Calcutta High Court
Manav Investment And Trading Co. ... vs Dbs Bank India Ltd on 16 February, 2022
IN THE HIGH COURT AT CALCUTTA
Ordinary Original Civil Jurisdiction
Original Side
(Commercial Division)
Present:
The Hon'ble Justice Shekhar B. Saraf
I.A. G.A. NO. 1 of 2021
in
C.S. NO. 138 of 2021
MANAV INVESTMENT AND TRADING CO. LTD.
Versus
DBS BANK INDIA LTD.
And
I.A. G.A. NO. 2 of 2021
In
C.S. No. 138 of 2021
MANAV INVESTMENT AND TRADING CO. LTD.
Versus
DBS BANK INDIA LTD.
For the Plaintiff/Petitioner : Mr. Anirban Ray, Advocate
Mr. Rajarshi Dutta, Advocate
Mr. Pankaj Agarwal, Advocate
Ms. Paramita Maity, Advocate
For the Defendant/Respondent : Mr. Jishnu Saha, Senior Advocate
Mr. Sakabda Roy, Advocate
Ms. Trisha Mukherjee, Advocate
Heard on : December 07, 2021, December 14, 2021, January 19, 2022, February 07,
2022, February 09, 2022 and February 11, 2022
Judgment on : February 16, 2022
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Shekhar B. Saraf, J.:
1. The present application being I.A. G.A. No. 1 of 2021 in C.S. No. 138 of
2021 has been preferred by the petitioner for seeking an order of
injunction to restrain the respondent from dealing with or selling the
securities pledged by the petitioner for securing certain financial
facilities. After hearing the above application, an ad-interim ex-parte
order dated August 3, 2021 was passed by this Hon'ble Court
restraining the respondent from selling the pledged securities.
Thereafter, a vacating application being I.A. G.A. No. 2 of 2021 in C.S.
No 138 of 2021 has been preferred by the respondent in terms of the
liberty granted in the order dated August 3, 2021. Both the applications
were accordingly heard together.
2. The relevant facts to decide the present interlocutory applications are
delineated as follows:
a) The petitioner, Manav Investment & Trading Company Limited, is a
common promoter of the companies, namely Birla Tyres Limited
(hereinafter referred as "BTL") and Kesoram Industries Limited
(hereinafter referred as "KIL"). The erstwhile Laxmi Vilas Bank
(hereinafter referred as "LVB") had extended a Term Loan facility
(hereinafter referred to as "TL facility") and a Working Capital
Facility (hereinafter referred to as "WC facility") to KIL. Later on, the
business of KIL was demerged into a new entity namely BTL after a
Scheme of Arrangement sanctioned by the National Company Law
Tribunal, Kolkata Bench on 8th November, 2019 and the erstwhile
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LVB amalgamated with the respondent, DBS Bank India Ltd.
(hereinafter referred to as "DBIL").
b) Pursuant to the demerger, the TL facility and the WC facility availed
by KIL were bifurcated and partly transferred to BTL. A Facility
Agreement governing the said transferred "TL facility" was executed
on February 11, 2021 between BTL as the borrower and the banks
and financial institutions (including DBIL) as the lenders, a total
31,75,000 BTL equity shares were pledged for the purpose of such
transferred "TL facility". Thereafter, the petitioner/plaintiff as the
promoter executed a Promoter Undertaking on February 15, 2021
wherein the pledged shares of KIL towards Working Capital Facility
were released by DBIL and the petitioner as a common promoter of
KIL and BTL pledged a further 31,75,000 equity shares of BTL (New
BTL Pledged shares) in favour of DBIL. The petitioner/plaintiff as a
Security Owner also executed an Agreement of Pledge of Shares
and other securities held in dematerialized form in favour of DBIL
on April 16, 2021.
c) According to the Pledge Agreement, there are two sets of pledge
shares for the facilities availed by BTL from DBIL. The first set of
the BTL pledged shares (hereinafter referred to as "Old BTL pledged
shares") were pledged by the petitioner in favour of DBIL to secure
the Term Loan which is governed by the terms of the Pledge
Agreement and the Facility Agreement dated February 11, 2021
entered into between BTL and DBIL. The second set of the BTL
pledged shares (hereinafter referred to as "New BTL pledged
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shares") were pledged by the plaintiff in favour of DBIL to secure
the "WC Facility". The New BTL pledged shares are governed by the
Pledged Agreement read with the Promoter Undertaking.
