In
Fact summary
In 2014,
The Corporate Debtor initiated voluntary insolvency proceedings under Section 10 of the Insolvency and Bankruptcy Code, 2006 (the "IBC"). Aggrieved by this, PIFSL invoked the pledge and procured the status of "beneficial owner" under the Depositories Act from the Depository Participant. PIFSL also filed an application under Section 7 of the IBC before the Interim Resolution Professional ("IRP") for initiation of insolvency resolution, which was challenged by MHPL. MHPL claimed that it substituted PIFSL as a creditor of the Corporate Debtor to the extent of the value of the pledged shares. PIFSL's and MHPL's claims were turned down by the IRP, which prompted PIFSL and MHPL to individually approach the
PIFSL challenged the NCLT's order before the
Analysis of the
The SC allowed the appeal and overturned the ruling of the NCLT and NCLAT. It held that a transfer of pledged shares in the name of the nominee does not discharge the debt until the actual sale of the pledged shares. The SC observed that there is a clear distinction between a mere transfer of the pledged shares in the name of the pawnee as a "beneficial owner" and the "actual sale" of the pledged shares, and a pawnor retains his/her right to redeem the pledged shares until the actual sale of the pledged shares. The SC highlighted that, under Section 176 of the Contract Act, the pawnee has the right to take the pawnor to court, retain the pledged shares, or sell them subject to notifying the pawnor of the sale.
Once the "actual sale" has been effected by the pawnee, the pawnor forfeits his/her right under section 177 of the Contract Act to seek redemption of the pawned shares.
The SC overruled the decision of the
In the PTC Ruling, the SC referred to the decisions of the
It should be noted that Regulation 58 of SEBI (Depositories and Participants) Regulations, 1996 (the "1996 Regulations") and Regulation 79 of the SEBI (Depositories and Participants) Regulations, 2018, clearly specify the manner in which a pledge or hypothecation of dematerialized shares can be created. Additionally, sub-regulation 9 of the 1996 Regulations requires the depository to notify the pledgor and pledgee once it amends its records on the invocation of a pledge and a transfer of the beneficial ownership of the shares. However, the Depositories Act does not require a pawnee to notify the pawnor prior to the sale of pledged shares. As can be seen, although the Contract Act does not specifically cover the pledging of goods without delivery of possession, the concept of pledging and hypothecation of dematerialized shares is well covered under the Depositories Act and its regulations.
Conclusion
Since the introduction of the dematerialized account system by the
In the PTC Ruling, the SC has avoided any conflicting interpretations between the provisions of the Contract Act, which is the substantive and general law relating to contracts, and the Depositories Act, which is primarily a law concerning securities. As a result, the PTC Ruling will serve as a landmark decision in all matters relating to the invocation of a pledge of dematerialized shares and the rights of the pledgor and pledgee.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
Mr
Raheja Chambers
2nd floor,
400 021
Tel: 226123 7272
Fax: 226123 7252
E-mail: akil@majmudarindia.com
URL: www.majmudarindia.com
© Mondaq Ltd, 2022 - Tel. +44 (0)20 8544 8300 - http://www.mondaq.com, source