Brief Facts:
The appellant is an existing company under the Companies Act, 2013. The principal business of PIFSL is to invest in power and energy sector projects in India. PIFSL, by way of a Bridge Loan Agreement dated 10th March 2014, had advanced a loan of Rs. 125 crores to NSL Nagapatnam Power and Infratech Limited. As per Clause 3.1.1 of the Bridge Loan Agreement, the loan is required to be secured. In accordance with sub-clause (6) of Clause 3.1.1, the second respondent, executed a Pledge Deed in favour of PIFSL, thereby, pledging 31,80,678 shares, equivalent to 26% of the shares of NSL Energy Ventures Private Limited. The Corporate Debtor filed a petition invoking Section 10 of the IBC, 2016 before the National Company Law Tribunal initiating the corporate insolvency resolution process. The petition was admitted under Section 10(4) of the IBC. As the debt remained unpaid, PIFSL wrote to the Depository Participant invoking its rights in terms of Clause 6.1 of the Pledge Deed. PIFSL filed an application before the Adjudicating Authority under Section 7 of the IBC as a financial creditor to whom payment was due and payable by the Corporate Debtor. The Adjudicating Authority allowed PIFSL to withdraw the application. PIFSL challenged the orders before the National Company Law Appellate Tribunal, but the appeals were dismissed vide the impugned judgment dated 20th June 2019.
SC’s Observations:
After hearing both the sides SC stated that the legal estate in the goods mortgaged passes on to the mortgagee. In comparison, a pawnee has only the special right in the goods pledged, namely, the right of possession as security and in case of default, he can bring a suit against the pawnor as well as sell the goods after giving a reasonable notice. Whether a particular transaction is a mortgage of moveable property or a pledge can only be determined by reference to the intention of the parties, and other surrounding circumstances.
SC refereed Lallan Prasad v. Rahmat Ali and Another and observed that 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.
SC referred The Official Assignee of Bombay v. Madholal Sindhu and Other where Chagla J., referring to Section 176, held that when the pawnor makes a default in the payment of the debt, the pawnee may sell the pawned goods on giving the pawnor reasonable notice of sale. He agreed that the requirement of giving the pawnor reasonable notice of sale is mandatory and it is not open to the parties to contract themselves out of this section. 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”. 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.
SC stated that the pawnor would be required to pay back the debt for which the goods were pledged as security to redeem the goods. If the loan remains unpaid after the demand, the pawnee is entitled to sell the goods and credit the proceeds towards the outstanding debt. After the goods are sold to a third party, the pledge ends.
The bench also overruled one solitary 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 held 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. The SC stated that the decision proceeds with the incorrect understanding of the ratio and is to be overruled.
SC Held:
After evaluating submissions made by both the parties the SC held that “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 has not been discharged or satisfied either in full or in part. PIFSL is 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. For the aforesaid reasons, the present appeal must be allowed”
Case Title: PTC India Financial Services Limited v. Venkateswarlu Kari and Another
Bench: J. M.R. Shah and J. Sanjiv Khanna
Citation: CIVIL APPEAL NO. 5443 OF 2019
Decided on: 12th May, 2022
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