d) Since BTL defaulted in repaying the facilities granted by DBIL, on
July 17, 2021, DBIL issued a notice of event of default and recall of
the "TL Facility" to BTL. The outstanding amount claimed under
this notice was INR 37,99,07,537/- (Thirty-Seven Crores Ninety
Nine Lakhs Seven Thousand Five Hundred thirty seven only). On
the same day, that is, July 17, 2021 another notice of event of
default and recall of the "WC Facility" was issued by DBIL to BTL
and an outstanding amount of INR 28,19,35,329/- (Twenty-Eight
Crores Nineteen Lakhs Thirty-Five Thousand Three Hundred
Twenty-Nine only) was claimed towards repayment of this loan. The
two notices of recalling and event of default addressed to BTL
provided for a time period of 2 days (i.e. from July 17, 2021 to July
20, 2021) for repayment of the outstanding dues. Simultaneously,
two separate notices were issued on 17th July, 2021 addressed to
the petitioner/plaintiff for invocation and sale of the two sets of
pledged shares. For the shares pledged against the Working Capital
Facility, the petitioner was granted time till 6th August, 2021 for
repayment of the outstanding amount (INR 28,19,35,329/-) under
the "WC Facility". Subsequently, on the same date, another notice
was issued for invocation and sale of the pledged shares towards
repayment of the outstanding amount (INR 66,18,42,866/-) under
the "WC Facility" as well as the "TL Facility", where the petitioner
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was granted time till July 20, 2021 to discharge its obligations.
Thereafter, on July 30, 2021, the defendant sold 3,76,063 shares
out of the 31,75,000 old BTL pledged shares in the open market.
The balance shares are in Respondent's Depository Participant
Account presently.
e) For challenging such action of the respondent, the petitioner
instituted the present suit and filed the application being G.A. No. 1
of 2021 seeking appropriate orders of injunction as stated therein.
Upon hearing the same an order dated 3rd August, 2021 was
passed by this Hon'ble Court restraining the respondent from
giving further effect to the letters dated July 17, 2021 issued for the
purpose of invoking or selling the pledged shares. Hence, the
vacating application being G.A. No. 2 of 2021 has been filed under
Order XXXIX Rule 4 read with Section 151 of Code of Civil
Procedure, 1908 by the defendant/respondent praying for setting
aside the ex-parte ad-interim order dated August 3, 2021 passed by
this Hon'ble Court in G.A. No. 1 of 2021 in C.S. No. 138 of 2021.
Arguments:
3. Counsel for the petitioner/plaintiff argues that in terms of Section 176
of the Indian Contract Act, 1872, the petitioner was provided time till
August 6, 2021 to cure the default and the respondent reserved its right
of sale of the pledged shares that was to be invoked only subsequent to
August 6, 2021. In breach of such clear understanding and the mandate
under Section 176 of the Indian Contract Act, 1872 (hereinafter referred
6
as "the Act"), the respondent sold 3,76,063 shares out of the 31,75,000
pledged shares in the open market on 30th July, 2021. He places
reliance upon The Cooperative Hindusthan Bank Ltd. -v-
Surendranath De reported in AIR 1932 Cal 524 wherein the Hon'ble
Calcutta High Court has found that any statement/communication in
the nature that stipulates sale of hypothecated stock on the failure of
payment by certain date is not a notice under Section 176 of the Act but
only intimation. Hence, such sale will be bereft of any notice under
Section 176 of the Act.
4. The petitioner further submits that Clause 8 of the Promoter
Undertaking dated February 15, 2021 provides that all monies that may
become payable by the Promoter to the respondent pursuant to such
undertaking shall, without any delay, demur or protest, be paid to the
respondent within 15 days of a written notice in such regard being
issued by the respondent. He submits that the notice dated 17th July,
2021 was received by the petitioner on that date and before the expiry of
the 15 days period as contemplated in Clause 8 of the Promoter
Undertaking, a part of the pledged shares (i.e. 3,76,063 shares) was
already sold by the respondent in open market.
5. Furthermore, the petitioner avers that the notice dated July 17, 2021 is
a combined notice of invocation and sale. The notice under Section 176
of the Act stipulates entitlement to a reasonable notice before exercising
the right available to the respondent/defendant for carrying on sale of
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the pledged shares. Hence, the notice dated July 17, 2021 is outside the
ambit of Section 176 of the Act. The above submissions were made with
respect to the Working Capital Facility.
6. With regard to the Term Loan Facility, the counsel for the petitioner
submits that the basis of the notice of invocation and sale of pledged
shares is default in payment. Such alleged default in payment is a
curable defect and is capable of being remedied. The facility agreement
read with the Promoter Undertaking required the respondent to give a
15 days' notice to the petitioner to remedy the default. The respondent
could not have exercised the right of invocation in respect of the pledged
shares prior to giving a reasonable time to the petitioner to remedy the
default. The petitioner invokes Clause 7.1 of the facility agreement dated
11th February, 2021 that provides for events of default and remedies
there under. It provides a cure period of Thirty days that shall be
applicable from the date of the occurrence of such event of default.
7. Counsel for the respondent/defendant argues that on account of default
of repayment obligations by Birla Tyres Limited, the
respondent/defendant is entitled to recall the entire principal amount of
Working Capital Facility along with accrued interest in accordance with
Clause 1 of Article IV and Clause 1 of Article V of Working Capital
Consortium Agreement dated January 19, 2018. The
defendant/respondent states that it is entitled to recall the entire
principal amount of Term Loan Facility along with accrued interest in
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the circumstances stated therein in accordance with Clauses 7.1 (a) and
7.1 (b) and Clause 7.2 of the Facility Agreement dated February 11,
2021.
