# PTC INDIA FINANCIAL SERVICES LIMITED v. VENKATESWARLU KARI AND ANOTHER

- **Citation:** [2022] 9 S.C.R. 1063
- **Court:** Supreme Court of India
- **Decided:** 2022-05-12
- **Case number:** Civil Appeal No. 5443 of 2019
- **Bench:** M. R. Shah, Sanjiv Khanna
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/ptc-india-financial-services-limited-v-venkateswarlu-kari-and-another-36555
- **Pages:** 66

## Headnote

Contract Act, 1872 - Depositories Act, 1996 - Securities and
Exchange Board of India (Depositories and Participants)
Regulations, 1996 - 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, 1872 and the common law as
applicable in India - Held: 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 - 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) requires a depository to maintain,
inter alia, records of all approvals, notices and entries, and
cancellation of pledge or hypothecation, as the case may be.
Contract Act, 1872 - ss. 148-171, 172-179 - Bailment and
Pledge - Legal Distinction - In the cases of bailment, the goods are
bailed for specific purpose and once the purpose is accomplished
the bailee is bound to deliver the possession of the goods back to
the bailor or to dispose off the goods as per the bailor's direction -
Unlike bailment, in pledge there is the delivery of possession of the
goods by the pawnor to the pawnee by way of security upon the
promise of repayment of a debt or the performance of a promise,
thereby creating an estate that vests with the pawnee - Pledge is
preceded by bailment
Words and Phrases - "Pledge", "Mortgage" - Movable
Property - Legal Distinction - A mortgage conveys the whole legal
interest in the chattel, while a pledge conveys only a special property
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leaving the general property in the pledger, and the pledgee never
has absolute ownership of property - Further unlike pledgee, a
mortgagee acquires general right in the things mortgaged subject
to the right of redemption of the mortgagor - Compared to the
pledge, a pawnee has only 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.
Contract Act, 1872 - Accretion of the Pawned Goods - Duty
of the the Pawnee towards such accretion - 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 - Further 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.
Contract Act, 1872 - s. 176, 177 - Pawnee's duty to give
notice of intended sale of pawned goods - Extent - 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 - Further, the mere tendering of notice
to the pawnor does not binds pawnee to put the intended sale to the
effect and he is not bound to sell even after tendering of such notice
- If the notice is served, the pawnor may redeem the goods as per s.
177 before the 'actual sale' by the pawnee.
Contract Act, 1872 - s. 63, 176 - Whether Parties to Pledge
Agreement can waive the requirement of Notice As contemplated by
s. 176 - Settled Legal position - S. 63 of th

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 [2022] 9 S.C.R. 1063
1063
PTC INDIA FINANCIAL SERVICES LIMITED
v.
VENKATESWARLU KARI AND ANOTHER
(Civil Appeal No. 5443 of 2019)
MAY 12, 2022
[M. R. SHAH AND SANJIV KHANNA, JJ.]
Contract Act, 1872 - Depositories Act, 1996 - Securities and
Exchange Board of India (Depositories and Participants)
Regulations, 1996 - 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, 1872 and the common law as
applicable in India - Held: 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 - 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) requires a depository to maintain,
inter alia, records of all approvals, notices and entries, and
cancellation of pledge or hypothecation, as the case may be.
Contract Act, 1872 - ss. 148-171, 172-179 - Bailment and
Pledge - Legal Distinction - In the cases of bailment, the goods are
bailed for specific purpose and once the purpose is accomplished
the bailee is bound to deliver the possession of the goods back to
the bailor or to dispose off the goods as per the bailor's direction -
Unlike bailment, in pledge there is the delivery of possession of the
goods by the pawnor to the pawnee by way of security upon the
promise of repayment of a debt or the performance of a promise,
thereby creating an estate that vests with the pawnee - Pledge is
preceded by bailment
Words and Phrases - "Pledge", "Mortgage" - Movable
Property - Legal Distinction - A mortgage conveys the whole legal
interest in the chattel, while a pledge conveys only a special property
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leaving the general property in the pledger, and the pledgee never
has absolute ownership of property - Further unlike pledgee, a
mortgagee acquires general right in the things mortgaged subject
to the right of redemption of the mortgagor - Compared to the
pledge, a pawnee has only 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.
