Tulip Kanth

New Delhi, May 13, 2022: Observing that the Indian Contract Act, 1872 does not conceive of sale of the pawn to self and consequently, the pawnor’s right to redemption in terms of Section 177 survives till actual sale, the Supreme Court has held that the  Insolvency proceedings against the Corporate Debtor, NSL Nagapatnam Power and Infratech Limited (NNPIL), will proceed accordingly.

Holding that Section 12 or Regulation 58 of the Depositories Act, 1996, do not by implication or due to conflict over-write and undo the legislative mandate of Sections 176 and 177 of the Contract Act, the Division Bench of Justice M.R.Shah and Justice Sanjiv Khanna opined that the Depositories Act recognises the principles relating to pledge prescribed by the Contract Act and the common law.

The factual background of this case was such that the appellant – PTC India Financial Services Limited, by way of a Bridge Loan Agreement had advanced a loan of Rs 125 crore to the Corporate Debtor. The second respondent, Mandava Holdings Private Limited (MHPL) pledged 31,80,678 shares, equivalent to 26% of the shares of NSL Energy Ventures Private Limited (NEVPL). When the CIRP was initiated against the corporate Debtor, then  acting on the request, PIFSL was accorded the status of beneficial owner of pledged shares of NEVPL. 

When an application was filed, the Adjudicating Authority allowed PIFSL to withdraw the application with liberty to file proof of financial claim but MHPL made a claim stating that PIFSL having been conferred status of beneficial owner, MHPL no longer had any title or right over those shares. Accordingly, MHPL had stepped into the shoes of PIFSL as a creditor of the Corporate Debtor to the extent of the value of those shares of NEVPL now owned by PIFSL.When such claims were not crystallised both MHPL and PIFSL preferred separate applications before the Adjudicatory Authority. PIFSL later challenged the orders before the National Company Law Appellate Tribunal but the appeals were dismissed. Aggrieved thereof, this appeal was filed.

Holding that MHPL is entitled to redeem the pledge before the sale to a third party is made, the Bench clarified that 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. The Bench also overruled the judgment of the single judge of the Punjab and Haryana High Court in Dhani Ram and Sons v. The Frontier Bank Ltd. and Another 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. 

Asserting that the Depositories Act prescribes how the dematerialised securities can be pledged, the Top Court said, “The provisions of the Depositories Act and the 1996 Regulations are not in derogation of the Contract Act but in addition to it…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.”

According to the Apex Court the 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 had not been discharged or satisfied either in full or in part and PIFSL was 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, added the Bench.

Affirming that the that MHPL is not a secured creditor of the Corporate Debtor, to the extent of the value of the shares in question and PIFSL had rightly made a claim as financial creditor of the Corporate Debtor without accounting for the value of the shares of NEVPL in its claim petition, the Bench allowed the present appeal.

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