Ptc India Financial Services Limited vs Venkateswarlu Kari and Another

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 – 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 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 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) 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, 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 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 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]

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 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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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 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