Contract Act, 1872 - Accretion of the Pawned Goods - Duty
of the the Pawnee towards such accretion - 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 - Further 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.
Contract Act, 1872 - s. 176, 177 - Pawnee's duty to give
notice of intended sale of pawned goods - Extent - 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 - Further, the mere tendering of notice
to the pawnor does not binds pawnee to put the intended sale to the
effect and he is not bound to sell even after tendering of such notice
- If the notice is served, the pawnor may redeem the goods as per s.
177 before the 'actual sale' by the pawnee.
Contract Act, 1872 - s. 63, 176 - Whether Parties to Pledge
Agreement can waive the requirement of Notice As contemplated by
s. 176 - Settled Legal position - S. 63 of the Contract Act governs
the domain of waiver and 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 however, such a waiver cannot infringe any public right
or public policy - But the requirement of 'notice' u/s 176 is a
mandatory requirement and a special protection given to the pawnor
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- S. 176 is not eclipsed or curtailed by the phrase "in the absence
of the contract to the contrary" and therefore the parties cannot
contract out of Section 176 - Further 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.
Contract Act, 1872 - Whether a Pawnee can Sell Goods
Pledged to 'Himself' - Settled Legal Position - It is settled legal
position that a pawnee cannot sell goods to himself, and if he does
so then such transfer could not be said to be a 'sale' but a
'conversion' and hence could not interpreted as 'sale' in terms of s.
176.
Interpretation of Statutes - Rules of Interpretation when two
or more than two statutes apply - To resolve a debate when two
views are evident, it is best to interpret the provision when we know
why the statute is enacted - If a statute is looked at, in the context
of its enactment, with the glasses of the statute-maker provided by
such context, its scheme, the sections, clauses, phrases and words
may take colour and appear different than when the statute is looked
at without the glasses provided by the context and this principle
may equally apply when we examine interplay between two statutes
- 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.
Depositories Act, 1996 - s.2(1)(a), 2(1)(j) - Words and
Phrases - "Registered Owner'', 'Beneficial Owner' - Legislative
Intent and Purpose - 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' and hence by the aforesaid enactment, the legislature
sought to get away with physical security - Further the Depositories
Act establishes the depository eco-system and introduces the concepts
of a 'registered owner' and 'beneficial owner' - 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' - Further the beneficial owner' shall be solely
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entitled to all rights, benefits, and liabilities attached to the securities
held by 'the depository'. And therefore 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.
Contract Act, 1872 - s. 176, 177 - Depositories Act, 1996 -
s.12 25, 28 - Securities and Exchange Board of India (Depositories
and Participants) Regulation 1996 - Regulation 58 - Interplay of
The Statutes - 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' but the aforesaid provision nowhere defines the
term 'pledge' - Section 25 of the Depositories Act, the Securities
and Exchange Board of India has been vested with the power to
make Regulations to carry out the purpose of the Depositories Act
- As per s. 25(2)(d) 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 - Further as per Regulation 58 a beneficial owner
may create a pledge on security owned by him and for this purpose,
in cases of Pledge, the pawnee, to exercise the right under s. 12 r/
w Regulation 58, shall, by virtue of Regulation 58(8), get himself
recorded as 'beneficial owner' before he proceeds to sell the pledged
securities - The Acts and the Regulations are not inconsistent but
are subject to harmonious construction in order to attain the
objective sought to be achieved more so when s. 28 itself provides
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'' - Further 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 -
Further the requirement of pawnee to get himself registered as
'beneficial owner' in in terms of the Act and Regulation, is not an
actual sale and would not affect the right of the pawnor of
redemption u/s 177 of the Contract Act more so because the pawnee
is not getting anything paid against the debt due.