8. Furthermore, it is submitted by the defendant/respondent that Clauses
6 (c) and Clause 8 of the Promoter Undertaking dated February 15, 2021
reflect that in the event an application under Section 7 of the Insolvency
and Bankruptcy Code, 2016 is filed, the Defendant Bank shall, on an
immediate basis, have a right to invoke the New BTL Pledged Shares
and the Promoter i.e. the Petitioner herein, shall be liable to pay all
outstanding dues within fifteen business days of Respondent's written
notice. According to the petitioner an Event of Default in terms of Clause
6 (c) of the Promoter Undertaking was triggered on or about July 7,
2021, as an application for initiation of corporate insolvency resolution
process under Section 7 of IBC (C.P. (IB) No. 200/KB/2021) was filed by
ICICI Bank Limited as a Financial Creditor against Birla Tyres Limited
before National Company Law Tribunal, Kolkata Bench.
9. Counsel for the defendant bank avers that Clauses 17 and 18 of the
Pledge Agreement dated April 16, 2021 establish that the
defendant/respondent was entitled to invoke the New BTL Pledged
Shares "on an immediate basis" under the Pledge Agreement read with
the Promoter Undertaking. Finally, the defendant/respondent submits
that neither the Promoter undertaking nor the Pledge Agreement specify
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any "cure period" in relation to the events of default contemplated there
under. Hence, the plaintiff/petitioner is not entitled to any interim relief.
10. Mr. Saha has further argued that the two notices issued to the
petitioner are in keeping with the mandatory requirement under Section
176 of the Act. He has submitted that the very fact that the petitioner
filed a suit seeking injunction of the two notices indicates that the
intention of the bank to sell the shares was patently clear in the above
two notices. He further submitted that the difference in the time given of
fifteen days in one notice and three days in another notice is based on
the agreements between the parties and is accordingly proper and
reasonable notice of sale under Section 176 of the Act.
Analysis:
11. Upon analysing the arguments put forward by both the parties, I am of
the view that the following issues are required to be addressed by me to
resolve the dispute between the parties:
a) Did the defendant bank act as per the terms of the agreements that
have been entered between the parties?
b) Were the two notices dated July 17, 2021 under section 176 of the
Indian Contract Act, 1872 a clear, proper and valid notice of sale?
c) If the answer to b) is in affirmative, then did the notices provide a
reasonable time as required under section 176 of the Indian
Contract Act, 1872?
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12. In order to tackle the first issue, that is, whether the defendant bank
acted as per the terms of the agreements that have been entered
between the parties, relevant clauses of the agreements governing the
obligations and rights of both the parties need to be examined. The
document which was entered into between the parties for securing both
the facilities granted to BTL is the Pledge Agreement. It governs the
rights and obligation of the parties in relation to the two sets of pledged
BTL equity shares. Clause 17 and Clause 18 of the Pledge Agreement
deal with the right to recall the facilities and the right to invoke the
securities respectively, and the same are extracted below:
"17. The "Security Owner" agrees that the bank shall have the right to
recall the advance/credit facilities at any time at its discretion and/or
violation of any of the terms of the agreement and/or any other
conditions stipulated from time to time or even without assigning any
specific reason thereof. It is also agreed that the bank may at its absolute
discretion discontinue the facility granted with or without assigning any
reason whatsoever and the bank shall not be liable for any loss or
damage that may cause or incur to the borrower(s)/ "Security Owner"
thereof.
18. The "Security Owner" agree that in the event of any default on
his/her/their part, in discharging its obligation hereunder or payment of
dues, or on the account becoming irregular, or on violation of any of the
terms and conditions of this agreement, or at any point of time during the
currency of loan/credit facilities at the discretion of the Bank, the Bank
shall be entitled to invoke the pledge as provided under SEBI (Depository
and Participants) Regulations 1996 and exercise any right as a pledgee as
per the provisions of Indian Contract Act and thereby sell, transfer in its
own name as beneficial owner or otherwise dispose of the said securities
or such part as the Bank may desire, and appropriate the sale proceeds
first in payment of the cost, secondly towards repayment of the balance
amount due with interest and cost in any of the loan accounts of the
borrower(s). The shortfall left, if any, in any of the loan accounts of the
borrower(s) after such appropriation shall be made good by the
borrower(s) on demand by the Bank."
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13. The relevant clauses of the Facility Agreement that governs terms and
conditions for the grant of "TL Facility" to BTL and defines "Event of
Default" are extracted below:
"7.1 EVENTS OF DEFAULTS
For the purpose of this Agreement, each of the following shall constitute
an Event of default
(a) Default in Repayment of Principal Sums of the Loan
Default has occurred in the payment of principal sums of the Loans on
the Due Dates.
(b) Default in Payment of Interest etc.
