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.

 REPORTABLE

IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO. 5443 OF 2019

PTC INDIA FINANCIAL SERVICES LIMITED ..... APPELLANT

VERSUS

VENKATESWARLU KARI AND ANOTHER ..... RESPONDENTS

J U D G M E N T

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:

1 For short, ‘1996 Regulations’.

2 For short, ‘Contract Act’.

Civil Appeal No. 5443 of 2019 Page 1 of 86

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)

Regulation, 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 whollyowned 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

3 Hereinafter referred to as “PIFSL”.

Civil Appeal No. 5443 of 2019 Page 2 of 86

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

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”.

Civil Appeal No. 5443 of 2019 Page 3 of 86

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.

12 Hereinafter referred to as “IRP”.

Civil Appeal No. 5443 of 2019 Page 4 of 86

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 6

th 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.

Civil Appeal No. 5443 of 2019 Page 5 of 86

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

Civil Appeal No. 5443 of 2019 Page 6 of 86

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

13 Hereinafter referred to as ‘Appellate Authority’.

Civil Appeal No. 5443 of 2019 Page 7 of 86

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

14 There are different recognised and established methods for valuation of unlisted securities – See,

(i) Commissioner of Wealth Tax v. Mahadeo Jalan and Mahabir Prasad Jalan and Others Etc., (1973)

3 SCC 157; and (ii) Bharat Hari Singhania and Others v. Commissioner of Wealth Tax (Central) and

Others, 1994 Supp. (3) SCC 46.

Civil Appeal No. 5443 of 2019 Page 8 of 86

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

15 Section 155, Contract Act.

16 Section 156, Contract Act.

Civil Appeal No. 5443 of 2019 Page 9 of 86

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

Civil Appeal No. 5443 of 2019 Page 10 of 86

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.”

xx xx xx

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.”

xx xx xx

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

Civil Appeal No. 5443 of 2019 Page 11 of 86

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.

Civil Appeal No. 5443 of 2019 Page 12 of 86

4.1 Md. Sultan and Others v. Firm of Rampratap Kannayalal,

Hyderabad, by its partners17 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

Kakarklhpudi Venkata Sudarsana Sundara Narasayamma

Garu (died) and others v. The Andhra Bank Ltd. Vijayawada

and others18 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

17 AIR 1964 AP 201.

18 AIR 1960 AP 273.

Civil Appeal No. 5443 of 2019 Page 13 of 86

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.19 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

19 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., Simla (In Liquidation) 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.

Civil Appeal No. 5443 of 2019 Page 14 of 86

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:20

“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.”

20 Hailsham Edn., (2nd Edn.), para 330, page 226 of Volume XXIII.

Civil Appeal No. 5443 of 2019 Page 15 of 86

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.21 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.22

(ii) Pawnee has a special and not general right in the pledged

property.

5.1 This Court, in Lallan Prasad v. Rahmat Ali and Another,

23

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 pawnee24 and (ii) a pawnee has only special property in the

21 Para 20, Sri Raja Kakarklhpudi Venkata Sudarsana Sundara Narasayamma Garu (supra)

22 Arjun Prasad and others v. Central Bank of India, Ltd., 1954 SCC OnLine Pat 138.

23 AIR 1967 SC 1322.

24 See also Morvi Mercantile Bank Ltd. v. Union of India, AIR 1965 SC 1954: “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

Civil Appeal No. 5443 of 2019 Page 16 of 86

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

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.

Civil Appeal No. 5443 of 2019 Page 17 of 86

payment of debt or performance of promise. Section 17325 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

25 173. 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.

Civil Appeal No. 5443 of 2019 Page 18 of 86

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. The State of Bihar and Others,

26 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

26 (1972) 3 SCC 196.

Civil Appeal No. 5443 of 2019 Page 19 of 86

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 Cooperative Bank Limited v. Assistant

Provident Fund Commissioner and Others,

27 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 Pawnbrokers’

Association and Others v. State of Karnataka and Others,

28

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.

27 (2009) 10 SCC 123.

28 (1998) 7 SCC 707.

Civil Appeal No. 5443 of 2019 Page 20 of 86

(iii) Accretion on pawned goods

6.1 In Standard Chartered Bank and Another v. Custodian and

Another,

29 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.