Allowing the appeal, the Court
HELD: 1. The two essential ingredients of pledge are (i)
the pawn i.e., the property pledged should be actually or
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constructively delivered to the pawnee and (ii) a pawnee has only
special property in the pledge but the general property therein
remains in the pawnor and wholly reverts to him on discharge of
the debt. The right to property vests in the pawnee only as far as
is necessary to secure the debt. A pawn or pledge is an
intermediate between a simple lien and a mortgage, which wholly
passes the property. A pawnor has an absolute right to redeem
the pledged property upon tendering the amount advanced but
that right would be lost if the pawnee in the meantime has lawfully
sold the pledged property. If the pawnee sells, he must appropriate
the proceeds of the sale towards the pawnor's debt, for the sale
proceeds are the pawnor's monies to be so applied and the pawnee
must pay the pawnor any surplus after satisfying the debt. [Para
5.1][1085-E-F]
2. 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. [Para 6.1][1088-F-G]
3. Section 176 of the Contract Act, unlike some of the
sections of the Contract Act, does not specifically provide that
the contractual terms can override the provision by using the
expression "in the absence of the contract to the contrary" or
"subject to special contract to the contrary". The notice, that is
to be given for the intended sale by the pawnee, is a special
protection that the statute has given to the pawnor, and the parties
cannot agree that the pawnee may sell the pledged goods without
notice to the pledgor. Dwelling on the aspect of the pawnor's
right of redemption under Section 177, the judge held that the
right remains till the 'actual sale' of the pledged goods. The
expression 'actual sale' in Section 177 must be a sale in conformity
with the provisions of Section 176 which gives the pledgee the
right to sell; and if the sale is not in conformity with those
provisions, then the equity of redemption with the pledgor is not
extinguished. The sale by the pawnee to himself being void does
not put an end to the pledge, but the pawnor is bound by resale(s)
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duly effected by the pawnee to the third parties after such abortive
sales to himself. [Para 7.6][1092-F-H; 1093-A-B]
4. 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. Section
63 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. However, such a waiver cannot
infringe any public right or public policy. [Para 7.9, 7.10][1095-AC]
5. 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. [Para 7.11][1097-F-G]
6. Section 176 of the Contract Act requires that the pawnee
may sell the thing pledged on giving the pawnor reasonable notice
of the sale. It does not prescribe any fixed form of notice or specify
any fixed period of notice. The object and purpose of giving notice
is to make the pawnor know about the pawnee's intent to sell the
pawn and give him an opportunity to exercise his statutory right
of redemption, which as per Section 177 can be exercised till the
date of 'actual sale'. Whether or not a notice was given and the
period of notice was reasonable would depend upon the facts of
the case. In view of the above discussion, the pawnor can
communicate his willingness and desire to the pawnee that the
pledged goods may be sold. In case any such request is made, a
pawnee may well act upon the request without violating Section
176 of the Contract Act. However, a pawnee, unless he also agrees,
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cannot be compelled by the pawnor to sell the pledged goods.
[Para 7.13][1100-B-D]
7. To resolve a debate when two views are evident, it is
best to interpret the provision when we know why the statute is
enacted. If a statute is looked at, in the context of its enactment,
with the glasses of the statute-maker provided by such context,
its scheme, the sections, clauses, phrases and words may take
colour and appear different than when the statute is looked at
without the glasses provided by the context. 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. [Para 9.1][1102-C-F]
8. 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'. The Depositories Act establishes the depository ecosystem and introduces the concepts of a 'registered owner' and
'beneficial owner'. Every owner of a physical share has to enter
into an agreement with 'the depository' for availing its services.
The physical certificate of security is cancelled. All securities
held by 'the depository' are in a fungible form. 'The depository'
becomes the 'registered owner' in respect of the security, whereas
the person who surrenders the physical shares is recorded as
'the beneficial owner'. 'The depository', as the registered owner,
does not have any voting right or any other right in respect of the
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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 7 69 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'.[Para
9.3][1103-C-F]
9. Power and right to transfer ownership of a dematerialised
security vests with the 'beneficial owner', same as in the case of
buying and selling physical securities. The difference lies in the
delivery process in case of sale, and receipt in case of purchase,
which is affected by the depository on instructions from the
participant. Every person recorded as the 'beneficial owner' to
transact and deal in securities must act through a participant who
is an agent of the depository. Section 10 70 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'. [Para 9.4][1104-B-D]
10. 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
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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. [Para
9.5][1105-A-C]
11. 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. [Para 9.8][1106-B-C]
12. A reading of Regulation 58 would show that a 'beneficial
owner' is entitled to create a pledge on security owned by him.
To do so, he must apply to the 'depository' through the participant
who has his account in respect of the securities. Sub-regulation
(2) requires the participant to accord its satisfaction that the
securities are available for pledge and make a note in this regard
in its records. The note is to be forwarded to the 'depository'. In
terms of sub-regulation (3), the 'depository' is required to within
fifteen days create and record a pledge and send an intimation to
the participants of the pledgor/pawnor and the pledgee/pawnee.