Default has been committed by the Borrower in payment of any
instalment of interest and/or payment of any amount payable in terms
or under or pursuant to any Finance Document on respective Due
Dates.
[....]
Upon the occurrence of any of the above Events of Default save and
except the Event of Default as mentioned in Section 7.1 (a) and (b), that is
capable of remedy, a cure period of Thirty (30) days shall be applicable
from the date of the occurrence of such event."
Based on a reading of the Clauses 7.1 (a) and 7.1 (b) along with a
reading of the subsequent exception clause it is apparent that the
default committed by the petitioner is not curable in nature. The same
falls within the ambit of Clause 7.1 (a) and (b) which does not
contemplate any cure period of 30 days. Hence, the contention of the
plaintiff/petitioner that a cure period of thirty days as mentioned in the
exception clause of the Facility Agreement should have been given by
the defendant bank does not hold water. The notice dated July 17, 2021
(Page 163 of G.A. No. 2 of 2021) for immediate recalling of the term loan
facility and demanding payment is correct and it is in sync with both the
Facility Agreement as well as the Pledge Agreement.
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14. The Promoter Undertaking governs the rights and obligations of both the
parties with regard to the "WC Facility". Relevant clauses that
contemplate events of default and notice for repayment of the money are
Clauses 6 (c) and 8 respectively, and the same are delineated below:
"6. Unconditional and Irrevocable Undertaking: MITCL hereby
irrevocably unconditionally undertakes the following obligations:
(c) Without prejudice to the above, if prior to the expiry of 12 (twelve)
months from the Effective Date, an insolvency application under Sections
7 or 10 of the Insolvency and Bankruptcy Code, 2016 ("Code") is filed, or
an insolvency application under Section 9 of the Code is admitted in
respect of BTL or any new Event of Default occurs in relation to the BTL
Facility, DBIL shall, on an immediate basis, have a right to invoke the
New BTL Pledged Shares and / or seek recovery of the Release Amount
from the Promoter in its entirety and upon such recovery, the dues of BTL
shall stand reduced to that extent. Such right shall be in addition to all
other rights of DBIL in relation to the BTL Facility, including but not
limited to the security interest over the Old BTL Pledged Shares and other
security interests.
8. All monies that may become payable by the Promoter to DBIL pursuant
to this Undertaking shall, without any delay, demur or protest, be paid to
DBIL within 15 (fifteen) business days of a written notice in this regard
being issued by DBIL ("Notice"). MITCL hereby agrees that the Notice in
this regard may be sent vide an email to either of [email protected],
and / or [email protected] which shall be effective upon delivery,
provided that there is no failure delivery notification and it is received
within business hours in India. Any Notice received post business hours
will be effective on the next business day. The payment shall be made in
the manner specified in the Notice, preferably by Real Time Gross
Settlement System (RTGS), by National Electronics Funds Transfer
(NEFT) or by cheque or by bank draft drawn in favour of DBIL on a
scheduled bank at Mumbai or such other place or to such other account
as may be notified by DBIL."
After a reading of the above two clauses it can be inferred that the
respondent bank granted a time period of 15 days as provided in the
first notice (Pg. 161 of G.A. No. 2 of 2021) for repayment of the
outstanding amount based on Clause 8 of the Promoter Undertaking.
The wording of the relevant clauses of the Promoter Undertaking is
unambiguous and it unequivocally states that the defendant bank shall
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have a right to invoke the new BTL pledged shares and / or seek
recovery of the release amount from the promoter in its entirety. The
immediate and concurrent release of the notice for recalling of the
facilities and notice for payment has been done rightfully as per the
terms of the agreement entered into between the parties. In my view, a
time period of 15 days is also reasonable for making repayment of the
due amount and it is in consonance to the Promoter Undertaking.
15. To answer the second issue with regard to the notices issued upon the
petitioner, one will have to examine the very concept of pledge. A pledge
is a bailment of goods as security for payment of debt or performance of
a promise. The pawnee has the right to retain the pawn as security and
the scope and ambit of this right of retainer is defined by sections 173
and 174 of the Act. Section 176 defines the pawnee's rights where the
pawner makes default. Section 177 gives the defaulting pawner a right
to redeem the pawn at any time before the actual sale of it. Sections 176
and 177 read thus:--
"176. Pawnee's right where pawnor makes default - If the pawnor makes
default in payment of the debt, or performance, at the stipulated time of
the promise, in respect of which the goods were pledged, the pawnee may
bring a suit against the pawnor upon the debt or promise, and retain the
goods pledged as a collateral security; or he may sell the thing pledged,
on giving the pawnor reasonable notice of the sale.
If the proceeds of such sale are less than the amount due in respect of
the debt or promise, the pawnor is still liable to pay the balance. If the
proceeds of the sale are greater than the amount so due, the pawnee shall
pay over the surplus to the pawnor.