29 (2000) 6 SCC 427.

Civil Appeal No. 5443 of 2019 Page 21 of 86

6.2 Accordingly, in Seth Motilal Hirabhai and Ors. v. Bai Mani,

30

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 and Others,

31 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 and Others v. Swadeshi Polytex

Ltd. and Another32 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.

30 1924 SCC OnLine PC 81.

31 AIR 1969 Del 313.

32 (1985) 2 SCC 167.

Civil Appeal No. 5443 of 2019 Page 22 of 86

7.2 Several High Courts in F. Nanak Chand Ramkishan Das of

Hodel and Others v. Lal Chand and Others,

33 Bank of

Maharashtra v. M/s. Racmann Auto (P) Ltd.34 and Rani Leasing

& Finance Ltd. v. Sanjay Khemani35 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.36 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

33 1958 SCC OnLine Punj 6.

34 AIR 1991 Del 278.

35 2015 SCC OnLine Cal 450.

36 AIR 1958 Cal 644.

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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.37 refers to two earlier decisions in the

cases of Hulas Kunwar (supra) and Kunj Behari Lal v. The

Bhargava Commercial Bank, Jubbulpore38 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.

37 AIR 1963 Cal 132.

38 AIR 1918 All 363 (2).

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7.5 In Vimal Chandra Grover v Bank of India,

39 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

39 (2000) 5 SCC 122.

Civil Appeal No. 5443 of 2019 Page 25 of 86

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 The Official Assignee of Bombay v. Madholal

Sindhu and Others,

40 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.”

40 AIR 1947 Bom 217.

Civil Appeal No. 5443 of 2019 Page 26 of 86

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

Civil Appeal No. 5443 of 2019 Page 27 of 86

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;

Civil Appeal No. 5443 of 2019 Page 28 of 86

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,

Civil Appeal No. 5443 of 2019 Page 29 of 86

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 trover41 and detinue42 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

41 A common law action to recover the value of personal property that has been wrongfully disposed

of by another person.

42 A common law action for recovery of personal chattel wrongfully detained or of its value.

Civil Appeal No. 5443 of 2019 Page 30 of 86

Section 176 of the Contract Act. Reference was made to the rule

of waiver as stated in Maxwell on Interpretation of Statutes43 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 foreign44 and Indian authorities45 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.:

46

“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

43 (1953), 10th Edition, Sweet & Maxwell, page 368.

44 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.

45 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.

46 1940-1 Ch 638 at p. C43

Civil Appeal No. 5443 of 2019 Page 31 of 86

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 6347 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.48 However, such

a waiver cannot infringe any public right or public policy. In

47 63. 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.

48 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.

Civil Appeal No. 5443 of 2019 Page 32 of 86

Krishna Bahadur v. Purna Theatre and Others,

49 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,50 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.51 Where a statute prescribes that a contract shall

be in a specific form or shall or shall not contain certain terms, the

49 (2004) 8 SCC 229.

50 Vol. 8, Third Edn., para 248 at p. 143.

51 G.P. Singh, Principles of Statutory Interpretation, 14th Edition, Lexis Nexis (2016) at page 462.

Civil Appeal No. 5443 of 2019 Page 33 of 86

statutory form must be followed.52 In reference to pledge, waiver

by contract and statutorily mandated terms, the High Court of

Calcutta in The Co-Operative Hindusthan Bank, Ltd. v.

Surendranath De,

53 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 Private Limited v. Dipak Kumar Singh

and Another,

54 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

52 Craies on Statute Law by S.G.G. Edgar, 7th Edition, Sweet & Maxwell Limited (1971) at page 255.

53 1931 SCC OnLine Cal 224.

54 (2016) 9 SCC 268.

Civil Appeal No. 5443 of 2019 Page 34 of 86

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 Pvt. Ltd. v. Harmishan Dass Lukhmi

Dass,

55 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

55 1995 SCC OnLine Del 239.

Civil Appeal No. 5443 of 2019 Page 35 of 86

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).