The participants of the pawnor and pawnee are required to inform
the pawnor and the pawnee as to the entry of creation of the
pledge. If the 'depository' does not create the pledge, intimation
of the reasons has to be given to the participants of the pawnor
and the pawnee. The 'depository' can cancel the pledge if the
pawnee applies to the depository through its participants. The
pawnor can also apply through its participant to the 'depository'
for cancelling the pledge. In this case, the entry can be cancelled
by the 'depository' with the prior concurrence of the pawnee. On
cancellation of the pledge entry, the 'depository' is to inform the
participant of the pawnor. [Para 9.10][1107-E-H; 1108-A]
PTC INDIA FINANCIAL SERVICES LTD. v. VENKATESWARLU KARI AND
ANOTHER
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13. Sub-regulation (8) to Regulation 58 uses the expression
"subject to the provisions of the pledge document" with a specific
purpose and objective. In other words, sub-regulation (8) to
Regulation 58 does not seek to curtail or restrict, but on the
other hand respects party autonomy and freedom to decide the
terms of the pledge, including the event of default that would
entitle the pawnee to invoke the pledge and sell the pawn. The
sub-regulation does not expressly nullify any provision of the
Contract Act. However, the stipulation that the pawnee may invoke
the pledge, and on such invocation, the pawnee is to be recorded
as the 'beneficial owner' of the pledged securities is mandatory.
A pledge document cannot stipulate to the contrary, and any
contravening contractual stipulation would not be binding. The
records maintained by the 'depository' are to be amended on the
pawnee invoking the pledge and thereupon, the 'depository' shall
register the pawnee as the 'beneficial owner' of the securities.
Consequent to the change and in terms of sub-regulation (9) to
Regulation 58, the 'depository' is to inform the participants of
the pawnor and pawnee, with a direction that they shall make
necessary changes in their records and that the participants shall
inform the pawnor and pawnee, respectively. Thus, the nonobstante 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. [Para 9.11, 9.12][1108-B-H]
14. The expression 'actual sale' used in Section 177 should
be read as 'the sale by the pawnee to a third person made in
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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. [Para 10.3][1111-B-D]
Commissioner of Wealth Tax v. Mahadeo Jalan and
Mahabir Prasad Jalan and Others Etc. (1973) 3 SCC
157 : [1973 ] 2 SCR 215; Bharat Hari Singhania and
Others v. Commissioner of Wealth Tax (Central) and
Others 1994 Supp. (3) SCC 46 : [1994] 1 SCR 1033;
Md. Sultan and Others v. Firm of Rampratap
Kannayalal, Hyderabad, by its partners AIR 1964 AP
201; Sri Raja Kakarklhpudi Venkata Sudarsana
Sundara Narasayamma Garu (died) and others v. The
Andhra Bank Ltd. Vijayawada and others AIR 1960
AP 273; Simla Banking and Industrial Co., Ltd., Simla
(In Liquidation) v. Pritams AIR 1960 Punj 42; Arjun
Prasad and others v. Central Bank of India, Ltd. 1954
SCC OnLine Pat 138; Lallan Prasad v. Rahmat Ali and
Another AIR 1967 SC 1322 : [1967] 2 SCR 233; Morvi
Mercantile Bank Ltd. v. Union of India, AIR 1965 SC
1954 : [1965] 3 SCR 254; Bank of Bihar v. The State
of Bihar and Others (1972) 3 SCC 196 : [1971 Suppl.
SCR 299; Maharashtra State Cooperative Bank Limited
v. Assistant Provident Fund Commissioner and Others
(2009) 10 SCC 123 : [2009] 15 SCR 1; Karnataka
Pawnbrokers' Association and Others v. State of
Karnataka and Others (1998) 7 SCC 707 : [1998] 2
Suppl. SCR 461; Standard Chartered Bank and Another
v. Custodian and Another (2000) 6 SCC 427 : [2000] 3
SCR 81; Seth Motilal Hirabhai and Ors. v. Bai Mani
1924 SCC OnLine PC 81; M.R. Dhawan v. Madan
Mohan and Others AIR 1969 Del 313; Balkrishan
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Gupta and Others v. Swadeshi Polytex Ltd. and Another
(1985) 2 SCC 167 : [1985] 2 SCR 854; F. Nanak Chand
Ramkishan Das of Hodel and Others v. Lal Chand and
Others 1958 SCC OnLine Punj 6; Bank of Maharashtra
v. M/s. Racmann Auto (P) Ltd. AIR 1991 Del 278; Rani
Leasing & Finance Ltd. v. Sanjay Khemani 2015 SCC
OnLine Cal 450; Hulas Kunwar v. Allahabad Bank Ltd.