177. Defaulting pawnor's right to redeem.--If a time is stipulated for the
payment of the debt, or performance of the promise, for which the pledge
is made, and the pawnor makes default in payment of the debt or
performance of the promise at the stipulated time, he may redeem the
goods pledged at any subsequent time before the actual sale of them1,
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but he must, in that case, pay, in addition, any expenses which have
arisen from his default."
16. In construing Section 176 too much importance should not be given to
the semicolon in the first paragraph. In a case where the pawner makes
default, the pawnee has three rights: (i) he may bring a suit against the
pawner upon the debt or promise, and (ii) he may retain the pawn as a
collateral security, or (iii) he may sell it on giving the pawner reasonable
notice of the sale. But the pawnee has the right to sue on the debt or the
promise concurrently with his right to retain the pawn or to sell it. The
retention of the pawn does not exclude this right of suit, since the pawn
is a collateral security only.
17. In the case of Haridas Mundra -v- National and Grind-Lays Bank
Ltd. reported in AIR 1963 Cal 132 it was held by this Hon'ble Court
that there is some difference between a notice giving mere intention to
sell and a notice of the intended sale. The court held that a mere
intention with giving specific particulars will not be enough and such
notice will be unreasonable. Relevant paragraph of the judgment is
extracted below:
"9. Mr. Deb contended secondly that the notice dated February 6, 1960
was not a reasonable notice of the sale within the meaning of section 176
because (a) the notice does not refer to the actual sale which is going to
be held and (b) because it does not give the place, date and time of the
sale. On the first branch of his contention, Mr. Deb argued that the notice
dated February 6, 1960 was a notice of an intention to sell and that such
notice is not enough. I am unable to accept this contention. The notice
stated that in default of payment of the debt due to the defendant on or
before the 18th February, 1960. "The undernoted shares, or such of them
as the Bank may decide to sell will be sold by the Bank in exercise of its
rights and powers as pledgee and the net proceeds applied in reduction of
your indebtedness." The notice gave a reasonable time to the plaintiff to
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pay the debt and redeem the pawn and definitely and clearly, stated that
in default of payment within the time mentioned the defendant would sell
the shares or such of them as the defendant might decide to sell. The
word "sale" in section 176 means intended sale as opposed to the
expression "actual sale" in section 177. Section 176 requires notice of the
intended sale. Such notice was sufficiently given by the, letter dated
February 6, 1960. Mr. Deb relied upon the decision in Co-operative
Hindusthan Bank Ltd. v. Surendra-nath De, (3) I.L.R. 59 Cal. 667 and (8)
the unreported decision in an appeal from Original decree No. 12 of 1953
(Agarchand Chunilal v. Gorakh-ram Sadhuram, p. 40, decided on January
17, 1957). Both these cases are distinguishable. In the first case, the
notice could not reach the pawner before the sale. Consequently the sale
was not a sale on reasonable notice of it. Besides the notice there stated
that failing payment by named date, the pawnee would arrange for the
sale of hypothecated stock and on this ground this case was
distinguished by Lahiri, J., in (12) Hulas Kunwar v. Allahabad Bank,
A.I.R. 1958 Cal. 644 where the court upheld the validity of a notice which
stated that the pawnee would arrange to effect sale of the securities as
and when opportunity offered. I must say however that 1 see no essential
distinction between the notices in the two cases and speaking for myself,
I am not prepared to say that the wording of the notice in the case of
the Co-operative Hindusthan Bank Ltd. v. Surendranath De (3) I.L.R. 59
Cal. 667 was in any way defective. In the unreported case decided by S.R.
Das Gupta, J. and myself, the pawnee had not given any notice of the
sale at all. In that case the pawnee gave a notice in writing dated April 10,
1946 calling upon the pawner to make immediate payment of the debt
and take back the goods and stating that in default of compliance with
the requisition within two weeks the pawnee would take further steps for
the recovery of his dues and hold the pawner liable for costs. The notice
was not a notice of intended sale at all; it did not state that in default of
payment the pawnee would proceed to sell the goods. In that case there
was also evidence to show that the pledged goods were re-conditioned at
the pawner's request for the sole purpose of enabling the pawnee to sell
them: the pawner had therefore knowledge of the pawnee's intention to
sell; never-less it could not be said that the pawner had received
reasonable notice of the sale or any notice giving him reason able time to
redeem the pledged goods and stating that in default of payment the
pawnee would proceed to sell the goods."
18. In the case of Prabhat Bank Ltd. and Another -v- Babu Ram reported
in AIR 1966 All 134 it was held by the Court that a notice of the
character contemplated by Sec. 176 cannot be implied. Such notice has
to be clear and specific in language indicating the intention of the
pawnee to dispose of the security. Relevant paragraphs of the judgement
are extracted below:
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"5. Two contentions were raised by the learned counsel before me. First,
that the term in the agreement empowering the Bank to sell the securities
for realising the debt due from the respondent being unqualified, it was
not necessary to comply with the provisions of Sec. 176 of the Contract
Act. Secondly, it was urged that the letter sent by the bank on 5-8-1948
asking the respondent to pay up the money due to the appellant, and the
reply of the defendant dated 13-8-1948 asking for time up to the 15th
September, 1948 and requesting the postponement of the sale of
securities clearly indicated that the respondent had notice of the intended
sale of the securities, pledged with the Bank. Consequently, so it was
urged, the sale of the securities by the appellant Bank was legal and the
suit for recovery of the balance was maintainable.