Civil Appeal No. 5443 of 2019 Page 36 of 86

(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):—

Civil Appeal No. 5443 of 2019 Page 37 of 86

“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

bonafide 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 divergence56 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

56 See paragraphs 22.7, 23 and 24 of the judgment in Nabha Investment.

Civil Appeal No. 5443 of 2019 Page 38 of 86

covered and can be taken care under clause (2)57 of the opinion

expressed by Chagla, J. in Madholal Sindhu (supra).58

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

57 (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.

58 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.

Civil Appeal No. 5443 of 2019 Page 39 of 86

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,59 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

59 ILR (1892) 19 Cal 322.

Civil Appeal No. 5443 of 2019 Page 40 of 86

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,

60 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 and Another v. M.S.A.P.L. Palaniappa Chettiar,

61 relying

upon the decision of the Privy Council in Neikram Dobey (supra),

opined that where the pawnee has the power to sell in default,

60 AIR 1944 Pat 135.

61 1929 SCC OnLine Mad 62.

Civil Appeal No. 5443 of 2019 Page 41 of 86

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.62

8.4 There is one solitary judgment of the single judge of the Punjab

and Haryana High Court in Dhani Ram and Sons v. The Frontier

Bank Ltd. and Another,

63 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

62 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).

63 AIR 1962 P&H 321.

Civil Appeal No. 5443 of 2019 Page 42 of 86

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.64 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.65

9.2 Thus, we begin by referring to the object and purpose behind the

enactment of the Depositories Act and which would underpin our

64 Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. and Others, (1987) 1

SCC 424, para 33.

65 Vasudev Ramachandra Shelat v. Pranlal Jayanand Thakkar and Others, (1974) 2 SCC 323, para

5.

Civil Appeal No. 5443 of 2019 Page 43 of 86

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’.66 The

Depositories Act establishes the depository eco-system and

introduces the concepts of a ‘registered owner’67 and ‘beneficial

owner’.68 Every owner of a physical share has to enter into an

66 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).

67 Section 2(1)(j): “registered owner” means a depository whose name is entered as such in the

register of the issuer;

68 Section 2(1)(a): “beneficial owner” means a person whose name is recorded as such with a

depository;

Civil Appeal No. 5443 of 2019 Page 44 of 86

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 769 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

69 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.

Civil Appeal No. 5443 of 2019 Page 45 of 86

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 1070 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

70 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.

Civil Appeal No. 5443 of 2019 Page 46 of 86

depository shall thereupon make entries in its records

accordingly.

(3) Any entry in the records of a depository under subsection (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

Civil Appeal No. 5443 of 2019 Page 47 of 86

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 and Ors.

(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 (Deceased) and Another v. P.N.

Krishna Pattar and Two Others71 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

71 AIR 1943 Mad 74.

Civil Appeal No. 5443 of 2019 Page 48 of 86

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 India72 has been vested with the power to

72 Hereinafter referred to as “Board”.

Civil Appeal No. 5443 of 2019 Page 49 of 86

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.

xx xx xx

(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:

Civil Appeal No. 5443 of 2019 Page 50 of 86

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

Civil Appeal No. 5443 of 2019 Page 51 of 86

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

Civil Appeal No. 5443 of 2019 Page 52 of 86

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,

Civil Appeal No. 5443 of 2019 Page 53 of 86

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

Civil Appeal No. 5443 of 2019 Page 54 of 86

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)

 Regulation, 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,

Civil Appeal No. 5443 of 2019 Page 55 of 86

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

Civil Appeal No. 5443 of 2019 Page 56 of 86

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

Civil Appeal No. 5443 of 2019 Page 57 of 86

‘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

Civil Appeal No. 5443 of 2019 Page 58 of 86

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

Civil Appeal No. 5443 of 2019 Page 59 of 86

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,

Civil Appeal No. 5443 of 2019 Page 60 of 86

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 Private Limited v. Deccan Leafine Services

Ltd. and Others73 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.74

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

73 (2004) 121 Comp Cas 12.

74 “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.”

Civil Appeal No. 5443 of 2019 Page 61 of 86

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 selfcontained 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

Civil Appeal No. 5443 of 2019 Page 62 of 86

Prasad (supra) and Maharashtra State Co-operative Bank

Limited (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 Pvt. Ltd. v. Renudevi Choudhary and

Others,

75 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.76 The said finding in JRY Investments Private Limited

(supra) as held above is contrary to the view expressed by this

Court in Morvi Merchantile Bank Limited (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 Pvt. 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

75 2014 SCC OnLine Bom 3661.