AIR 1958 Cal 644; Haridas Mundra v. National and
Grind-Lays Bank Ltd. AIR 1963 Cal 132; Kunj Behari
Lal v. The Bhargava Commercial Bank, Jubbulpore AIR
1918 All 363; Vimal Chandra Grover v Bank of India
(2000) 5 SCC 122 : [2000] 3 SCR 587; The Official
Assignee of Bombay v. Madholal Sindhu and Others
AIR 1947 Bom 217; 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; 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; Soho Square Syndicate Ltd. v Poland & Co. 19401 Ch 638 at p. C43; Krishna Bahadur v. Purna Theatre
and Others (2004) 8 SCC 229 : [2004] 3 Suppl. SCR
833; The Co-Operative Hindusthan Bank, Ltd. v.
Surendranath De 1931 SCC OnLine Cal 224; Park
Street Properties Private Limited v. Dipak Kumar Singh
and Another (2016) 9 SCC 268; Nabha Investment Pvt.
Ltd. v. Harmishan Dass Lukhmi Dass 1995 SCC
OnLine Del 239; Neikram Dobay v. Bank of Bengal
ILR (1892) 19 Cal 322; Ramdeyal Prasad v. Sayed
Hasan AIR 1944 Pat 135; S.L. Ramaswamy Chetty and
Another v. M.S.A.P.L. Palaniappa Chettiar 1929 SCC
OnLine Mad 62; Dhani Ram and Sons v. The Frontier
Bank Ltd. and Another AIR 1962 P&H 321; Reserve
Bank of India v. Peerless General Finance and
Investment Co. Ltd. and Others (1987) 1 SCC 424 :
[1987] 2 SCR 1; Vasudev Ramachandra Shelat v.
Pranlal Jayanand Thakkar and Others (1974) 2 SCC
323 : [1975] 1 SCR 534; Kannambra Nayar Veetil Valia
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D
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Ammukutti Neithiar's Son Kunhunni Elaya Nayar
Avargal (Deceased) and Another v. P.N. Krishna Pattar
and Two Others AIR 1943 Mad 74; Pushpanjali Tie
Up Pvt. Ltd. v. Renudevi Choudhary and Others 2014
SCC OnLine Bom 3661; Firm Thakur Das Marakhan
Lal v. Mathura Prasad and Others AIR 1958 All. 66;
Donald v. Suckling (1866) L.R. 1 Q.B. 585; GTL Limited
v. IFCI Ltd. & Ors. 2011 SCC OnLine Del 3628; Liquid
Holdings Private Limited v. The Securities Exchange
Board of India (2011) SCC Online SAT 40 - referred
to.
JRY Investments Private Limited v. Deccan Leafine
Services Ltd. and Others (2004) 121 Comp Cas 12 -
partly overruled.
Tendril Financial Services Pvt. Ltd. & Ors. v. Namedi
Leasing & Finance Ltd. and Ors. 2018 SCC OnLine
Del 8142 - disapproved.
Hailsham Edn., (2nd Edn.), para 330, page 226 of
Volume XXIII
P3 (1953), 10th Edition, Sweet & Maxwell, page 368
Case Law Reference
[1973] 2 SCR 215
referred to
Para 2.15
[1994] 1 SCR 1033
referred to
Para 2.15
[1967] 2 SCR 233
referred to
Para 5.1
[1965] 3 SCR 254
referred to
Para 5.1
[1971] Suppl. SCR 299
referred to
Para 5.3
[2009] 15 SCR 1
referred to
Para 5.4
[1998] 2 Suppl. SCR 461
referred to
Para 5.4
[2000] 3 SCR 81
referred to
Para 6.1
[1985] 2 SCR 854
referred to
Para 7.1
[2000] 3 SCR 587
referred to
Para 7.5
[2004] 3 Suppl. SCR 833
referred to
Para 7.10
PTC INDIA FINANCIAL SERVICES LTD. v. VENKATESWARLU KARI AND
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(2016) 9 SCC 268
referred to
Para 7.10
[1987] 2 SCR 1
referred to
Para 9.1
[1975] 1 SCR 534
referred to
Para 9.1
CIVIL APPELLATE JURISDICTION : Civil Appeal No.5443
of 2019.