6. Sec. 176 of the Contract Act provides that if the pawner makes a
default in payment of the debt in respect of which the goods were
pledged, the pawnee may bring a suit against the pawner upon the debt,
or he may sell the thing pledged on giving the pawner reasonable notice of
the same. The contention that notice of the contemplated sale to the
pawner should be inferred from his letter dated 13-8-1948, cannot hold
water inasmuch as the said letter does not disclose that a reasonable
notice had been given by the pawnee to the pawner to sell the securities.
A notice of the character contemplated by Sec. 176 cannot be implied.
Such notice has to be clear and specific in language indicating the
intention of the pawnee to dispose of the security. No such intention was
disclosed by the Bank in any letter to the respondent.
....
....
8. I am, therefore, clearly of the opinion that the sale of the securities by
the appellant Bank without reasonable notice to the respondent was bad
and was not binding on him. What is contemplated by Sec. 176 is not
merely a notice but a 'reasonable' notice, meaning thereby a notice of
intended sale of the security by the creditor within a certain date so as to
afford an opportunity to the debtor to pay up the amount within the time
mentioned in the notice. No such notice was ever given by the appellant
to the respondent. There can thus be no escape from the conclusion that
the sale of the securities by the appellant was against law and not
binding on the respondent. The conclusion reached by the lower appellate
court was, therefore, legally sound."
19. In the case of GTL Limited -v- IFCI Ltd. & Ors. reported in (2011) 182
DLT 696 it was held by the Court that the provisions of Section 176
Contract Act are mandatory and the applicability and sweep of Section
176 unlike several other provisions on the same subject is not eclipsed
by the phrase "in the absence of a contract to the contrary". Relevant
paragraph of the judgment are extracted below:
"66. From the above observations two things immediately become clear
first, that there are exceptions to the general rule that the suit for the
redemption of the pledge is maintainable without offering to deposit the
money in certain exceptional cases. Secondly, the wordings of the section
176 are not eclipsed by the qualification "In the absence of the contract to
the contrary" which means that the notice under section 176 is
mandatory and must be given effect to in all circumstances before the
power to sale can be exercised."
20. In the case of Co-operative Hindustan Bank Ltd. -v- Surendra Nath
Dey reported in AIR 1932 Cal 524 it was held by the Court that a mere
intimation that arrangements will be made for a sale is not a notice
under Section 176. The Court held that reasonable notice of the sale
would require more definite particulars. Relevant paragraph of the
judgment is extracted below:
"These being the facts, we have to consider, in the first place, whether
notice was necessary and, if so, whether the notice, that was issued, was
sufficient. Section 176 of the Contract Act, unlike some other
sections, e.g., sections 163, 171 and 174, does not contain a saving
clause in respect of special contracts contrary to its express terms. The
section gives the pawnee the right to sell only as an alternative to the
right to have his remedy by suit. Besides, section 177 gives the pawner a
right to redeem even after the stipulated time for payment and before the
sale. In our opinion, in view of the wording of section 176 as compared
with the wordings of the other sections of the Act, to which we have
referred, and also, in view of the right which section 177 gives to the
pawner, and, in order that the provision of that section may not be made
nugatory, the proper interpretation to put on section 176 is to hold that,
notwithstanding any contract to the contrary, notice has to be given. We
are also of opinion that the notice, that is to be given, should, in the
words of the section, be a "reasonable notice of the sale". The notice in
the present case satisfies none of the requirements of this expression. It
says,--"Failing which (i.e., the payment by the 7th) we shall arrange for
sale of the hypothecated stock". This is merely intimation that
arrangements will be made for a sale but it is not a notice of the sale that
is to be held: such a notice would require more definite particulars. What
such particulars should be must depend upon the peculiar facts of each
case. And once a proper notice is given, it is not necessary that a fresh
notice is to be given if the contemplated sale is adjourned to a future
date. "
21. Upon careful perusal of the judgement cited by the parties the following
principles emerge:
a) The provisions of Section 176 of the Act are mandatory. The
applicability and sweep of Section 176 unlike several other
provisions on the same subject is not eclipsed by the phrase "in the
absence of a contract to the contrary." The notice that is to be given
to the pledgor of the intended sale by the pledgee is a special
protection which statute has given to the pledgor and, parties
cannot agree that in the case of any pledge, the pledgee may sale
the pledged articles without notice to the pledgor.
b) Right to redeem under Section 177 can be exercised right up to the
time the actual sale of the goods pledged takes place. The actual
sale referred to in Section 177 must be a sale in conformity with
the provisions of Section 176 which gives the pledgee the right to
sale; and if the sale is not in conformity with those provisions, then
the equity of redemption in the pledgor is not extinguished.
c) A notice of the character contemplated by Sec. 176 cannot be
implied. Such notice has to be clear and specific in language
indicating the intention of the pawnee to dispose of the security.
d) What is contemplated by Sec. 176 is not merely a notice but a
'reasonable' notice, meaning thereby a notice of intended sale of the
security by the creditor within a certain date so as to afford an
opportunity to the debtor to pay up the amount within the time
mentioned in the notice.
e) Section 176 only requires an intimation of the intention to sell and
not that, a sale should be arranged beforehand and due notice of
all details of the time, date and place of sale be given to the pawnor.
