Section 2(1)(e): "depository" means a company formed and registered under the Companies Act, 1956 (1
of 1956) and which has been granted a certificate of registration under sub-section (1-A) of Section 12 of
the Securities and Exchange Board of India Act, 1992 (15 of 1992).
36. Section 2(1)(j): "registered owner" means a depository whose name is entered as such in the register of
the issuer;
37. Section 2(1)(a): "beneficial owner" means a person whose name is recorded as such with a depository;
38. 7. Registration of transfer of securities with depository:
(1) Every depository shall, on receipt of intimation from a participant, register the transfer of security in
the name of the transferee.
(2) If a beneficial owner or a transferee of any security seeks to have custody of such security, the
depository shall inform the issuer accordingly.
39. 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.
40. Hereinafter referred to as "Board".
41. "20. It does not appear that the transfer of shares in the present case can be taken to be a pledge in law.
Therefore, there can be no question of applicability of Section 176 of the Contract Act which requires the
pledgee to give a notice to the pledgor of his intention to transfer the pledged goods. This aspect is being
considered because at one stage it was argued by learned counsel for the plaintiffs that the transfer by
defendant No. 1 of shares in favour of the other defendants is void in the absence of the notice by
defendant No. 1 of their intention to sell the shares."
42. "25. ……….. For the purpose 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……."
43. 38. Records to be maintained. (1) Every depository shall maintain the following records and documents,
namely :—
(a)   records of securities dematerialised and rematerialised;
(b)   the names of the transferor, transferee, and the dates of transfer of securities;
(c)   a register and an index of beneficial owners;
(cc)   details of the holding of the securities of beneficial owners as at the end of each day;
(d)   records of instructions received from and sent to participants, issuers, issuers' agents and beneficial
owners;
(e)   records of approval, notice, entry and cancellation of pledge or hypothecation, as the case may be;
(f)   details of participants;
(g)   details of securities declared to be eligible for dematerialisation in the depository; and
(h)   such other records as may be specified by the Board for carrying on the activities as a depository.

(2) Every depository shall intimate the Board the place where the records and documents are maintained.
(3) Subject to the provisions of any other law the depository shall preserve records and documents for a
minimum period of five years.
44. However, cases praying for an injunction on the plea that the full/part amount of debt has been paid or
the event of default etc. has not occurred would have to be examined on their facts. See, infra para 11.7.
45. Supra para 11.4.
46. Section 38. Perpetual injunctions when granted:
(3) When the defendant invades or threatens to invade the plaintiff's right to, or enjoyment of, property
the court may grant a perpetual injunction in the following cases, namely:—
(c) where the invasion is such that compensation in money would not afford adequate relief;
47. Section 38(2): When any such obligation arises from contract, the court shall be guided by the rules and
provisions contained in Chapter II.
48 Chapter II: Specific Performance of Contract
49. Section 10. Cases in which specific performance of contract enforceable.—
Except as otherwise provided in this Chapter, the specific performance of any contract may, in the
discretion of the court, be enforced—

(a)   when there exists no standard for ascertaining actual damage caused by the non-
performance of the act agreed to be done; or
(b)   when the act agreed to be done is such that compensation in money for its non-
performance would not afford adequate relief.

Explanation.—Unless and until the contrary is proved, the court shall presume—

(i)   that the breach of a contract to transfer immovable property cannot be adequately relieved by
compensation in money; and
(ii)   that the breach of a contract to transfer movable property can be so relieved except in the following
cases:—

(a)   where the property is not an ordinary article of commerce, or is of special value or interest
to the plaintiff, or consists of goods which are not easily obtainable in the market;
(b)   where the property is held by the defendant as the agent or trustee of the plaintiff.
50. A pawnee is a trustee but has a special right to sell the pawned property after giving reasonable notice of
sale to the pawnor.
51. Section 10. Specific performance in respect of contracts.—The specific performance of a contract shall
be enforced by the court subject to the provisions contained in sub-section (2) of section 11, section 14
and section 16.
52. Section 11. Cases in which specific performance of contracts connected with trusts enforceable.
53. Section 14. Contracts not specifically enforceable.
54. Section 16. Personal bars to relief: Specific performance of a contract cannot be enforced in favour of a
person—
(a)   who has obtained substituted performance of contract under section 20; or
(b)   who has become incapable of performing, or violates any essential term of, the contract that on his
part remains to be performed, or acts in fraud of the contract, or wilfully acts at variance with, or in
subversion of, the relation intended to be established by the contract; or
(c)   who fails to prove that he has performed or has always been ready and willing to perform the
essential terms of the contract which are to be performed by him, other than terms the performance
of which has been prevented or waived by the defendant.

Explanation.—For the purposes of clause (c),—

(i)   where a contract involves the payment of money, it is not essential for the plaintiff to actually
tender to the defendant or to deposit in court any money except when so directed by the court;
(ii)   the plaintiff must prove aver performance of, or readiness and willingness to perform, the contract
according to its true construction.
55. 11. APPROPRIATIONS OF PAYMENTS:
All monies, sums, distributions, and monetary accretions received or recovered by the Bridge Loan
Lender under or pursuant to this Deed of Pledge shall be applied, and appropriated in accordance with the
Transaction Documents. Any surplus of such monies following payment of the Amounts Outstanding in
full, held by the Bridge Loan Lender shall until such surplus amounts are paid to the Pledgor, be held in
trust for the benefit of the Pledgor.
56. 14. RELEASE AND TERMINATION:
14.1 This Deed of Pledge shall terminate upon the repayment in full of the Amounts Outstanding or upon
a sale, transfer or other disposition of all the Pledged Shares in accordance with the terms of this Deed of
Pledge.
14.2 Upon termination of this Deed of Pledge, following the repayment in full of the Amounts
Outstanding, the Bridge Loan Lender shall, at the Pledgor's cost and expense, release the Pledged Shares
from the pledge created under this Deed of Pledge and intimate the Pledgor of such release, other than
such of the Pledged Shares that may have been sold or disposed off (sic.).
57. 2.3. Voting rights and dividends
(A) So long as no event of default or potential event of default has occurred and is continuing, subject to
the provisions of the Transaction Documents:
(ii) the Pledgor shall be entitled to receive and retain any and all dividends and other distributions paid in
respect of the Pledged Shares only with prior written approval of Bridge Loan Lender, provided,
however, that any and all:
(b) dividends and other distributions paid or payable in cash in respect of or in con`nection with any
liquidation or dissolution or in connection with a reduction of capital