The Delhi High Court opined that the object of the notice under Section 176 of the Indian Contracts Act, 1872 (hereinafter referred to as “ICA”), is to make the Pawnor aware of the intentions of the Pawnee to sell the pawn. It further expounded that to constitute a valid notice, an intimation of invocation followed by a notice is sufficient.
Brief Facts:
Defendant Bank extended a cash credit facility to Defendant No. 2 company of whom Plaintiff is the promoter and managing director. In exchange, Plaintiff pledged 30% promoter’s holding along with LIC policies to Defendant Bank. During the Pandemic, the business was affected and pursuant to this, meetings were held to restructure the cash credit facility. In 2021, the cash credit facility of the Defendant No. 2 was declared as a Non-Performing Asset by Defendant Bank. Subsequently, a notice under Section 13(2) of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (hereinafter referred to as “SARFAESI”) to Defendant No.2 and Plaintiff. Thereafter, in 2022, Defendant Bank invoked the pledge concerning the promoters’ shares in Defendant No.2 company and hence, the shares were transferred from the Demat account of Plaintiff to Defendant Bank.
The Plaintiff filed a writ petition against the invocation of the pledged shares. Pursuant to this, Defendant Bank issued a 7 days notice to Plaintiff for the sale of pledged shares, which is why Plaintiff has filed the present suit seeking a permanent and mandatory injunction against Defendant Bank from selling the pledged shares.
In the present suit, the summons was issued and thereafter, an ex-parte ad interim order was issued by this Court to restrain the Defendant Bank from selling the pledged shares. Defendant Bank filed two applications, one for seeking vacation of the said ex-parte ad interim order and another under Order VII Rule 11 of the Code of Civil Procedure, 1908 (hereinafter referred to as “CPC”).
Contentions of the Plaintiff:
It was contended by Plaintiff that the Schedules-I and II of the share pledge agreement were left blank and it was later that Defendant Bank had filled in the number of shares, date and time of execution of the said agreement. It was argued that Defendant Bank did not give proper notice concerning pledged shares, as per Section 176 of ICA. It was further alleged that the LIC policies were not assigned in favour of the Defendant Bank and in fact, only a lien was created.
Contentions of the Defendant:
Defendant Bank contended that the share pledge agreement along with the Schedules was duly executed by Plaintiff and therefore, allegations of forgery are baseless. It was contended that there was no need for a notice to be served in regards to the invocation of pledged shares as the Plaintiff was duly intimated which amounts to the notice of the intention of the Bank to sell the pledged shares. It was argued that the LIC policies are the subject matter of the notice issued under Section 13 of SARFAESI and therefore, cannot be the subject matter of the present suit.
Observations of the Court:
For the ex-parte ad interim order, the Court observed that the Plaintiff had obtained the same dishonestly as neither he informed the writ Court nor the counsel appearing on behalf of the Defendant Bank.
Therefore, the interim order was vacated on this ground alone.
With respect to shares, date and time being filled by the Defendant Bank, the High Court did not find any such case as the evidence on record clearly shows that signature of the Plaintiff himself and it was the Plaintiff’s case that shares have been pledged to the Defendant Bank.
For the notice under Section 176, ICA, it was noted that the said section does require a Pawnee to give reasonable notice of sale to the Pawnor before selling the pledged goods. Relying on the judgement of PTC India Financial Services Limited v. Venkateswarlu Kari and Anr. (2022 SCC OnLine SC 708), the High Court re-iterated that the object of the notice is to make the Pawnor aware of the intentions of the Pawnee to sell the pawn and therefore, in essence, the Pawnor gets an opportunity to exercise the statutory right of redemption as per Section 177, ICA.
The High Court observed Regulation 58(8) of the SEBI (Depositories and Participants) Regulations, 1996 under which the pledgee can invoke the pledge as per the provisions of the pledge document and as per a clause of the said share pledge agreement between the parties, the Defendant Bank could invoke pledge without giving prior notice to the Plaintiff.
It was pointed out that the Defendant Bank had conveyed via text the intimation of invocation, thereafter, even a notice was issued. This amounts to reasonable notice as per the facts and circumstances of the case.
Concerning the LIC policies, it was opined that Plaintiff did assign the policies to Defendant Bank and in any case, since these policies are the subject matter of the notice under SARFAESI, the same cannot be made the subject matter of the present suit.
Another significant observation made by Court was that the fact that insolvency proceedings have been initiated against the Plaintiff before the NCLT cannot come to his rescue as the interim moratorium as per Section 96 of the Insolvency and Bankruptcy Code, 2016 is in respect of the suits/legal proceedings filed against the Plaintiff, not by the Plaintiff.
Decision of the Court:
Therefore, based on the abovementioned reasons, the Court vacated the interim order and imposed costs on Plaintiff.
Case Title: Amit Jain v. Canara Bank & Ors.
Coram: Hon’ble Mr. Justice Amit Bansal
Case No.: CS (COMM) 667/2022 and I.A. 16541/2022
Advocates for Petitioner: Advs. Mr. Manik Dogra, Ms. Shankari Mishra, Mr. Dhruv Pande
Advocates for Respondent: Advs. Mr. Deepak Jain, Mr. Tanpreet Gulati
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