22. Coming to the present facts, it is clear that the defendant issued two
notices on BTL one for recalling of the "TL Facility" for a sum of Rs. 38
Crore approx and the other for recalling of the "WC Facility" for a sum of
Rs. 28 Crore approx. In both these notices, the defendant called upon
BTL to make the outstanding payments within a period of two days from
the date of notice. On the same day, that is, July 17, 2021, two notices
were also issued upon the petitioner herein with regard to the Notice of
Invocation and Sale of the pledged equity shares of BTL. The first notice
(Pg. 161 of G.A. No. 2 of 2021) was with reference to the New BTL shares
that were covered under the pledge agreement and the promoter
undertaking. The relevant clauses in relation to the intended sale are
Clauses 3 and 4 of the said notice and are delineated below:
"3. DBIL hereby notifies you that pursuant to this Notice of Invocation
and Sale, in the event that you fail to fulfil your obligation to us in
accordance with the terms of the Promoter Undertaking, DBIL shall have
the right to enforce the pledge by transferring the New BTL Pledge
shares into DBIL's depository participant account and/or selling the New
BTL Pledged Shares.
4. In accordance with Section 176 of the Indian Contract Act, 1872, we
hereby request you to pay us INR 15,87,50,000 (Rupees Fifteen Crore
Eighty Seven Lakhs and Fifty Thousand) in its entirety in the manner
specified under Clause 8 of the Promoter Undertaking by 5:00 pm on
August 06, 2021, post which DBIL shall have the right of sale as
specified in 3 above. Needless to add, all economic risks in relation to
the value of the shares and price fluctuations, if any, shall continue to
vest with you as the pledgor till such time that DBIL exercises its right of
sale and utilises such proceeds towards settlement of outstanding
amounts."
In this particular notice it is to be noted that a time frame of 15 days
was given to the petitioner/plaintiff to pay a particular sum of money
post which the defendant would have the right of sale. In the second
notice, the same was with reference to the Old BTL pledged shares
which was governed by the Facility Agreement and the Pledge
Agreement. The relevant paragraphs in the said notice dated July 17,
2021 (Page 163 of G.A. No. 2 of 2021) therein are paragraph 5 and 6
wherein time was granted till July 20, 2021 (3 days) to make payment of
the outstanding amounts in failure of which the respondent bank would
have the right of sale. The contents of this notice with reference to
Section 176 and right of sale are similar to the first notice.
23. Upon a reading of the relevant clauses in the above notices issued to the
petitioner it appears that on failure of the petitioner to make payment of
the outstanding dues the defendant would have a right of sale. This
right of sale is further specified in the preceding paragraph of the notice
which says that the defendant shall have the right to enforce the
pledge by transferring the New BTL Pledge Shares into the respondent
bank's depository account and/or selling the New BTL Pledged Shares.
It is noticeable that in both of the clauses, the respondent bank states
that they shall have the right to enforce the pledge. However, I don't find
an unequivocal statement stating that the shares shall be sold. In my
view, there is a clear distinction between having a right of sale and
intention to sell. The very philosophy of Section 176 and 177 is that a
protection is given to the pawnor with regard to having an opportunity
to redeem the shares upon a proper and reasonable notice being given
to him. A positive assertion has to be made that in default sale shall
take place. The statement used in the notices is ambiguous, fraught
with too many technical words and creates a cloud over what exactly is
the intention of the pawnee. A Right of sale is not a Notice for Sale. It
has to be kept in mind that Section 176 is not subject to the contract
between the parties and is an independent section that has to be applied
without being tied down by the contract between the parties. For
example, if the contract between the parties states that no notice is
required to be given under Section 176 of the Contract Act, such part of
the agreement would be void ab initio and the pawnee would be required
to give notice under Section 176.
24. Furthermore, the notice is required to be a reasonable notice.
Admittedly, the notice of sale need not specify the date, time and place
of the sale but the notice must specify unambiguously that the pawnee
intends to carry out the sale. By merely stating that the pawnee shall
have the right of sale is not enough. In my opinion, Section 176 is
mandatory and the required notice must be given to the parties before
sale of the pledged security by the pawnee. The requirement cannot be
waived at the time of making the contract of pledge, and supersedes any
contract to the contrary. In the case of Prabhat Bank (supra), similar
findings were made by the Court and it was further observed that an
agreement authorising the pawnee to the sell the goods pawned, without
notice, is void under the Indian Contract Act, 1872. The above findings
are applicable to the case at hand as well. However, it may be noted in
the present case, the Pledge Agreement is not contrary to the Indian
Contract Act, 1872. In fact, Clause 18 of the pledge agreement provides
for adherence to Section 176 of the Act.