From the Judgment and Order dated 20.06.2019 of the National
Company Law Appellate Tribunal, New Delhi in Company Appeal (AT)
(Insolvency) No.450 of 2018.
Maninder Singh, Sr. Adv., Sidharth Sethi, Ms. Pallavi Kumar, Advs.
for the Appellant.
Sajan Poovayya, Sr. Adv., G. Ramakrishna Prasad, Byrapaneni,
Suyodhan, Ms. Filza Moonis, K. Trinath, Pratibhanu S. K., John Mathew,
Karthik S. D., Advs. for the Respondents.
The Judgment of the Court was delivered by
SANJIV KHANNA, J.
The primary legal issue which arises for consideration in this appeal
is whether the Depositories Act, 1996 read with the Regulation 58 of the
Securities and Exchange Board of India (Depositories and Participants)
Regulations, 19961 has the legal effect of overwriting the provisions
relating to the contracts of pledge under the Indian Contract Act, 18722
and the common law as applicable in India. To facilitate analysis, this
judgment has been divided into sections as follows:
A.
Factual background of the case
B.
Relevant provisions of the Contract Act
C.
Analysis of case laws under the Contract Act:
(i)
What is pledge and the legal difference between
ownership, pledge and mortgage
(ii)
Pawnee has a special and not general right in
the pledged property
(iii)
Accretion on pawned goods
1 For short, '1996 Regulations'.
2 For short, 'Contract Act'.
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3 Hereinafter referred to as "PIFSL".
4 Hereinafter referred to as "RBI".
5 Hereinafter referred to as "NBFC".
6 Hereinafter referred to as "IFC".
7 Hereinafter referred to as "NNPIL" or "Corporate Debtor".
8 Hereinafter referred to as "MHPL".
9 Hereinafter referred to as "NEVPL".
(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 wholly-owned
subsidiary of PTC India Limited, which in 1999 was promoted by four
public sector undertakings, namely, NTPC Limited, Power Finance
Corporation Limited, NHPC Limited, and Power Grid Corporation of
India Limited. PIFSL is registered with the Reserve Bank of India4 as a
Non-Banking Finance Company5and 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.7As per Clause 3.1.1 of the Bridge Loan
Agreement, the loan is required to be secured. In accordance with subclause (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.
PTC INDIA FINANCIAL SERVICES LTD. v. VENKATESWARLU KARI AND
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2.3 On17th November 2017,the Corporate Debtor filed a petition
invoking Section 10 of the Insolvency and Bankruptcy Code, 201610
before the National Company Law Tribunal, Hyderabad,11 initiating the
corporate insolvency resolution process. The petition was admitted under
Section 10(4) of the IBC on 18th January 2018. Mr. Venkateswarlu Kari,
respondent No.1, was appointed as the Interim Resolution Professional.12
2.4 On 28th December 2017, PIFSL issued a notice under the
Pledge Deed apprising MHPL on the default son the part of Corporate
Debtor and that if the debt due was not discharged within seven days,
PIFSL would exercise the rights in terms of the Pledge Deed.
2.5 On 16th January 2018, as the debt remained unpaid, PIFSL
wrote to the Depository Participant invoking its rights in terms of Clause
6.1 of the Pledge Deed. Acting on the request, the Depository Participant
has accorded PIFSL the status of 'beneficial owner' of 31,80,678 pledged
shares of NEVPL.
2.6 On 23rd January 2018,PIFSL wrote to MHPL informing that
due to continued defaults in payment on the part of the Corporate Debtor,
it had exercised the right under Clause 6.1, while reserving its right to
sell the shares under Clause 6.2 of the Pledge Deed read with Section
176 of the Contract Act.