76 “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…….”

Civil Appeal No. 5443 of 2019 Page 63 of 86

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 and

Others,

77 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

77 AIR 1958 All. 66.

Civil Appeal No. 5443 of 2019 Page 64 of 86

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

Civil Appeal No. 5443 of 2019 Page 65 of 86

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)78 requires a

78 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;

Civil Appeal No. 5443 of 2019 Page 66 of 86

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,79 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

(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.

79 (1866) L.R. 1 Q.B. 585.

Civil Appeal No. 5443 of 2019 Page 67 of 86

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.

xx xx xx

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 Pvt. 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

Civil Appeal No. 5443 of 2019 Page 68 of 86

in Pushpanjali Tie Up Pvt. 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 Pvt. Ltd. &

Ors. v. Namedi Leasing & Finance Ltd. and Ors.,

80 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

80 2018 SCC OnLine Del 8142

Civil Appeal No. 5443 of 2019 Page 69 of 86

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.81

11.5 On other aspects the judgment has placed reliance on JRY

Investments Private Limited (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:

xx xx xx

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

81 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.

Civil Appeal No. 5443 of 2019 Page 70 of 86

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

Civil Appeal No. 5443 of 2019 Page 71 of 86

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

Civil Appeal No. 5443 of 2019 Page 72 of 86

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

Civil Appeal No. 5443 of 2019 Page 73 of 86

‘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 Limited v. IFCI Ltd. & Ors.82

 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

Limited (supra) temporary injunction was granted. We have briefly

commented that injunction should not be normally granted in such

cases.83 Clause (c) to sub-section (3) to Section 3884 of the

82 2011 SCC OnLine Del 3628.

83 Supra para 11.4.

84 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;

Civil Appeal No. 5443 of 2019 Page 74 of 86

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. Subsection (2) to Section 3885 states that when any obligation arises

from a contract, the court shall be guided by the rules and

provisions contained in Chapter II.86 Section 10,87 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

85 Section 38(2): When any such obligation arises from contract, the court shall be guided by the

rules and provisions contained in Chapter II.

86 Chapter II: Specific Performance of Contract

87 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.

Civil Appeal No. 5443 of 2019 Page 75 of 86

is held by the defendant as the agent or trustee of the plaintiff. 88 As

per new Section 1089 with effect from 1st January 2018, specific

performance of a contract can be enforced subject to provisions

contained in sub-section (2) to Section 11,90 Section 1491 and

Section 16.92 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

88 A pawnee is a trustee but has a special right to sell the pawned property after giving reasonable

notice of sale to the pawnor.

89 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.

90 Section 11. Cases in which specific performance of contracts connected with trusts enforceable.

91 Section 14. Contracts not specifically enforceable.

92 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.

Civil Appeal No. 5443 of 2019 Page 76 of 86

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 Private

Limited v. The Securities Exchange Board of India.93 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 Regulation 7 and

11(1) of the Securities and Exchange Board of India (Substantial

Acquisition of Shares and Takeovers) Regulations, 1997. This

93 (2011) SCC Online SAT 40.

Civil Appeal No. 5443 of 2019 Page 77 of 86

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

Civil Appeal No. 5443 of 2019 Page 78 of 86

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

Civil Appeal No. 5443 of 2019 Page 79 of 86

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.94 Clause 14.195 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

94 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.

95 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.).

Civil Appeal No. 5443 of 2019 Page 80 of 86

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

Civil Appeal No. 5443 of 2019 Page 81 of 86

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:-

xx xx xx

(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;

xx xx xx

(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

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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

Civil Appeal No. 5443 of 2019 Page 83 of 86

vests with them as per Clause 2.3(A)(ii)(b)96 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

96 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;

Civil Appeal No. 5443 of 2019 Page 84 of 86

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.

Civil Appeal No. 5443 of 2019 Page 85 of 86

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.

......................................J.

(M.R. SHAH)

......................................J.

(SANJIV KHANNA)

NEW DELHI;

MAY 12, 2022.

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