25. In the case of Surendranath De (supra) the Division Bench of the
Calcutta High Court held that the statement "Failing which (that is, the
payment by the 7th) we shall arrange for sale of the hypothecated stock"
was held to be a mere intimation that arrangements will be made for a
sale but not a notice of the same. On a reading of the clauses in the case
at hand, I find that the words "shall have the right to enforce the pledge"
is far from a notice of sale. Indicating to the pawnor that the pawnee
shall have the right of sale does not amount to a notice of sale of the
pledged goods. One may argue that the distinction being drawn between
the words "right of sale" and "shares would be sold" is just a play on
words and mere semantic in nature. At first blush, one would agree with
the above contention. However, it has to be kept in mind that Section
176 has to be read along with Section 177 that provides for a right of
redemption to the pawnor. Such right of redemption would become
otiose if a crystal clear and unambiguous reasonable notice of sale is not
given to the pawnor.
26. Another argument may be made that since the words "in accordance
with Section 176 of the Indian Contract Act, 1872" were used at the
start of the clause the intent behind the entire clause is crystal clear
that in the event of default sale would take place. In my view, merely
referring to Section 176 is not enough - the ingredients and
requirements of the Section have to be mandatorily complied and a
reasonable notice of the sale should be evident from the words used in
the notice. As pointed out above, the words used in the notices dated
July 17, 2021 do not communicate a clear intention of sale. The
argument that the notices were clearly understood by the petitioner as a
notice under Section 176 as the petitioner immediately filed a suit
seeking injunction of the notices is also rejected by me for the reason
that the actions of the petitioner cannot be faulted on the ground that
the petitioner was vigilant of his rights and apprehending an illegal
action by the defendant bank, petitioner took steps to prevent the same.
Furthermore, it may be pointed out that the conduct of the petitioner in
approaching the Court cannot and does not have any impact on the
wording of the notices that were sent by the defendant bank. The
judgment in Surendranath De (supra) and Haridas Mundra (supra)
cited above also support the view being taken by me presently. I,
therefore, conclude that the two notices issued were not proper notices
under Section 176 of the Indian Contract Act, 1872 as they did not
contain the essential ingredients of a notice of sale.
27. As pointed out in the preceding paragraph, the notices issued by the
defendant respondent were not sufficient notices under Section 176 and
therefore, one need not go into the arena of whether the notice was a
reasonable notice, that is, whether reasonable time was given to the
pawnor. However, I may note here that one of the notices provides for
fifteen days whereas the other one provides for 2 days. Mr. Shah arguing
on behalf of the defendant has submitted that the same is due to the
reason that the agreements that have to be read along with the pledge
agreement provide for a longer period in the case of Promoter
Undertaking while that is not the case in the case of the Facility
Agreement. As pointed out above, Section 176 is not dependent on the
contract between the parties and the reasonableness of the notice has to
be construed independently of the specific contract of the parties. It is
not the case of the pawnee that the goods that were pledged in this
particular case were perishable in nature, and accordingly, required to
be sold by giving a very short period of notice. In fact, in the present
case, the pledge goods are shares and the rationale for giving a longer
period of time in one notice in contradistinction to giving a shorter
period in another notice for shares of the same company that are
pledged with the defendant does not stand to reason and is accordingly
rejected by me. In my view, having given notice for 15 days (which is a
reasonable period) in one notice, the defendant should have also given a
period of 15 days in the other notice. In conclusion, notice under
Section 176 was not proper and valid and neither was the time provided
therein reasonable.
28. Having answered the above questions, I am inclined to grant permanent
injunction on the two notices dated July 17, 2021 in relation to the
portion dealing with the sale of the pledged shares. I hasten to add over
here that the defendant shall be at liberty to issue fresh notices
complying with the provisions of Section 176 and proceed in accordance
with law.
29. I make it clear that the present injunction is specifically with reference
to the two notices dated July 17, 2021 and actions emanating from the
two notices for sale of the pledged goods.
30. Hence, I.A. G.A. No. 1 of 2021 in C.S. No 138 of 2021 is allowed and I.A.
G.A. No. 2 of 2021 in C.S. No 138 of 2021 is dismissed.
31. With the above directions I.A. G.A. No. 1 of 2021 and I.A. G.A. No. 2 of
2021 in C.S. No 138 of 2021 are disposed of.
32. I would go amiss if I do not state my sincere appreciation for the
dexterous and assiduous efforts of Counsel appearing on behalf of both
sides.
33. Urgent Photostat certified copy of this order, if applied for, should be
made available to the parties upon compliance with the requisite
formalities.
(Shekhar B. Saraf, J.)