2.7 On 17th January 2018, PIFSL filed an application before the
Adjudicating Authority under Section 7 of the IBC as a financial creditor
to whom Rs.167,29,23,507/- was due and payable by the Corporate
Debtor.
2.8 On 30th January 2018, the Adjudicating Authority allowed PIFSL
to withdraw the application with liberty to file proof of financial claim
before the IRP in Form C.
2.9 On 6th February 2018, MHPL made a claim before the IRP,
inter alia, stating that PIFSL having been conferred status of 'beneficial
owner', MHPL no longer has any title or right over 31,80,678 shares.
Accordingly, MHPL had stepped into the shoes of PIFSL as a creditor
of the Corporate Debtor to the extent of the value of 31,80,678 shares of
NEVPL now owned by PIFSL.
10 For short, 'IBC'.
11 Hereinafter referred to as "Adjudicating Authority".
12 Hereinafter referred to as "IRP".
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2.10 Contrarily, on 10th February 2018, PIFSL submitted Form C
with a financial claimof Rs.169,19,17,637/-, being the amount due and
payable to PIFSL by the Corporate Debtor as of 18th January 2018, the
date on which the Adjudicating Authority admitted the Section 10
application of the Corporate Debtor. The value of 31,80,678 pledged
shares was not accounted for or reduced.
2.11 On 19th February 2018, the IRP, by two separate emails,
informed that MHPL's claim could not be crystalized as it was not possible
to ascertain the value of 31,80,678 shares 'transferred' to PIFSL.
Similarly, PIFSL's claim cannot be crystalized due to the settlement in
whole/part of its claim and the need to arrive at the valuation at the time
of 'transfer' of shares to PIFSL.
2.12 PIFSL and MHPL preferred separate applications before
the Adjudicatory Authority against the rejections of their claims.
2.13 By a common order dated 6thJuly 2018, the Adjudicating
Authority disposed of the applications filed by PIFSL and MHPL,
accepting the MHPL's claim by primarily relying on the Depositories
Act and Regulation 58 of the 1996 Regulations. The Adjudicating Authority
agreed with MHPL that PIFSL having exercised its right under the Pledge
Deed to'transfer'31,80,678 pledged shares, MHPL's shareholding in
NEVPL got reduced by 31,80,678 shares. Therefore, MHPL is a financial
creditor of the Corporate Debtor to the extent of the value of 31,80,678
shares. Further,16th January 2018, the date on which the pledge was
invoked by PIFSL, is the crucial date for determining the extent to which
PIFSL and MHPL are the financial creditors of the Corporate Debtor.
The IRP was directed to appoint an independent valuer to assess the
fair market value of 31,80,678 shares of NEVPL as on 16th January
2018.
2.14 PIFSL challenged the orders before the National Company
Law Appellate Tribunal, New Delhi,13 but the appeals were dismissed
vide the impugned judgment dated 20thJune 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,
13Hereinafter referred to as 'Appellate Authority'.
PTC INDIA FINANCIAL SERVICES LTD. v. VENKATESWARLU KARI AND
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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 176of
the Contract Act to 'reclaim' the debt. Section 176 of the Contract Act
cannot be taken into consideration by the IRP for collating the financial
claim of PIFSL under Section 18 of the IBC.
2.15 Other aspects which require to be noted are: (a) as per PIFSL,
the principal and interest amount due to them by the Corporate Debtor
as of 23rd December 2021 are Rs.3,76,13,03,389/-; (b) the shares of
NEVPL are unlisted, and there are no open market transactions, and (c)
the value of the pledged shares is disputed. On 13th August 2018, the
IRP has submitted a valuation report of an independent valuer who has
valued the pledged shares at Rs.179 crores as of 16th January 2018.
MHPL relies on the 2013 valuation report of Axis Capital and the annual
report of MHPL for the financial year 2012-13. As per the annual report
relied on by MHPL, shares of NEVPL as of 31st March 2013 were
valued at Rs.1229.66 crores. Accordingly, MHPL claims that the fair
value of each of the 1,22,33,378 shares of NEVPL (100% of the total
equity shares - all held by MHPL) was Rs.1,005.17p per share.
Therefore, the total value of the 31,80,678 pledged shares was equivalent
to Rs. 319 crores at the time of the creation of the pledge. On the other
hand, PIFSL claims that the actual value per share of NEVPL, as
calculated on31st 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'.